UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996
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 I.D.NO.)
6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33313
(Address of Principal Executive (Zip Code)
Offices)
Telephone: (954) 587-2900
Securities registered pursuant to Section 12(g) of the Act:
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 or15(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
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein,
and will not be contained to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X].
Aggregate market value, as of April 12, 1997 of Common Stock held
by non-affiliates of the registrant: $75,087,914.
The number of shares outstanding of the registrant's only class of
Common Stock as of April 12, 1997 was 37,308,306
PART OF DOCUMENT
DOCUMENTS INCORPORATED BY IN WHICH INCORPORATED
REFERENCE:
Proxy Statement for the 1997 annual Meeting Part III, Items
of Shareholders 10,11,12,13
A list of all exhibits to this Form 10-K is on Page 50.
PART I
Item 1 Business
(a) General Development of Business
Encore Computer Corporation ("Encore" or the "Company"), founded
in 1983, designs, manufactures, distributes and supports scalable
real-time systems, data storage, data retrieval, and sharing
technologies for mixed platform processing environments.
Headquartered in Fort Lauderdale, Florida, the Company sells its
products direct and through distributors in the United States,
Canada, Europe and the Far East.
In 1989, Encore acquired the assets and assumed the liabilities
of the Gould Electronics Inc. Computer Systems Division (the
"Computer Systems Business"), a business that was significantly
larger than the Company itself. Since 1989, Japan Energy Group
and its wholly owned subsidiaries, Gould and EFI, have been the
principal source of the Company's financing by either directly
providing or guaranteeing the Company's loans. Each of the
Company's debt agreements with Japan Energy Group and its wholly
owned subsidiaries have contained various covenants including
maintenance of cash flow, leverage, tangible net worth ratios,
limitations on capital expenditures, dividend payments and
additional indebtedness. Currently and at various times in the
past, the Company has been in default of certain covenants
contained in the debt agreements but waivers of compliance with
those covenants have been obtained and, generally, the Company
has been able to successfully renegotiate favorable terms with
its creditor. To continue operating in the normal course of
business, the Company is and will remain dependent on the
continued financial support of Japan Energy Group and its
subsidiaries. Until such time as the Company returns to a state
of sustained profitability, Encore will be unable to secure
funding from other parties and/or generate sufficient levels of
cash through operations to meet the needs of the business.
Since the acquisition, the Company has invested heavily in
research and development activities to integrate both
businesses' technologies into a single, high performance open
system architecture. This effort has most recently resulted in
the announcement and delivery of products such as the Infinity
SP(TM) and the Infinity R/T (TM). The Company has invested
heavily in research and development of the Infinity SP (TM)
Universal Storage Processor with DataShare(TM) Facilities to
establish its presence in the multibillion dollar storage
marketplace. Although the storage marketplace is new to Encore,
the Company believes the Infinity SP(TM) product will be a
market leader. From a storage perspective, the Infinity SP(TM)
supports multiple environments and cross platform data sharing
between open systems and mainframe applications. The Infinity
SP(TM) is built around Encore's patented Memory
Channel/Reflective Memory technology. The Infinity SP(TM)
offers extremely competitive application, connectivity and
performance advantages. In the context of cross platform shared
protected storage for open systems and mainframes, the Infinity
SP(TM) family of products are technology leaders.
The Infinity SP(TM) storage systems were developed specifically
for the information systems storage market. These systems
handle the complex requirements of large on-line transaction
processing (OLTP), including IBM-compatible customer information
control systems (CICS), client server, relational data base
management systems (RDBMS), decision support systems (DSS) and
interactive information networks. These applications are
primarily found in the banking, brokerage, insurance, airline,
electronic publishing, information, telecommunications and data
services industries.
The newest real-time product is the Infinity R/T(TM). The
performance features of the Infinity R/T(TM), based on scalable
system elements, along with the Company's reputation in real-
time computing have captured the attention of many of its
traditional customers. The Infinity R/T(TM) has significant
price performance advantages in the real-time market. This,
coupled with Encore's proprietary software, yields highly
deterministic open systems solutions. These solutions range
from Encore's traditional markets in simulation, energy, and
data acquisition to newly developed market opportunities in
transportation and process control. The Company's continued
development of its patented Reflective Memory(R) interconnect
technology, integration capabilities and "Hard Real-Time"
software makes Encore a technology leader.
As more fully discussed in Management's Discussion and Analysis
of Financial Condition and Results of Operations and in Notes B
and F of the Notes to Consolidated Financial Statements, since
the acquisition of the Computer Systems Business the Company's
results have been adversely affected by; (i) a slower than
anticipated acceptance of the Company's new open systems
technology products in the information systems marketplace, (ii)
the termination of a reseller agreement between the Company and
Amdahl Corporation, (iii) continued heavy investment in research
and development of its open systems architecture and (iv)
declining equipment sales as certain of the Company's traditional
real-time products have reached the end of their product life
cycle. Total sales from the Company's new open systems
technology products amounted to $6,603,000 through December 31,
1996.
Approximately 22% of 1996 revenues were derived through sales to
various U.S. government agencies. Certain of these agencies,
such as the Department of Defense, are precluded from awarding
contracts which require access to classified information to
foreign owned or controlled companies. The principal source of
both debt and equity financing for the Company has been provided
by Gould Electronics Inc. ("Gould") and EFI International Inc.,
wholly owned subsidiaries of Japan Energy Corporation ("Japan
Energy"; a Japanese corporation with $20 billion in annual net
sales).
As of March 19, 1997, the Japan Energy Group beneficially owned
83% of the Company's common stock assuming the full conversion of
all shares of its preferred stock. In light of limitations on
the ability of certain U.S. government agencies to transact
business with foreign owned or controlled companies, Encore and
the Japan Energy Group have proactively worked to comply with all
U.S. requirements. In this connection, the Japan Energy Group
has agreed to accept certain terms and conditions relating to its
equity securities in the Company, including limitations on the
voting rights of its shares, limitations on the number of seats
it may have on the board of directors and certain restrictions on
the conversion of its preferred shares into common stock. In
connection with the recapitalizations and exchanges of debt for
Series H and Series I Preferred Convertible Stock as discussed in
more detail in Notes J and M of Notes to Consolidated Financial
Statements, 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 resolution of the Company's Board of
Directors, with a more detailed Security Control Agreement as
prescribed by DIS in the NISPOM, which is currently being drafted
by Encore's counsel.
Encore is committed to complying with all U.S. government
requirements regarding foreign ownership and control of U.S.
companies. At this time, the Company is not aware of any
circumstances that would adversely affect the position previously
taken by DIS. However, should DIS change its opinion of the
nature of Japan Energy's influence or control on the Company, a
significant portion of the Company's future revenues realized
through U.S. government agencies could be jeopardized.
(b) Financial Information About Industry Segments
The Company operates in a single industry segment as described
in Item 1(c) below. Certain required segment information related
to the Company's financial operations for the last three years is
included in Note K of Notes to Consolidated Financial Statements.
(c) Narrative Description of the Business
The Company operates in various market niches of a single
industry segment, the information technology industry, which
includes the design, manufacture, sale and service of storage and
computer systems, software and other related equipment on a
worldwide basis.
Principal Markets
Within the information technology industry, Encore participates
in mainframe and open systems storage and real-time computing
marketplaces.
Mainframe and Open Systems Storage Markets
The Company has introduced its massively scalable, symmetric
multiprocessor-based open systems products into primarily four
information processing markets; (i) Cross Platform Enterprise
Data Storage, (ii) Mainframe Storage, (iii) Network Attached
Storage and (iv) Open Systems Storage. Encore's strategy is to
provide a system that can continue to support a user's existing
critical applications while allowing the user to reengineer some
or all of those applications to run in an open systems
environment at a much lower cost than traditional mainframes.
Data storage demands within the information processing market are
expanding due to increased requirements of capturing business
data as well as storing new forms of information (e.g. document
images, sound and video). Accordingly, the mainframe storage
marketplace is undergoing changes similar to those of the
information processing marketplace. These changes include the
need for faster, denser and more cost effective storage solutions
to reduce demands on existing facilities and shrinking mainframe
data processing budgets. Today's data processing environments
have developed a strong strategic requirement to leverage
technology advances being applied to the open systems
environment.
Encore addresses the growing open data storage market by
providing the world's fastest Universal Storage Processors with
DataShare(TM) Facilities. From a storage perspective, the
Infinity SP(TM) supports multiple environments and cross-platform
data sharing between open systems and mainframe applications.
This means that with Encore's Mainframe DataShare(TM) Facility,
mainframe sequential datasets stored on the Infinity SP(TM) can
be read by attached open systems. Additionally Encore's Open
Systems DataShare(TM) Facility provides comparable support in the
opposite direction. Channel attached mainframes can read open
systems volumes stored on the Infinity SP(TM). Businesses
operating applications on mainframes or in an open systems
environment can use the DataShare(TM) Facilities to significantly
reduce the elapsed time and effort required to access data
between platforms. The Infinity SP(TM) offers competitive
applications, connectivity, and performance advantages. In the
context of cross-platform shared protected storage for open
systems and mainframes, the Infinity SP(TM) is a technology
leader.
To market the new Storage Product, the Company has established an
aggressive direct distribution and OEM sales and marketing
campaign. As part of this campaign, the Company has recruited
industry knowledgeable sales people from leading storage vendors.
Additionally, Encore continues to seek out strategic distribution
partners whose industry presence, expertise and sales channels
will allow it to more efficiently bring the Company's leading
edge Storage Product offerings to market. The successful
acceptance in the marketplace of the new storage products and
their timely development and shipment will play a key role in
determining the Company's results of operations and competitive
strength in the future.
Real-Time Markets
The Company's real-time computer systems, the Infinity R/T(TM)
Family, are used for the acquisition, processing and
interpretation of data primarily in three market niches; (i)
simulation, (ii) energy and (iii) transportation.
Simulation is the Company's largest real-time market niche.
Encore products are widely used in simulators that
duplicate complex situations in controlled environments. The
Company's installed simulation systems are used to safely and
economically train commercial and military personnel to operate
and maintain complex systems such as space vehicles, aircraft,
weapons systems, ships, ground-based vehicles and nuclear power
plants.
Encore also competes in the power and electric utility market
niches of the energy marketplace where the Company's real-time
systems typically acquire, monitor and provide supervisory and
closed loop control in energy management, power plant
monitoring and control and power plant simulation systems.
The Company's systems monitor the transmission and distribution
of electrical power from generation to substation to end use.
The system also facilitates the training of power plant operators
by putting them in simulated environments to prepare them for
emergency situations. Within the energy marketplace as a whole,
Encore systems provide the same real-time capability of data
acquisition and control to other market niches such as seismic,
oil exploration and off-shore oil platforms.
Within the transportation market niche, the Company's products
are installed in a variety of rapid transit/metro rail and marine
transportation applications. Strategically, the Company is
focusing on other developing niches within this marketplace
including intelligent vehicular highway systems .
The Company's real-time customers include original equipment
manufacturers (OEMs) and systems integrators who combine Encore
products with other hardware and/or application software for
resale to end users. The Company also sells its products to end
users who require a compatible range of high performance systems
which are used as the basis for major internal installations.
The Encore customer base in both the information processing and
real-time market places are technology and life cycle cost driven
and constantly in need of increased performance at lower
costs. The Company's sales efforts in the real-time market are
concentrated on "program" business where typically large
contracts are awarded with multiple systems scheduled for
delivery over an extended period of years, including continued
demand for upgrades and spare parts as well as ongoing
maintenance.
Principal Products
Encore offers two principal families of storage and computer
systems targeted at the niches within the storage processing and
real-time computing marketplaces of the information technology
industry discussed above. These product families are the
Infinity SP(TM) Storage Processors, and the Infinity R/T(TM)
Series. Additionally, the Company continues to support its prior
generation CONCEPT/32(R) real-time computer product line.
Infinity SP(TM)
The Infinity SP(TM) Series Universal Storage Processors with
DataShare(TM) Facilities are designed to concurrently address the
mixed storage needs of IBM and plug compatible mainframes, SCSI
attached hosts, and network attached clients under a common,
versatile platform. In order for the Infinity SP(TM) to support
simultaneously all of these roles, Encore developed software
products such as Mainframe DataShare(TM), Open Systems
DataShare(TM), Backup/Restore DataShare(TM), Remote Dual Copy,
Backup While Open and others which take full advantage of the
storage processors architecture to provide data center solutions
to the entire enterprise in a seamless fashion. These products
enable mainframe and open systems data stored on the Infinity
SP(TM) to be shared at disk speeds, thereby significantly
narrowing the information gap. The Mainframe DataShare(TM)
Facility allows MVS IBM mainframe sequential datasets (QSAM)
stored on an Infinity SP(TM) to be read by a SCSI attached Open
System Platform. The Open System DataShare(TM) Facilities allows
selected SCSI attached volumes stored on an Infinity SP(TM) to be
read by an IBM compatible mainframe running MVS with no special
software running on the mainframe. The Backup/Restore
DataShare(TM) Facility allows an Infinity SP(TM) to backup and
restore SCSI attached and network attached volumes from an IBM
compatible mainframe running MVS with existing mainframe resident
backup utilities.
The Infinity SP(TM) fulfills the diverse storage requirements of
legacy and open enterprises by eliminating the overlaps and
hidden costs of multiple conventional fixed function storage
products. Infinity SP(TM) storage subsystems are capable of
delivering storage solutions from 48 gigabytes to multiple
terabytes. Encore believes the Infinity SP(TM) provides the
world of increasingly heterogeneous computing components simpler
and cost effective solutions.
Infinity Gateway (TM)
The Encore Infinity Gateway(TM), the lowest priced member of the
Infinity SP(TM) family provides mainframes and open systems
concurrent access to shared datasets in real-time. The Infinity
Gateway utilizing DataShare(TM) Facilities provides a disk-based
high-speed/low latency interchange path between MVS, UNIX(R), and
other operating platforms. For example, mainframe data sets
stored on the Infinity Gateway as IBM 3390 volumes are
immediately accessible from SCSI and network attached hosts
without file duplication. Such direct data sharing technology
bypasses lengthy file transfers and laborious tape handling
currently employed to exchange data between dissimilar systems.
Similarly, open systems may store files on the Infinity Gateway
for direct access by mainframes.
Infinity R/T
The Encore Infinity R/T(TM) offers high performance real-time
solutions with the latest in processor technology. The Infinity
R/T is specifically designed to incrementally migrate CONCEPT/32
legacy applications to an open systems environment by
maintaining object code and bus compatibility.
The Infinity R/T Model 500 Modular Computing Family is Encore's
entry level PCI bus based system, powered by Digital Equipment
Corporation's Alpha(R) and/or Intel Corporation's Pentium(R)
processor. This provides unprecedented modularity and
flexibility with tremendous price/performance leadership. The
Infinity R/T Model 400 Family of systems is comprised of state-
of-the-art departmental and enterprise Symmetrical Multi-
processing computers, powered by Digital's Alpha micro-
processors and is based on the latest PCI bus technology.
Encore's Real-Time software and hardware enables users to derive
ultra high performance without sacrificing the Real-Time
requirements of low latency, high determinism and fast I/O
response. Both models are compatible with Encore's new PCI
Reflective Memory subsystem that provides high-speed R/T
connectivity for up to 256 clustered nodes.
Customer Service
Service and support are critical elements in maintaining customer
satisfaction. The Company offers its customers a variety of
service and support programs for both hardware and software
products principally through its own customer service
organization supplemented by third party maintenance partners
with locations throughout the world. The Company also offers
maintenance service for selected third party equipment.
Specific service and support programs include preventive
maintenance, resident labor service, customer training and
education, logistics support programs, data facility management
and custom technical and consulting services. In addition, the
Company provides a dial in hotline as well as remote diagnostic
capabilities to allow problem resolution from Encore's home
office.
The Company provides a standard product warranty on its computer
systems for parts and labor which generally extends ninety days
from the date of installation, but on certain products for up to
two years. On its storage processor product line, the standard
product warranty for parts and labor generally extends two and,
in some cases, may extend three years.
Sales and Distribution
Encore uses multiple channels of distribution to sell its
products. The primary channel for storage system sales has been
its direct sales force, consisting of approximately 23
salespersons located throughout the United States, Canada and
Western Europe. The Company also has joint venture operations in
Japan, and various other arrangements with distributors
throughout the world.
The Company is expanding its utilization of systems integrators,
distributors and independent software vendors (ISVs) in its
distribution network particularly after the termination of the
Amdahl Reseller Agreement discussed in Note B of Notes to
Consolidated Financial Statements. The Company's strategy is to
continue to expand its distribution channels through the
establishment of marketing alliances with other industry leaders.
Examples of the Company's efforts were the signing of a
distribution agreement with Federal Computer Corporation as well
as a business development agreement with Jones & McClesky.
The Company's ability to increase sales and improve operating
results for future periods is dependent upon the acceptance of
its Storage Products in the marketplace, and the timely and
successful introduction of additional functions and features for
these products. Encore continues to seek out strategic
distribution partners whose industry presence, expertise and
sales channels will allow it to more efficiently bring the
Company's leading edge open system and Storage Product offerings
to market. There can be no assurance that the Company's products
will achieve or sustain market acceptance or successfully compete
against the products of other larger, better known companies.
The Company's general policy is to sell rather than lease its
products. The Company generally has a policy of no returns and
does not typically extend payment terms beyond those prevalent in
the computer industry. A significant portion of the Company's
sales typically occur in the last month of a fiscal quarter, a
pattern that is not uncommon in the computer industry. The
Company seeks to minimize the time from receipt of a purchase
order for a computer system to delivery of the system.
Accordingly, the Company does not believe backlog reported at any
point in time aids materially in the overall understanding of the
business. Encore's business is not subject to pronounced
seasonal fluctuations.
During the years reported, the Company has not been dependent
upon any one customer for a material part of its business with
no single customer accounting for more than 10% of its sales.
However, in fiscal 1996, 1995 and 1994, approximately 22%, 24%,
and 32%, respectively, of its sales were derived either directly
or indirectly from various United States government agencies.
None of the Company's contracts with United States government
agencies are subject to the renegotiation of profits or
termination at the election of the government.
Research and Development
Storage Product
The company builds and distributes a family of revolutionary
storage products designed to connect to IBM Mainframe, Open
Systems and Network Hosts. While competing products are
implemented as dedicated hardware designs intended to meet a
single storage requirement, Encore's implementation is a software
approach based on standard hardware components. As a result, the
Encore product is the expression in the high-end storage market
of the following industry trends:
-The replacement of dedicated, proprietary, single-function
electronic hardware platforms with standard, general
purpose, "commodity," computer configurations.
-The migration of virtually all computing platforms to low
cost, personal computer components.
-The replacement of hardware-intensive solutions with
software-intensive ones.
-The replacement of large, stand-alone systems with
multiple, networked small systems.
To accomplish Encore's vision, the Company is integrating the
necessary elements:
-Data sharing to allow universal real-time access to common
data (one copy of data, readable from open and proprietary
systems). The SP is a "computer," thus a generic platform.
DataShare represents one key application; new applications
like Intershare, Communications, Storage Management, etc.
further demonstrates the inherent flexibility of the
architecture.
-Encore's current multi-node capability is a predecessor to
the ability to have hundreds of storage processors
interconnected over high speed fiber optics. All discs
across the network of storage processors must become
available to all hosts in a real-time manner. This
requires a high-speed media (Fiber optics), distances to
multiple kilometers, and most importantly,
"indistinguishable access to local or remotely located
discs".
-Internet and Intranet capabilities. Users on open and
proprietary systems through Encore have access via networks
(e.g., Ethernet LANs, WANs) as well as access via the
Internet or Intranet to previously unseen data. Mainframe
data can now be viewed via the Infinity SP on to the Net.
Encore's product vision is to use highly intelligent and
interconnected storage processors to blur the traditional
boundaries between computer networks and storage environments.
Encore's systems attempt to provide a single system view of
corporate data by making access to any device remote or local,
open or proprietary, transparent.
Real Time
Encore's Research and Development strategy is defined around the
following targets of opportunity:
-Encore's existing customer base: "Systems, SEL, Gould" -
simulation, telemetry, energy and transportation.
-Digital Equipment Corporation (DEC) customers who need real-
time capabilities, integration and high speed
interconnectivity:
- Digital UNIX real-time enhancements
- Real-Time option modules
- VME Alpha Systems
- Deterministic SMP Alpha Systems
- High Speed Clustering
-Other opportunities in which high speed interconnectivity
of systems (extreme low latency and greater throughput than
networking) is a critical aspect of the application.
The Company has a long history of proprietary design (SEL,
Concept, RSX, Encore 91/93) and a large installed base. In Real-
Time/Technical computing, the key trend of the 90s has been to
utilize PC and PC-bus technologies because of their price and
performance advantages. The traditional competition has not
reacted to this trend and has lost major market share by
continuing to do proprietary designs. The new competition is
made up of UNIX Servers and PCUs augmented with third party
offerings to provide reasonable real-time capabilities. Encore
seeing this trend has implemented a research and development
strategy in which we utilize industry standard technology
(Pentium Pro, Alpha, UNIX, Windows NT, PC buses, etc.). Encore's
value-add is that the Company has developed a set of real-time
software, scaling technologies, cluster interconnects, real-time
options, and third party integration to provide true real-time
capabilities while maintaining industry price and performance
curves.
Because Encore's value-adds have been developed as layered
products, which sit above industry solutions, they are quickly
ported to the diverse and ever changing technology. Therefore,
the Company's products avoid the classic lag time associated with
adding real-time capabilities to the industry's leading
technology.
Manufacturing and Raw Materials
The Company's manufacturing operation is ISO 9002 certified and
consists primarily of the assembly and integration of purchased
parts, components, and subassemblies into computer and data
storage systems. Printed circuit boards are assembled using
surface mount technology and automatic placement equipment, while
substantially all peripherals are purchased from third party
vendors. Extensive testing and burn in is performed at the
board, component and sub assembly level and at final systems
integration.
Encore's products are comprised of a wide variety of electronic
and mechanical components, raw materials and supplies. The
Company relies heavily on external sources of supply for these
items as well as for other supplies and services. Neither the
Company's customers nor its vendors require Encore to carry
significant amounts of inventory to meet rapid delivery
requirements or to assure itself of a continuous allotment of
goods from suppliers. The Company has developed multiple
commercial sources for most components and raw materials used in
the manufacture of its computer systems. However, because of the
attractiveness of employing the latest technology in its product
line, Encore does utilize several single source vendors for
certain critical components in the Infinity SP(TM) product line.
While delays in delivery of such single source components could
cause unplanned delays in the shipment of certain products, at
this time, the Company has no reason to believe any of its single
source vendors present a serious business risk to the Company.
The Company believes that its manufacturing facilities are
sufficient to meet its requirements for three years.
Competition
The computer storage industry is intensely competitive and is
characterized by rapid technological advances, decreasing product
life cycles and price reductions. The principal competitive
factors in the Company's markets are total system performance and
functionality, quality, reliability, price,
compatibility/connectivity to other vendors' systems, along with
long term service and support.
Within the storage product marketplace, the Company's competition
includes EMC, International Business Machines (IBM) and Hitachi
Data Systems. The primary competitors in the Company's real-time
markets are also established companies, such as Concurrent
Computer Corporation and Silicon Graphics.
Many of Encore's competitors have greater financial, technical,
and marketing resources than Encore. In some cases, this places
the Company at a disadvantage. While the competition is
beginning to utilize software solutions to improve functionality
in the storage marketplace, the Company considers its level of
experience and general understanding of its computer architecture
and software solutions to be its competitive advantage.
Patents and Licenses
Encore owns a number of patents, copyrights, and trademarks
relating to its products and business. Encore's most important
patents constitute the basis for Encore's premiere Reflective
Memory technology, which is incorporated into the Company's high-
performance, high-availability Storage Systems products.
Reflective Memory products permit the same data to be broadcast
(i.e. reflected) instantaneously to several nodes at once,
thereby extraordinarily decreasing data transfer times. Encore
continues to develop this highly valuable and sought-after
technology and is actively engaged in a program to protect it's
patents and registered marks from infringement. The Company is
also actively pursuing additional patents on its innovations.
From time to time, companies in the industry have claimed that
certain products and components manufactured by others are
covered by patents held by such companies. It may, therefore, be
necessary or desirable for Encore to obtain additional patent
licenses. Management believes that such licenses could be
obtained on terms which would not have a material adverse effect
on the Company's financial position or the results of its
operations.
Encore has entered into licensing agreements with several third
party software developers and suppliers. The licenses generally
allow for use and sublicense of certain software provided as part
of the computer systems marketed by the Company. Encore is
licensed by the Santa Cruz Operation to use and sublicense their
UNIX operating system in the Company's computer systems.
As discussed in Note I of Notes to Consolidated Financial
Statements, in connection with its recapitalization in January
1991, the Company licensed substantially all of its intellectual
property to Gould on a royalty free basis. However, under the
terms of the agreement, and in combination with certain
extensions granted by Gould, Encore retained the exclusive use of
the intellectual property through December 31, 1995. Those
extensions have expired and effective January 1, 1996, both Gould
and Encore have the right to use the Encore intellectual
property.
While the Company maintains the legal right to terminate the
Gould license under certain conditions, the Company does not
currently have the financial capability to do so. Gould has
stated it has no immediate plans to utilize the technology to
compete with the Company in which it has a very substantial
investment.
Environmental Matters
Compliance with Federal, state and local provisions which have
been enacted or adopted regulating the discharge of materials
into the environment, or otherwise relating to the protection of
the environment are not expected to have a material effect on the
capital expenditures, operations or competitive posture of the
Company or its subsidiaries.
Employees
As of December 31, 1996, Encore had 694 full-time employees
engaged in the following activities:
Employees
Customer Service 131
Manufacturing 125
R & D/Custom Products 235
Sales and Marketing 147
General and 56
Administrative
Total 694
The Company's future success will depend in large part on its
ability to attract and retain highly skilled and motivated
personnel, who are in great demand throughout the industry.
None of the Company's domestic employees are represented by a
labor union.
Executive Officers of the Company
The names of the Company's executive officers and certain information
about them are set forth below.
Name Age Position with Company
Kenneth G. Fisher 66 Chairman of the Board
and Chief Executive Officer
Rowland H. Thomas, 61 President and
Jr.
Chief Operating Officer
Charles S. Anderson 67 Vice President,
Corporate Relations
Ziya Aral 44 Vice President, Systems
Engineering
and Chief Technology Officer
Robert A. DiNanno 50 Vice President and General
Manager,
Global Customer Operations
Charles S. Namias 38 Vice President,
Corporate Alliances
James C. Shaw 49 Vice President,
Manufacturing Operations
George S. Teixeira 40 Vice President,
Product Business Group
Mr. Fisher is a founder of the Company and has served as a
Director, Chairman and Chief Executive Officer of the Company
since the Company's inception in May 1983. He was the Company's
President from its inception until December 1985 and also served
in that capacity from December 1987 to January 1991. From
January 1982 until May 1983, Mr. Fisher was engaged in private
venture transactions. From 1975 to 1981, Mr. Fisher was
President and Chief Executive Officer of Computervision (formerly
Prime Computer, Inc.). Before joining Computervision, Mr. Fisher
was Vice President of Central Operations for Honeywell
Information Systems, Inc.
Mr. Thomas has been a member of the Board of Directors since
December 1987 and Chief Operating Officer since June 1989. He
presently serves as President of the Company, a position to which
he was elected in January 1991. From June 1989 to January 1991,
Mr. Thomas served as Executive Vice President of the Company. In
February 1988, he was named President and Chief Executive Officer
of Netlink Inc. Prior to joining Netlink, Mr. Thomas was Senior
Executive Vice President of National Data Corporation ("NDC"), a
transaction processing company, a position he held from June 1985
to February 1988. From May 1983 through June 1985, Mr. Thomas
was Executive Vice President and Senior Vice President at NDC.
Mr. Anderson, joined the Company in 1985. From 1984 until
joining the Company, Mr. Anderson served as Director of Human
Resource Operations at Data General Corporation. Before joining
Data General, Mr. Anderson was with Honeywell Information
Systems, Inc. serving in various management positions since 1970,
most recently as Director of Employee Relations.
Mr. Aral joined the Company in 1987 and was appointed to his
present position of Chief Technology Officer in 1993. Since
1987, he has held various positions of increasing responsibility
within the Company including Vice President of Systems
Engineering and Senior Technology Consultant. Prior to joining
Encore, Mr. Aral was employed by the Reed-Prentice Division of
PMCo. in a variety of software engineering positions.
Mr. DiNanno joined the Company in July 1986. Until June 1992,
Mr. DiNanno served as Vice President and General Manager,
Operations. At that time, he was appointed Vice President and
General Manager, Real-Time Operations. In June of 1996, Mr.
DiNanno was appointed Vice President and General Manager of
Global Customer Operations. Prior to joining the Company, he
served as Vice President, Manufacturing at Adage, Inc. from
November 1983 to June 1986. Mr. DiNanno also held domestic and
international management assignments with Honeywell Information
Systems, Inc. from June 1979 until November 1983. Mr. DiNanno
has experience with military and commercial flight simulations
acquired during his tenure at Singer Link.
Mr. Namias joined the Company in 1983 as Director of Processor
Engineering. From 1986 to 1989 he held direct sales and several
field sales management positions. In 1990, he was promoted to
Director, Strategic Business Alliances and in 1992 promoted to
Vice President, Business Development. In 1993, Mr. Namias was
appointed Vice President, Corporate Alliances and an officer of
the Company. Prior to joining the Company, Mr. Namias was
employed by Digital Equipment Corporation and Raytheon Missile
Systems.
Mr. Shaw joined the Company in 1989 as Vice President,
Manufacturing Operations. In November 1992, he was appointed an
officer of the Company. From 1985 to 1989 he served as Senior
Director, Manufacturing for Modicon, Inc. Prior to that time, he
was Vice President, Manufacturing for Chomerics, Inc., a position
he held from 1980 to 1985.
Mr. Teixeira assumed his present position in 1994. From 1991 to
1994, he held the position of Vice President, Product
Development. Prior to 1991, Mr. Teixeira held the positions of
Vice President of Marketing and Vice President of Product
Management. Mr. Teixeira was Director of Product Marketing and
Management for the Computer Systems Business of Gould Electronics
Inc. which the Company acquired in 1989. Prior to 1989 he held
several progressively more responsible positions since joining
Gould Electronics Inc. in 1981.
(d) International Operations
The Company maintains sales and service operations in Europe and
Canada through wholly-owned subsidiaries. In the Far East, sales
and service operations are performed through a joint venture in
Japan, and distributor agreements throughout the remainder of the
Pacific Rim. In fiscal 1996, approximately 59% of consolidated
net sales were derived from foreign operations. The Company
believes that its overall profit margins with respect to foreign
sales are not materially different from profit margins from
domestic sales. In view of the locations and diversification of
its foreign activities, the Company does not believe that there
are any unusual risks beyond the normal business risks attendant
to activities abroad. Encore attempts to limit its foreign
currency denominated assets and liabilities to reduce its
exposure to foreign currency fluctuations. Additional
information relating to the Company's international operations,
including financial information segregated by major geographic
area, is contained in Note K of the Notes to Consolidated
Financial Statements.
Item 2 Properties
Listed below are the Company's principal facilities as of
December 31, 1996.
Owned or Approximate
Location Principal Leased Square
Use Feet
Ft. Administrative/ Owned 232,000
Lauderdale,FL Development/
Marketing
Melbourne,FL Manufacturing Owned 137,000
London,England Sales/Service Leased 35,000
Paris, France Sales/Service Leased 23,000
In addition to the facilities listed above, Encore also leases
space in various other domestic and foreign locations for use as
sales and service offices. The Company's owned facilities are
encumbered by various mortgages, including mortgages which
collateralize the Gould loan agreements (See Note G of Notes to
the Consolidated Financial Statements).
Item 3 Legal Proceedings
The Company is subject to legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of
management, the amount of the ultimate liability with respect to
these actions will not materially affect the financial position
of the company.
Item 4 Submissions of Matters to a Vote of Security Holders
No items were submitted to a vote of the security holders during
the fiscal quarter ended December 31, 1996.
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters The Company's common stock is traded on the
NASDAQ Small Cap Market System under the symbol ENCC.
The high and low closing sale prices of Encore's common stock are
shown for fiscal years 1996 and 1995 in the table below:
Fiscal 1996 Fiscal 1995
High Low High Low
1st Quarter 3 7/16 1 5/8 3 9/32 1 23/32
2nd Quarter 3 13/16 2 7/16 3 1 1/16
3rd Quarter 3 1/32 1 11/16 2 19/32 1 1/16
4th Quarter 1 31/32 1 2 3/4 1 1/2
The First National Bank of Boston is the stock transfer agent and
registrar of the Company's common stock, and maintains
shareholder records. The agent will respond to questions on
change of ownership, lost stock certificates, consolidation of
accounts and change of address. Shareholder correspondence on
these matters should be addressed to:
The First National Bank of Boston
Shareholder Services Division
P.O. Box 644
Boston, Massachusetts 02109.
As of April 12, 1997, there were approximately 2,638 holders of
record of the Company's common stock. The Company has never paid
cash dividends on its common stock and under the terms of the
Company's current financing agreements, the Company is prohibited
from paying such dividends.
Item 6 Selected Financial Data
(in thousands Pro For the year ended December 31,
except Forma
per share 1996(2) 1996 1995 1994 1993 1992
data)
Net sales $47,627 $47,627 $49,328 $76,550 $93,532 $130,893
Operating loss (67,218) (67,218) (77,796)(50,848)(62,085)(22,544)
Net loss (70,732) (70,732) (81,354)(54,556)(69,565)(32,522)
Net loss per
common
share (1) (2.18) (2.18) (2.37) (1.68) (2.01) (0.98)
Weighted average
shares of
common
stock 44,174 44,174 42,287 40,755 39,273 37,899
outstanding
(1)
Working capital (27,479) (67,295) 5,490 20,237 3,499 14,270
(deficit)
Total assets 69,256 69,256 72,537 99,021 84,070 105,686
Long term debt 476 476 40,812 89,249 112,919 66,413
Shareholders'
equity
(capital 5,806 (34,010) 2,514 (22,040)(66,560) 508
deficiency)
(1) During 1996, 1995, 1994 and 1993, preferred stock dividends
amounted to $25,413,000, $19,061,600, $13,986,600 and $9,184,700,
respectively. All preferred stock dividends were paid in
additional shares of preferred stock.
(2) Presents the pro forma effect of an exchange of $40,000,000
indebtedness for preferred stock between Gould Electronics Inc.
and the Company on March 19, 1997 as if such transaction had
occurred on December 31, 1996.
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Encore Computer Corporation ("Encore" or the "Company") was
founded in May 1983 and was in the development stage until
October 1986. During this period, the Company was primarily
involved in the research, development and marketing of UNIX(R)
based computers and terminal servers. In 1989, Encore
significantly increased its size and worldwide marketing presence
when it acquired substantially all of the assets of the Computer
Systems Division of Gould Electronics Inc. (the "Computer Systems
Business"). This was a significantly larger business than the
Company and one which for over twenty-five years provided real-
time computer systems solutions to the simulation, transportation
and energy marketplaces.
During the late 1980s, product demand in the computer marketplace
began to migrate from more traditional proprietary computing
technologies towards an open systems technology. The Company
targeted its research and development efforts towards programs to
develop a new generation of open system computers. Since the
beginning of 1994, the Company has spent approximately
$94,000,000 in research and development activities. This has
resulted in the current availability of a family of storage
systems and open system computers including; (i) the Infinity
SP(TM) Storage Processor with DataShare Facilities(TM), and (ii)
the Infinity R/T(TM). In light of this new technology the
Company has targeted the multibillion dollar storage market as a
strategic growth market. This is a new market for the Company
and is intended to replace the declining revenues from the real-
time market. The Company's real-time market revenues have
decreased from $130,893,000 in 1992 to $41,024,000 in 1996. The
Company expects the Infinity SP(TM) to penetrate the storage
market and establish market presence. The acceptance of Encore's
Infinity SP Universal Storage Processor with DataShare(TM)
Facilities in the market place, and the timely and successful
introduction of additional functions and features for these
products will determine the Company's future results. Through
December 31, 1996, total sales of the Company's new open systems
technology products amounted to $6,603,000.
To market the new storage product, the Company has developed a
direct distribution and OEM sales and marketing strategy. The
Company has recruited industry knowledgeable sales people from
leading storage vendors and expanded its sales offices around the
world. Additionally, Encore continues to seek out strategic
distribution partners whose industry presence, expertise and
sales channels will allow it to more efficiently bring the
Company's leading edge storage product and open system offerings
to market. The Company has acquired significant inventories,
provided product to customers on a trial basis and continues to
improve product features and functionality. Direct sales of
these products to date have not met management's expectations as
customers express concerns over the financial viability of the
Company. The Company was unsuccessful in negotiating an OEM
agreement in 1996, but continues to discuss possible agreements,
with several potential OEM's. There can be no assurance that the
Company's products will achieve or sustain market acceptance or
successfully compete against the products of other larger and
more financially resourceful companies.
With the net losses incurred in the three years ended December
31, 1996, the Company has not generated sufficient levels of cash
flow to fund its operations. During this period of time the
principal source of financing has been provided by the Japan
Energy Group. During the three years ended December 31, 1996,
the Company and the Japan Energy Group have also entered into a
series of financing transactions involving the cancellation of
$240,000,000 of indebtedness in exchange for the issuance of
various series of the Company's Preferred Stock. As discussed
more fully in Note M of Notes to Consolidated Financial
Statements, on March 19, 1997, the Company and Gould agreed to
cancel $40,000,000 of indebtedness owed to Gould under 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") with a liquidation preference of
$40,000,000. In addition to the exchange of indebtedness for
shares of Series I, 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. As of April 12,
1997 the Company owed to Gould $45,525,494 under the Credit
Agreement, plus $12,974,348 in accrued interest. All borrowings
under the Credit Agreement, plus accrued interest, are due and
payable on May 31, 1997. In the event of default, the rate of
interest to be applied will immediately increase by an additional
2%.
The accompanying consolidated financial statements have been
prepared assuming that the company will continue as a going
concern. Based on current estimates of available cash flow,
management does not believe it will have sufficient cash to make
the mandatory payment on May 31, 1997, without proceeds from the
sale of assets or a refinancing or restructuring of the Credit
Agreement prior to such date. Additionally, the Company does not
have a committed source of financing to meet expected
requirements over the next year. The Company has retained an
investment banking firm to assist in exploring strategic
alternatives which include, among other things, a business
combination, sales of assets, strategic investment in the Company
or a refinancing of the Credit Agreement. There can be no
assurance that the Company will be successful in its attempt to
consummate one of the strategic alternatives or a refinancing or
restructuring of the Credit Agreement. If the Company does not
make the required payment at maturity of the Credit Agreement or
is unable to obtain a committed source of financing adequate to
meet expected requirements, it may be unable to continue its
normal operations, except to the extent permitted by the Japan
Energy Group. Substantially all of the Company's tangible and
intangible assets are pledged as collateral under the Credit
Agreement.
Comparison of Calendar 1996, 1995 and 1994.
Net sales for 1996 were $47,627,000 compared to net sales for
1995 and 1994 of $49,328,000 and $76,550,000, respectively.
Equipment sales increased 25% in 1996 to $27,600,000 when
compared to $22,005,000 in 1995. Equipment sales in 1994 were
$38,412,000. Service revenues for 1996, 1995 and 1994 were
$20,027,000, $27,323,000 and $38,138,000, respectively.
Equipment sales as a percentage of total net sales in 1996, 1995
and 1994 were 58%, 45% and 50%, respectively. The increase in
1996 is primarily due to; (i) sales of the Company's Storage
Products of $6,603,000, (ii) steady sales in real-time and open
systems computers and (iii) the decline in service sales. The
decrease in 1995 is primarily due to; (i) the delay in the
acceptance of the Company's new technology products in the
storage information systems marketplace, (ii) the decline in real-
time and open system computer sales and (iii) the adverse effects
from the termination of the Amdahl Reseller Agreement.
International equipment sales increased 68% to $16,050,000 in
1996, while domestic equipment sales decreased 7% to $11,550,000
compared to 1995.
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. The Company expects this trend to continue.
International service sales decreased 22% to $12,277,000 in 1996,
while domestic service sales decreased 33% to $7,750,000 compared
to 1995. The slower decline in International service revenue is
attributed to limited competition.
International net sales increased 12% in 1996 when compared to
1995, versus a decrease of 26% in 1995 compared to 1994.
Domestic net sales decreased 20% and 44% in 1996 and 1995,
respectively, when compared to the prior year. International
sales in 1996, 1995 and 1994 were $28,327,000, $25,277,000 and
33,937,000 or 59%, 51% and 44%, respectively, of total net sales.
During the three years ended December 31, 1996, no single
customer accounted for more than 10% of the Company's annual
sales. However, sales to various U.S. government agencies have
represented approximately 22%, 24% and 32% of net sales in 1996,
1995 and 1994, respectively. The Company recognizes that
reductions in current levels of U.S. government agency spending
on computers and computer related services could adversely affect
its traditional sources of revenue. The Company believes the
expansion into non traditional, high growth storage markets with
the Infinity SP(TM), and the Infinity R/T(TM) Family of products
will mitigate potential risk.
Total cost of sales decreased in 1996 to $53,608,000, from
$55,963,000 in 1995 and $60,907,000 in 1994. The decrease in all
years reported was due generally to lower sales volumes and lower
spending resulting from the restructuring of manufacturing and
customer service operations during the three year period. Since
the beginning of 1994, combined manufacturing and customer
service headcount has been reduced by approximately 33%, certain
customer service field operations have been closed or scaled
down, and manufacturing operations have been consolidated in
Melbourne, Florida.
In 1996 and 1995, cost of equipment sales exceeded sales by
$8,186,000 and
$12,970,000 or (30%) and (59%) of net sales, respectively,
compared to a 9% gross margin of $3,360,000 in 1994. 1996 cost
of sales included $9,932,000 in additional valuation reserves on
Storage Product inventory. Gross margins were reduced in 1995 and
1994 due to the charges associated with the termination of the
Amdahl Reseller Agreement and the negative effect of the under
utilization of manufacturing capacity. As discussed in Note B of
Notes to Consolidated Financial Statements, in 1995 and 1994, the
Company recorded charges of $14,242,000 and $8,960,000
respectively, in connection with the termination of the Amdahl
Reseller Agreement. The following table illustrates equipment
gross margins, adjusted for this impact as well as the impact of
Storage Product valuation reserves charged in 1996 as a result of
slow moving inventory:
1996 1995 1994
Equipment Sales $27,600 $22,005 $38,412
Equipment Cost of Sales 35,786 34,975 35,052
Amdahl Restructuring Charge 0 (14,242) (8,960)
Valuation Reserve Adjustment (9,932) 0 0
Adjusted Equipment Cost of Sales 25,854 20,733 26,092
Adj. Equipment Gross Margin $1,746 $1,272 $12,320
Adj. Gross Margin as % of 6% 6% 32%
Revenue
The decline in equipment gross margin as a percentage of revenue
in 1995 when compared to 1994 is attributable to factory
variances related to lower production volumes and under
utilization of manufacturing capacity, as well as higher warranty
costs associated with new product introductions. Equipment gross
margin remained low in 1996 due to the discounting of Storage
Products in order to penetrate the marketplace and establish
reference accounts. Warranty costs related to the Storage
Product were also higher than anticipated due to engineering
changes on current installations and spare part inventory.
In 1996, gross margins on service sales were $2,205,000 or (11%),
compared to $6,605,000 (24%) and $12,283,000 (32%) in 1995 and
1994, respectively. For 1996, 1995 and 1994, service margins
were reduced for investments in various programs and
infrastructure necessary to support the Storage Product line.
The following table illustrates service gross margins adjusted
for these investments:
1996 1995 1994
Service Sales $20,027 $27,323 $38,138
Cost of Service Sales 17,822 20,718 25,855
Investment in Storage Product (5,979) (3,719) (2,010)
Support
Adjusted Cost of Service Sales 11,843 16,999 23,845
Adjusted Service Gross Margin $8,184 $10,324 $14,293
Adjusted Gross Margin as % of 41% 38% 37%
Sales
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. Therefore,
as revenues decline, costs decline as well. Moreover, management
continues to reduce fixed costs on an ongoing basis. As a
result, gross margin as a percentage of revenue has increased to
41% in 1996, from 38% and 37% for 1995 and 1994, respectively,
when adjusted for the impact of the investment in Storage Product
support programs and infrastructure. The Company expects to
achieve similar gross margins in the future.
Research and development expenses in 1996 were $30,260,000
compared to $33,249,000 and $30,339,000 in 1995 and 1994,
respectively. However, in 1995 the Company charged research and
development $500,000 for the write down of capitalized software
projects as discussed in Note B of the Notes to Consolidated
Financial Statements. Excluding this charge, 1996 expenses
decreased $2,489,000 or 8% when compared to 1995. The decrease
in research and development expenses in 1996 is primarily related
to restructuring actions taken in the second quarter of 1995.
Research and development expenses as a percentage of net sales
was 64% in 1996, 67% in 1995 and 40% in 1994. The percentage
increase from 1994 was a result of both lower net sales and
higher expense levels. Over the three year period, management
increased expenditures on those strategic product offerings
necessary for the future growth of the business while
significantly reducing the level of investment in areas outside
the Company's principal focus. To effectively compete in its
market niches, the Company must continue to invest aggressively
in research and development activities.
Sales, general and administrative ("SG&A") expenses in 1996 were
$30,977,000 compared to $33,683,000 and $36,152,000 in 1995 and
1994, respectively. In 1996 and 1995, SG&A expenses decreased
due to management's actions taken to minimize headcount, close or
consolidate marginally profitable field offices and to more
effectively focus its advertising programs. During 1995, SG&A
expenses were also reduced by lower commissions on the year's
lower sales. These reductions were partially offset by non cash
compensation charges of $589,000 and $1,424,000 in 1996 and 1995,
respectively, in connection with the extension of the expiration
date of certain individual stock option grants. As a percentage
of net sales, SG&A expenses were 65%, 68% and 47% in 1996, 1995
and 1994, respectively.
As discussed in Note F of Notes to Consolidated Financial
Statements, in the second quarter of 1995 management evaluated
the Company's latest financial projections, and concluded; (i)
the termination of the Amdahl Reseller Agreement resulted in a
significant delay in the realization of product revenues, (ii)
the rate of decline in real-time equipment and service revenues
had exceeded its previous estimates and (iii) the rate of
worldwide sales growth anticipated in newer product lines
remained significantly below projected levels. In light of these
conclusions, management restructured operations and recorded a
charge to operations of $4,499,000. The most significant of
these restructuring actions were; (i) a 95 person reduction in
workforce primarily in manufacturing and development, resulting
in a severance charge of $1,335,000, (ii) a write down of
$782,000 in the carrying value of the equipment used in the
support of the Amdahl Reseller Agreement and (iii) the write off
of $1,624,000 of capitalized software assets relating to the
Company's UNIX(R) based product lines. Management will continue
to assess its cost structure and the carrying value of its
assets in light of expected future business. While there are no
existing plans to take any additional actions, should future
conditions require, management could approve additional plans to
further reduce its cost base or recognize the impairment in value
of long-lived assets.
Interest expense increased in 1996 to $3,520,000 primarily due to
increased debt levels. Interest expense decreased to $2,957,000
in 1995 from $3,363,000 in 1994. Since February 4, 1994, Encore
has completed a series of refinancing agreements with the Japan
Energy Group resulting in conversions of $240,000,000 of debt to
preferred stock.
Other expense, net, was greater in 1996 than in 1995 and 1994 due
principally to greater foreign exchange losses.
Income taxes provided in 1996, 1995 and 1994 relate to taxes
payable by foreign subsidiaries (see Note H of the Notes to
Consolidated Financial Statements).
Liquidity and Capital Resources
Because of the continuing operating losses incurred for the five
years ended December 31, 1996, the Company has been unable to
generate cash from operating activities. In 1996, 1995 and 1994,
the Company used cash in operating activities of $60,744,000,
$49,769,000 and $64,504,000, respectively. As of December 31,
1996, the Company had a capital deficiency of $34,010,000.
From 1995 to 1996, cash used in operating activities increased by
$10,975,000, reflecting the increase in working capital of
$8,600,000, primarily increased inventory. Additionally, for
1996, the net loss, as adjusted for non cash items, exceeded the
1995 net loss by $2,029,000.
Cash used in 1995 operating activities decreased by $14,735,000
from 1994 reflecting working capital changes which resulted
principally from the Amdahl Reseller Agreement and its
termination as discussed more fully in Note B of Notes to
Consolidated Financial Statements. During 1994 the Company
significantly increased its investment in accounts receivable and
inventories as a result of the acceleration of activities under
the Amdahl Reseller Agreement. With the termination of this
agreement in 1995, the Company's related working capital
investment was significantly reduced. Accordingly, net changes
in accounts receivable and inventories amounted to $3,906,000 in
1995, an improvement of $24,302,000 as compared to 1994. These
improvements were partially offset by the increase in the 1995
net loss of $10,174,000, as adjusted by non cash items.
Expenditures for property and equipment during 1996, 1995 and
1994 were $7,433,000, $7,335,000 and $13,089,000, respectively.
Purchases of Customer Service spare parts in support of the
Storage Product accounted for 40% of total property and equipment
spending in 1996. Expenditures for capitalized software during
1995 and 1994 were $673,000 and $2,467,000, respectively. As of
December 31, 1996, there were no material commitments for capital
expenditures.
Cash was provided through financing activities of $68,707,000,
$58,658,000 and $78,496,000, in 1996, 1995 and 1994,
respectively. The principal source of financing has been through
various agreements provided by the Japan Energy Group. On April
16, 1996 the Japan Energy Group continued its support as
discussed in Note G of the Notes to Consolidated Financial
Statements by; (i) accepting Preferred Series "H" Stock in
exchange for $35,000,000 of debt and (ii) providing a $65,000,000
committed borrowing facility. Gould has allowed the Company to
borrow additional funds in excess of the maximum limit. As of
December 31, 1996, Encore owed to Gould $72,659,000 in principal,
plus $10,791,000 in accrued interest. On January 9, 1997 Gould
and Encore agreed to amend the credit agreement to increase the
maximum amount of loans to $80,000,000, however, any loan
exceeding $65,000,000 will be made at the discretion of Gould.
On March 19, 1997, the Company and Gould agreed to cancel
$40,000,000 of indebtedness owed to Gould under 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") with a liquidation preference of
$40,000,000. In addition to the exchange of indebtedness for
shares of Series I, 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. As of April 12,
1997 the Company owed to Gould $45,525,494 under the Credit
Agreement, plus $12,974,348 in accrued interest. All borrowings
under the Credit Agreement, plus accrued interest, are due and
payable on May 31, 1997. In the event of default, the rate of
interest to be applied will immediately increase by an additional
2%.
The accompanying consolidated financial statements have been
prepared assuming that the company will continue as a going
concern. Based on current estimates of available cash flow,
management does not believe it will have sufficient cash to make
the mandatory payment on May 31, 1997, without proceeds from the
sale of assets or a refinancing or restructuring of the Credit
Agreement prior to such date. Additionally, the Company does not
have a committed source of financing to meet expected
requirements over the next year. The Company has retained an
investment banking firm to assist in exploring strategic
alternatives which include, among other things, a business
combination, sales of assets, strategic investment in the Company
or a refinancing of the Credit Agreement. There can be no
assurance that the Company will be successful in its attempt to
consummate one of the strategic alternatives or a refinancing or
restructuring of the Credit Agreement. If the Company does not
make the required payment at maturity of the Credit Agreement or
is unable to obtain a committed source of financing adequate to
meet expected requirements, it may be unable to continue its
normal operations, except to the extent permitted by the Japan
Energy Group. Substantially all of the Company's tangible and
intangible assets are pledged as collateral under the Credit
Agreement.
The majority of the year end cash on hand of $3,936,000 was at
various international subsidiaries. With minor exceptions, all
cash is freely remittable to the United States.
Item 8 Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors
of Encore Computer Corporation
We have audited the consolidated financial statements and the
financial statement schedule of Encore Computer Corporation and
Subsidiaries listed in Item 14 (a) of this Form 10-K. These
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Encore Computer Corporation and
Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included
therein.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. The Company has suffered recurring losses from
operations and has a net capital deficiency and a working capital
deficit as of December 31, 1996. As discussed in Notes G and M
to the consolidated financial statements, on March 19, 1997,
Japan Energy Corporation exchanged $40 million of the Company's
outstanding indebtedness for preferred stock and provided the
Company with an uncommitted credit facility of up to $50 million.
The facility, plus accrued interest is due and payable on May 31,
1997. Based on current estimates of available cash flow,
management does not believe it will have sufficient cash to make
the payment due at maturity. 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.
Management's plans in regard to these matters are described in
Note N to the consolidated financial statements. The
consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Coopers & Lybrand L.L.P.
Miami, Florida
January 30, 1997 except for Note M as to
which the date is March 19, 1997.
<PAGE>
ENCORE COMPUTER CORPORATION
Consolidated Statements of Operations
(in thousands except per share data)
Year Ended
Dec 31, Dec 31, Dec 31,
1996 1995 1994
Net sales:
Equipment $27,600 $22,005 $38,412
Service 20,027 27,323 38,138
Total 47,627 49,328 76,550
Costs and expenses:
Cost of equipment sales (Note B) 35,786 34,975 35,052
Cost of service sales 17,822 20,718 25,855
Research and development 30,260 33,249 30,339
Sales, General and Admin 30,977 33,683 36,152
Restruct costs (Note B) 0 4,499 0
Total 114,845 127,124 127,398
Operating loss -67,218 -77,796 -50,848
Int exp, princ related parties -3,520 -2,957 -3,363
Interest income 196 171 128
Other (expense)/income, net -554 75 70
Loss before income taxes -71,096 -80,507 -54,013
Provision for income taxes -364 847 543
Net loss ($70,732) ($81,354) ($54,556)
Net loss per common share (Note A):
Net loss attributable to common
shareholders ($96,145)($100,416) ($68,543)
Loss per common share ($2.18) ($2.37) ($1.68)
Weighted average shares
of common stock 44,174 42,287 40,755
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
Proforma
Dec 31, Dec 31, Dec 31,
1996 1996 1995
(See Note M)
ASSETS
Current assets:
Cash and cash equivalents $3,936 $3,936 $3,490
Accounts receivable, less allowances of $614 in 1996 and
$1,798 in 1995 14,970 14,970 13,030
Inventories 13,896 13,896 15,796
Prepaid expenses and other current assets 1,409 1,409 1,353
Total current assets 34,211 34,211 33,669
Property and equipment, net 33,376 33,376 35,800
Other assets 1,669 1,669 2,239
Total assets $69,256 $69,256 $72,537
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Curr. portion long term debt-rela parties(Note E) $32,659 $72,659 $0
Current portion long term debt-other (Note E) 182 182 171
Accounts payable and accrued liabilities (Note D) 28,849 28,665 28,008
Total current liabilities 61,690 101,506 28,179
Long term debt-related parties (Note E) 0 0 40,154
Long term debt-other (Note E) 476 476 658
Other liabilities 1,284 1,284 1,032
Total liabilities 63,450 103,266 70,023
Commitments and contingencies (Note I)
Shareholders' equity (Capital deficiency) (Notes E and F):
Preferred stock, $.01 par value; authorized 10,000,000 shares:
Series A Convertible Participating Preferred, issued
73,641 shares in 1996 and 1995 1 1 1
6% Cumulative Series B Convertible Preferred, issued
728,722 and 707,345 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $72,872,200
and $70,734,500 in 1996 and 1995, respectively. 7 7 7
6% Cumulative Series D Convertible Preferred, issued
1,115,074 and 1,082,362 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $111,507,400
and $108,236,200 in 1996 and 1995, respectively 11 11 11
6% Cumulative Series E Convertible Preferred, issued
1,139,782 and 1,106,343 in 1996 and 1995, with an
aggregate liquidation preference of $113,978,200 and
$110,634,300 in 1996 and 1995, respectively 11 11 11
6% Cumulative Series F Convertible Preferred, issued
533,333 and 517,687 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $53,333,300
and $51,768,700 in 1996 and 1995, respectively. 5 5 5
6% Cumulative Series G Convertible Preferred, issued
572,289 and 555,500 in 1996 and 1995, respectively,
with an aggregate liquidation preference of $57,228,900
and $55,550,000 in 1996 and 1995, respectively. 6 6 6
6% Cumulative Series H Convertible Preferred, issued
350,000 in 1996 with an aggregate liquidation preference
of $35,000,000. 4 4 0
6% Cumulative Series I Convertible Preferred, issued
400,000 in 1996 with an aggregate liquidation preference
of $40,000,000. 4 0 0
Common stock, $.01 par value; authorized 200,000,000 shares;
issued 37,270,457 and 36,067,792 in 1996 and 1995,
respectively. 373 373 361
Additional paid-in capital 486,880 447,068 412,876
Accumulated deficit -481,496 -481,496 -410,764
Total shareholders' equity (Capital deficiency) 5,806 -34,010 2,514
Total liab and sharehldrs' equity (Cap'l Defic.) $69,256 $69,256 $72,537
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Year Ended
Dec 31, Dec 31, Dec 31,
1996 1995 1994
Cash flows from operating activities:
Net loss ($70,732) ($81,354) ($54,556)
Adjustments to arrive at net cash used in operating activities:
Depreciation and amortization 10,747 11,750 10,850
Non cash compensation (Note J) 589 1,424 0
Inventory obsolescence and writedown to lower of cost
or market 11,013 12,367 -30
Equity in loss of
joint venture 253 773 286
Bad debt provision (credit) -550 2,735 2,928
Restructuring charges 0 4,499 0
Foreign exchange loss (gain) 412 -134 -93
Loss (gain) on disposal of property
and equipment 138 1,839 -1
Net changes in operating assets and liabilities:
Accounts receivable -1,750 4,514 -5,942
Inventories -8,888 -608 -9,765
Prepaid expenses and other current assets -89 375 1,217
Other assets 36 381 -257
Accounts payable and accrued liabilities -1,922 -8,330 -9,048
Other liabilities -1 0 -93
Net cash used in operating activities -60,744 -49,769 -64,504
Cash flows from investing activities:
Additions to property and equipment -7,433 -7,335 -13,089
Proceeds from sale of property and equipment 114 14 220
Capitalization of software costs 0 -673 -2,467
Net cash used in investing activities -7,319 -7,994 -15,336
Cash flows from financing activities:
Net borrowings under revolving loan agreements 67,505 56,733 76,497
Principal payments of long term debt -171 -194 -169
Dividends paid on Preferred Stock -2 -1 -2
Issuance of Common Stock 1,375 2,120 2,170
Net cash provided by financing activities 68,707 58,658 78,496
Effect of exchange rate changes
on cash -198 78 110
Increase (decrease) in cash and cash equivalents 446 973 -1,234
Cash and cash equivalents, beginning 3,490 2,517 3,751
Cash and cash equivalents, ending $3,936 $3,490 $2,517
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Consolidated Statements of Cash Flows
1996 1995 1994
Supplemental disclosure of cash flow information (in thousands):
Cash paid during the period for interest $150 $1,354 $2,162
Cash paid during the period for income taxes 631 1,273 0
Non-cash investing and financing activity:
Indebtedness exchanged for preferred stock $35,000 $105,000 $100,000
Accruals originally established for transaction
costs related to Gould capital transactions credited to
additional paid-in capital $0 $400 $625
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
ENCORE COMPUTER CORPORATION
Consolidated Statements of Shareholders' Equity (Capital Deficiency)
(in thousands except share data)
Preferred Stock
Series A Series B Series D
Par Par Par
Shares Val Shares Val Shares Val
Bal Dec 31, 1993 73,641 1 591,625 6 905,283 9
Common stock options
exercised, $.63 to $2.00
per share
Shares issued through employee
stock purchase plan, at an avg
price of $2.69 per share
Issuance of Series E Convertible
Preferred Stock (Note E)
Dividends issued to Preferred Stockholders
in shares of Series B, D
and E 0 0 74,828 1 114,504 1
Adjustment of estimated transaction costs
relating to Gould capital transactions
Net loss
Bal Dec 31, 1994 73,641 1 666,453 7 1,019,787 10
Common stock options
exercised, $.63 to $2.31
per share
Shares issued through employee
stock purchase plan, at an avg price of
$1.75 per share
Issuance of Series F and G Convertible
Preferred Stock (Note E)
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 0 0 40,892 0 62,575 1
Cash paid in lieu of fract shs
Extension of expiration date on outstanding
grant of common stock options
Adjustment of estimated transaction costs
relating to Gould capital transactions
Net loss
Bal Dec 31, 1995 73,641$ 1 707,345 $ 7 1,082,362$ 11
Common stock options
exercised, $.69 to $2.00
per share
Shares issued through employee
stock purchase plan, at an avg price of
$1.52 per share
Issuance of Series H Convertible
Preferred Stock (Note E)
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 0 0 21,377 0 32,712 0
Cash paid in lieu of fract shs
Extension of expiration date on outstanding
grant of common stock options
Net loss
Bal Dec 31, 1996 73,641$ 1 728,722 $ 7 1,115,074$ 11
Preferred Stock
Series E Series F Series G Series H
Par Par Par Par
Shares Val Shares Val Shares Val Shares Val
Bal Dec 31, 1993 0 $0 0 $0 0 $0 0 $0
Common stock options
exercised, $.63 to $2.00
per share
Shares issued through employee
stock purchase plan, at an avg
price of $2.69 per share
Issuance of Series E
Convertible Preferred
Stock (Note E) 1,000,000 10 0 0 0 0 0 0
Dividends issued to Preferred Stockholders
in shares of Series B, D
and E 42,381 0 0 0 0 0 0 0
Net loss
Bal Dec 31, 1994 1,042,381 $10 0 $0 0 $0 0 $0
Common stock options
exercised, $.63 to $2.31
per share
Shares issued through employee
stock purchase plan, at a price of
$1.75 per share
Issuance of Series F and G
Convertible Preferred
Stock (Note E) 0 0 500,000 5 550,000 6
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 63,962 1 17,687 0 5,500 0
Cash paid in lieu of fract shs
Extension of expiration date on outstanding
grant of common stock options
Adjustment of estimated transaction costs
relating to Gould capital transactions
Net loss
Bal Dec 31, 1995 1,106,343$ 11 517,687 $ 5 555,500$ 6
Common stock options
exercised, $.69 to $2.00
per share
Shares issued through employee
stock purchase plan, at an avg price of
$1.52 per share
Issuance of Series H Convertible
Preferred Stock (Note E)
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 33,439 0 15,646 0 16,789 0
Cash paid in lieu of fract shs
Extension of expiration date on outstanding
grant of common stock options
Bal Dec 31, 1996 1,139,782 $11 533,333 $5 572,289 $6 350,000 $4
Common Stock Shrhldrs'
Addt'l Eq
Par Paid-in Accum (Capital
Shares Val Capital Deficit Def)
Bal Dec 31, 1993 32,726,391 $327 $207,951 $-274,854 $-66,560
Common stock options
exercised, $.63 to $2.00
per share 966,734 10 1,131 0 1,141
Shares issued through employee stock
purchase plan, at an avg price of $2.69
per share 382,999 4 1,025 0 1,029
Issuance of Series E
Convertible Preferred
Stock (Note E) 0 0 96,273 0 96,283
Dividends issued to Preferred Stockholders
in shares of Series B, D
and E 0 0 -4 0 -2
Adjustment of estimated transaction
costs relating
to Gould 0 0 625 0 625
Net loss 0 0 0 -54,556 -54,556
Bal Dec 31, 1994 34,076,124 $341 $307,001 $-329,410 $-22,040
Common stock options
exercised, $.63 to $2.31
per share 1,568,934 16 1,363 0 1,379
Shares issued through employee stock
purchase plan, at an avg price of $1.75
per share 422,734 4 737 0 741
Issuance of Series F and G
Convertible Preferred
Stock (Note E) 0 0 101,954 0 101,965
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 0 0 -2 0 0
Cash paid in lieu of
fract shs 0 0 -1 0 -1
Extension of expiration date on outstanding
grant of commom
stock options 0 0 1,424 0 1,424
Adjustment of estimated transaction
costs relating to Gould capital
transactions 0 0 400 0 400
Net loss 0 0 0 -81,354 -81,354
Bal Dec 31, 1995 36,067,792 $361 $412,876 $-410,764 $2,514
Common stock options
exercised, $.69 to $2.00
per share 808,011 8 767 0 775
Shares issued through employee stock
purchase plan, at an avg price of $1.52
per share 394,654 4 596 0 600
Issuance of Series H
Convertible Preferred
Stock (Note E) 0 0 32,242 0 32,246
Dividends issued to Preferred Stockholders
in shares of Series B, D, E, F
and G 0 0 -1 0 -1
Cash paid in lieu of
fract shs 0 0 -1 0 -1
Extension of expiration date on outstanding
grant of commom
stock options 0 0 589 0 589
Net loss 0 0 0 -70,732 -70,732
Bal Dec 31, 1996 37,270,457 $373 $447,068 $-481,496 $-34,010
Notes to Consolidated Financial Statements
A. Nature of Operations and Summary of Significant Accounting
Policies
Nature of Operations
Encore Computer Corporation ("Encore" or the "Company"), founded
in 1983, designs, manufactures, distributes and supports scalable
real time data storage, data retrieval, and sharing technologies
for mixed platform processing environments. Headquartered in Fort
Lauderdale, Florida, the Company has sales offices and
distributors in the United States, Canada, Europe, and the Far
East.
Basis of Presentation
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note N of the Notes to Consolidated
Financial Statements, the Company has borrowings under a
$50,000,000 facility which matures May 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.
Principles of Consolidation
The accompanying financial statements include the accounts of
Encore and its wholly owned subsidiaries. All material
intercompany transactions have been eliminated. The Company's 50%
investment in a Japanese joint venture operation is accounted for
under the equity method. The Company has a commitment to make
additional capital contributions to the joint venture,
accordingly, the Company has recognized losses in excess of its
investment to the extent of this capital commitment.
Pervasiveness of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with
maturities at the date of purchase of three months or less.
Revenue Recognition
Revenue related to equipment and software sales is recognized upon
shipment. With respect to the Company's storage processor product
line, during the product introductory period, revenue will be
recognized upon customer acceptance. The Company expects
acceptance to occur within thirty days of shipment. This practice
will be reviewed in 1997 and, if appropriate, the Company will
revert to the established recognition policy. Service revenue is
recognized over the term of the related maintenance agreements
which approximates the timing of services performed.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method. Loaned equipment
which consists primarily of finished computer systems that are
loaned to customers for test and evaluation is classified as
inventory only if the equipment is intended for resale and
anticipated to be in service for a period of less than 12 months
prior to sale. Loaned equipment in service for more than 12
months is classified as property and equipment.
Property and Equipment
Property and equipment is stated at cost. Property and equipment
includes customer service inventory which consists principally of
spare parts utilized to support repairs at customer installations
and is generally not available for resale. Additions, renewals and
improvements are capitalized, and repair and maintenance costs are
expensed. Upon an assets retirement or disposition, the cost and
related accumulated depreciation are removed from the accounts and
any resulting gain or loss is reflected in the results of
operations. Depreciation is provided on a straight line basis
over the estimated lives of the assets, generally three years for
loaned equipment, five years for equipment and customer service
inventory, ten years for furniture and fixtures, and 25 to 30
years for buildings. Leasehold improvements are amortized over
their expected useful lives or the lease term, whichever is
shorter.
Statement of Financial Accounting Standards ("FAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" was issued in March 1995 and was
adopted in the Company's fiscal year beginning January 1, 1996.
FAS 121 requires that long-lived assets, such as property and
equipment, and certain identifiable intangibles to be held and
used, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss, based on the fair value
of the asset, should be recognized if the expected future cash
flows (undiscounted and without interest charges) resulting from
the use and eventual disposition of the asset is less than the
carrying amount of the asset.
As discussed in Note F of Notes to Consolidated Financial
Statements, the Company has historically written down the carrying
value of long-lived assets deemed permanently impaired. However,
as contemplated by FAS 121, the Company's history of operating and
cash flow losses indicates that the recoverability of the carrying
amount of the long-lived assets should be assessed. Based on the
Company's analysis of the fair value of property and equipment, no
adjustment is required in 1996.
Employer's Postemployment Benefits
The Company provides employees with salary continuation and job
counseling services in the event of an employee's involuntary
termination. The Company recognizes such costs on a terminal
accrual basis, recording the estimated cost of postemployment
benefits at the date of the event giving rise to the liability to
pay those benefits.
Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its stock option and stock purchase plans.
Accordingly, no compensation cost has been recognized for these
plans with the exception of extension of the expiration date of
certain individual stock option grants. Pro forma disclosure of
the fair value impact on earnings and earnings per share as
required in FAS 123, "Accounting for Stock-Based Compensation" is
presented in Note J of the Notes to Consolidated Financial
Statements.
Capitalized Software
Through June 1995, the Company capitalized certain internal costs
associated with software development after the project reached
technological feasibility. Such costs as well as capitalized costs
for purchased software, were amortized to cost of sales by the
greater of; (a) straight line amortization over the expected
commercial life of each product (three to five years), or (b) the
ratio that current revenues for a product bear to the total of
current and anticipated future revenues for that product.
Software development costs incurred prior to reaching the point of
technological feasibility were considered research and development
costs and were expensed as incurred. During June 1995, as
discussed in Note B of the Notes to Consolidated Financial
Statements, the Company took a charge of $500,000 to research and
development to write down capitalized software projects in
process. Since that time, all software development costs have
been expensed as incurred.
Income Taxes
The Company utilizes the liability method of accounting for
deferred income taxes. Under this method, deferred tax assets and
liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to reverse. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some or all of the deferred tax assets will
not be realized.
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 has been considered common stock (on an assumed
converted basis) for purposes of all 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
$25,413,000, $19,061,600 and $13,986,600 for 1996, 1995 and 1994,
respectively. Based on the capital deficiency at December 31,
1996, the Company has accumulated preferred stock dividends
amounting to $13,417,000. All preferred stock dividends other
than those accumulated as of December 31, 1996, have been paid in
additional shares of the appropriate class of preferred stock.
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, Earnings Per Share (EPS) ("SFAS No. 128"). SFAS No.
128 specifies new standards designed to improve the EPS
information provided in financial statements by simplifying the
existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS
computations include; (a) eliminating the presentation of primary
EPS and replacing it with basic EPS, with the principal difference
being that common stock equivalents are not considered in
computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision, and (c)
revising the contingent share provisions and the supplemental EPS
data requirements. SFAS 128 also makes a number of changes to
existing disclosure requirements. SFAS 128 is effective for
financial statements issued for periods ending after December 15,
1997, including interim periods. The Company had not yet
determined the impact of the implementation of SFAS 128.
Foreign Currency Translation and Transactions;
Management has determined that the functional currency of each of
the Company+s subsidiaries is the United States dollar.
Consequently, assets and liabilities of foreign operations are
translated into U.S. dollars at period end exchange rates, except
that inventory and property and equipment are translated at
historical exchange rates. Income and expenses are translated at
the average rates prevailing during the year, except that cost of
sales and depreciation are translated at historical exchange
rates. All gains and losses arising from changes in exchange rates
are included in operating results in the period incurred.
Warranties
The Company provides a standard product warranty on its computer
systems for parts and labor which generally extends ninety days
from the date of installation, but on certain products for up to
one year. On its storage processor product line, the standard
product warranty for parts and labor generally extends two, and
in some cases, three years from the date of installation. The
estimated cost of providing such warranty on products sold is
included in cost of sales at the time revenue is recognized.
Reclassifications
Certain reclassifications have been made to conform prior years'
data to the current year presentation.
B. Termination of Amdahl Reseller Agreement
During 1994, the Company and Amdahl Corporation ("Amdahl") entered
into a five year reseller agreement (the "Amdahl Reseller
Agreement") which granted Amdahl the exclusive right to distribute
the Company's Infinity Storage Products under the Amdahl brand.
The Amdahl Reseller Agreement, as amended, established procurement
schedules, which if certain product requirements were met, would
have required Amdahl to purchase a significant amount of product
from the Company. Sales under the Amdahl Reseller Agreement were
anticipated to begin in the second half of 1994 with significant
sales volumes scheduled in the first half of 1995. However, after
entering into the agreement certain significant contractual issues
arose delaying the sale of products and on June 8, 1995, Encore
announced that the Amdahl Reseller Agreement had been terminated.
The Company's inventory levels and overhead costs were based on a
plan designed to meet accelerating sales commitments defined in
the Amdahl Reseller Agreement. However, because of the
termination of the Amdahl Reseller Agreement, product sales fell
well short of expectations and all elements of the Company's
results of operations were adversely affected. As a result of
these events, during 1995, the Company charged operations
$19,241,000, consisting of $11,442,000 charged to cost of sales to
reduce inventory carrying amounts to estimated net realizable
value, as well as $2,800,000 charged to cost of sales for
uncollected Amdahl accounts receivable, $500,000 charged to
research and development to write down capitalized software
projects in process and $4,499,000 charged to restructuring costs.
The charge related to; (i) the recognition of the permanent
impairment in value of $2,406,000 of certain long-lived assets,
including capitalized software and property and equipment, (ii)
severance and benefit pay of $1,335,000 as a result of a 95 person
reduction in workforce, principally in manufacturing and
development, and (iii) other expenses associated with the
termination of the Amdahl Reseller Agreement. As of December 31,
1994, because of uncertainties surrounding the Amdahl
relationship, the Company also charged cost of sales $8,960,000 in
order to reduce inventories to estimated net realizable value and
to provide for uncollectible accounts receivable.
C. Inventories
Inventories consist of the following (in thousands):
December December
31, 31,
1996 1995
Purchased Parts $ 9,357 $ 9,161
Work in process 306 4,570
Finished goods 3,981 1,799
Loaned computer equipment
and
consignment inventory 252 266
$ 13,896 $ 15,796
During the fourth quarter of 1996, the Company provided an
additional reserve of $7,348,000 in light of the continued slow
market acceptance of the Company's storage products. Storage
product inventory, amounted to $9,169,000 and $11,139,000 at
December 31, 1996 and 1995, respectively. The Company is
expanding its programs to market the Company's storage products
through various direct, distributor and OEM channels. No estimate
can be made of a range of amounts of loss that are reasonably
possible should the programs not be successful.
D. Property and Equipment
Property and equipment consists of the following (in thousands):
December December
31, 31,
1996 1995
Land $ 5,100 $ 5,100
Buildings 15,238 15,243
Equipment 36,005 44,349
Customer service inventory 16,282 13,985
Furniture and fixtures 2,539 2,900
Leasehold improvements 1,298 1,309
Loaned equipment 4,815 4,815
81,277 87,701
Accumulated depreciation
and amortization (47,901) (51,901)
$ 33,376 $ 35,800
Depreciation expense in 1996, 1995 and 1994 amounted to
$9,380,000, $9,260,000 and $8,619,000, respectively.
E. Capitalized Software
Capitalized software consists of the following (in thousands):
December December
31, 31,
1996 1995
Capitalized software $ - $ 3,708
Accumulated amortization - (2,879)
$ - $ 829
Software costs capitalized in 1995 and 1994 amounted to $673,000
and $2,467,000, respectively. Amortization of capitalized
software costs charged to expense in 1996, 1995 and 1994 amounted
to $1,367,000, $2,490,000 and $2,226,000, respectively. During
1995, $1,625,000 was charged to restructuring in recognition of
the permanent impairment in value of capitalized software and
$561,000 was transferred from construction in progress to
capitalized software.
F. Accounts Payable and Accrued Liabilities;
Accounts payable and accrued liabilities consist of the following
(in thousands):
December December
31, 31,
1996 1995
Accounts payable $ $ 7,
4,976 339
Accrued salaries and 4,034 4,261
benefits
Accrued restructuring 362 1,566
costs
Accrued interest-related 11,614 5,921
parties
Accrued taxes 2,760 4,045
Deferred income,
principally
maintenance contracts 879 827
Other accrued expenses 4,040 4,049
$ 28,665 $ 28,008
Accrued interest of $10,791,000 and $5,215,000 was payable to
Gould at December 31, 1996 and 1995, respectively. The balance of
accrued interest to related parties is being amortized over the
term of the credit agreement.
G. Debt
Debt consists of the following (in thousands):
(See Note
M)
Pro forma
December December December
31, 31, 31,
1996 1996 1995
(Unaudited)
Debt to unrelated parties:
Mortgages payable $ $ $
658 658 829
Current portion of debt (182) (182) (171)
Total long term debt to $ $ $
unrelated parties 476 476 658
Debt to related parties:
Credit Agreement with Gould
Electronics Inc. $ 32,659 $ 72,659 $ 40,154
Current portion of debt (32,659) (72,659) -
Total long term debt to $ $ $ 40,154
related parties - -
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. As discussed
more fully in Note J of Notes to Consolidated Financial
Statements, the Japan Energy Group has canceled indebtedness owed
by the Company in exchange for various series of convertible
preferred stock. Assuming full conversion of preferred stock
holdings as of December 31, 1996, the Japan Energy Group
beneficially owns 82% of the Company's common stock.
During 1995, Gould canceled $105,000,000 of indebtedness and on
April 16, 1996, Gould as authorized by Japan Energy Corporation
canceled $35,000,000 of indebtedness pursuant to a Credit
Agreement ("Credit Agreement") which was scheduled to mature on
that date, in exchange for 350,000 shares of the Company's Series
H Convertible Preferred Stock ("Series H"). In addition to the
exchange of indebtedness for Series H, Gould amended the Credit
Agreement in order to provide the Company with a committed
borrowing facility of $65,000,000. Gould also has allowed the
Company to borrow additional funds in excess of the maximum limit.
The credit facility bears interest at the prime rate plus 2%
(10.25% at December 31, 1996). As of December 31, 1996, Encore
owed to Gould $72,659,000 in principal, plus $10,791,000 in
accrued interest. On January 9, 1997 Gould and Encore agreed to
amend the credit agreement to increase the maximum amount of loans
to $80,000,000, however, any loan exceeding $65,000,000 will be
made at the discretion of Gould. 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.
As discussed more fully in Note M of Notes to Consolidated
Financial Statements, on March 19, 1997, the Company and Gould
agreed to cancel $40,000,000 of indebtedness owed to Gould under
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") with a liquidation
preference of $40,000,000. In addition to the exchange of
indebtedness for shares of Series I, 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. As of
April 12, 1997 the Company owed to Gould $45,525,494 under the
Credit Agreement, plus $12,974,348 in accrued interest. All
borrowings under the Credit Agreement, plus accrued interest, are
due and payable on May 31, 1997. In the event of default, the
rate of interest to be applied will immediately increase by an
additional 2%.
H. Income Taxes
The Company utilizes the liability method of accounting for
deferred income taxes and has recorded a credit of $364,000 in
1996 due to overestimated tax accruals in prior years, and a
provision of $847,000 and $543,000 for 1995 and 1994,
respectively. The provisions relate to the profitable operations
of certain foreign subsidiaries.
The financial reporting bases of investments in certain foreign
subsidiaries exceeds their tax bases. A deferred tax liability is
not recorded for the excess because the investments are
essentially permanent. A reversal of the Company's plans to
permanently invest in these operations would cause the excess to
become taxable. On December 31, 1996, these temporary differences
were approximately $6,000,000. A determination of the amount of
unrecognized deferred tax liability related to these investments
is not practicable.
The significant components of the deferred tax assets and
liabilities as of December 31, 1996 and 1995 were as follows (in
thousands):
December December
31, 31,
1996 1995
Net operating losses $ 150,195 $ 126,618
Research and experimental 1,750 1,750
credits
Capital losses 4,954 4,396
Allowance for doubtful 172 452
accounts
Inventory reserves 9,023 8,113
Accrued vacation 560 600
Various reserves/other 4,279 3,405
Accrued restructuring 7 102
170,940 145,436
Valuation allowance (168,739) (143,808)
2,201 1,628
Deferred tax liabilities:
Depreciation (1,863) (770)
Capitalized software (338) (858)
Net $ - $ -
For income tax purposes the Company had a change in ownership, as
defined by Internal Revenue Code Section 382, in connection with
the Gould debt exchange on January 28, 1991. The change in
ownership resulted in an annual limitation of approximately
$2,000,000 on the amount of net operating losses incurred prior to
January 28, 1991 that can be utilized to offset the Company's
future taxable income.
At December 31, 1996, the Company has available approximately
$85,000,000 of pre change net operating losses of which only
$30,000,000 will be allowable after application of the Section 382
limitation, pre change tax credit carryforwards, principally
research and development credits, of approximately $1,750,000 and
post change net operating losses of $330,000,000. These net
operating losses and tax credit carryforwards expire in the years
1998 through 2012. The Company also has a capital loss
carryforward of $12,937,000 related to the 1992 refinancing, which
expires in 1997, as well as, a $100,000 capital loss carryforward
stemming from the sale of an interest in a foreign investment
during 1995, which expires in 2000. For financial reporting
purposes, the full amount of the deferred tax assets was offset by
a valuation allowance due to uncertainties associated with the
eventual realization of such benefits.
As of December 31, 1996, the U.S. Federal Income Tax Returns for
1992 through 1994 were in the process of examination by the
Internal Revenue Service, which the Company believes will propose
certain adjustments. The Company believes that the tax returns
are substantially correct as filed and intends to vigorously
contest any proposed adjustments. Management believes that the
amounts that have been provided are adequate and that the ultimate
resolution of the examination will result in no material impact on
the Company's consolidated results of operations or financial
position.
I. Commitments and Contingencies
Leases
The Company leases office space and equipment under operating
leases. Certain building leases have renewal options generally
for periods ranging from one to five years. Rental expenses, net
of sublease income, were approximately $3,003,000, $3,187,000 and
$3,594,000 for 1996, 1995, and 1994, respectively. Approximate
future minimum rental payments under operating leases for the next
five years are as follows (in thousands):
Year
1997 $ 2,756
1998 1,623
1999 1,312
2000 1,215
2001 817
Joint Venture Capital Commitment
The Company has committed to invest up to a total of $3,250,000
for a Japanese joint venture, of which $1,285,000 has been accrued
in recognition of losses reported through December 31, 1996.
Litigation
The Company is subject to legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of
management, the amount of the ultimate liability with respect to
these actions will not materially affect the financial position of
the Company.
Intellectual Property License
In connection with its recapitalization in January 1991, the
Company licensed substantially all of its intellectual property
to Gould on a royalty free basis. However, under the terms of
the agreement, and in combination with certain extensions granted
by Gould, Encore retained the exclusive use of the intellectual
property through December 31, 1995. Those extensions have
expired and effective January 1, 1996, both Gould and Encore have
the right to use the Encore intellectual property. The Company
maintains the right to terminate the Gould license if all Gould
borrowings are repaid and the commitments under any Gould credit
agreements are terminated and one of the following four
conditions is met; (i) the 6% Cumulative Series B Convertible
Preferred Stock ("Series B") is converted into common stock or
Series A Convertible Participating Preferred Stock, or (ii) the
Series B is redeemed; or (iii) the Company pays Gould the fair
value of the license, or (iv) the Company pays Gould a fixed
dollar amount equal to $46,540,000 plus 9% per annum interest
compounded annually for the period after January 28, 1996,
through the date of payment.
J. Capital Stock
Based upon the Company's anticipated needs to issue additional
shares of Common Stock, "pay-in-kind" preferred stock dividends
and the issuance of Series I Preferred Convertible Stock (as
discussed more fully in Note M of Notes to Consolidated Financial
Statements), as well as common stock reserves established for the
Company's Stock Option and Purchase plans, the Company will
attempt to obtain stockholder approval to amend Encore's
Certificate of Incorporation to increase the number of shares of
common stock it is authorized to issue to 300,000,000 shares.
Series A Convertible Participating Preferred Stock
Certain of the Company's operations relate to classified U.S.
Government contracts. Accordingly, the United States Government
expressed concern regarding the extent of Gould's ownership of the
Company's common stock, since Gould, the Company's largest
shareholder, is owned and controlled by the Japan Energy
Corporation, a foreign corporation. In this connection, the
Company has issued to Gould 73,641 shares of Series A Convertible
Participating Preferred Stock ("Series A") in lieu of common
stock. The Company has agreed to reserve 7,364,100 shares of
common stock for issuance to Gould upon exercise of the conversion
option.
The holder of Series A and the Company each have the option at
any time, with 30 days prior notice, to convert or require to be
converted, all or any portion of the Series A to common stock at a
ratio of 1 to 100. Dividend rights are equal to those of the
common shares (on an assumed converted basis); however, there are
significant restrictions on the voting rights of the Series A.
The Series A is entitled to elect two members of the Board of
Directors but is not entitled to participate in the election of
other members of the Board. Based upon the characteristics and
rights of the Series A, the Company has deemed these shares to be
common stock (on an assumed converted basis) for purposes of all
per share calculations for the fiscal periods presented herein.
Cumulative Convertible Preferred Stock
The Company's Cumulative Convertible Preferred Stock, consisting
of Series B, D, E, F G and H (collectively "Preferred Stock") has
a liquidation preference of $100 per share and carries a 6%
cumulative annual dividend requirement payable quarterly which the
Company can accumulate or pay in additional shares of preferred
stock (valued at its liquidation preference) until the Company's
shareholders' equity exceeds $50,000,000. The Series B is
convertible into the Company's common stock at $3.25 per share at
the holder's option at any time and at the Company's option upon
satisfaction of certain conditions. The Series D, E, F G and H is
convertible, at the holder's option, into the Company's common
stock at $3.25 per share only; (a) if the shareholder is a United
States citizen or a corporation or other entity owned in the
majority by United States citizens, or (b) in connection with an
underwritten public offering. The stock is convertible, at the
Company's option, if the price of the common stock exceeds $3.90
per share for twenty consecutive days and; (a) a buyer is
contractually committed to purchase for at least $3.90 per share
at least 50% of the shares into which all outstanding Preferred
Stock would be converted, or (b) a buyer is contractually
committed to purchase for at least $3.50 per share at least 75% of
the shares into which all outstanding Preferred Stock would be
converted. Series B Preferred Stock is redeemable by the Company
at any time for cash equal to the liquidation preference plus
accumulated dividends. Series D,E,F,G and H are not redeemable.
The Company has reserved shares of common stock sufficient for
issuance upon conversion of the Preferred Stock and additional
shares which may be issued as a dividend. As of December 31,
1996, the number of common shares reserved for this purpose
amounts to 149,353,415.
The Series B is non-voting, except for the right to elect a
majority of the directors of the Company if certain operating
income levels are not achieved by the Company and the right to
approve actions adversely affecting the Series B. The Series B
also has the right to elect two additional directors in the event
that Encore fails to pay cash dividends for eight consecutive
quarters. As of January 1, 1997, Encore failed to meet this
requirement. The Series D, E, F G and H shares are non-voting,
except for the right to approve actions adversely affecting the
Preferred Stock. The Company has not achieved operating income
levels set forth by the terms of the Series B and accordingly, the
holders of the Series B Preferred Stock could elect a majority of
the directors of the Company. However, Gould has agreed it would
not vote its shares of Preferred Stock or take any other action as
a holder of the Preferred Stock to elect any additional directors
of the Company due to the Company's failure to meet the operating
income and cash dividend payment requirements of the Series B
until at least December 31, 1996. The Company has not met these
requirements as of December 31, 1996, therefore, Gould could
exercise its rights under the terms of the Series B.
During 1996, 350,000 shares of Series H were issued to Gould as
part of the exchange of indebtedness totaling $35,000,000. During
1995, 500,000 shares of Series F and 550,000 shares of Series G
were issued to Gould as part of the exchange of indebtedness
totaling $105,000,000. Because of the related party nature of
these transactions, the difference between the carrying amount of
the indebtedness exchanged and the par value of the securities
issued and other consideration granted has been credited to
additional paid-in capital. The financial effects of these
transactions are summarized as follows (in thousands):
December December
31, 31,
1996 1995
Reduction of debt $ 35,000 $ 105,000
Less:
Par value of shares (4) (11)
issued
Accrued transaction costs (200) (600)
Reversal of accrued interest on
previous
recapitalizations 111 5,203
Accrued interest on remaining Gould
indebtedness
for the remaining term of the (2,665) (7,638)
agreements
Increase in additional $ 32,242 $ 101,954
paid-in capital
In recording the various exchanges of preferred stock for
indebtedness, the Company had accrued the estimated transaction
costs of the exchanges. Actual costs incurred in connection with
the exchanges were less than those initially estimated and
accrued. Accordingly, during 1995 the Company reduced the
remaining accrued liability by $400,000 and increased additional
paid-in capital.
A quarterly dividend on Preferred Stock for the period of October
16, 1996 through January 15, 1997 of $6,859,600 was accumulated as
of January 15, 1997.
Impact of Foreign Ownership
In connection with the various exchanges of indebtedness for
preferred stock discussed herein and in Note M of the Notes to
Consolidated Financial Statements, 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.
Shareholders' Agreement
The Company, Kenneth G. Fisher, the Company's Chairman and Chief
Executive Officer, and Gould have agreed that as long as any
shares of Series A are outstanding, Gould, in all elections of
directors, will vote all of its common stock pro rata in
accordance with the votes of the other shareholders of the
Company. In addition, so long as the credit facility with Gould
is in effect, should Gould request it, Mr. Fisher has agreed to
vote his common shares in favor of expanding the Board of
Directors and electing an additional Gould representative to the
Board.
Stock Compensation Plans
At December 31, 1996, the Company had two fixed stock option
plans, the 1983 Incentive Stock Option Plan (the "ISO Plan") which
expired in 1993, and the 1985 Non-Qualified Stock Option Plan (the
"NQO Plan"). On January 19, 1995, the Board of Directors adopted
the Company's 1995 Long Term Performance Plan (the "Performance
Plan") which was approved by the stockholders of the Company on
June 27, 1995. The Performance Plan replaced both the ISO Plan
and the NQO Plan. No further grants under the ISO Plan or NQO
Plan have been made. The 24,000,000 shares of Common Stock
previously reserved for issuance under the ISO Plan and the NQO
Plan are now reserved for issuance under the Performance Plan to
officers, directors, employees and certain consultants. The
Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has
been recognized for its fixed stock option plans and its stock
purchase plan. Had compensation cost for the Company's stock
based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with
the method of FASB Statement 123, the Company's net loss and loss
per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
Net Income As reported ($70,732) ($81,354)
Pro forma ($71,641) ($81,942)
Primary earning per share As reported ($2.18) ($2.37)
Pro forma ($2.20) ($2.39)
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the
following assumptions for 1995 and 1996: risk-free interest rate
of 6 percent; dividend yield of 0 percent; expected life of 4
years; and volatility of 4.9 percent.
During 1996 and 1995, 1,119,000 and 1,652,000 options granted to
certain officers and employees of the Company were scheduled to
expire if not exercised. However, at the time the options were
scheduled to expire the Company's policy on insider trading
effectively prevented the officers from exercising the options.
Accordingly, the Board of Directors approved an extension of the
expiration date until such time as the options could be exercised
and the underlying shares sold in accordance with Company policy.
The extensions were treated as cancellations of the old options
and a grant of new options in the same amounts at the same
exercise prices. Non-cash compensation charges of $589,000 and
$1,424,000, respectively, were incurred in connection with the
extension of the expiration dates of the stock options.
A summary of the status of the Company's fixed stock option plans
as of December 31, 1996, 1995 and 1994, and changes during the
years ending on those dates is presented below:
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise SharesExercise
(000) Price (000) Price (000) Price
Outstanding at
beginning
of year 9,946 $1.50 10,112 $1.44 10,026 $1.09
Granted
Price = Fair Value 666 $2.83 1,690 $1.58 1,331 $3.74
Price > Fair Value - $0.00 15 $2.00 - -
Exercised (808) $0.96 (1,569) $0.88 (966) $1.18
Forfeited (222) $2.47 (302) $2.97 (279) $1.02
Outstanding at end 9,582 $1.62 9,946 $1.50 10,112 $1.44
of year
Options exercisable 7,445 7,290 7,311
at year end
Weighted-average
fair value of
options granted $2.09 $1.17 $1.07
during the year
The following table summarizes information about fixed stock
options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXCERCISABLE
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Excercisable Exercise
Exercise as of Life Price as of Price
Prices 12/31/96 12/31/96
$0.62- 713,149 2.19 $0.7525 713,149 $0.7525
$0.81
$0.94- 4,395,791 2.73 $0.9375 4,395,791 $0.9375
$0.94
$1.50- 2,606,175 6.52 $1.7197 1,560,889 $1.8193
$2.00
$2.38- 1,867,075 8.07 $3.4075 774,773 $3.6824
$4.19
$.062- 9,582,190 4.76 $1.6177 7,444,602 $1.3903
$4.19
Employee Stock Purchase Plan
Under the 1991 Employee Stock Purchase Plan (the "Purchase Plan"),
the Company is authorized to issue up to 8,000,000 shares of
common stock to its full-time employees. As of December 31, 1996,
4,271,669 shares have been purchased. Under the terms of the
Purchase Plan, employees can choose each year to have up to 10
percent of their annual base earnings withheld to purchase the
Company's common stock. The purchase price per share of common
stock in any offering under the Purchase Plan is the lower of; (i)
85% of the closing price per share of common stock on the
commencement of the offering, or (ii) 85% of the closing price of
a share of common stock on the termination of the offering. Each
offering is for a period of approximately six months. The
percentage of employees participating in the plan were 39% and 29%
in 1995 and 1996, respectively. Under the Purchase Plan, the
Company issued 394,654 shares at a weighted average price of $1.52
in 1996, 422,734 shares at a weighted average price of $1.75 in
1995, and 382,999 shares at a weighted average price of $2.69 in
1994. Pro forma compensation cost is recognized for the fair
value of the employees' purchase rights, which was estimated using
the Black-Scholes model with the following assumptions for 1995
and 1996: dividend yield of 0 percent; expected life of six
months; expected volatility of 4.9% ; and risk-free interest rate
of 5.2%. For 1996 and 1995, the Pro forma compensation costs
under the Purchase Plan were $270,000 and $337,000, respectively.
K. Segment Information
The Company operates in a single industry segment which includes
developing, manufacturing, marketing, installing and servicing
business information processing systems, principally in the United
States, Europe, the Far East, and Canada. In 1996, 1995, and
1994, no single customer accounted for as much as 10% of revenues.
During 1996, 1995 and 1994 approximately 22%, 24% and 32%,
respectively, of its revenues were directly or indirectly derived
from U.S. Government agencies.
The Company maintains operations in Europe and Canada principally
through consolidated subsidiaries. Far East operations are
through a joint venture in Japan, and distributors throughout the
remainder of the region. Information about the Company's
operations for 1994, 1995, and 1996 is presented below (in
thousands). Inter-geographic net sales, operating income and
assets have been eliminated to arrive at the consolidated amounts.
Net Sales Inter- Operating
to Geographic Total Income Identifiable
Unrelated
Entities Net Net (Loss) Assets
Sales Sales
1994:
United $ 42,613 $ 8,886 $ 51,499 $ (55,133) $ 83,234
States
Europe 29,147 - 29,147 4,164 14,340
Other 4,790 - 4,790 72 2,352
Geographic 76,550 8,886 85,436 (50,897) 99,926
Total
Inter- - (8,886) (8,886) 49 (905)
Geographic
Total $ 76,550 $ - $ 76,550 $ (50,848) $ 99,021
1995:
United $ 24,051 $ 7,893 $ 31,944 $ (78,767) $ 55,488
States
Europe 23,721 - 23,721 1,165 18,030
Other 1,556 - 1,556 69 189
Geographic 49,328 7,893 57,221 (77,533) 73,707
Total
Inter- - (7,893) (7,893) (263) (1,170)
Geographic
Total $ 49,328 $ - $ 49,328 $ (77,796) $ 72,537
1996:
United $ 19,300 $ 12,026 $ 31,326 $ (65,502) $ 46,734
States
Europe 26,616 - 26,616 (968) 24,258
Other 1,711 - 1,711 (79) 103
Geographic 47,627 12,026 59,653 (66,549) 71,095
Total
Inter- - (12,026) (12,026) (669) (1,839)
Geographic
Total $ 47,627 $ - $ 47,627 $ (67,218) $ 69,256
Inter-geographic net sales are recorded principally at 60% of list
price; however, inter-geographic net sales of the Company's
storage processor product line are recorded at 85% of end selling
price. Identifiable assets are all assets, including corporate
assets, identified with operations in each region.
L. Financial Instruments
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are limited to cash and trade
receivables. The Company maintains its cash in bank deposit
accounts which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts.
The Company grants credit terms in the normal course of business
to its customers which are consistent with industry practices.
Generally, the Company's customers are United States government
agencies or substantial international corporations often included
among the Fortune 500. Additionally, as part of its ongoing
control procedures, the Company monitors the credit worthiness of
its major customers and establishes individual customer credit
limits accordingly. The Company performs in-depth credit
evaluations for all new customers and requires letters of credit
if deemed necessary. Doubtful accounts are adequately reserved
when identified and bad debts realized by the Company in prior
years have not been excessive, except in relation to the
cancellation of the Amdahl Reseller Agreement discussed more fully
in Note B of Notes to Consolidated Financial Statements.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate
fair value because of the short maturity of these items. Based
upon the unique and significant financial relationship between the
Company and Gould, it is not practicable to estimate the fair
value of the Gould long term debt.
M. Subsequent Events
As of March 19, 1997 (the "Closing Date"), the Company and Gould
consummated the transactions described below:
Exchange of Indebtedness for Preferred Stock
On the Closing Date, Gould agreed to cancel $40,000,000 of
indebtedness owed to it by the Company for 400,000 newly-issued
shares of Series I Convertible Preferred Stock ("Series I"). The
canceled debt had represented prior to the Closing Date, a portion
of the indebtedness owed by the company to Gould under the Credit
Agreement.
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 I 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.
Prior to the transaction, Japan Energy Corporation, and its wholly-
owned subsidiaries including Gould (the "Japan Energy Group")
beneficially owned, on a fully-diluted basis, 81.6% of the
Company's outstanding common stock. Upon completion of this
transaction, Japan Energy Group's beneficial ownership, on a fully
converted basis, increased to 82.8%.
The Credit Agreement
As of the Closing Date, the Company had borrowed $81,915,869 under
the Credit Agreement. In conjunction with the exchange of the
canceled debt for Series I, the Second Amendment to the Credit
Agreement was executed between Encore and Gould which (i) reduced
the maximum amount which can be borrowed by the Company from
$80,000,000 to $50,000,000 and (ii) provides 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. All borrowings under the Credit Agreement, plus accrued
interest, are due and payable on May 31, 1997.
Borrowings under the Credit Agreement 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. Interest on the loans equals the prime
rate plus 2%.
Financial Impact of Transactions
The completion of these transactions has 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 (446)
agreements
Increase in additional paid- $ 39,833
in capital
Note 1 - Because the transaction is considered a troubled debt
restructuring, interest is accrued from the Closing Date until the
loan's maturity on the outstanding loan balance for the remainder
of the loan agreement.
(ii) No costs in connection with the transaction have been
recorded as an accrued expense, due to the over accrual of costs
associated with prior recapitalizations.
N. Liquidity
The accompanying consolidated financial statements have been
prepared assuming that the company will continue as a going
concern. Since 1989, the principal source of financing for the
Company has been provided by the Japan Energy Group. As discussed
in Note M of Notes to Consolidated Financial Statements, on March
19, 1997, Gould exchanged $40 million of the Company's outstanding
indebtedness for 400,000 shares of Series I Convertible Preferred
Stock and provided the Company with an uncommitted credit facility
of up to $50 million. After giving effect to the aforementioned
debt conversion, approximately $41.9 million was outstanding under
the Credit Agreement. Any loans exceeding the $41.9 million can
be made only at the discretion of Gould. All borrowing under the
Credit Agreement, plus accrued interest, are due and payable on
May 31, 1997. Based on current estimates of available cash flow,
management does not believe it will have sufficient cash to make
the mandatory payment on May 31, 1997, without proceeds from the
sale of assets or a refinancing or restructuring of the Credit
Agreement prior to such date. Additionally, the Company does not
have a committed source of financing to meet expected requirements
over the next year. The Company has retained an investment
banking firm to assist in exploring strategic alternatives which
include, among other things, a business combination, sales of
assets, strategic investment in the Company or a refinancing of
the Credit Agreement. There can be no assurance that the Company
will be successful in its attempt to consummate one of the
strategic alternatives or a refinancing or restructuring of the
Credit Agreement. If the Company does not make the required
payment at maturity of the Credit Agreement or is unable to obtain
a committed source of financing adequate to meet expected
requirements, it may be unable to continue its normal operations,
except to the extent permitted by the Japan Energy Group.
Substantially all of the Company's tangible and intangible assets
are pledged as collateral under the Credit Agreement.
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not Applicable.
PART III
Item 10 Directors and Executive Officers of the Registrant
Information regarding directors of the Company included in the
Company's definitive Proxy Statement for the 1997 Annual Meeting
of Shareholders under the caption "Election of Directors" is
incorporated herein by reference. Information regarding
executive officers of the Company is included in Part I of this
Form 10-K under the caption "Executive Officers of the Company"
and is incorporated herein by reference.
Item 11 Executive Compensation
Information regarding Executive Compensation included in the
Company's definitive Proxy Statement for the 1997 Annual Meeting
of Shareholders under the caption "Executive Compensation" is
incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and
Management
Information regarding security ownership of the executive
officers and directors of the Company and certain other
stockholders which is included in the Company's definitive Proxy
Statement for the 1997 Annual Meeting of Shareholders under the
captions "Principal Stockholders", "Election of Directors", and
"Executive Compensation" is incorporated herein by reference.
Item 13 Certain Relationships and Related Transactions
Information regarding Certain Relationships and Related
Transactions included in the Company's definitive Proxy Statement
for the 1997 Annual Meeting of Shareholders under the caption
"Certain Relationships and Related Transactions" is incorporated
herein by reference.
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)1. and (a)2. Index to Financial Statements and Financial
Statement Schedules
Form 10-K Page Number
Report of independent public accountants relating to
consolidated financial statements and financial
statement schedules 22
Consolidated statements of operations for the years
ended December 31, 1996, 1995 and 1994 23
Consolidated balance sheets at December 31, 1996 and
1995 24
Consolidated statements of cash flows for the years
ended
December 31, 1996, 1995 and 1994 25
Consolidated statements of shareholders' equity
capital
deficiency) for the years ended December 31, 1996,
1995, and 1994 27
Notes to consolidated financial statements28-44
The following consolidated financial statement schedules are
submitted herewith:
Form 10-K Page Number
Valuation and qualifying accounts 48
The consolidated financial statement schedules should be read in
conjunction with the consolidated financial statements included
herein. All other schedules have been omitted since the required
information is not present or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial
statements and notes thereto.
(a)3. Index to Exhibits
The exhibits listed on the accompanying index to exhibits
immediately following the signature page are incorporated herein
by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of
the year ended December 31, 1996.
For purposes of complying with the amendments to the rules
governing Form S-8 under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which
undertaking shall be incorporated by reference into the
Registrant's Registration Statements on Form S-8 Nos. 33-34171
and 33-33907.
Insofar as indemnification of liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by the appropriate
jurisdiction, litigate the question whether such indemnification
by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
ENCORE COMPUTER CORPORATION
Valuation and qualifying accounts
(in thousands)
Balance Additions Balance
at Charged to Charged to at End of
Beginning costs and other Deductions Period
of expenses accounts(2) (1)
Period
Year ended
Dec 31, 1994:
Allowance for $ 2,150 $ 2,928 $ - $ (61) $ 5,017
doubtful
accounts
Year ended
Dec 31, 1995:
Allowance for $ 5,017 $ 65 $(2,800) $ (484) $ 1,798
doubtful
accounts
Year ended
Dec 31, 1996:
Allowance for $ 1,798 $ (550) $ - $ (634) $ 614
doubtful
accounts
(1) Includes amounts deemed uncollectible
(2) Charged to restructuring
<PAGE>
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 as the chief accounting officer and
an officer of the registrant thereunto duly authorized.
ENCORE COMPUTER CORPORATION
(Registrant)
By: KENNETH G. FISHER By: EDWARD J.BAKER
_________________ ______________
Kenneth G. Fisher Edward J.Baker
Chairman of the Board Secretary, Treasurer and
Chief Executive Officer Chief Accounting Officer
April 15, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
KENNETH G. FISHER
____________________ Chairman of the Board
Kenneth G. Fisher Chief Executive Officer April 15,1997
ROWLAND H. THOMAS, JR. President and Chief
___________________ Operating Officer and
Rowland H. Thomas, Jr. Director April 15, 1997
C. DAVID FERGUSON
____________________
C. David Ferguson Director April 15, 1997
ROBERT J. FEDOR
____________________
Robert J. Fedor Director April 15, 1997
DANIEL O. ANDERSON
____________________
Daniel O. Anderson Director April 15, 1997
EDWARD J. BAKER
____________________ Secretary, Treasurer and
Edward J. Baker Chief Accounting Officer April 15,1997
<PAGE>
(a)3. Index to Exhibits.
The exhibit numbers in the following index correspond to the
numbers assigned to such exhibits in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit No. Description
3.1 Certificate of Incorporation of the Company, as
amended (incorporated herein by reference to the
Company's Form 10-K for the year ended December
31, 1990)
3.1a Amendment to the Certificate of Incorporation
filed with the Delaware Secretary of State on
March 26, 1992 (incorporated herein by reference
to Exhibit 3.1a to the Company's Form 10-K for the
year ended December 31, 1991).
3.2 By-laws of the Company, as amended (incorporated
herein by reference to Exhibit 3.2 to the
Company's Form l0-K for the year ended December
31, 1989).
3.3 Amendment to the Certificate of Incorporation
dated September 30, 1993 increasing the number of
authorized common shares from 120,000,000 to
150,000,000 (incorporated herein by reference to
Exhibit 3.3 to the Company's Form l0-K for the
year ended December 31, 1993).
3.4 Amendment to the Certificate of Incorporation
dated August 8, 1995 increasing the number of
authorized common shares from 150,000,000 to
200,000,000.
3.5 Certificate of Designations, Powers Rights and
Preferences of Series G Convertible Preferred
Stock of Encore Computer Corporation (incorporated
herein by reference to Exhibit 3.1 to the
Company's Form l0-Q for the period ended October
1, 1995).
3.6 Certificate of Designations, Powers Rights and
Preferences of Series H Convertible Preferred
Stock of Encore Computer Corporation (incorporated
herein by reference to Exhibit 3.1 to the
Company's Form 10Q for the period ended June 30,
1996).
*3.7 Certificate of Designations, Powers Rights and
Preferences of Series I Convertible Preferred
Stock of Encore Computer Corporation.
*3.8 Certificate of Designations, Powers Rights and
Preferences of Series J Convertible Preferred
Stock of Encore Computer Corporation.
4.1 Articles NINTH and TENTH of the Certificate of
Incorporation of the Company, as amended, and
Certificates of Stock Designation relating,
respectively, to the Company's Series A
Convertible Participating Preferred Stock, Series
B Convertible Preferred Stock and Series C
Redeemable Preferred Stock (see Exhibit 3.1).
Incorporated herein by reference to the Company's
Form 10-K for the year ended December 31,1990.
4.2 Article 1 of the By-laws of the Company, as
amended (incorporated herein by reference to
Exhibit 3.2 to the Company's Form 10-K for the
year ended December 31,1989).
4.3 Certificate of Stock Designation relating to the
Company's Series D Convertible Preferred Stock
(incorporated herein by reference to Exhibit 4.3
to the Company's Form 10-K for the year ended
December 31,1992).
4.4 Certificate of Stock Designation relating to the
Company's Series E Convertible Preferred Stock
(incorporated herein by reference to Exhibit 4.4
to the Company's Form l0-K for the year ended
December 31, 1993).
4.5 Certificate of Stock Designation relating to the
Company's Series F Convertible Preferred Stock
#10.1 The Company's 1983 Incentive Stock Option Plan, as
amended (incorporated herein by reference to the
Company's Form S-8/Form S-3 Registration Statement
No. 33-34171).
#10.2 The Company's 1985 Non-Qualified Stock Option
Plan, as amended (incorporated herein by reference
to the Company's Form S-8/Form S-3 Registration
Statement No. 33-34171).
#10.3 The Company's 1990 Employee Stock Purchase Plan
as amended (incorporated herein by reference to
the Company's Form S-8/Form S-3 Registration
Statement No. 33-72458).
#10.4 Form of Indemnification Agreement between the
Company and its executive officers (incorporated
herein by reference to Exhibit 10.4 to the
Company's Form 10-K for the year ended December
31, 1989).
10.5 Master Purchase Agreement dated as of February 3,
1994 between the Company and Gould Electronics
Inc. (incorporated herein by reference to Exhibit
10.7b to the Company's Form l0-K for the year
ended December 31, 1993).
10.6 Intellectual Property License Agreement dated as
of January 28, 1991, among the Company, Encore
Computer U.S., Inc. ("Encore U.S.") and Gould Inc.
(incorporated herein by reference to Exhibit 10.9
of the Company's Form 10-K for the year ended
December 31, 1990).
10.7a The Amended and Restated Revolving Loan Agreement
dated March 31, 1992 between Encore Computer
Corporation and Gould Inc. (incorporated herein by
reference to the Company's Form 10-K Exhibit
10.13c for the year ended December 31, 1991).
10.7b The Second Amended and Restated Revolving Loan
Note dated March 31, 1992 between Encore Computer
Corporation and Gould Inc. (incorporated herein by
reference to the Company's Form 10-K Exhibit
10.13d for the year ended December 31, 1991).
10.7c The Renewal Term Notes dated March 31, 1992
between Encore Computer Corporation and Gould Inc.
(incorporated herein by reference to the Company's
Form 10-K Exhibit 10.13e for the year ended
December 31, 1991).
10.7d Amendment Agreement to the Revolving Loan
Agreement among the Company and Gould Inc. and the
Term Loan Agreement among the Company and Gould
Inc. dated April 12, 1993 (incorporated herein by
reference to Exhibit 10.9d to the Company's Form
10-K for the year ended December 31, 1992).
10.7e Amended Loan Agreement and related letter
agreement dated April 11, 1994 between the Company
and Gould Electronics Inc. (incorporated herein
by reference to Exhibit 10.13g to the Company's
Form l0-K for the year ended December 31, 1993).
10.8 Amended and Restated General Security Agreement
dated as of January 28, 1991, among the Company,
Encore U.S. and Gould Inc. (incorporated herein by
reference to the Company's Form 10-K Exhibit 10.14
for the year ended December 31,1990).
10.9 Support Services Provider Agreement dated December
9, 1993 between Encore Computer Corporation and
Halifax Corporation to subcontract certain
customer service field maintenance activities to
Halifax Corporation (incorporated herein by
reference to Exhibit 10.17 to the Company's Form
l0-K for the year ended December 31, 1993).
#10.10 Amendment No. 1 to Nonqualified Stock Option
Agreement between Encore Computer Corporation and
T. Mark. Morley dated November 10, 1993
(incorporated herein by reference to Exhibit 10.18
to the Company's Form l0-K for the year ended
December 31, 1993).
#10.11 Description of the Company's Corporate Executive
Compensation Plan (incorporated herein by
reference to Exhibit 10.19 to the Company's Form
l0-K for the year ended December 31, 1993).
10.13 The Uncommitted Loan Agreement and certain
exhibits thereto dated as of December 21, 1994
between Encore Computer Corporation and Gould
Electronics Inc. (incorporated herein by reference
to Exhibit 10.13 to the Company's Form l0-K for
the year ended December 31, 1994).
10.14 The Amended and Restated Credit Agreement dated as
of March 17, 1995 between Encore Computer
Corporation and Gould Electronics Inc.
(incorporated herein by reference to Exhibit 10.14
to the Company's Form l0-K for the year ended
December 31, 1994).
10.15 Master Purchase Agreement dated as of March 17,
1995 between the Company and Gould Electronics
Inc. relating to the purchase of Series F
Convertible Preferred Stock, Cancellation of
Indebtedness and Related Documentation
(incorporated herein by reference to Exhibit 10.15
to the Company's Form l0-K for the year ended
December 31, 1994).
10.16 The Second Amended and Restated Credit Agreement
dated as of August 17, 1995 between Encore
Computer Corporation and Gould Electronics Inc.
(incorporated herein by reference to Exhibit 10.1
to the Company's Form l0-Q for the period ended
October 1, 1995).
10.17 Certificate. Reference made to the Master
Purchase Agreement dated as of August 17, 1995
between the Company and Gould Electronics Inc.
relating to the purchase of Series G Convertible
Preferred Stock, Cancellation of Indebtedness and
Related Documents (incorporated herein by
reference to Exhibit 10.2 to the Company's Form l0-
Q for the period ended October 1, 1995).
#10.18 The Company's 1985 Non-Qualified Stock Option Plan
and 1995 Long Term Performance Plan, as amended
(incorporated herein by reference to the Company's
Form S-8/Form S-3 Registrations Statement No. 33-
72741).
10.19 The Third Amended and Restated Credit Agreement
dated as of April 16, 1996 between Encore Computer
Corporation and Gould Electronics Inc.
(incorporated herein by reference to Exhibit 10.1
to the Company's Form l0-Q for the period ended
June 30, 1996).
10.20 Certificate. Reference made to the Master
Purchase Agreement dated as of August 17, 1995
between the Company and Gould Electronics Inc.
relating to the purchase of Series H Convertible
Preferred Stock, Cancellation of Indebtedness and
Related Documents (incorporated herein by
reference to Exhibit 10.2 to the Company's Form l0-
Q for the period ended June 30, 1996).
*10.21 Certificate. Reference made to the Master
Purchase Agreement dated as of March 19, 1997
between the Company and Gould Electronics Inc.
relating to the purchase of Series I Convertible
Preferred Stock, Cancellation of Indebtedness and
Related Documents.
*11.0 Computation of Loss per Share
*22.0 Subsidiaries of the Company.
*23.1 Consent of Independent Public Accountants.
*27 Financial Data Schedule
*99 Cautionary Statement for the Purposes of the "Safe
Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995 (incorporated herein
by reference to Exhibit 99 to the Company's Form
l0-Q for the period ended June 30, 1996).
# Management contract or compensatory plan or arrangement
* Filed herewith.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statement of Encore Computer Corporation on Forms
S-8 (Registration Statement Nos. 33-10225, 33-33907, 33-34171,
33-72458 and 33-72741) and on Forms S-3 (Registration
Statement Nos. 33-121, 33-33907 and 33-34171) of our reports
dated January 30, 1997 except for Note M as to which the date
is March 19, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Encore Computer
Corporation as of December 31, 1996 and 1995 and for the years
ended December 31, 1996, 1995 and 1994, which report is
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 15, 1997
ENCORE COMPUTER CORPORATION
Computation of Loss per Share
(in thousands except per share data)
Primary 1996 1995 1994
Net Loss ($70,732) ($81,354) ($54,556)
Series B, D, E, F and G Preferred
Stock Dividends -11,996 -19,062 -13,987
Series B, D, E, F, G and H Accumulated
Preferred Stock Dividends -13,417 0 0
Net loss attributable to
common shareholders ($96,145)($100,416) ($68,543)
Weighted average common
shares outstanding 36,810 34,923 33,391
Series A assumed converted 7,364 7,364 7,364
Weighted avg shares outstand 44,174 42,287 40,755
Net loss per common share ($2.18) ($2.37) ($1.68)
Assuming Full Dilution
Net loss ($70,732) ($81,354) ($54,556)
Wghtd avg common shares outstand 36,810 34,923 33,391
Series A assumed converted 7,364 7,364 7,364
Series B assumed converted 22,544 21,242 20,014
Series D assumed converted 34,496 32,503 30,624
Series E assumed converted 35,260 33,223 28,481
Series F assumed converted 16,499 12,437 0
Series G assumed converted 17,704 6,388 0
Series H assumed converted 7,760 0 0
Exercise of options reduced by the number
of shares purchased
with proceeds 3,158 3,349 4,866
Weighted avg shares outstand 181,595 151,429 124,740
Net loss per share ($0.39) ($0.54) ($0.44)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
ENCORE COMPUTER CORPORATION
Financial Data Schedule
(in thousands except per share data)
For the years ended December 31,
1996 1995 1994
Cash and cash items 3,936 3,490 2,517
Marketable securities 0 0 0
Notes and accounts receivable-trade 15,584 14,828 24,872
Allowances for doubtful accounts -614 -1,798 -5,017
Inventory 13,896 15,796 27,555
Total current assets 34,211 33,669 51,790
Property, plant and equipment 81,277 87,701 86,808
Accumulated depreciation -47,901 -51,901 -45,887
Total assets 69,256 72,537 99,021
Total current liabilities 101,506 28,179 31,553
Bonds, mortgages and similar debt 658 829 1,023
Preferred stock no mandatory redemption 45 41 28
Common stock 373 361 341
Other shrhldrs' eq (Cap'l deficiency) -34,428 2,112 -22,409
Total liabilities & equity 69,256 72,537 99,021
Sales of tangible products 27,600 22,005 38,412
Total revenues 47,627 49,328 76,550
Cost of tangible goods sold 35,786 34,975 60,907
Total costs applicable to revenues 53,608 55,693 127,398
Other costs and expenses 554 -75 -70
Provision for doubtful accounts and notes -550 2,735 2,928
Interest and amortization of debt discount 3,324 2,786 3,235
Loss before taxes -71,096 -80,507 -54,013
Income tax expense -364 847 543
Net loss -70,732 -81,354 -54,556
Earnings per share-primary -2.18 -2.37 -1.68
Earnings per share-fully diluted -0.39 -0.54 -0.44
</TABLE>
EXHIBIT 22
SUBSIDIARIES OF ENCORE COMPUTER CORPORATION
NAME JURISDICTION OWNERSHIP
ENCORE COMPUTER U.S., INC DELAWARE 100%
ENCORE COMPUTER INTERNATIONAL, INC. DELAWARE 100%
ENCORE COMPUTER LIMITEE CANADA 100%
ENCORE COMPUTER (U.K.) LIMITED UNITED KINGDOM 100%
ENCORE COMPUTER BELGIUM S.A. BELGIUM 100%
ENCORE COMPUTER GmbH GERMANY 100%
ENCORE COMPUTER de PUERTO RICO, INC. DELAWARE 100%
ENCORE COMPUTER S.A. FRANCE 100%
ENCORE COMPUTER (IRELAND) LIMITED IRELAND 100%
ENCORE COMPUTER ITALIA S.p.A. ITALY 100%
JAPAN ENCORE COMPUTER JAPAN 50%
ENCORE COMPUTER B.V. NETHERLANDS 100%
ENCORE COMPUTER NETHERLANDS, B.V. NETHERLANDS 100%
ENCORE COMPUTER ESPANA S.A. SPAIN 100%
ENCORE COMPUTER (IRISH PARTNERSHIP) IRELAND 50%
LAUDERDALE COMPUTER A.B. SWEDEN 100%
CERTIFICATE OF DESIGNATIONS,
POWERS, RIGHTS AND PREFERENCES
OF SERIES I CONVERTIBLE PREFERRED STOCK
OF
ENCORE COMPUTER CORPORATION
---------------------------
ENCORE COMPUTER CORPORATION, a corporation organized and existing by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
That, pursuant to the authority conferred upon the Board of
Directors of the corporation by the certificate of incorporation and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors of the corporation, at a meeting
held on February , 1997, duly adopted a resolution designating the
designations, powers, rights and preferences relating to its Series I
Convertible Preferred Stock as follows:
"RESOLVED, that the Board of Directors (the "Board") of Encore
Computer Corporation (the "Corporation") authorizes the issuance of a series of
preferred stock consisting of 800,000 shares and the Board fixes the powers,
designations, preferences and relative, participating, optional or other
rights, and the qualifications, limitations or restrictions thereof, of the
shares of that series as follows:
1. DESIGNATION AND AMOUNT. The designation of the series of
preferred stock authorized by this resolution will be the Series I Convertible
Preferred Stock (the "Series I Convertible Stock"). The total number of shares
of Series I Convertible Stock will be 800,000 shares. These shares may be
issued for any purpose determined by the Board of Directors.
2. DIVIDENDS AND DISTRIBUTIONS.
(a) Holders of shares of Series I Convertible Stock will be
entitled to receive, when, as and if declared by the Board out of funds of the
Corporation legally available for the payment of dividends, an annual cash
dividend per share equal to $6.00, payable in equal quarterly installments of
$1.50 per share each on January 15, April 15, July 15 and October 15 of each
year, commencing April 15, 1997 (each a "Dividend Payment Date"), except that
(i) the annual cash dividend payable in 1997 will be $3.75 per share and the
quarterly installment payable on April 15, 1997 will be $.75 per share and (ii)
unless by July 15, 1997, the number of shares of common stock the Corporation
is authorized to issue is increased to at least 300,000,000 shares, from July
15, 1997 until the number of shares of common stock the Corporation is
authorized to issue is increased to at least 300,000,000 shares, the cash
dividend will be at the rate of $10.00 per share per year, payable in equal
quarterly installments of $2.50 per share each on the quarterly Dividend
Payment Dates, commencing October 15, 1997. If after July 15, 1997, the number
of shares of common stock the corporation is authorized to issue is increased
to at least 300,000,000 shares, the quarterly dividend payable on the Dividend
Payment Date following the day on which the number of shares of common stock
the corporation is authorized to issue is increased will be $2.50 per share and
all subsequent dividends will be at the annual rate of $6.00 per share, payable
in quarterly installments of $1.50 per share each. Dividends on the Series I
Convertible Stock will be cumulative from the date of initial issuance of
shares of Series I Convertible Stock. The Corporation will not, however, be
<PAGE>
required to pay a cash dividend unless that cash dividend can be paid out of
Stockholders Equity in excess of $50,000,000. To the extent the Corporation
does not have sufficient Stockholders Equity to be able to pay a dividend on
the Series I Convertible Stock out of Stockholders Equity in excess of
$50,000,000, the Corporation will have the option to (i) pay the portion of the
dividend which cannot be paid out of Stockholders Equity in excess of
$50,000,000 by distributing on the applicable Dividend Payment Date to each
holder of record on the applicable Record Date, shares of Series I Convertible
Stock with a Liquidation Preference equal to the amount of the cash dividend
which cannot be paid out of Stockholders Equity in excess of $50,000,000, or
(ii) accumulate that portion of the dividend on the Series I Convertible Stock
and pay it in cash when, and to the extent, it can be paid in cash out of
Stockholders Equity in excess of $50,000,000. For the purposes of the Series I
Convertible Stock, the term "Stockholders Equity" will mean (i) the
stockholders equity of the Corporation computed in accordance with generally
accepted accounting principles applied in the same manner they are applied in
preparing reports filed with the Securities and Exchange Commission (or, if no
reports are filed with the Securities and Exchange Commission, applied as they
are applied in preparing the Corporation's annual report to stockholders) plus
(ii) the aggregate liquidation preference of all outstanding shares of the
Corporation's preferred stock which is not included in the stockholders equity
of the Corporation calculated in accordance with the preceding clause (i).
Each dividend will be payable to holders of record of the Series I Convertible
Stock on a date fixed by the Board (a "Record Date") which is not more than 60
days nor less than 10 days before the Dividend Payment Date. No Record Date
will precede the date when the resolution fixing the Record Date is adopted.
(b) Unless and until all accumulated dividends on the Series
I Convertible Stock have been paid in cash or, to the extent permitted by
subparagraph 2(a), in shares of Series I Convertible Stock, the Corporation may
not (i) declare or pay any dividend, make any distribution (other than a
distribution solely of Common Stock), or set aside any funds or other assets
for payment or distribution, with regard to any Junior Shares or, except as
provided in the last sentence of this subparagraph 2(b) or the second sentence
of Paragraph 4, any Parity Shares or (ii) redeem or repurchase (directly or
through subsidiaries), or set aside any funds or other assets for the
redemption or repurchase of, any Junior Shares or any Parity Shares. In any
event, the Corporation may not declare or pay any dividend, make any
distribution (other than a distribution solely of Common Stock), or set aside
any funds or other assets for payment or distribution, with regard to any
Junior Shares or Parity Shares, or redeem or repurchase (directly or through
subsidiaries), or set aside any funds or other assets for the redemption or
repurchase of, any Junior Shares or Parity Shares, to the extent the dividend,
distribution, redemption, repurchase or setting aside of funds or assets would
reduce Stockholders Equity below $50,000,000. As used with regard to the
Series I Convertible Stock, the term "Junior Shares" means all shares of every
class or series of stock of the Corporation to which the shares of Series I
Convertible Stock rank prior. If the Series I Convertible Stock ranks prior to
another class or series of preferred stock as to some matters, but not as to
other matters, shares of the other class or series are "Junior Shares" with
regard to the matters as to which the Series I Convertible Stock ranks prior to
the other class or series but not as to other matters. As used with regard to
the Series I Convertible Stock, the term "Parity Shares" means any class or
series of preferred stock which ranks on a parity with the shares of Series I
Convertible Stock. If the Series I Convertible Stock ranks on a parity with
another class or series of preferred stock as to some matters, but not as to
other matters, shares of the class or series are "Parity Shares" with regard to
the matters as to which the Series I Convertible Stock ranks on a parity but
not as to other matters. At any time when there are accumulated dividends on
the Series I Convertible Stock and on any Parity Shares which have not been
<PAGE>
paid in full, no dividends will be paid or set aside with regard to the Parity
Shares unless at the same time dividends are paid or set aside with regard to
the Series I Convertible Stock constituting at least the same percentage of the
accumulated dividends on the Series I Convertible Stock that the dividend on
the Parity Stock is of the accumulated dividends on the Parity Stock.
3. RANKING. The shares of Series I Convertible Stock rank prior
to all shares of all classes and series of Common Stock of the Corporation and
all shares of all classes and series of preferred stock of the Corporation
other than any class or series of preferred stock which is designated, with the
approval of the holders of 66-2/3% of the shares of Series I Convertible Stock
which are outstanding at the time the designation is made (or such greater
percentage of the outstanding shares of Series I Convertible Stock as is
required by law), as ranking prior to, or on a parity with, the shares of
Series I Convertible Stock with regard to the right to receive dividends, the
right to receive distributions on the liquidation, dissolution or winding up of
the Corporation, or with regard to any other matters. The shares of Series I
Convertible Stock rank prior to the shares of Series B Convertible Preferred
Stock, Series D Convertible Preferred Stock, Series E Convertible Preferred
Stock, Series F Convertible Preferred Stock, Series G Convertible Preferred
Stock, Series H Convertible Preferred Stock and Series J Convertible
Participating Preferred Stock in all respects.
4. LIQUIDATION. Upon the liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of the Series
I Convertible Stock will be entitled to receive out of the assets of the
Corporation available for distribution to its stockholders, whether from
capital, surplus or earnings, before any distribution is made to holders of any
Junior Shares, an amount equal to $100 per share (the "Liquidation Preference")
plus an amount equal to all dividends (whether or not earned or declared)
accumulated and unpaid on the shares of Series I Convertible Stock to the date
of final distribution. If, upon any liquidation, dissolution or winding up of
the Corporation, the assets of the Corporation, or proceeds of those assets,
available for distribution to the holders of shares of Series I Convertible
Stock and any Parity Shares are insufficient to pay in full the preferential
amount payable to the holders of shares of Series I Convertible Stock described
in the preceding sentence and the preferential amount payable to any Parity
Shares upon liquidation, dissolution or winding up of the Corporation, then the
assets, or the proceeds of those assets which are available for distribution to
the holders of shares of Series I Convertible Stock and to the holders of such
Parity Shares, will be distributed to the holders of the Series I Convertible
Stock and to the holders of such Parity Shares ratably in proportion to the
full amounts to which they each are entitled. After payment of the full amount
of the Liquidation Preference and accumulated dividends to which holders of
shares of Series I Convertible Stock are entitled, the holders of shares of
Series I Convertible Stock will not be entitled to any further participation in
any distribution of assets by the Corporation. For the purposes of this
Paragraph, neither a consolidation or merger of the Corporation with or into
any other corporation, nor a sale or transfer of all or any part of the
Corporation's assets for cash or securities, will be considered a liquidation,
dissolution or winding up of the Corporation.
5. OPTIONAL CONVERSION.
(a) Subject to and upon compliance with the provisions of
this Paragraph 5, each holder of shares of Series I Convertible Stock will have
the right, at the holder's option, at any time, to convert all or any of the
shares of the Series I Convertible Stock into a number of fully paid and
nonassessable shares of Common Stock (calculated as to each conversion to the
nearest 1/100th of a share) equal to the Liquidation Preference (as defined in
<PAGE>
Paragraph 4) of the shares surrendered for conversion divided by the Conversion
Price (as defined in subparagraph 5(d)).
(b) (i) In order to exercise the conversion privilege, the
holder of each share of Series I Convertible Stock to be converted will
surrender the certificate representing that share to the conversion agent for
the Series I Convertible Stock appointed by the Corporation (which may be the
Corporation itself), with the Notice of Election to Convert on the back of that
certificate duly completed and signed, together with funds equal to the
Dividend Amount, if any, required to be paid under subparagraph 5(b)(iii), at
the principal office of the conversion agent. If the shares issuable on
conversion are to be issued in a name other than the name in which the shares
of Series I Convertible Stock are registered, each share surrendered for
conversion must be accompanied by instruments of transfer, in form satisfactory
to the Corporation, duly executed by the holder or the holder's duly authorized
attorney and by funds in an amount sufficient to pay any transfer or similar
tax.
(ii) Each conversion will be at the Conversion Price in
effect at the close of business on the date when all the conditions in
subparagraph 5(b)(i) have been satisfied.
(iii) The holders of record of shares of Series I
Convertible Stock at the close of business on a dividend payment Record Date
will be entitled to receive the dividend payable on those shares on the
corresponding Dividend Payment Date notwithstanding the conversion of the
shares after the dividend payment Record Date or the Corporation's default in
payment of the dividend due on the Dividend Payment Date. However, shares of
Series I Convertible Stock surrendered for conversion during the period between
the close of business on any dividend payment Record Date and the opening of
business on the corresponding Dividend Payment Date must be accompanied by
payment of an amount equal to the dividend payable on the shares on the
Dividend Payment Date (the "Dividend Amount"). The holders of shares of Series
I Convertible Stock on a dividend payment Record Date who (or whose
transferees) convert any of those shares on or after the corresponding Dividend
Payment Date will receive the dividend payable by the Corporation on those
shares of Series I Convertible Stock on the Dividend Payment Date, and need not
include payment of the Dividend Amount upon surrender of those shares for
conversion. Except as provided above, the Corporation will make no payment or
adjustment for accrued and unpaid dividends on shares of Series I Convertible
Stock, whether or not in arrears, on conversion of those shares, or for
dividends on the shares of Common Stock issued upon the conversion.
(iv) As promptly as practicable after the surrender by a
holder of certificates for shares of Series I Convertible Stock in accordance
with this subparagraph 5(b), the Corporation will issue and will deliver at the
office of the conversion agent to the holder, or on the holder's written order,
a certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of the shares of Series I Convertible Stock in
accordance with the provisions of this Paragraph 5. Any fractional interest in
respect of a share of Common Stock arising upon a conversion will be settled as
provided in subparagraph 5(c).
(v) Each conversion will be deemed to have been
effected immediately prior to the close of business on the date on which all
the conditions specified in subparagraph 5(b)(i) have been satisfied, and the
person in whose name any certificate for shares of Common Stock will be
issuable upon a conversion will be deemed to have become the holder of record
of the shares of Common Stock represented by that certificate at that time,
<PAGE>
unless the stock transfer books of the Corporation are closed on that date, in
which event that person will be deemed to have become the holder of record at
the close of business on the next succeeding day on which the stock transfer
books are open. All shares of Common Stock delivered upon conversion of Series
I Convertible Stock will upon delivery be duly and validly issued and fully
paid and nonassessable, free of all liens and charges and not subject to any
preemptive rights. Upon the surrender of certificates representing shares of
Series I Convertible Stock to be converted and compliance with all the other
requirements of subparagraph 5(b)(i), the shares represented by those
certificates will no longer be deemed to be outstanding and all rights of a
holder with respect to those shares will immediately terminate, except the
right to receive the Common Stock or other securities, cash or other assets to
be issued or distributed as a result of the conversion.
(c) No fractional shares or securities representing
fractional shares of Common Stock will be issued upon conversion of Series I
Convertible Stock. Any fractional interest in a share of Common Stock
resulting from conversion of shares of Series I Convertible Stock will be paid
in cash (computed to the nearest cent) based on the Current Market Price (as
defined in subparagraph 5(d)(v)) of the Common Stock on the Trading Day (as
defined in subparagraph 5(d)(v)) next preceding the day of conversion. If more
than one share of Series I Convertible Stock is surrendered for conversion at
one time by the same holder, the number of full shares of Common Stock issuable
upon the conversion will be computed on the basis of all the shares of Series I
Convertible Stock so surrendered.
(d) The "Conversion Price" per share of Series I Convertible
Stock will be $3.25, subject to adjustment from time to time as follows:
(i) In case the Corporation (A) pays a dividend or
makes a distribution on its Common Stock in shares of its Common Stock, (B)
subdivides its outstanding Common Stock into a greater number of shares, or (C)
combines its outstanding Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to that event will be adjusted so
that the holder of any share of Series I Convertible Stock surrendered for
conversion after that event will be entitled to receive the number of shares of
Common Stock of the Corporation which the holder would have been entitled to
receive if the share had been converted immediately prior to the happening of
the event (or, if there is more than one such event, if the share had been
converted immediately before the first of those events and the holder had
retained all the Common Stock or other securities or assets received after the
conversion). An adjustment made pursuant to this subparagraph 5(d)(i) will
become effective immediately after the record date in the case of a dividend or
distribution except as provided in subparagraph 5(d)(viii), and will become
effective immediately after the effective date in the case of a subdivision or
combination. If any dividend or distribution is not paid or made, the
Conversion Price then in effect will be appropriately readjusted.
(ii) In case the Corporation issues rights or warrants
to all holders of its Common Stock entitling them (for a period expiring within
45 days after the record date for issuance of the rights or warrants) to
subscribe for or purchase Common Stock at a price per share less than the
Current Market Price (as defined in subparagraph 5(d)(v)) of the Common Stock
at the record date for the determination of stockholders entitled to receive
the rights or warrants, the Conversion Price in effect immediately prior to the
issuance of the rights or warrants will be adjusted so that it will equal the
price determined by multiplying the Conversion Price in effect immediately
prior to the date of issuance of the rights or warrants by a fraction of which
the numerator will be the number of shares of Common Stock outstanding on the
<PAGE>
date of issuance of the rights or warrants plus the number of shares of Common
Stock which the aggregate exercise price of all the rights or warrants would
purchase at the Current Market Price at that record date, and of which the
denominator will be the number of shares of Common Stock outstanding on the
date of issuance of the rights or warrants plus the number of additional shares
of Common Stock issuable on exercise of all the rights or warrants. The
adjustment provided for in this subparagraph 5(d)(ii) will be made successively
whenever any rights or warrants are issued, and will become effective
immediately, except as provided in subparagraph 5(d)(viii), after each record
date. In determining whether any rights or warrants entitle the holders of the
Common Stock to subscribe for or purchase shares of Common Stock at less than
the Current Market Price, and in determining the aggregate offering price of
the shares of Common Stock issuable on the exercise of rights or warrants,
there will be taken into account any consideration received by the Corporation
for the rights or warrants, with the value of that consideration, if other than
cash, to be determined by the Board (whose determination, if made in good
faith, will be conclusive). If any rights or warrants which led to an
adjustment of the Conversion Price expire without being exercised, the
Conversion Price in effect when the rights or warrants expire will be
appropriately readjusted.
(iii) In case the Corporation distributes to all holders
of its Common Stock any shares of capital stock of the Corporation (other than
Common Stock) or evidences of indebtedness or assets (excluding cash dividends
or distributions paid from retained earnings of the Corporation) or rights or
warrants to subscribe for or purchase any of its securities (excluding those
referred to in subparagraph 5(d)(ii)) then, in each such case, the Conversion
Price will be adjusted so that it will equal the price determined by
multiplying the Conversion Price in effect immediately prior to the date of the
distribution by a fraction of which the numerator will be the Current Market
Price of the Common Stock on the record date for the distribution less the then
fair market value (as determined by the Board, whose determination, if made in
good faith, shall be conclusive) of the capital stock or assets or evidences of
indebtedness so distributed, or of the rights or warrants so distributed, with
respect to one share of Common Stock, and of which the denominator will be the
Current Market Price of the Common Stock on the record date. Each adjustment
will, except as provided in subparagraph 5(d)(viii), become effective
immediately after the record date for the determination of the stockholders
entitled to receive the distribution. If any such distribution is not made or
if any rights or warrants expire or terminate without having been exercised,
the Conversion Price then in effect will be appropriately readjusted.
(iv) In case of any reclassification or change of
outstanding shares of Common Stock (other than a change in par value, or as a
result of a subdivision or combination), or in case of any consolidation of the
Corporation with, or merger of the Corporation with or into, any other entity
that results in a reclassification, change, conversion, exchange or
cancellation of outstanding shares of Common Stock, or any sale or transfer of
all or substantially all of the assets of the Corporation, upon conversion of
Series I Convertible Stock, the holder of the Series I Convertible Stock will
be entitled to receive the kind and amount of securities, cash and other
property which the holder would have received if the holder had converted the
shares of Series I Convertible Stock into Common Stock immediately before the
first such reclassification, change, consolidation, merger, sale or transfer
and had retained all the securities, cash and other assets received as a result
of all the reclassifications, changes, consolidations, mergers, sales or
transfers.
(v) For the purpose of any computation under
subparagraphs 5(d)(ii) and 5(d)(iii) above, the "Current Market Price" of the
<PAGE>
Common Stock at any date will be the average of the last reported sale prices
per share on each of the thirty consecutive Trading Days (as defined below)
preceding the date of the computation. The last reported sale price on each
day will be (A) the last reported sale price of the Common Stock on the
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation System (the "NASDAQ National Market"), or any similar
system of automated dissemination of quotations of securities prices then in
common use, if so quoted, or (B) if not quoted as described in clause (A), the
mean between the high bid and low asked quotations for the Common Stock as
reported by National Quotation Bureau Incorporated if at least two securities
dealers have inserted both bid and asked quotations for the Common Stock on at
least five of the ten preceding Trading Days, or (C) if the Common Stock is
listed or admitted for trading on any national securities exchange (whether or
not it is also quoted on the NASDAQ National Market), the last sale price, or
the closing bid price if no sale occurred, of the Common Stock on the principal
securities exchange on which the Common Stock is listed. If the Common Stock
is quoted on a national securities or central market system, in lieu of a
market or quotation system described above, the last reported sale price will
be determined in the manner set forth in clause (B) of the preceding sentence
if bid and asked quotations are reported but actual transactions are not, and
in the manner set forth in clause (C) of the preceding sentence if actual
transactions are reported. If the Common Stock is not quoted or traded as
described in any of clause (A), (B) or (C), the Current Market Price of the
Common Stock on a day will be the fair market value of the Common Stock on that
day as determined by a member firm of the New York Stock Exchange, Inc.
selected by the Corporation. As used with regard to the Series I Convertible
Stock, the term "Trading Day" means (x) if the Common Stock is quoted on the
NASDAQ National Market or any similar system of automated dissemination of
quotations of securities prices, a day on which trades may be made on such
system, or (y) if not quoted as described in clause (x), a day on which
quotations are reported by the National Quotation Bureau Incorporated, or (z)
if the Common Stock is listed or admitted for trading on any national
securities exchange (whether or not it is also quoted on the NASDAQ National
Market), a day on which that national securities exchange is open for business.
(vi) No adjustment in the Conversion Price will be
required unless the adjustment would require a change of at least 1% in the
Conversion Price; PROVIDED, HOWEVER, that any adjustments which by reason of
this subparagraph 5(d)(vi) are not required to be made will be carried forward
and taken into account in any subsequent adjustment; and PROVIDED, FURTHER,
that adjustment will be required and made in accordance with the provisions of
this Paragraph 5 (other than this subparagraph 5(d)(vi)) not later than such
time as may be required in order to preserve the tax-free nature of a
distribution to the holders of shares of Common Stock. All calculations under
this Paragraph 5 will be made to the nearest cent or to the nearest one
hundredth of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted, the
Corporation will promptly send each holder of record of Series I Convertible
Stock a notice of the adjustment of the Conversion Price setting forth the
adjusted conversion Price and the date on which the adjustment becomes
effective and containing a brief description of the events which caused the
adjustment.
(viii) In any case in which this subparagraph 5(d)
provides that an adjustment will become effective immediately after a record
date for an event, the Corporation may defer until the occurrence of the event
(i) issuing to the holder of any share of Series I Convertible Stock converted
after the record date and before the occurrence of the event the additional
shares of Common Stock issuable upon the conversion by reason of the adjustment
<PAGE>
required by the event over and above the Common Stock issuable upon the
conversion before giving effect to the adjustment and (ii) paying to the holder
any amount in cash in lieu of any fractional share pursuant to subparagraph
5(c) above.
(e) If:
(i) the Corporation declares a dividend (or any other
distribution) on the Common Stock (other than in cash out of retained
earnings); or
(ii) the Corporation authorizes the granting to the
holders of the Common Stock of rights or warrants to subscribe for or purchase
any shares of any class or any other rights or warrants; or
(iii) there is any reclassification of the Common Stock
(other than a subdivision or combination of the outstanding Common Stock and
other than a change in the par value, or from par value to no par value, or
from no par value to par value), or any consolidation, merger, or statutory
share exchange to which the Corporation is a party and for which approval of
any stockholders of the Corporation is required, or any sale or transfer of all
or substantially all the assets of the Corporation; or
(iv) there is a voluntary or an involuntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation will cause to be mailed to the holders of record of shares
of the Series I Convertible Stock at their addresses as shown on the stock
books of the Corporation, at least 15 days prior to the applicable date
specified below, a notice stating (A) the date on which a record is to be taken
for the purpose of the dividend, distribution or grant of rights or warrants,
or, if a record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to the dividend, distribution or rights or
warrants are to be determined or (B) the date on which the reclassification,
consolidation, merger, statutory share exchange, sale, transfer, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record will be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon the reclassification, consolidation, merger, statutory share
exchange, sale, transfer, dissolution, liquidation or winding up. Failure to
give any such notice or any defect in the notice will not affect the legality
or validity of the proceedings described in this subparagraph 5(e).
(f)
(i) The Corporation will at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
shares of Common Stock or its issued shares of Common Stock held in its
treasury, or both, for the purpose of effecting conversions of the Series I
Convertible Stock, the maximum number of shares of Common Stock which the
Corporation would be required to deliver upon the conversion of all the
outstanding shares of Series I Convertible Stock (or such lesser number of
shares as, taken together with the shares which are actually outstanding and
the maximum number of shares of Common Stock which the Corporation would be
required to issue on conversion of all the outstanding shares of Series A,
Series B, Series D, Series E, Series F, Series G and Series H Convertible
Preferred Stock, equals the total number of shares of Common Stock which the
Corporation is authorized to issue). For the purposes of this subparagraph
<PAGE>
5(f), the maximum number of shares of Common Stock which the Corporation would
be required to deliver upon the conversion of all the outstanding shares of
Series I Convertible Stock (or any other Series of Preferred Stock) will be
computed as if at the time of the computation all the outstanding shares were
held by a single holder.
(ii) Before taking any action which would cause an
adjustment reducing the Conversion Price below the then par value (if any) of
the shares of Common Stock deliverable upon conversion of the Series I
Convertible Stock, the Corporation will take any corporate action which may, in
the opinion of its counsel, be necessary in order that the Corporation may
validly and legally issue fully paid and non-assessable shares of Common Stock
at the adjusted Conversion Price.
(iii) The Corporation will endeavor to list the shares of
Common Stock required to be delivered upon conversion of the Series I
Convertible Stock, prior to the delivery, upon each national securities
exchange, if any, upon which the outstanding Common Stock is listed at the time
of delivery.
(iv) Prior to the delivery of any securities which the
Corporation will be obligated to deliver upon conversion of the Series I
Convertible Stock, the Corporation will endeavor, in good faith and as
expeditiously as possible, to comply with all federal and state laws and
regulations requiring the registration of those securities with, or any
approval of or consent to the delivery of those securities by, any governmental
authority.
(g) The Corporation will pay any documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares
of Common Stock on conversion of the Series I Convertible Stock; PROVIDED,
HOWEVER, that the Corporation will not be required to pay any tax which may be
payable in respect of any transfer involved in the issue or delivery of shares
of Common Stock in a name other than that of the holder of the Series I
Convertible Stock to be converted and no such issue or delivery will be made
unless and until the person requesting the issue or delivery has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that the tax has been paid.
(h) If at any time the issuance of Common Stock on conversion
of the Series I Convertible Stock would, in the written opinion of counsel to
the Corporation, create a likelihood that the United States Defense
Investigative Service would withdraw a facility security clearance held by the
Corporation or a subsidiary, the stock to be issued upon a conversion at that
time will be a number of shares of Series A Convertible Participating Preferred
Stock which is convertible into the number of shares of Common Stock which
otherwise would be issued on the conversion.
(i) To the extent that at the time when a certificate
representing shares of Series I Convertible Stock is surrendered for conversion
and all the other conditions specified in subparagraph 5(b)(i) have been
satisfied, issuance of the shares of Common Stock into which shares of Series I
Convertible Stock represented by the certificate are being converted (which may
be fewer than all the shares of Series I Convertible Stock represented by the
certificate) would cause the sum of (i) the number of shares of Common Stock
which would be outstanding immediately after those shares of Series I
Convertible Stock are converted into Common Stock, plus (ii) the maximum number
of shares of Common Stock which the Corporation may be required to issue on
exercise of options, warrants and rights which are outstanding on the day the
certificate representing shares of Series I Convertible Stock is surrendered
for conversion, plus (iii) 135% of the maximum number of shares of Common Stock
<PAGE>
the Corporation may be required to issue on conversion of all the shares of
Series B, Series D, Series E, Series F, Series G and Series H Convertible
Preferred Stock and Series J Convertible Participating Preferred Stock (to the
extent it is at the time convertible into common stock) which is outstanding on
the day the certificate representing shares of Series I Convertible Preferred
Stock is surrendered for conversion, plus (iv) the maximum numbers of shares of
Common Stock the Corporation may be required to issue under any other
convertible or exchangeable securities which are outstanding, or under any
other agreements which are in effect, on the day the certificate representing
shares of Series I Convertible Preferred Stock is surrendered for conversion
(the sum of the number of shares of Common Stock described in clauses (i)
through (iv) being the "Total Issuable Common Stock") exceeds the total number
of shares of Common stock the Corporation is authorized to issue, the
Corporation may issue with regard to the Series I Convertible Stock which is
being converted, in lieu of the shares of Common Stock which would cause the
Total Issuable Common Stock to exceed the total number of shares of Common
Stock the Corporation is authorized to issue, shares of Series J Convertible
Preferred Stock of the Corporation ("Series J Convertible Stock") at the rate
of one share of Series J Convertible Stock for each 100 shares of Common Stock
which, if issued on conversion of the Series I Convertible Stock, would cause
the Total Issuable Common Stock to exceed the total number of shares of Common
Stock the Corporation is authorized to issue.
(j) No holder of shares of Series I Convertible Stock shall
have the right to convert all or any of such shares into shares of Common Stock
or Series J Convertible Stock, pursuant to this Paragraph 5, unless (i) such
holder is a citizen of the United States of America or a corporation or other
entity of which a majority of the outstanding shares or other equity interests
are owned of record and, to the best of the knowledge of the corporation or
other entity, beneficially, by citizens of the United States of America, or
(ii) the Corporation is instructed to issue the Common Stock to be issued upon
the conversion to, or as instructed by, the underwriters of an underwritten
public offering in respect of which there are at least one hundred
beneficial.purchasers of the shares sold in the offering.
6. MANDATORY CONVERSION.
(a) The Corporation may, by a notice (a "Notice of Mandatory
Conversion") given to the holders of the Series I Convertible Stock at a time
when (i) the last sale price of the Common Stock quoted on the NASDAQ National
Market, or the last sale price of the Common Stock in trading on the principal
national securities exchange on which the Common Stock is traded, exceeded
$3.90, but not less than 120% of the then Conversion Price, per share for each
of the 20 Trading Days next preceding the day on which the notice is given,
(ii) there is a signed contract (which may be a firm commitment underwriting
contract or any other form of purchase contract) by which a buyer or group of
buyers with the financial ability to carry out their obligations under the
contract are either (X) contractually committed to purchase for at least $3.90,
but not less than 120% of the then Conversion Price, per share at least 50% of
the shares of Common Stock into which all the outstanding Series I Convertible
Stock will be converted at the Conversion Price then in effect or (Y)
contractually committed, to purchase for at least $3.50 per share, but not less
than 107.69% of the then Conversion Price, at least 75% of the shares of Common
Stock into which all the outstanding shares of Series I Convertible Stock will
be converted at the Conversion Price then in effect, and (iii) conversion of
all the outstanding Series I Convertible Stock into Common Stock would not
cause the Total Issuable Common Stock to exceed the total number of shares of
Common Stock the Corporation is authorized to issue, require the holders of all
(but not less than all) the outstanding Series I Convertible Stock to convert
their Series I Convertible Stock into Common Stock on a date specified in the
<PAGE>
notice (which may be the date the notice is given or any other date which is
not more than 60 days after the date the notice is given) for the Conversion
Price, calculated as provided in subparagraph 5(d), in effect on the day the
notice is given.
(b) If the Corporation gives a Notice of Mandatory Conversion
as provided in subparagraph 6(a), the holders of the outstanding Series I
Convertible Stock will be deemed to have surrendered the certificates
representing their shares of Series I Convertible Stock for conversion at the
close of business on the conversion date specified in the Notice of Mandatory
Conversion, and, regardless of whether they do or do not surrender those shares
for conversion, at the close of business on that date (i) the certificates
representing the shares of Series I Convertible Stock will cease to represent
anything other than the right to receive the shares of Common Stock or cash,
other securities or other assets issuable upon conversion of the shares of
Series I Convertible Stock and (ii) the Corporation may, at its option (the
exercise of which will be described in the Notice of Mandatory Redemption),
either (A) issue the shares of Common Stock, or distribute the cash, other
securities or other assets, to which the holders of the Series I Convertible
Stock are entitled without requiring the surrender of the certificates which
formerly represented shares of Series I Convertible Stock, or (B) set aside in
trust for the respective holders of certificates which formerly represented
Series I Convertible Stock, the cash, securities and other assets (other than
Common Stock, which need not be set aside) to which those holders are entitled
and issue or distribute the Common Stock, cash, other securities or other
assets which each former holder of Series I Convertible Stock is entitled to
receive, without interest, when the former holder surrenders the certificates
which represented the Series I Convertible Stock and complies with the other
requirements of subparagraph 5(b)(i). Any interest on funds set aside for
distribution to former holders of Series I Convertible Stock will belong to the
Corporation.
(c) If the Corporation presents to the holders of the Series
I Convertible Stock a form of firm commitment underwriting agreement or other
purchase contract relating to a purchase by a buyer or group of buyers meeting
the requirements set forth in subparagraph 6(a) relating to (x) a purchase for
at least $3.90 per share, but not less than 120% of the then Conversion Price,
of at least 50% of the shares of Common Stock into which all the outstanding
shares of Series I Convertible Stock are convertible at the Conversion Price
then in effect or (y) to purchase for at least $3.50 per share, but not less
than 107.69% of the then Conversion Price, at least 75% of the shares of Common
Stock into which all the outstanding shares of Series I Convertible Stock will
be converted at the Conversion Price then in effect, which underwriting
contract or other purchase contract contains customary terms and conditions
(but requires no representations or warranties from a selling stockholder other
than representations that, when Common Stock is issued to that selling
stockholder on conversion of the Series I Convertible Stock, the selling
stockholder will own that Common Stock and have the right and ability to sell
it to the buyer or group of buyers free and clear of any liens or encumbrances,
and will impose no obligations on a selling stockholder other than (x) the
obligation to deliver certificates representing the Common Stock (assuming they
are issued) upon payment of the purchase price for them, and (y) the obligation
to indemnify the buyer or group of buyers against liability or damages
resulting from any misstatement by the selling stockholder of a material fact
regarding the selling stockholder, or omission by the selling stockholder to
state a material fact necessary to make the statements made by the selling
stockholder regarding the selling stockholder not misleading), and the
Corporation notifies the holders of the Series I Convertible Stock that the
buyer or group of buyers has signed, or agreed to sign, the contract subject to
signature by the holders of the Series I Convertible Stock, the condition in
clause (ii) of subparagraph 6(a) will be deemed waived, and not to be a
prerequisite to required conversion, by each holder of Series I Convertible
<PAGE>
Stock who does not, within 10 days after the contract is presented to the
holder, agree to sign a copy of the contract, or authorize the Corporation to
sign a copy of the contract as attorney in fact for the holder.
7. STATUS. Upon any conversion, exchange or redemption of shares
of Series I Convertible Stock, the shares of Series I Convertible Stock so
converted, exchanged or redeemed shall not be reissued thereafter as shares of
such series, but will have the status of authorized and unissued shares of
preferred stock, and the number of shares of preferred stock which the
Corporation will have authority to issue will not be decreased by the
conversion, exchange or redemption of shares of Series I Convertible Stock.
8. VOTING RIGHTS. (a) The holders of shares of Series I
Convertible Stock will have no voting rights, except any voting rights to which
they may be entitled under the laws of the State of Delaware and except as
otherwise expressly provided in this resolution.
(b) So long as any shares of the Series I Convertible Stock
remain outstanding, the Corporation will not, either directly or indirectly, or
through merger or consolidation with or into any other corporation, without the
affirmative vote at a meeting or the written consent with or without a meeting
of the holders of at least 66-2/3% of the outstanding shares of Series I
Convertible Stock, (i) create or issue or increase the authorized number of
shares of any class or series of stock ranking prior to or on a parity with the
Series I Convertible Stock either as to dividends or upon liquidation, (ii)
amend, alter or repeal any of the provisions of the Certificate of
Incorporation (including this resolution) so as to affect adversely the
preferences, special rights or powers of the Series I Convertible Stock, (iii)
authorize any reclassification of the Series I Convertible Stock or
(iv) increase the number of shares of Series I Convertible Stock the
Corporation may issue. This subparagraph will not prevent (t) the issuance of
Series I Convertible Stock which is authorized in Paragraph 1, (u) the issuance
of Series B Convertible Preferred Stock which is authorized in Paragraph 1 of
the Certificate of Designations, Powers, Rights and Preferences of Series B
Convertible Preferred Stock dated January 28, 1991 (the "Series B Certificate
of Designation"), (v) the issuance of Series D Convertible Preferred Stock
which is authorized in Paragraph 1 of the Certificate of Designations, Powers,
Rights and Preferences of Series D Convertible Preferred Stock dated September
10, 1992 (the "Series D Certificate of Designation"), (w) the issuance of
Series E Convertible Preferred Stock which is authorized in Paragraph 1 of the
Certificate of Designations, Powers, Rights and Preferences of Series E
Convertible Preferred Stock dated February 3, 1994 (the "Series E Certificate
of Designation"), (x) the issuance of Series F Convertible Preferred Stock
which is authorized in Paragraph 1 of the Certificate of Designations, Powers,
Rights and Preferences of Series F Convertible Preferred Stock dated March 17,
1995 (the "Series F Certificate of Designation"), (y) the issuance of Series G
Convertible Preferred Stock which is authorized in Paragraph 1 of the
Certificate of Designations, Powers, Rights and Preferences of Series G
Convertible Preferred Stock dated August 17, 1995 (the "Series G Certificate of
Designation") or (z) the issuance of Series H Convertible Preferred Stock which
is authorized in Paragraph 1 of the Certificate of Designations, Powers, Rights
and Preferences of Series H Convertible Preferred Stock dated April 16, 1996
(the "Series H Certificate of Designation").
9. MISCELLANEOUS
(a) Except as otherwise expressly provided, whenever in this
resolution a notice or other communication is required or permitted to be given
to holders of shares of Series I Convertible Stock, the notice or other
<PAGE>
communication will be deemed properly given if deposited in the United States
mail, postage prepaid, addressed to the persons shown on the books of the
Corporation as the holders of the shares at the addresses as they appear in the
books of the Corporation, as of a record date or dates determined in accordance
with the Corporation's Certificate of Incorporation and By-laws and applicable
law, as in effect from time to time.
(b) The holders of the Series I Convertible Stock will not
have any preemptive right to subscribe for or purchase any shares or any other
securities which may be issued by the Corporation.
(c) The voting powers, designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions of those powers, designations, preferences and
rights, of the Series I Convertible Stock may be amended by (i) the affirmative
vote of the Board of Directors, together with (ii) the affirmative vote at a
meeting or the written consent with or without a meeting of the holders of at
least 66-2/3% of the outstanding shares of Series I Convertible Stock.
(d) Except as may otherwise be required by law, the shares of
Series I Convertible Stock will not have any designations, preferences,
limitations or relative rights, other than those specifically set forth in this
resolution and in the Certificate of Incorporation.
(e) The headings of the various subdivisions of this
resolution are for convenience of reference only and will not affect the
meaning or interpretation of any of the provisions of this resolution.
(f) The preferences, special rights or powers of the Series I
Convertible Stock may be waived upon the affirmative vote at a meeting or the
written consent with or without a meeting of the holders of (i) at least
66-2/3% of the outstanding shares of Series I Convertible Stock and (ii) 100%
of the shares of Series I Convertible Stock held by or for the benefit of Gould
Electronics Inc. and any permitted assignee of Gould Electronics Inc."
IN WITNESS WHEREOF, Encore Computer Corporation has caused this
certificate to be made under the seal of the Corporation and signed by Kenneth
G. Fisher, its Chief Executive Officer, and attested by Mary F. Macomber, its
Assistant Secretary, this 14th day of March, 1997.
ENCORE COMPUTER CORPORATION
By:____________________________
Kenneth G. Fisher
Chief Executive Officer
Attest:
___________________________
Assistant Secretary
CERTIFICATE OF DESIGNATIONS,
POWERS, RIGHTS AND PREFERENCES
OF SERIES J CONVERTIBLE PARTICIPATING PREFERRED STOCK
OF
ENCORE COMPUTER CORPORATION
ENCORE COMPUTER CORPORATION, a corporation organized and existing by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
That, pursuant to the authority conferred upon the Board of
Directors of the corporation by the certificate of incorporation and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors of the corporation, at a meeting
held on February , 1997, duly adopted a resolution designating the
designations, powers, rights and preferences relating to its Series J
Convertible Preferred Stock as follows:
"RESOLVED, that the Board of Directors (the "Board") of Encore
Computer Corporation (the "Corporation") authorizes the issuance of a series of
preferred stock consisting of 246,154 shares and the Board fixes the powers,
designations, preferences and relative, participating, optional or other
rights, and the qualifications, limitations or restrictions thereof, of the
shares of that series as follows:
1. DESIGNATION AND AMOUNT. The designation of the series of
preferred stock authorized by this resolution will be the Series J Convertible
Participating Preferred Stock (the "Series J Convertible Stock"). The total
number of shares of Series J Convertible Stock will be 246,154 shares. These
shares may be issued for any purpose determined by the Board of Directors.
2. DIVIDENDS AND DISTRIBUTIONS.
The Board of Directors may not at any time declare, and the
Corporation may not at any time pay, a dividend or make any distribution with
regard to the Common Stock, par value $.01 per share, of the Corporation
("Common Stock"), unless simultaneously with the payment of the dividend or the
making of the distribution with regard to the Common Stock the Corporation pays
a dividend with regard to each outstanding share of Series J Convertible Stock
which is equal to 100 times the dividend paid or other distribution with regard
to a share of Common Stock.
3. RANKING. The shares of Series J Convertible Stock (i) rank
prior to the shares of Common Stock to the extent specifically provided in this
resolution, and in all other respects, rank on a parity with the common stock,
(ii) are on a parity with the shares of Series A Convertible Participating
Preferred Stock and (iii) are, and will be, junior to the shares of all other
series of preferred stock, other than series which are designated in the
resolution or other documents creating them as ranking on a parity with, or
being junior to, the Series J Convertible Stock.
4. LIQUIDATION. Upon the liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, before any payment or
<PAGE>
distribution of the assets of the Corporation is made or set aside for the
holders of the Common Stock, the holders of the Series J Convertible stock will
be entitled to receive out of the assets of the Corporation available for
distribution to its stockholders an amount equal to $1 per share plus an amount
equal to any dividends required to have been paid with regard to the Series J
Convertible Stock which have not been paid. After the holders of the Series J
Convertible Stock have received $1 per share plus an amount equal to any
dividends required to have been paid with regard to the Series J Convertible
Stock which have not been paid, the holders of the Series J Convertible Stock
will not be entitled to receive any further amount until the holders of the
Common Stock have received $.01 per share. After the holders of the Common
Stock have received $.01 per share, the holders of the Series J Convertible
Stock will be entitled to receive as to each share of Series J Convertible
Stock an amount equal to 100 times the amount per share in excess of that $.01
received by the holders of the Common Stock. For the purposes of this
Paragraph, neither a consolidation or merger of the Corporation with or into
any other corporation, nor a sale or transfer of all or any part of the
Corporation's assets for cash or securities, will be considered a liquidation,
dissolution or winding up of the Corporation.
5. OPTIONAL CONVERSION.
(a) Each holder of Series J Convertible Stock will have the
right at any time or from time to time, at the holder's option, to convert all
or any of the holder's shares of Series J Convertible Stock into shares of
Common Stock on the terms set forth in this Paragraph 5.
(b) Each share of Series J Convertible Stock will initially
be convertible into 100 shares of Common Stock, subject to adjustment as
provided in subparagraphs (d) and (e). The number of shares of Common Stock
into which a share of Series J Convertible Stock is convertible at any time is
called the "Conversion Rate."
(c) (i) In order to exercise the conversion privilege, the
holder of each share of Series J Convertible Stock to be converted will
surrender the certificate representing that share to the conversion agent for
the Series J Convertible Stock appointed by the Corporation (which may be the
Corporation itself), with the Notice of Election to Convert on the back of that
certificate duly completed and signed, together with funds equal to the
Dividend Amount, if any, required to be paid under subparagraph 5(c)(iii), at
the principal office of the conversion agent. If the shares issuable on
conversion are to be issued in a name other than the name in which the shares
of Series J Convertible Stock are registered, each share surrendered for
conversion must be accompanied by instruments of transfer, in form satisfactory
to the Corporation, duly executed by the holder or the holder's duly authorized
attorney and by funds in an amount sufficient to pay any transfer or similar
tax.
(ii) Each conversion will be at the Conversion Rate in
effect at the close of business on the date when all the conditions in
subparagraph 5(c)(i) have been satisfied.
(iii) The holders of record of shares of Series J
Convertible Stock at the close of business on a dividend payment record date
will be entitled to receive the dividend payable on those shares on the
corresponding dividend payment date notwithstanding the conversion of the
shares after the dividend payment record date or the Corporation's default in
payment of the dividend due on the dividend payment date. However, shares of
Series J Convertible Stock surrendered for conversion during the period between
<PAGE>
the close of business on any dividend payment record date and the opening of
business on the corresponding dividend payment date must be accompanied by
payment of an amount equal to the dividend payable on the shares on the
dividend payment date (the "Dividend Amount"). The holders of shares of Series
J Convertible Stock on a dividend payment record date who (or whose
transferees) convert any of those shares on or after the corresponding dividend
payment date will receive the dividend payable by the Corporation on those
shares of Series J Convertible Stock on the dividend payment date, and need not
include payment of the Dividend Amount upon surrender of those shares for
conversion. Except as provided above, the Corporation will make no payment or
adjustment for accrued and unpaid dividends on shares of Series J Convertible
Stock, whether or not in arrears, on conversion of those shares, or for
dividends on the shares of Common Stock issued upon the conversion.
(iv) As promptly as practicable after the surrender by a
holder of certificates for shares of Series J Convertible Stock in accordance
with this subparagraph 5(c), the Corporation will issue and will deliver at the
office of the conversion agent to the holder, or on the holder's written order,
a certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of the shares of Series J Convertible Stock in
accordance with the provisions of this Paragraph 5. Any fractional interest in
respect of a share of Common Stock arising upon a conversion will be settled as
provided in subparagraph 5(c).
(v) Each conversion will be deemed to have been
effected immediately prior to the close of business on the date on which all
the conditions specified in subparagraph 5(c)(i) have been satisfied, and the
person in whose name any certificate for shares of Common Stock will be
issuable upon a conversion will be deemed to have become the holder of record
of the shares of Common Stock represented by that certificate at that time,
unless the stock transfer books of the Corporation are closed on that date, in
which event that person will be deemed to have become the holder of record at
the close of business on the next succeeding day on which the stock transfer
books are open. All shares of Common Stock delivered upon conversion of Series
J Convertible Stock will upon delivery be duly and validly issued and fully
paid and nonassessable, free of all liens and charges and not subject to any
preemptive rights. Upon the surrender of certificates representing shares of
Series J Convertible Stock to be converted and compliance with all the other
requirements of subparagraph 5(c)(i), the shares represented by those
certificates will no longer be deemed to be outstanding and all rights of a
holder with respect to those shares will immediately terminate, except the
right to receive the Common Stock or other securities, cash or other assets to
be issued or distributed as a result of the conversion.
(d) No fractional shares or securities representing
fractional shares of Common Stock will be issued upon conversion of Series J
Convertible Stock. Any fractional interest in a share of Common Stock
resulting from conversion of shares of Series J Convertible Stock will be paid
in cash (computed to the nearest cent) based on the Current Market Price (as
defined in subparagraph 5(e)(v)) of the Common Stock on the Trading Day (as
defined in subparagraph 5(e)(v)) next preceding the day of conversion. If more
than one share of Series J Convertible Stock is surrendered for conversion at
one time by the same holder, the number of full shares of Common Stock issuable
upon the conversion will be computed on the basis of all the shares of Series J
Convertible Stock so surrendered.
(e) The "Conversion Rate" set forth in subparagraph 5(b) will
be adjusted from time to time as follows:
<PAGE>
(i) In case the Corporation (A) pays a dividend or
makes a distribution on its Common Stock in shares of its Common Stock, (B)
subdivides its outstanding Common Stock into a greater number of shares, or (C)
combines its outstanding Common Stock into a smaller number of shares, the
Conversion Rate in effect immediately prior to that event will be adjusted so
that the holder of any share of Series J Convertible Stock surrendered for
conversion after that event will be entitled to receive the number of shares of
Common Stock of the Corporation which the holder would have been entitled to
receive if the share had been converted immediately prior to the happening of
the event (or, if there is more than one such event, if the share had been
converted immediately before the first of those events and the holder had
retained all the Common Stock or other securities or assets received after the
conversion). An adjustment made pursuant to this subparagraph 5(e)(i) will
become effective immediately after the record date in the case of a dividend or
distribution except as provided in subparagraph 5(e)(viii), and will become
effective immediately after the effective date in the case of a subdivision or
combination. If any dividend or distribution is not paid or made, the
Conversion Rate then in effect will be appropriately readjusted.
(ii) In case the Corporation issues rights or warrants
to all holders of its Common Stock entitling them (for a period expiring within
45 days after the record date for issuance of the rights or warrants) to
subscribe for or purchase Common Stock at a price per share less than the
Current Market Price (as defined in subparagraph 5(e)(v)) of the Common Stock
at the record date for the determination of stockholders entitled to receive
the rights or warrants, the Conversion Rate in effect immediately prior to the
issuance of the rights or warrants will be adjusted so that it will equal the
rate determined by multiplying the Conversion Rate in effect immediately prior
to the date of issuance of the rights or warrants by a fraction of which the
numerator will be the number of shares of Common Stock outstanding on the date
of issuance of the rights or warrants plus the number of additional shares of
Common Stock issuable on exercise of all the rights or warrants and of which
the denominator will be the number of shares of Common Stock outstanding on the
date of issuance of the rights or warrants plus the number of shares of Common
Stock which the aggregate exercise price of all the rights or warrants would
purchase at the Current Market Price at that record date. The adjustment
provided for in this subparagraph 5(e)(ii) will be made successively whenever
any rights or warrants are issued, and will become effective immediately,
except as provided in subparagraph 5(e)(viii), after each record date. In
determining whether any rights or warrants entitle the holders of the Common
Stock to subscribe for or purchase shares of Common Stock at less than the
Current Market Price, and in determining the aggregate offering price of the
shares of Common Stock issuable on the exercise of rights or warrants, there
will be taken into account any consideration received by the Corporation for
the rights or warrants, with the value of that consideration, if other than
cash, to be determined by the Board (whose determination, if made in good
faith, will be conclusive). If any rights or warrants which led to an
adjustment of the Conversion Rate expire without being exercised, the
Conversion Rate in effect when the rights or warrants expire will be
appropriately readjusted.
(iii) In case the Corporation distributes to all holders
of its Common Stock any shares of capital stock of the Corporation (other than
Common Stock) or evidences of indebtedness or assets (excluding cash dividends
or distributions paid from retained earnings of the Corporation) or rights or
warrants to subscribe for or purchase any of its securities (excluding those
referred to in subparagraph 5(e)(ii)) then, in each such case, the Conversion
Rate will be adjusted so that it will equal the rate determined by multiplying
the Conversion Rate in effect immediately prior to the date of the distribution
by a fraction of which the numerator will be the Current Market Price of the
<PAGE>
Common Stock on the record date for the distribution and the denominator will
be the Current Market Price of the Common Stock on the record date for the
distribution less the then fair market value (as determined by the Board, whose
determination, if made in good faith, shall be conclusive) of the capital stock
or assets or evidences of indebtedness so distributed, or of the rights or
warrants so distributed, with respect to one share of Common Stock. Each
adjustment will, except as provided in subparagraph 5(e)(viii), become
effective immediately after the record date for the determination of the
stockholders entitled to receive the distribution. If any such distribution is
not made or if any rights or warrants expire or terminate without having been
exercised, the Conversion Rate then in effect will be appropriately readjusted.
(iv) In case of any reclassification or change of
outstanding shares of Common Stock (other than a change in par value, or as a
result of a subdivision or combination), or in case of any consolidation of the
Corporation with, or merger of the Corporation with or into, any other entity
that results in a reclassification, change, conversion, exchange or
cancellation of outstanding shares of Common Stock, or any sale or transfer of
all or substantially all of the assets of the Corporation, upon conversion of
Series J Convertible Stock, the holder of the Series J Convertible Stock will
be entitled to receive the kind and amount of securities, cash and other
property which the holder would have received if the holder had converted the
shares of Series J Convertible Stock into Common Stock immediately before the
first such reclassification, change, consolidation, merger, sale or transfer
and had retained all the securities, cash and other assets received as a result
of all the reclassifications, changes, consolidations, mergers, sales or
transfers.
(v) For the purpose of any computation under
subparagraphs 5(e)(ii) and 5(e)(iii) above, the "Current Market Price" of the
Common Stock at any date will be the average of the last reported sale prices
per share on each of the thirty consecutive Trading Days (as defined below)
preceding the date of the computation. The last reported sale price on each
day will be (A) the last reported sale price of the Common Stock on the
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation System (the "NASDAQ National Market"), or any similar
system of automated dissemination of quotations of securities prices then in
common use, if so quoted, or (B) if not quoted as described in clause (A), the
mean between the high bid and low asked quotations for the Common Stock as
reported by National Quotation Bureau Incorporated if at least two securities
dealers have inserted both bid and asked quotations for the Common Stock on at
least five of the ten preceding Trading Days, or (C) if the Common Stock is
listed or admitted for trading on any national securities exchange (whether or
not it is also quoted on the NASDAQ National Market), the last sale price, or
the closing bid price if no sale occurred, of the Common Stock on the principal
securities exchange on which the Common Stock is listed. If the Common Stock
is quoted on a national securities or central market system, in lieu of a
market or quotation system described above, the last reported sale price will
be determined in the manner set forth in clause (B) of the preceding sentence
if bid and asked quotations are reported but actual transactions are not, and
in the manner set forth in clause (C) of the preceding sentence if actual
transactions are reported. If the Common Stock is not quoted or traded as
described in any of clause (A), (B) or (C), the Current Market Price of the
Common Stock on a day will be the fair market value of the Common Stock on that
day as determined by a member firm of the New York Stock Exchange, Inc.
selected by the Corporation. As used with regard to the Series J Convertible
Stock, the term "Trading Day" means (x) if the Common Stock is quoted on the
NASDAQ National Market or any similar system of automated dissemination of
quotations of securities prices, a day on which trades may be made on such
system, or (y) if not quoted as described in clause (x), a day on which
quotations are reported by the National Quotation Bureau Incorporated, or (z)
<PAGE>
if the Common Stock is listed or admitted for trading on any national
securities exchange (whether or not it is also quoted on the NASDAQ National
Market), a day on which that national securities exchange is open for business.
(vi) No adjustment in the Conversion Rate will be
required unless the adjustment would require a change of at least 1% in the
Conversion Rate; PROVIDED, HOWEVER, that any adjustments which by reason of
this subparagraph 5(e)(vi) are not required to be made will be carried forward
and taken into account in any subsequent adjustment; and PROVIDED, FURTHER,
that adjustment will be required and made in accordance with the provisions of
this Paragraph 5 (other than this subparagraph 5(e)(vi)) not later than such
time as may be required in order to preserve the tax-free nature of a
distribution to the holders of shares of Common Stock. All calculations under
this Paragraph 5 will be made to the nearest cent or to the nearest one
hundredth of a share, as the case may be.
(vii) Whenever the Conversion Rate is adjusted, the
Corporation will promptly send each holder of record of Series J Convertible
Stock a notice of the adjustment of the Conversion Price setting forth the
adjusted Conversion Rate and the date on which the adjustment becomes effective
and containing a brief description of the events which caused the adjustment.
(viii) In any case in which this subparagraph 5(e)
provides that an adjustment will become effective immediately after a record
date for an event, the Corporation may defer until the occurrence of the event
(i) issuing to the holder of any share of Series J Convertible Stock converted
after the record date and before the occurrence of the event the additional
shares of Common Stock issuable upon the conversion by reason of the adjustment
required by the event over and above the Common Stock issuable upon the
conversion before giving effect to the adjustment and (ii) paying to the holder
any amount in cash in lieu of any fractional share pursuant to subparagraph
5(d) above.
(f) If:
(i) the Corporation declares a dividend (or any other
distribution) on the Common Stock (other than in cash out of retained
earnings); or
(ii) the Corporation authorizes the granting to the
holders of the Common Stock of rights or warrants to subscribe for or purchase
any shares of any class or any other rights or warrants; or
(iii) there is any reclassification of the Common Stock
(other than a subdivision or combination of the outstanding Common Stock and
other than a change in the par value, or from par value to no par value, or
from no par value to par value), or any consolidation, merger, or statutory
share exchange to which the Corporation is a party and for which approval of
any stockholders of the Corporation is required, or any sale or transfer of all
or substantially all the assets of the Corporation; or
(iv) there is a voluntary or an involuntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation will cause to be mailed to the holders of record of shares
of the Series J Convertible Stock at their addresses as shown on the stock
<PAGE>
books of the Corporation, at least 15 days prior to the applicable date
specified below, a notice stating (A) the date on which a record is to be taken
for the purpose of the dividend, distribution or grant of rights or warrants,
or, if a record is not to be taken, the date as of which the holders of Common
Stock of record who will be entitled to the dividend, distribution or rights or
warrants are to be determined or (B) the date on which the reclassification,
consolidation, merger, statutory share exchange, sale, transfer, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record will be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon the reclassification, consolidation, merger, statutory share
exchange, sale, transfer, dissolution, liquidation or winding up. Failure to
give any such notice or any defect in the notice will not affect the legality
or validity of the proceedings described in this subparagraph 5(f).
(g)
(i) The Corporation will at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
shares of Common Stock or its issued shares of Common Stock held in its
treasury, or both, for the purpose of effecting conversions of the Series J
Convertible Stock, the maximum number of shares of Common Stock which the
Corporation would be required to deliver upon the conversion of all the
outstanding shares of Series J Convertible Stock (or such lesser number of
shares as, taken together with the shares which are actually outstanding and
the maximum number of shares of Common Stock which the Corporation would be
required to issue on conversion of all the outstanding shares of Series A,
Series B, Series D, Series E, Series F, Series G, Series H and Series I
Convertible Preferred Stock, equals the total number of shares of Common Stock
which the Corporation is authorized to issue). For the purposes of this
subparagraph 5(g), the maximum number of shares of Common Stock which the
Corporation would be required to deliver upon the conversion of all the
outstanding shares of Series J Convertible Stock (or any other Series of
Preferred Stock) will be computed as if at the time of the computation all the
outstanding shares were held by a single holder.
(ii) Before taking any action which would cause an
adjustment increasing the Conversion Rate above the amount such that the shares
of Common Stock issuable on conversion of the Series J Convertible Stock will
be legally issued, fully paid and non-assessable, the Corporation will take any
corporate action which may, in the opinion of its counsel, be necessary in
order that the Corporation may validly and legally issue fully paid and non-
assessable shares of Common Stock at the adjusted Conversion Rate.
(iii) The Corporation will endeavor to list the shares of
Common Stock required to be delivered upon conversion of the Series J
Convertible Stock, prior to the delivery, upon each national securities
exchange, if any, upon which the outstanding Common Stock is listed at the time
of delivery.
(iv) Prior to the delivery of any securities which the
Corporation will be obligated to deliver upon conversion of the Series J
Convertible Stock, the Corporation will endeavor, in good faith and as
expeditiously as possible, to comply with all federal and state laws and
regulations requiring the registration of those securities with, or any
approval of or consent to the delivery of those securities by, any governmental
authority.
(h) The Corporation will pay any documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares
<PAGE>
of Common Stock on conversion of the Series J Convertible Stock; PROVIDED,
HOWEVER, that the Corporation will not be required to pay any tax which may be
payable in respect of any transfer involved in the issue or delivery of shares
of Common Stock in a name other than that of the holder of the Series J
Convertible Stock to be converted and no such issue or delivery will be made
unless and until the person requesting the issue or delivery has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that the tax has been paid.
(i) If at any time the issuance of Common Stock on conversion
of the Series J Convertible Stock would, in the written opinion of counsel to
the Corporation, create a likelihood that the United States Defense
Investigative Service would withdraw a facility security clearance held by the
Corporation or a subsidiary, the stock to be issued upon a conversion at that
time will be a number of shares of Series A Convertible Participating Preferred
Stock which is convertible into the number of shares of Common Stock which
otherwise would be issued on the conversion.
6. STATUS. Upon any conversion, exchange or redemption of shares
of Series J Convertible Stock, the shares of Series J Convertible Stock so
converted, exchanged or redeemed shall not be reissued thereafter as shares of
such series, but will have the status of authorized and unissued shares of
preferred stock, and the number of shares of preferred stock which the
Corporation will have authority to issue will not be decreased by the
conversion, exchange or redemption of shares of Series J Convertible Stock.
7. VOTING RIGHTS.
(a) The holders of the Series J Convertible Stock will be
entitled to vote together with the holders of the Common Stock, voting as a
single class, on all matters presented for a vote of the holders of the Common
Stock (including, but not limited to, the election of directors), with the
holder of each share of Series J Convertible Stock being entitled to 100 times
the number of votes to which the holder of a share of Common Stock is entitled.
(b) In addition to having the voting rights described in
subparagraph (a), the holders of the Series J Convertible Stock, voting as a
separate series, will have all the voting rights to which they may be entitled
under the laws of the State of Delaware.
8. MISCELLANEOUS
(a) Except as otherwise expressly provided, whenever in this
resolution a notice or other communication is required or permitted to be given
to holders of shares of Series J Convertible Stock, the notice or other
communication will be deemed properly given if deposited in the United States
mail, postage prepaid, addressed to the persons shown on the books of the
Corporation as the holders of the shares at the addresses as they appear in the
books of the Corporation, as of a record date or dates determined in accordance
with the Corporation's Certificate of Incorporation and By-laws and applicable
law, as in effect from time to time.
(b) The holders of the Series J Convertible Stock will not
have any preemptive right to subscribe for or purchase any shares or any other
securities which may be issued by the Corporation.
<PAGE>
(c) The voting powers, designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions of those powers, designations, preferences and
rights, of the Series J Convertible Stock may be amended by (i) the affirmative
vote of the Board of Directors, together with (ii) the affirmative vote at a
meeting or the written consent with or without a meeting of the holders of at
least 66-2/3% of the outstanding shares of Series J Convertible Stock.
(d) Except as may otherwise be required by law, the shares of
Series J Convertible Stock will not have any designations, preferences,
limitations or relative rights, other than those specifically set forth in this
resolution and in the Certificate of Incorporation.
(e) The headings of the various subdivisions of this
resolution are for convenience of reference only and will not affect the
meaning or interpretation of any of the provisions of this resolution.
(f) The preferences, special rights or powers of the Series J
Convertible Stock may be waived upon the affirmative vote at a meeting or the
written consent with or without a meeting of the holders of (i) at least
66-2/3% of the outstanding shares of Series J Convertible Stock and (ii) 100%
of the shares of Series J Convertible Stock held by or for the benefit of Gould
Electronics Inc. and any permitted assignee of Gould Electronics Inc."
IN WITNESS WHEREOF, Encore Computer Corporation has caused this
certificate to be made under the seal of the Corporation and signed by Kenneth
G. Fisher, its Chief Executive Officer, and attested by Mary F. Macomber, its
Assistant Secretary, this 14th day of March, 1997.
ENCORE COMPUTER CORPORATION
By:_______________________________
Kenneth G. Fisher
Chief Executive Officer
Attest:
___________________________
Assistant Secretary
PREFERRED STOCK PURCHASE AGREEMENT
This is an Agreement dated March 19, 1997 between Gould Electronics
Inc. ("GOULD"), an Ohio corporation, as assignee of Gould Inc., and Encore
Computer Corporation ("ENCORE"), a Delaware corporation, relating to the
cancellation by Gould of the Exchanged Indebtedness (as that term is defined in
Paragraph 1.2) in exchange for shares of Series I Convertible Stock (as that
term is defined in Paragraph 1.1).
NOW, THEREFORE, Gould and Encore agree as follows:
ARTICLE I
PURCHASE OF SHARES
1.1 ISSUANCE OF SHARES. At the Closing described in Paragraph 2.1,
Encore will issue to Gould 400,000 shares of Series I Convertible Preferred
Stock of Encore with the powers, rights and preferences set forth on EXHIBIT
1.1 (the "SERIES I CONVERTIBLE STOCK").
1.2 CONSIDERATION FOR SHARES. The consideration to be paid by
Gould for the shares of Series I Convertible Stock to be issued to Gould
pursuant to Paragraph 1.1 will be cancellation of the Exchanged Indebtedness.
As used in this Agreement, the term "EXCHANGED INDEBTEDNESS" means $40,000,000
of revolving credit loans outstanding under the Amended and Restated Credit
Agreement between Encore and Gould dated as of March 17, 1995, as amended (the
"LOAN AGREEMENT") .
<PAGE>
ARTICLE II
THE CLOSING
2.1 TIME AND PLACE OF CLOSING. The closing (the "CLOSING") of the
issuance of the shares of Series I Convertible Stock pursuant to Paragraph 1.1
will take place at the offices of Rogers & Wells, 200 Park Avenue, New York,
New York, at 3:00 p.m. New York City time, on March 19, 1997, or such other
place, time and date as Gould and Encore may agree in writing (the "CLOSING
DATE").
2.2 ITEMS TO BE DELIVERED BY ENCORE TO GOULD AT CLOSING. At the
Closing, Encore will deliver to Gould the following:
(a) Certificates representing all of the shares of Series I
Convertible Stock to be issued to Gould pursuant to Paragraph 1.1, registered
in the name of Gould. These certificates shall be legended to the effect that
the shares represented by them were issued in a transaction which was not
registered under the Securities Act of 1933, as amended, and those shares may
only be sold or transferred in a transaction which is registered under that Act
or exempt from the registration requirements of that Act.
(b) A copy, executed by Encore and Indian Creek Capital, Ltd.
("INDIAN CREEK"), as assignee of Kenneth G. Fisher, of an Eighth Amended and
Restated Registration Agreement (the "REGISTRATION AGREEMENT"), substantially
in the form of EXHIBIT 2.2-B.
(c) A copy, executed by Indian Creek and Encore, of the Third
Amendment to the Second Amended and Restated Stockholders Agreement (the
"STOCKHOLDERS AGREEMENT AMENDMENT"), substantially in the form of EXHIBIT 2.2-
C.
(d) An agreement by Kenneth G. Fisher to vote all shares of stock
of Encore which he owns or has the power to vote in favor of amending Encore's
2
<PAGE>
certificate of incorporation to increase the number of shares of common stock
it is authorized to issue to 300,000,000 shares.
2.3 ITEMS TO BE DELIVERED BY GOULD TO ENCORE AT CLOSING. At the
Closing, Gould will deliver to Encore copies of the following documents:
(a) The Registration Agreement, executed by Gould and EFI
International, Inc. ("EFI").
(b) A document (the "ACKNOWLEDGEMENT OF CANCELLATION"), executed by
Gould, in which Gould acknowledges cancellation of the Exchanged Indebtedness.
(c) A letter, executed by Gould, in which Gould acknowledges that
it will be acquiring the shares of Series I Convertible Stock to be issued to
it pursuant to Paragraph 1.1 for investment and not with a current view toward
their sale or distribution.
(d) The Stockholders Agreement Amendment, executed by Gould and
EFI.
(e) Written consents executed by Gould in its capacities as the
holder of 728,722 shares of Series B Convertible Preferred Stock of Encore,
123,890 shares of Series D Convertible Preferred Stock of Encore, 1,139,789
shares of Series E Convertible Preferred Stock of Encore, 533,333 shares of
Series F Convertible Preferred Stock, 572,289 shares of Series G Convertible
Preferred Stock and 350,000 shares of Series H Convertible Preferred Stock, and
a written consent executed by EFI, in its capacity as the holder of 991,184
shares of Series D Convertible Preferred Stock of Encore, each approving the
creation and designation of the Series I Convertible Stock and the issuance of
the Series I Convertible Stock pursuant to Paragraph 1.1 of this Agreement
(share amounts exclude accrued dividends with respect to each of the above) .
(f) An agreement by Gould to vote all shares of Encore common stock
or Series A Convertible Participating Preferred Stock of Encore (or any shares
3
<PAGE>
of any other class or series of Encore stock which is entitled to vote) which
Gould owns or has the power to vote in favor of amending Encore's certificate
of incorporation to increase the number of shares of common stock it is
authorized to issue to 300,000,000 shares.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF ENCORE. Encore represents
and warrants to Gould as follows:
(a) Encore and each of its subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Encore and each of its subsidiaries is
qualified to do business as a foreign corporation in each jurisdiction in which
qualification is required, except jurisdictions in which the failure to
qualify, in the aggregate, will not have a material adverse effect upon Encore
and its subsidiaries taken as a whole.
(b) This Agreement has been duly executed by Encore and, upon
receipt of the consents referred to in Paragraph 2.3(e), is authorized by all
necessary corporate action on the part of Encore, and is a valid and binding
agreement of Encore, enforceable against Encore in accordance with its terms.
Encore has all corporate power and authority necessary to enable it to carry
out the transactions contemplated by this Agreement, upon receipt of the
consents referred to in Paragraph 2.3(e). Neither the execution or delivery by
Encore of this Agreement or any document contemplated by this Agreement nor the
4
<PAGE>
consummation by Encore of the transactions contemplated by this Agreement or
any document contemplated by this Agreement will violate, result in a breach
of, constitute a default under, or give any party other than Encore or a
subsidiary of Encore the right to terminate, or modify the rights or
obligations of Encore or any of its subsidiaries under, (i) subject to receipt
of the consents referred to in Paragraph 2.3(e), any agreement or instrument to
which Encore or any of its subsidiaries is a party or by which any of them is
bound, (ii) any statute, ordinance or other law to which Encore or any of its
subsidiaries is subject, (iii) any rule or regulation of any governmental
agency having jurisdiction over Encore or any of its subsidiaries, (iv) any
license, permit or other governmental authorization held by Encore or any of
its subsidiaries, or (v) any order or decree of any court or governmental
agency having jurisdiction over Encore or any of its subsidiaries or any of
their assets.
(c) Except as disclosed on EXHIBIT 3.1-C, no governmental filings,
authorizations, approvals or consents, or other governmental action, are
required to permit Encore to fulfill all its obligations under this Agreement
or any document contemplated by this Agreement.
(d) When executed and delivered at the Closing, the Stockholders
Agreement Amendment, the Second Amended and Restated Stockholders Agreement, as
previously amended and as amended by the Stockholders Agreement Amendment, and
the Registration Agreement (together, the "ENCORE AGREEMENTS") will each be a
valid and binding agreement of Encore and Indian Creek, enforceable against
each of them in accordance with their respective terms.
(e) The only authorized stock of Encore is 200,000,000 shares of
common stock, par value $.01 per share, and 10,000,000 shares of preferred
stock, par value $.01 per share, and the only series of preferred stock
authorized by the Board of Directors of Encore is 73,641 shares of Series A
Convertible Participating Preferred Stock, 1,000,000 shares of Series B
5
<PAGE>
Convertible Preferred Stock, 1,500,000 shares of Series D Convertible Preferred
Stock, 1,500,000 shares of Series E Preferred Convertible Stock, 1,000,000
shares of Series F Convertible Preferred Stock, 1,000,000 shares of Series G
Convertible Preferred Stock, 700,000 shares of Series H Convertible Preferred
Stock, and 800,000 shares of Series I Convertible Preferred Stock and 246,154
shares of Series J Convertible Participating Preferred Stock ("Series J
Convertible Stock"). At the date of this Agreement, the only outstanding stock
of Encore is not more than 37,300,000 shares of common stock, 73,641 shares of
Encore Series A Convertible Participating Preferred Stock, 728,722 shares of
Series B Convertible Preferred Stock, 1,115,074 shares of Series D Convertible
Preferred Stock, 1,139,782 shares of Series E Convertible Preferred Stock,
533,333 shares of Series F Convertible Preferred Stock, 572,289 shares of
Series G Convertible Preferred Stock and 350,000 shares of Series H Convertible
Preferred Stock. Except as disclosed in Encore's Annual Report on Form 10-K
for the year ended December 31, 1995 (the "1995 10-K") or its Report on Form
10-Q for the period ended September 30, 1996 (the "September 10-Q" and,
together with the 1995 10-K, the "Encore Reports") or shown on EXHIBIT 3.1-E,
Encore does not have any outstanding options, warrants or convertible or
exchangeable securities, and Encore is not a party to any other agreements
(other than this Agreement), which require, or upon the passage of time, the
payment of money or the occurrence of any other event may require Encore to
issue any of its stock.
(f) When issued as contemplated in this Agreement, the shares of
Series I Convertible Stock to be issued to Gould pursuant to Paragraph 1.1 (i)
will all be duly authorized, validly issued, fully paid and nonassessable and
will have the powers, rights and preferences set forth on EXHIBIT 1.1 and (ii)
will be the only outstanding shares of Series I Convertible Stock. When shares
6
<PAGE>
of common stock or of Series J Convertible Stock are issued on conversion of
such shares of Series I Convertible Stock, and when shares of common stock are
issued on conversion of Series J Convertible Stock, those shares of common
stock or Series J Convertible Stock will be duly authorized, validly issued,
fully paid and nonassessable, and the shares of Series J Convertible Stock will
have the rights and preferences set forth on EXHIBIT 3.1-F. When Gould
receives the shares of Series I Convertible Stock to be issued to it pursuant
to Paragraph 1.1, it will own such shares free and clear of any liens or
encumbrances attributable to Encore, other than restrictions imposed by the
Stockholders Agreement.
(g) The subsidiaries of Encore are set forth on EXHIBIT 3.1-G.
Except as set forth on EXHIBIT 3.1-G, each of the subsidiaries is wholly owned
by Encore. Neither Encore nor any of those subsidiaries has any outstanding
options, warrants or convertible or exchangeable securities, or is a party to
any other agreements (other than the Security Documents (as that term is
defined in the Loan Agreement) and except as set forth on EXHIBIT 3.1-G), which
require, or upon the passage of time, the payment of money or the occurrence of
any other event, may require Encore or any of those subsidiaries to issue or
transfer any stock or other ownership interests in any of those subsidiaries.
(h) Each of the Encore Reports, including the documents
incorporated by reference in each of the Encore Reports, contains all the
information required to be included in it and does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading. The financial statements included in the
1995 10-K all were, and the financial information in the September 10-Q was
derived from financial statements which were, prepared in accordance with
7
<PAGE>
generally accepted accounting principles, consistently applied, and present
fairly the consolidated financial position, results of operations and cash
flows of Encore and its subsidiaries at the dates, and for the periods, to
which they apply. Since September 30, 1996, Encore has made all disclosures
about its activities and financial condition required by the Securities
Exchange Act of 1934, as amended, and the rules under that Act. Except as set
forth on EXHIBIT 3.1-H, since September 30, 1996 there has been no material
adverse change in (i) the consolidated financial condition of Encore and its
subsidiaries, (ii) the consolidated results of operations of Encore and its
subsidiaries compared with the consolidated results of operations of those
corporations for the same period of the prior year, or (iii) the operations or
prospects of Encore and its subsidiaries taken as a whole. For the purposes of
this Paragraph, (x) an adverse change in financial condition will be material
if it is a material reduction of working capital, tangible net worth or
shareholders' equity, and (y) an adverse change in results of operations will
be material if it is a material reduction in total revenues, net income before
income taxes or net income. As a result of the transactions contemplated by
this Agreement, following the Closing, Encore, as a separate entity, and Encore
and its subsidiaries as a consolidated group, will each be solvent.
(i) Encore and each of its subsidiaries has filed when due (after
the taking into account of extensions) all national (including United States
federal), state and local tax returns which they have been required to file and
have paid all taxes shown on those returns to be due. Each tax return filed by
Encore or a subsidiary has been a complete and correct return and has reported
all taxable items and taxes which were required to be reported, other than
items as to which there was substantial authority to support a position that
the items need not be reported and for which there are adequate reserves on the
consolidated financial statements included in the Encore Reports. The United
States federal corporate income tax returns of Encore have been audited, or the
period of limitations has expired, with regard to all years to and including
8
<PAGE>
the year ended December 31, 1989. Except as described on EXHIBIT 3.1-I, (i) no
tax return filed by Encore or any of its subsidiaries is the subject of a
pending audit, (ii) no deficiency has been asserted against Encore or any of
its subsidiaries with regard to any tax return filed by it, other than (x)
deficiencies which are being contested in good faith and for which there are
adequate reserves on the financial statements included in the Encore Reports,
or (y) deficiencies which have been satisfied, and (iii) except as described on
EXHIBIT 3.1-I, neither Encore nor any of its subsidiaries has granted any
extensions of the time for the assessment of any taxes.
(j) Encore and each of its subsidiaries has complied in all
material respects with the requirements of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and of the Internal Revenue Code of
1986, as amended (the "CODE"), and all other applicable laws and regulations,
with regard to each of the "employee benefit plans" within the meaning of
Section 3(3) of ERISA under which any of them is providing compensation or
benefits to any of their employees which is or was subject to ERISA, the Code
or other applicable laws or regulations. No employee benefit plan which Encore
or any of its subsidiaries maintains or sponsors has (i) incurred an
"accumulated funding deficiency," as that term is used in Section 412(a) of the
Code, whether or not waived, (ii) been the subject of a "reportable event," as
that term is used in Section 4043(b) of ERISA (except to the extent reporting
has been waived by the Pension Benefit Guaranty Corporation ("PBGC")), or (iii)
resulted, or is expected to result, in termination liability to the PBGC.
(k) Except as described in EXHIBIT 3.1-K, Encore has not received
any notice from any governmental authority, or otherwise become aware, that any
facility owned or leased by it, or any operation being conducted by it, is
violating any applicable law or regulation regarding the discharge of
9
<PAGE>
pollutants or other hazardous substances into the atmosphere, contamination of
soil or ground water, storage of hazardous substances or other matters relating
to protection of the environment.
(l) All the documentation constituting Licensed Intellectual
Property, as that term is defined in an Intellectual Property License Agreement
between Encore and Encore Computer U.S., Inc. and Gould Inc. dated as of
January 28, 1991 (the "Intellectual Property Agreement"), including but not
limited to all documentation relating to Encore Enhancements and Encore
Derivative Works, as those terms are defined in the Intellectual Property
Agreement, has been deposited with Barnett Bank (the "Escrow Agent"), as escrow
agent, or it has been deposited in On-Site Escrow Deposit under an Escrow,
Access and Training Agreement dated as of January 28, 1991 among Encore, Encore
Computer U.S., Inc. and Gould Inc. (the "Escrow Agreement") (except
documentation which is currently being worked on). The most recent day on
which documentation was deposited with the Escrow Agent under the Escrow
Agreement was January 27, 1997. The Licensed Intellectual Property is all the
intellectual property used by Encore with regard to all the products which
Encore is manufacturing, or which are being developed by Encore, at the date of
this Agreement (except materials which are currently being worked on).
3.2 REPRESENTATIONS AND WARRANTIES OF GOULD. Gould represents and
warrants to Encore as follows:
(a) Gould is a corporation duly organized, validly existing and in
good standing under the laws of the State of Ohio.
(b) This Agreement has been duly executed by Gould and authorized
by all necessary corporate action on the part of Gould and is a valid and
binding agreement of Gould, enforceable against Gould in accordance with its
terms. Gould has all corporate power and authority necessary to enable it to
10
<PAGE>
carry out the transactions contemplated by this Agreement. When delivered at
the Closing, the Registration Agreement, the Stockholders Agreement Amendment,
the Acknowledgment of Cancellation and the stockholder's consents of Gould and
EFI referred to in Section 2.3(e) (together, the "GOULD AGREEMENTS"), will each
be a valid and binding agreement of Gould, enforceable against Gould or EFI, as
the case may be, in accordance with its terms. Neither the execution or
delivery by Gould of this Agreement or any document contemplated by this
Agreement nor the consummation by Gould of the transactions contemplated by
this Agreement or any document contemplated by this Agreement will violate,
result in a breach of, or constitute a default under (i) except as set forth on
EXHIBIT 3.2-B, any agreement or instrument to which Gould or any of its
subsidiaries is a party or by which any of them is bound, (ii) any statute,
ordinance or other law to which Gould or any of its subsidiaries is subject,
(iii) any rule or regulation of any governmental agency having jurisdiction
over Gould or any of its subsidiaries, (iv) any license, permit or other
governmental authorization held by Gould or any of its subsidiaries, or (v) any
order or decree of any court or governmental agency having jurisdiction over
Gould or any of its subsidiaries or any of their assets.
(c) Except as disclosed on EXHIBIT 3.2-C, no governmental filings,
authorizations, approvals or consents, or other governmental action, are
required to permit Gould to fulfill all its obligations under this Agreement or
any document contemplated by this Agreement.
(d) Gould is the owner of all right, title and interest in all of
the Exchanged Indebtedness and has the right to surrender the Exchanged
Indebtedness as contemplated by this Agreement as consideration for the Series
I Convertible Stock to be issued to it pursuant to Paragraph 1.1 and such
Exchanged Indebtedness is not subject to any lien.
11
<PAGE>
3.3 INDEMNIFICATION. If any representation or warranty contained
in Paragraph 3.1 or 3.2 or in any certificate delivered at or prior to the
Closing is not correct in any respect, the party which gave that representation
or warranty will indemnify the other party against, and will hold the other
party harmless from, all liabilities, costs and expenses, including legal and
accounting fees and disbursements and costs of settlements or judgments, which
that other party suffers because the facts were not as represented or
warranted, so that, after taking account of any applicable tax benefits
resulting from the facts which were not as represented or warranted, and any
applicable taxes resulting from the indemnification payments, the indemnified
party will be in the same position in which it would have been if the facts had
been as represented or warranted.
ARTICLE IV
ACTIONS PRIOR TO THE CLOSING
4.1 LIMITATIONS ON ACTS OF ENCORE. Encore agrees that from the
date this Agreement is signed to the date of the Closing it and its
subsidiaries will, except with the written consent of Gould:
(a) Operate its business and the business of each of its
subsidiaries in a manner consistent with the manner in which it was being
operated at the date of this Agreement.
(b) Comply in all material respects with all applicable laws and
regulations of governmental agencies, other than laws and regulations the
applicability of which Encore or a subsidiary of Encore is contesting in good
faith.
(c) Not issue or agree to issue any stock, or any options, rights
or convertible or exchangeable securities, or enter into any other agreements
12
<PAGE>
(except as set forth on EXHIBIT 4.1-C) by which Encore or any of its
subsidiaries is, or upon the passage of time, the payment of money, or the
occurrence of any other event may be, required to issue any stock, except as
contemplated by this Agreement.
4.2 EFFORTS TO FULFILL CONDITIONS. Gould will use its best efforts
to cause all the conditions set forth in Paragraph 5.1 to be fulfilled prior to
or at the Closing, and Encore will use its best efforts to cause all the
conditions contained in Paragraph 5.2 to be fulfilled prior to or at the
Closing.
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
5.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF ENCORE. The obligations
of Encore at the Closing are subject to satisfaction of the following
conditions (any or all of which may be waived by Encore):
(a) The representations and warranties of Gould contained in this
Agreement will be true and correct in all material respects at the date of the
Closing with the same effect as though made on that date, and Gould will have
delivered to Encore a certificate dated that date and signed by the President
or a Vice President of Gould to that effect.
(b) Gould will have fulfilled in all material respects all its
obligations under this Agreement required to have been fulfilled at or prior to
the Closing.
(c) All government filings, authorizations, approvals and consents
listed on EXHIBIT 3.2-C shall have been completed or received, as appropriate.
(d) No order will have been entered by any court or governmental
authority and be in force which invalidates this Agreement or restrains Encore
from completing the transactions which are the subject of this Agreement.
13
<PAGE>
(e) Encore will have received an opinion of Rogers & Wells, counsel
to Gould, to the effect that (i) Gould is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio; (ii) Gould
has all corporate power and authority necessary to enable it to enter into this
Agreement and each of the Gould Agreements and to carry out the transactions
contemplated by this Agreement and each of the Gould Agreements; (iii) this
Agreement and each of the Gould Agreements have been duly executed and
delivered by Gould and each of them is a valid and binding obligation of Gould,
enforceable against Gould in accordance with its terms, except to the extent
enforceability may be affected by bankruptcy, reorganization or other laws
affecting the rights of creditors generally or equitable principles of general
application; (iv) the consummation of the transactions contemplated by this
Agreement and the Gould Agreements will not violate, result in a breach of, or
constitute a default under, (A) any agreement or instrument of which that
counsel is aware, after a reasonable investigation, to which Gould or any of
its subsidiaries is a party or by which any of them is bound, (B) any statute,
ordinance or other law to which Gould or any of its subsidiaries is subject,
(C) any rule or regulation of any governmental agency having jurisdiction over
Gould or any of its subsidiaries, (D) any license, permit or other governmental
authorization held by Gould or any of its subsidiaries of which that counsel is
aware, after reasonable investigation, or (E) any order or decree of which that
counsel is aware, after a reasonable investigation, of any court or
governmental agency having jurisdiction over Gould or any of its subsidiaries
or any of their assets; and (v) no governmental filings, authorizations,
approvals or consents or other governmental action are required to permit Gould
to fulfill all its obligations under this Agreement and each of the Gould
Agreements.
14
<PAGE>
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF GOULD. The obligations
of Gould at the Closing are subject to the following conditions (any or all of
which may be waived by Gould):
(a) The representations and warranties of Encore contained in this
Agreement will be true and correct in all material respects at the date of the
Closing with the same effect as though made at that date, and Encore will have
delivered to Gould a certificate dated that date and signed by the Chairman of
the Board, the President or a Vice President of Encore to that effect.
(b) Encore will have fulfilled in all material respects all its
obligations under this Agreement required to have been fulfilled at or prior to
the Closing.
(c) No order will have been entered by any court or governmental
authority and be in force which invalidates this Agreement or restrains Encore
from completing the transactions which are the subject of this Agreement.
(d) Gould will have received an opinion of Choate, Hall & Stewart,
counsel to Encore, substantially in the form of EXHIBIT 5.2-D.
(e) Gould will have received an opinion of Mary F. Macomber, Esq.,
General Counsel of Encore, substantially in the form of EXHIBIT 5.2-E.
(f) The consents of third parties listed on EXHIBIT 3.2-B shall
have been obtained and shall be in form and substance satisfactory to Gould.
(g) Gould will have received a certificate dated the Closing Date
and signed by the Chairman of the Board of Encore setting forth the most recent
date on which documentation was deposited with the Escrow Agent under the
Escrow Agreement.
15
<PAGE>
ARTICLE VI
STOCKHOLDERS MEETING
6.1 HOLDING OF MEETING. Not later than June 30, 1997, Encore will
hold a meeting of the holders of its common stock at which they will be asked
to approve an amendment to Encore's Certificate of Incorporation which will
authorize Encore to issue at least 300,000,000 shares of common stock.
6.2 EFFORTS TO OBTAIN STOCKHOLDER APPROVAL. Not later than April
30, 1997, Encore will file with the Securities and Exchange Commission proxy
materials relating to the stockholders meeting described in Paragraph 6.1.
Those proxy materials will include a recommendation by Encore's Board of
Directors that Encore's stockholders approve the amendment to Encore's
Certificate of Incorporation described in Paragraph 6.1. Encore will use its
best efforts, including complying with any comments received from the staff of
the Securities and Exchange Commission, to be able to mail the proxy materials
to its stockholders not later than May 31, 1997. Encore will also take all
reasonable steps to cause its stockholders to approve the amendment to Encore's
Certificate of Incorporation described in Paragraph 6.1.
ARTICLE VII
ABSENCE OF BROKERS
7.1 REPRESENTATIONS REGARDING BROKERS. Each party to this
Agreement represents and warrants to each other party that nobody acted as a
broker, a finder or in any similar capacity in connection with the transactions
which are the subject of this Agreement. Each party to this Agreement
16
<PAGE>
indemnifies each other party against, and agrees to hold each such other party
harmless from, all liabilities and expenses (including reasonable attorneys'
fees) in connection with any claim by anyone for compensation as a broker, a
finder or in any similar capacity by reason of services allegedly rendered to
the indemnifying party in connection with the transactions which are the
subject of this Agreement.
ARTICLE VIII
MISCELLANEOUS
8.1 DEFINITION OF SUBSIDIARY. As used in this Agreement with
respect to any specified entity, the term "subsidiary" means any other entity
of which the specified entity, directly or indirectly, beneficially owns fifty
percent or more in value of the equity or holds the voting control of fifty
percent or more of the voting equity.
8.2 REIMBURSEMENT FOR EXPENSES OF TRANSACTION. Encore will
reimburse Gould for all out-of-pocket expenses of Gould in connection with the
transactions which are the subject of this Agreement and in connection with the
preparation, negotiation, execution and delivery of this Agreement and the
documents, instruments and agreements referred to in this Agreement. Encore
will bear its own expenses in connection with the transactions which are the
subject of this Agreement and in connection with the preparation, negotiation,
execution and delivery of this Agreement and the documents, instruments and
agreements referred to in this Agreement.
8.3 ENTIRE AGREEMENT. This document, together with the documents
and agreements to be delivered as provided in this Agreement, contain the
entire agreement between Encore and Gould regarding the subject matter of this
Agreement and those other documents. All prior negotiations, understandings
and agreements between Encore and Gould are superseded by this Agreement and
such other documents, and there are no representations, warranties,
17
<PAGE>
understandings or agreements concerning the transactions which are the subject
of this Agreement and those other documents, other than those expressly set
forth in this Agreement and those other documents.
8.4 EFFECT OF HEADINGS. The article and paragraph headings are for
reference only, and do not affect the meaning or interpretation of this
Agreement.
8.5 PROHIBITION AGAINST ASSIGNMENT. Neither this Agreement nor any
right of any party under it may be assigned by any party hereto without the
consent of the other party and any purported assignment in violation hereof
shall be null and void.
8.6 NOTICES. Any notice or other communication required or
permitted to be given under this Agreement must be in writing and will be
deemed effective when delivered in person or sent by facsimile, if promptly
confirmed in writing, or on the third day after the day on which mailed by
first class mail from within the United States of America, to the following
addresses:
If to Encore:
Encore Computer Corporation
6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33313
Attention: Kenneth G. Fisher
Facsimile No.: (954) 797-5719
with a copy to:
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, Massachusetts 02109
Attention: Cameron Read, Esq.
Facsimile No.: (617) 248-4000
If to Gould:
Gould Electronics Inc.
35129 Curtis Boulevard
18
<PAGE>
Eastlake, Ohio 44095
Attention: General Counsel
Facsimile No.: (216) 953-5120
with a copy to:
Rogers & Wells
200 Park Avenue
New York, New York 10166
Attention: David W. Bernstein, Esq.
Facsimile No.: (212) 878-8375
8.7 GOVERNING LAW. This Agreement will be governed by, and
construed under, the substantive laws of the State of New York.
8.8 AMENDMENTS. This Agreement may be amended only by a document in
writing signed by Gould and Encore.
8.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same agreement.
This Agreement has been executed on the day set forth on the first
page and constitutes a binding agreement between the parties to it.
ENCORE COMPUTER CORPORATION GOULD ELECTRONICS INC.
[CAPTION]
By:________________________ By:_____________________________________
Name: Name:
Title: Title:
19
<PAGE>
EXHIBITS
Exhibit 1.1 Certificate of Designations of Series I
Convertible Stock
Exhibit 2.2-B Registration Agreement
Exhibit 2.2-C Stockholders Agreement Amendment
Exhibit 3.1-C Governmental Filings, Authorizations,
Approvals or Consents of Encore
Exhibit 3.1-E Issued Options, Warrants or Convertible
Securities and Agreements
Exhibit 3.1-F Certificate of Designations of Series J
Convertible Stock
Exhibit 3.1-G Subsidiaries
Exhibit 3.1-H Material Adverse Changes
Exhibit 3.1-I Tax Return Information
Exhibit 3.1-K Environmental Violations
Exhibit 3.2-B Conflicts
Exhibit 3.2-C Governmental Filings, Authorizations,
Approvals or Consents of Gould
Exhibit 4.1-C Issuance of Stock
Exhibit 5.2-D Form of opinion of Choate, Hall & Stewart
Exhibit 5.2-E Form of opinion of In-House Counsel to Encore
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
DATED
March 19, 1997
BETWEEN
EXHIBIT 3.1-C
GOVERNMENTAL FILINGS, AUTHORIZATIONS
APPROVALS OR CONSENTS OF ENCORE
------------------------------------
Encore shall have obtained such approval of the United States Defense
Investigative Service as it deems necessary for the consummation of the
transactions contemplated by the Preferred Stock Purchase Agreement.
NC143796.5
<PAGE>
EXHIBIT 3.1-E
ISSUED OPTIONS, WARRANTS OR
CONVERTIBLE SECURITIES AND AGREEMENTS
-------------------------------------
Options issued under Encore's Employee Stock Option Plan.
<TABLE>
<CAPTION>
Number of
SHARES
---------
<S> <C>
Outstanding at December 31, 1996 9,582,190
Granted between December 31, 1996 and 0
Closing Date
Exercised between December 31, 1996 and 0
Closing Date
Cancelled between December 31, 1996 and 0
Closing Date ---------
Outstanding at Closing Date 9,582,190
=========
</TABLE>
<PAGE>
EXHIBIT 3.1-G
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME Jurisdiction OWNERSHIP
OF FORMATION
- - ---------- ------------ ----------------------------------
<S> <C> <C> <C>
Encore Computer Delaware Encore{*} 100%
U.S. Inc.
Encore Computer Delaware Encore{*} 100%
International Inc.
Encore Computer Limited Canada International 100%
Encore Computer United Kingdom International 100%
(UK) Limited
Encore Computer Belgium International 100%
Belgium S.A.
Encore Computer GmbH West Germany International 100%
Encore Computer de Delaware Encore{*} 100%
Puerto Rico Inc.
Encore Computer S.A. France International 100%
Encore Computer Ireland Encore Computer B.V. 99%
(Ireland) Limited
International 1%
Encore Computer Italy International 100%
Italia S.p.A.
Japan Encore Computer Japan International/ 50%
Japan Energy Corporation{***} 50%
Encore Computer B.V. Netherlands International 100%
Encore Computer Netherlands International 100%
Nederlands B.V.
Encore Computer Spain International 100%
Espana S.A.
Encore Computer Ireland Encore Computer B.V. 50%
(Irish Partnership)
Encore Computer Ireland Ltd. 50%
Lauderdale Computer A.B. Sweden International 100%
</TABLE>
- - ----------------------------------
[FN]
{* }Encore Computer Corporation
{** }Encore Computer International
{*** }Not an Encore subsidiary
<PAGE>
EXHIBIT 3.1-H
MATERIAL ADVERSE CHANGES
------------------------
Encore and its consolidated subsidiaries will report an operating loss of
approximately $17.0 million for the year ended December 31, 1996. This
will result in a capital deficiency of approximately $30.3 million.
Encore's common stock was delisted from NASDAQ's National Market System on
February 6, 1997. On February 7, 1997 Encore's common stock was listed on
NASDAQ's Small Cap Market.
<PAGE>
EXHIBIT 3.1-I
TAX RETURN INFORMATION
<TABLE>
<CAPTION>
RETURNS CURRENTLY UNDER AUDIT EXTENSION GRANTED
- - ----------------------------- -----------------
<S> <C>
Federal Income Tax Return 1992, 1993 and 1994 1992 and 1993
under waiver through 12/31/97
Virginia Sales Tax Returns In Appeals
Massachusetts Income Tax 1992 and 1993 None
Tennessee Sales, Use and Income Tax None
FOREIGN INCOME TAX RETURNS UNDER AUDIT
- - --------------------------------------
NONE
</TABLE>
<PAGE>
EXHIBIT 3.1-K
ENVIRONMENTAL MATTERS
---------------------
Reference is made to the reports dated May 1990 prepared for Encore by
Camp, Dresser & McKee, an environmental firm relating to (i) certain
asbestos-containing floor coverings at Encore's corporate headquarters in
Plantation, Florida and at the Melbourne, Florida facilities and (ii)
underground storage tanks located at the Melbourne, Florida facilities.
Copies of this report have been provided to Gould Electronics, Inc.
Substantial work has been done at the Melbourne facility to remove the
tanks and clean the area of remaining residuals. The site is currently in
a "Monitoring Only" status as assessed by the Florida Department of
Environmental Protection.
Reference is also made to the liabilities incurred in connection with the
property formerly leased by System Engineering Laboratories, Inc. and
located at 3000 S. Andrews Avenue, Fort Lauderdale, Florida. These
liabilities were assumed by Gould Electronics, Inc.
Reference is made to the possible liability as a party potentially
responsible for less than 1% of the waste at the Seaboard Chemical Site
located in North Carolina and as further described in the September 19,
1991 memorandum from Schiff Hardin & Waite. A copy of that memorandum and
attachments has been furnished to Gould Electronics, Inc.
<PAGE>
EXHIBIT 3.2-B
CONFLICTS OF GOULD
------------------
None.
<PAGE>
EXHIBIT 3.2-C
GOVERNMENTAL FILINGS,
AUTHORIZATIONS, APPROVALS OR CONSENTS OF GOULD
----------------------------------------------
None.
<PAGE>
EXHIBIT 4.1-C
ISSUANCE OF STOCK
-----------------
New shares of common stock may be issued as options previously granted
under Encore's Stock Option plans are exercised and purchases are made
under Encore's Employee Stock Purchase Plan.
<PAGE>
EXHIBIT 5.2-D
[LETTERHEAD OF CHOATE, HALL & STEWART]
February __, 1997
Gould Electronics Inc.
35129 Curtis Boulevard
Eastlake, Ohio 44095-4001
Gentlemen:
We have acted as counsel to Encore Computer Corporation, a
Delaware corporation (the "Company"), Encore Computer International, Inc.
("Encore International"), Encore Computer U.S., Inc. ("Encore U.S.") and
Encore Computer de Puerto Rico, Inc. ("Encore Puerto Rico" and together
with Encore International, Encore U.S. and Encore Puerto Rico,
collectively, the "U.S. Subsidiaries"), in connection with the preparation,
authorization, execution and delivery of, and the consummation of the
transactions contemplated by, the Preferred Stock Purchase Agreement dated
February __, 1997 between Gould Electronics, Inc. ("Gould") and the Company
(the "Purchase Agreement"), the Eighth Amended and Restated Registration
Agreement dated as of February __, 1997 among the Company, Gould, EFI
International, Inc. ("EFI") and Indian Creek Capital, Ltd. ("Indian Creek")
(the "Registration Agreement"), the Third Amendment to the Second Amended
and Restated Stockholders Agreement dated as of February __, 1997 among the
Company, Gould, EFI and Indian Creek (the "Stockholders Agreement
Amendment"), the Third Amended and Restated Credit Agreement, dated as of
April 16, 1996, between the Company and Gould, as amended on January 9,
1997 and February ___, 1997 (the "Credit Agreement"), the Master Revolving
Note, dated February __, 1997, made by the Company in favor of Gould (the
"Master Revolving Note") and the Monthly Revolving Term Notes, made by the
Company in favor of Gould issued on or before the date hereof (the "Monthly
Revolving Term Notes" and, together with the Purchase Agreement, the
Registration Agreement, the Stockholders Agreement Amendment, the Credit
Agreement, the Master Revolving Note and the Monthly Revolving Term Notes,
the "Documents"). Terms defined in the Purchase Agreement and not
otherwise defined herein are used herein with the meanings as so defined.
<PAGE>
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Documents and such
corporate records, agreements, documents and other instruments, and such
certificates or comparable documents of public officials and of officers
and representatives of the Company, and have made such inquiries of such
officers and representatives as we have deemed relevant and necessary as a
basis for the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals,
the conformity to original documents of documents submitted to us as
certified or photostatic copies and the authenticity of the originals of
such latter documents. As to all questions of fact material to this
opinion that have not been independently established, we have relied upon
certificates or comparable documents of officers and representatives of the
Company and the U.S. Subsidiaries and upon the representations and
warranties of the Company and the U.S. Subsidiaries contained in the
Documents. We have also assumed the due incorporation and existence of,
and the due authorization, execution and delivery of the Documents by, the
Company and that the Company and each of the U.S. Subsidiaries has the
requisite corporate power and authority to enter into the Documents and
perform its obligations thereunder.
Based on the foregoing, and subject to the qualifications stated
herein, we are of the opinion that:
1. Each Document (assuming due authorization, execution and
delivery thereof by the parties thereto) constitutes the legal, valid and
binding obligation of the Company and each of the U.S. Subsidiaries,
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
and similar laws affecting creditors' rights and remedies generally, and
subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing
(regardless of whether enforcement is sought in a proceeding at law or in
equity) and except to the extent that rights to indemnification thereunder
may be limited by federal or state securities laws or public policy
relating thereto.
2. The issuance by the Company of shares of Series I
Convertible Preferred Stock pursuant to the Purchase Agreement (the "Issued
Shares") to Gould is exempt from the registration requirements of Section 5
of the Securities Act of 1933, as amended (the "Securities Act"). In this
connection, we have assumed that no offers or sales of securities have or
will be made by or on behalf of the Company that are of the same or of a
similar class as the Issued Shares. In addition, we have assumed that
(i) no general solicitation or general advertising by or on behalf of the
Company has occurred in connection with the issuance of the Issued Shares
and (ii) prior to the signing and delivery of the Purchase Agreement, Gould
was given an opportunity to ask questions, receive answers and participate
<PAGE>
in the negotiations concerning the terms and provisions of the Purchase
Agreement and the terms and provisions of the Issued Shares and to obtain
such additional information as necessary to make an informed investment
decision. Furthermore, we note that the certificates evidencing the Issued
Shares have been endorsed with a legend to the effect that such shares have
not been registered under the Securities Act and, therefore, cannot be
resold or transferred unless they are so registered or unless an exemption
therefrom is available. Finally, in rendering the opinion contained in
this paragraph 2 we have relied upon a certificate of Gould to the effect
that Gould (i) is acquiring the Issued Shares for its own account and for
investment purposes and not with a current view to their sale or
distribution, and (ii) is an "accredited investor" within the meaning of
Rule 501(a) under the Securities Act of 1933, as amended.
3. The lien granted pursuant to the Security Agreement, as
amended by the Master Amendment Agreement, is valid, and the Security
Agreement, as amended by the Master Amendment Agreement, constitutes a
legal, valid and binding obligation of the Company and each of the U.S.
Subsidiaries which are signatories thereto enforceable against them, in
each case in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar
laws affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of
whether enforcement is sought in a proceeding at law or in equity) and
except that certain remedial provisions of the Security Agreement, as
amended by the Master Amendment Agreement, are or may be unenforceable in
whole or in part under the laws of the State of New York, but inclusion of
such provisions does not affect the validity of the Security Agreement, as
amended by the Master Amendment Agreement, and the Security Agreement, as
amended by the Master Amendment Agreement, contains adequate provisions for
the practical realization of the rights and benefits afforded thereby.
Assuming the Uniform Commercial Code as in effect in the State of Florida
is the same in all relevant provisions as the Uniform Commercial Code as in
effect in the State of New York, the execution, delivery and effectiveness
of the Loan Documents will not adversely affect the validity or perfection
of the liens governed by such Uniform Commercial Code to the extent they
were perfected prior to execution of the Loan Documents and these liens
will secure all Obligations.
No opinion is expressed herein as to whether liens granted
pursuant to the Security Agreement, as amended by the Master Amendment
Agreement, were or are perfected or as to the priority of these liens.
The opinions herein are limited to the laws of the State of New
York and the federal laws of the United States, and we express no opinion
as to the effect on the matters covered by this opinion of the laws of any
other jurisdiction.
<PAGE>
This opinion is rendered solely for your benefit in connection
with the transactions described above. This opinion may not be used or
relied upon by any other person and may not be disclosed, quoted, filed
with a governmental agency or otherwise referred to without our prior
written consent.
Very truly yours,
<PAGE>
EXHIBIT 5.2-E
[Letterhead of Mary F. Macomber]
February __, 1997
Gould Electronics Inc.
35129 Curtis Boulevard
Eastlake, Ohio 44095
Gentlemen:
I am General Counsel of Encore Computer Corporation, a Delaware
corporation (the "Company"). I have acted as counsel for the Company and
certain of its subsidiaries in connection with the preparation,
authorization, execution and delivery of, and the consummation of the
transactions contemplated by, the Preferred Stock Purchase Agreement dated
February __, 1997 between Gould Electronics Inc. ("Gould") and the Company
(the "Purchase Agreement"), the Eighth Amended and Restated Registration
Agreement dated as of the date hereof among the Company, Gould, EFI
International, Inc. ("EFI") and Indian Creek Capital, Ltd. ("Indian Creek")
(the "Registration Agreement"), the Third Amendment to the Second Amended
and Restated Stockholders Agreement dated as of the date hereof among the
Company, Gould, EFI and Indian Creek (the "Stockholders Agreement
Amendment"), the Third Amended and Restated Credit Agreement, dated as of
April 16, 1996, between the Company and Gould, as amended on January 9,
1997 and February __, 1997 (the "Credit Agreement"), the Master Revolving
Note, dated February __, 1997, made by the Company in favor of Gould (the
"Master Revolving Note") and the Monthly Revolving Term Notes, made by the
Company in favor of Gould issued on or before the date hereof (the "Monthly
Revolving Term Notes" and, together with the Purchase Agreement, the
Registration Agreement, the Stockholders Agreement Amendment, the Credit
Agreement, the Master Revolving Note and the Monthly Revolving Term Notes,
the "Documents"). Terms defined in the Purchase Agreement and not
otherwise defined herein are used herein with the meanings as so defined.
In so acting, I have examined originals or copies, certified or
otherwise identified to my satisfaction, of the Documents and such
corporate records, agreements, documents and other instruments, and such
certificates or comparable documents of public officials and of officers
and representatives of the Company, and have made such inquiries of such
officers and representatives as I have deemed relevant and necessary as a
basis for the opinions hereinafter set forth.
In such examination, I have assumed the genuineness of all
signatures (other than those of officers of the Company and its
subsidiaries), the authenticity of all documents submitted to me as
<PAGE>
originals, the conformity to original documents of documents submitted to
me as certified or photostatic copies and the authenticity of the originals
of such latter documents. As to all questions of fact material to this
opinion that have not been independently established, I have relied upon
certificates or comparable documents of officers and representatives of the
Company and upon the representations and warranties of the Company
contained in the Documents.
Based on the foregoing, and subject to the qualifications stated
herein, I am of the opinion that:
1. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and
the Company has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being
conducted. The Company is duly qualified to transact business and is in
good standing as a foreign corporation in each jurisdiction where the
character of its activities requires such qualification, except where the
failure of the Company to be so qualified would not have a material adverse
effect on the business, operations or financial condition of the Company
and its subsidiaries considered as a whole.
2. The Company has all requisite corporate power and authority
to execute and deliver the Documents to which it is a party, and to perform
its obligations thereunder. The execution, delivery and performance of the
Documents by the Company and the consummation by the Company of the
transactions contemplated thereby have been duly authorized by all
necessary corporate action on the part of the Company. The Documents have
been duly and validly executed and delivered by the Company.
3. The execution and delivery of the Documents, the
consummation of the transactions contemplated thereby and compliance by the
Company with any of the provisions thereof will not conflict with,
constitute a default under or violate (i) any of the terms, conditions or
provisions of any document, agreement or other instrument to which the
Company is a party or by which it is bound of which I am aware, or (ii) any
order or ruling of any court or governmental authority binding on the
Company of which I am aware.
4. No consent, approval, waiver, license or authorization or
other action by or filing with any Florida, Delaware corporate or federal
governmental authority is required in connection with the execution and
delivery by the Company of the Documents or the consummation by the Company
of the transactions contemplated thereby, other than those which have
already been obtained.
5. To my knowledge, there is no litigation, proceeding or
governmental investigation pending or overtly threatened against the
Company that relates to any of the transactions contemplated by the
<PAGE>
Documents or which, if adversely determined, would have a material adverse
effect on the business, assets or financial condition of the Company.
6. The authorized capital stock of the Company consists of
200,000,000 shares of common stock, par value $.01 per share, and
10,000,000 shares of preferred stock, par value $.01 per share. As of
February __, 1997, there were ____________ shares of common stock, ________
shares of Series A Convertible Participating Preferred Stock, __________
shares of Series B Convertible Preferred Stock, ________ shares of Series D
Convertible Preferred Stock, _________ shares of Series E Convertible
Preferred Stock, ________ shares of Series F Convertible Preferred Stock,
________ shares of Series G Convertible Preferred Stock and ________ shares
of Series H Convertible Preferred Stock issued and outstanding (Series B,
D, E, F, G, H and I Convertible Preferred Stock together being "Preferred
Stock"). All of such outstanding shares of the Company's capital stock are
duly authorized, validly issued, fully paid and non-assessable.
7. The shares of Series I Preferred Stock to be issued pursuant
to the Purchase Agreement have been duly authorized and, when issued as
contemplated by the Purchase Agreement, will be validly issued, fully paid
and nonassessable and free of preemptive rights.
8. The shares of Common Stock issuable on conversion of all the
shares of Series A Convertible Participating Preferred Stock and of the
Preferred Stock outstanding on the date of this opinion or being issued
pursuant to the Purchase Agreement have been, and the shares of Common
Stock issuable on conversion of all the Preferred Stock which may be issued
within one year after the date of this letter as dividends on outstanding
Preferred Stock will be, duly authorized and when issued on conversion of
those shares of Series A Convertible Participating Preferred Stock and the
Preferred Stock will be validly issued, fully paid and non-assessable and
free of preemptive rights. [If the Certificate of Incorporation of Encore
is amended to increase the authorized common stock of Encore to more than
when shares of common stock are issued on conversion of such shares of
Series I Convertible Stock those shares of common stock will be duly
authorized, validly issued, fully paid and nonassessable.]
The opinions herein are limited to the laws of the State of
Florida, the corporate laws of the State of Delaware and the federal laws
of the United States, and I express no opinion as to the effect on the
matters covered by this opinion of the laws of any other jurisdiction.
This opinion is rendered solely for your benefit in connection
with the transactions described above. This opinion may not be used or
relied upon by any other person and may not be disclosed, quoted, filed
with a governmental agency or otherwise referred to without my prior
<PAGE>
written consent, except that this opinion may be disclosed or quoted to, or
filed with, a bank or insurance regulatory authority.
Very truly yours,
<PAGE>
EIGHTH AMENDED AND RESTATED
REGISTRATION AGREEMENT
This Eighth Amended and Restated Registration Agreement dated as
of March 19, 1997, among Gould Electronics Inc. ("Gould"), an Ohio
corporation, for itself and as assignee of Gould Inc., EFI International
Inc. ("EFI"), a Delaware corporation, Encore Computer Corporation
("Encore"), a Delaware corporation, and Indian Creek Capital, Ltd. ("Indian
Creek"), as assignee of Kenneth G. Fisher, and its transferees as permitted
under the terms of this Agreement (collectively, Indian Creek and any such
transferees, the "Management Stockholders") amends and restates the Seventh
Amended and Restated Registration Agreement dated as of April 16, 1996
among Gould, EFI, Encore and Indian Creek.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Gould currently owns 3,935,900 shares of Encore Common
Stock, 73,641 shares of Encore Series A Convertible Participating Preferred
Stock ("Series A Stock"), 728,722 shares of Encore Series B Convertible
Preferred Stock ("Series B Stock"), 123,890 shares of Encore Series D
Convertible Preferred Stock ("Series D Stock"), 1,139,789 shares of Encore
Series E Convertible Preferred Stock ("Series E Stock"), 533,333 shares of
Encore Series F Convertible Preferred Stock ("Series F Stock"), 572,289
shares of Encore Series G Convertible Preferred Stock ("Series G Stock"),
350,000 shares of Encore Series H Convertible Preferred Stock ("Series H
<PAGE>
Stock") and 400,000 shares of Encore Series I Stock ("Series I Stock") and
EFI currently owns 991,184 shares of Series D Stock (the Series A Stock,
Series B Stock, Series D Stock, Series E Stock, Series F Stock, Series G
Stock, Series H Stock and Series I Stock, together, being "Encore Preferred
Stock"). The Encore Preferred Stock collectively is convertible into an
additional 162,501,423 shares of Encore Common Stock (after taking into
account accrued dividends in the Encore Preferred Stock through January 15,
1997);
WHEREAS, the Management Stockholders currently own shares of
Series B Stock which are convertible into 1,096,923 shares of Encore Common
Stock (after taking into account accrued dividends in the Encore Preferred
Stock through January 15, 1997); and
WHEREAS, Encore, Gould, EFI and the Management Stockholders wish
to set forth certain registration rights which Gould, EFI and the
Management Stockholders have with respect to shares of Encore Common Stock.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties hereto agree as follows:
1. REGISTRATION ON REQUEST OF GOULD.
(a) Encore agrees that any time it receives a written
notice from Gould or EFI that either or both of Gould and EFI desires to
sell Gould Shares (as hereinafter defined) with a reasonably estimated
public offering price of $10,000,000 or more in a transaction or
transactions requiring registration under the Securities Act of 1933, as
amended (the "Act"), and requesting that Encore effect registration with
<PAGE>
respect to the Gould Shares specified in the notice (which, at the election
of Gould or EFI, may be or include a registration of a delayed offering in
accordance with Rule 415 under the Act or a successor to that Rule), Encore
will, subject to subparagraph (c) of this Paragraph 1, promptly file a
registration statement with the Securities and Exchange Commission (the
"SEC") relating to the Gould Shares specified in the notice from Gould or
EFI and use its best efforts to make the registration statement become
effective and qualify the sale of the shares to which it relates under the
Blue Sky laws of those states reasonably requested by Gould and/or EFI, as
applicable, as promptly as practicable. The notice received by Encore from
Gould and/or EFI will contain Gould's and/or EFI's undertaking, as
applicable, to cooperate with Encore in connection with the registration
and to furnish Encore all such information in connection with the
registration as Encore may reasonably request or as may be required by the
SEC. There will be no limit on the number of notices Gould or EFI can give
under this subparagraph or the number of registration statements Encore
will be required under this subparagraph to file.
(b) Encore will not be obligated to file a registration
statement during the period beginning at Encore's fiscal year end and
ending at the time Encore's year end financial statements are completed,
which will be no later than the time Encore's Annual Report on Form 10-K is
required to be filed with the SEC. If Encore has any contractual
obligation to others entitling them to join any registration of securities
<PAGE>
of Encore and Encore wishes to include such other securities of Encore in
any registration statement filed pursuant to this Paragraph 1, Encore will
be permitted to so include such other securities; PROVIDED, HOWEVER, that
Encore will not be permitted to so include such other securities if the
managing underwriter determines in good faith that the inclusion of such
other securities would interfere with the successful sale of the Gould
Shares proposed to be sold.
(c) Encore will not be required to effect registration
pursuant to paragraph (a) or (b) of this Paragraph 1 if a majority of the
directors of Encore determines in good faith that owing to business or
market conditions or the business or financial condition of Encore it is
inappropriate at such time to undertake a public offering of Encore
securities;, PROVIDED, HOWEVER, that Encore may elect not to effect
registration on such grounds only once in any two year period beginning on
the date of such election by Encore, and that within six months after
Encore elects not to effect registration on such grounds Encore will file a
registration statement which will effect such registration. Furthermore,
Encore will not be required to effect registration pursuant to paragraph
(a) or (b) of this Paragraph 1 if a registration statement filed in
connection with an underwritten public offering of Encore Common Stock has
become effective under the Act within six months before the date of receipt
of the notice from Gould or EFI; PROVIDED, HOWEVER, that Encore may elect
not to effect registration on such grounds only once in any two year
period. In addition, if Encore can establish, by delivery of an opinion of
responsible underwriters, that sale of Gould Shares by a means legally
<PAGE>
available but not involving an underwriting -- whether by block
transaction, private placement, Rule 144 sale or Rule 144A sale -- will
produce a net price to the prospective seller not lower than that which
would be obtained in an underwriting, Gould and/or EFI, as applicable, will
be obligated to pursue the non-underwritten method (for which registration
is not required) for disposal of such Gould Shares.
(d) The term "Gould" as used in this Agreement shall be
deemed to include, in addition to Gould, any subsequent holder of all or a
portion of the Gould Shares initially owned by Gould who agrees to become a
party to this Agreement. The term "EFI" as used in this Agreement shall be
deemed to include, in addition to EFI, any subsequent holder of all or a
portion of the Gould Shares initially owned by EFI who agrees to become a
party to this Agreement.
(e) The term "Gould Shares" means (i) the shares of Encore
Common Stock currently held by Gould, (ii) the shares of the Series A
Stock, Series B Stock, Series D Stock, Series E Stock, Series F Stock,
Series G Stock, Series H Stock and Series I Stock currently held by Gould
or EFI, as the case may be, or issued as a dividend with regard to those
shares, (iii) any shares of Encore Common Stock issued or issuable to Gould
or EFI upon conversion of any shares of Series A Stock, Series B Stock,
Series D Stock, Series E Stock, Series F Stock, Series G Stock, Series H
Stock and Series I Stock currently held by Gould or EFI or issued as a
dividend with regard to those shares and (iv) any shares of Encore Common
Stock or preferred stock issued in respect of shares described in clauses
<PAGE>
(i), (ii) and (iii) upon any stock split, stock dividend or
recapitalization. A notice under Paragraph 1(a) requesting registration of
Gould Shares may specifically be with regard to one or more specified
series of Encore Preferred Stock, and if that is the case, the registration
statement filed as a result of that request will relate only to Preferred
Stock of the specified series.
(f) If Gould acquires Gould Shares from EFI, those shares
will remain Gould Shares and Gould's rights under this Agreement will apply
to the Gould Shares Gould acquires from EFI to the same extent as though
Gould owned those shares on the date of this Agreement.
2. "PIGGYBACK" RIGHTS.
(a) If Encore shall at any time propose to file a
registration statement under the Act for any underwritten sale of shares of
Encore Common Stock, Encore will give written notice to Gould, EFI and the
Management Stockholders of the registration and the form of registration
statement on which it intends to register such shares. If Gould, EFI or
any Management Stockholder so requests within 10 days, Encore will include
in any such registration Gould Shares or Management Shares (as hereinafter
defined), but Encore will not be obligated to so include the Gould Shares
or the Management Shares if the managing underwriter or underwriters of
such sale determines in good faith that the inclusion of those shares would
interfere with the successful sale of the shares of Encore Common Stock
proposed to be sold or would require the use of a form of registration
statement other than the form which could have been used with regard to the
<PAGE>
transaction and which was originally proposed by such managing underwriter.
Any cut-back of the Gould Shares and the Management Shares will be PRO RATA
based upon the respective numbers of Gould Shares and Management Shares
requested to be sold. Except as set forth in Paragraph 2(b) hereof, the
obligations and rights of Encore, Gould and EFI under this Paragraph 2 will
not affect in any way their obligations and rights under Paragraph 1.
(b) If Gould or EFI requests inclusion of Gould Shares in
any registration statement pursuant to Paragraph 2(a) and Encore decides,
pursuant to the terms of such provisions, not to include such Gould Shares,
Encore will, within a reasonable time thereafter, such time not to exceed
six months, use all reasonable efforts to cause the Gould Shares to be
registered under the Act and to prepare and file a registration statement
to effect such registration, unless Encore can establish, by delivery of an
opinion of responsible underwriters, that the sale of such Gould Shares by
a means legally available but not involving a public offering or an
underwriting whether by block transaction, private placement, Rule 144 sale
or Rule 144A sale will produce a net price to the prospective seller not
lower than that which would be obtained in an underwriting.
(c) The term "Management Stockholders" means Indian Creek
and any individual who is an officer of Encore to whom Indian Creek
transfers any shares of Series B Stock and who agrees to become a party to
this Agreement.
<PAGE>
(d) The term "Management Shares" means (i) the shares of
Encore Common Stock issued or issuable to any Management Stockholder upon
conversion of the Series B Stock held by the Management Stockholder, (ii)
any shares of Encore Common Stock issued or issuable to any Management
Stockholder upon conversion of any shares of Series B Stock issued to the
Management Stockholders as a dividend on Series B Stock, (iii) shares of
Series B Stock presently held by Indian Creek or issued as a dividend with
regard to these shares and (iv) any shares of Encore Common Stock or
Preferred Stock issued in respect of the shares described in clauses (i),
(ii) and (iii) upon any stock split, stock dividend or recapitalization.
3. EXPENSES.
(a) Subject to the limitations contained in this Paragraph
3, the entire costs and expenses of the registration and qualification
pursuant to Paragraph 1(a) will be borne by Encore. Such costs and
expenses shall include the fees and expenses of counsel for Encore and of
its accountants, all other costs and expenses of Encore incident to the
preparation, printing and filing under the Act of the registration
statement and all amendments and supplements thereto, the cost of
furnishing copies of each preliminary prospectus, each final prospectus and
each amendment or supplement thereto to underwriters, dealers and other
purchasers of the Encore Shares, and the costs and expenses (including fees
and disbursements of counsel) incurred by Encore in connection with the
qualification of the Gould Shares under the Blue Sky laws of various
jurisdictions. Notwithstanding the above, Encore will not be required to
<PAGE>
pay the underwriting fees or commissions, or the fees of counsel for the
underwriters or Gould or EFI, in connection with any sale pursuant to
Paragraph 1.
(b) Gould, EFI and the Management Stockholders will bear
their PRO RATA shares (based on the percentage the Gould Shares and the
Management Shares registered pursuant to Paragraph 2 bear to the total
number of shares of Encore Common Stock included in such registration) of
the costs and expenses of such registration which are not borne by Encore,
including the costs and expenses listed in paragraph (a) hereof.
4. PROCEDURES. In the case of each registration or
qualification pursuant to Paragraph 1 or 2, Encore will keep Gould and EFI
(and, in the case of each registration or qualification pursuant to
Paragraph 2, each Management Stockholder) advised in writing as to the
initiation of proceedings for such registration and qualification and as to
the completion thereof, and will advise Gould and EFI (and, in the case of
each registration or qualification pursuant to Paragraph 2, each Management
Stockholder), upon request, of the progress of such proceedings. At its
expense Encore will keep such registration and qualification effective by
any action as may be necessary or appropriate for a period of 120 days
after the effective date of the registration statement including, without
limitation, the filing of post-effective amendments and supplements to any
registration statement or prospectus necessary to keep the registration
statement current and further qualification under any applicable Blue Sky
or other state securities law to permit the sale or distribution which is
<PAGE>
the subject of the registration statement, all as requested by Gould, EFI
or any Management Stockholder (except that (i) in the case of an
underwritten offering said 120-day period will instead be a 90-day period
and (ii) in the case of a registration statement under Rule 415 said 120-
day period will instead be a nine-month period or a shorter period which
expires when all the Gould Shares and the Management Shares to which the
registration statement relates are sold).
5. INDEMNIFICATION.
(a) Encore will indemnify and hold harmless Gould, EFI and
any underwriter (as defined in the Act) for Gould or EFI, and each person,
if any, who controls Gould, EFI or any underwriter within the meaning of
the Act, against any losses, claims, damages, or liabilities, joint or
several, and expenses (including reasonable costs of investigation) to
which Gould, EFI or any underwriter or such controlling person may be
subject, under the Act or otherwise, insofar as any thereof arise out of or
are based upon any untrue statement or alleged untrue statement of a
material fact contained in any registration statement under which Gould
Shares were registered under the Act pursuant to Paragraph 1 or 2, any
prospectus or preliminary prospectus contained therein (provided, in the
case of any preliminary prospectus, that the foregoing indemnification
shall not apply to any underwriter or controlling person from whom the
person asserting any such losses, claims, damages or liabilities purchased
the Gould Shares if a copy of the final prospectus had not been sent or
given by or on behalf of such underwriter or controlling person to such
<PAGE>
person at or prior to the written confirmation of the sale of such
securities to such person), or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based upon any
untrue statement or alleged untrue statement or omission or alleged
omission based upon information furnished to Encore in writing by Gould or
EFI (with respect to which information furnished by it, each of Gould and
EFI shall so indemnify and hold harmless Encore, any underwriter for Encore
and each person, if any, who controls Encore or such underwriter within the
meaning of the Act).
(b) Encore will indemnify and hold harmless each Management
Stockholder and any underwriter (as defined in the Act) for each Management
Stockholder and each person, if any, who controls each Management
Stockholder or any underwriter within the meaning of the Act, against any
losses, claims, damages, or liabilities, joint or several, and expenses
(including reasonable costs of investigation) to which each Management
Stockholder or any underwriter or such controlling person may be subject,
under the Act or otherwise, insofar as any thereof arise out of or are
based upon any untrue statement or alleged untrue statement of a material
fact contained in any registration statement under which the Management
Shares were registered under the Act pursuant to Paragraph 2, any
prospectus or preliminary prospectus contained therein (provided, in the
case of any preliminary prospectus, that the foregoing indemnification
<PAGE>
shall not apply to any underwriter or controlling person from whom the
person asserting any such losses, claims, damages or liabilities purchased
the Management Shares if a copy of the final prospectus had not been sent
or given by or on behalf of such underwriter or controlling person to such
person at or prior to the written confirmation of the sale of such
securities to such person), or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based upon any
untrue statement or alleged untrue statement or omission or alleged
omission based upon information furnished to Encore in writing by any
Management Stockholder (with respect to which information furnished by it,
such Management Stockholder shall so indemnify and hold harmless Encore,
any underwriter for Encore and each person, if any, who controls Encore or
such underwriter within the meaning of the Act).
6. GENERAL.
(a) This document contains the entire agreement between
Gould, EFI, Encore and the Management Stockholders concerning the
transactions which are the subject of this Agreement, all prior
negotiations, understandings and agreements between them are superseded by
this Agreement, and there are no representations, warranties,
understandings or agreements concerning the transactions which are the
subject of this Agreement other than those expressly set forth in this
Agreement.
<PAGE>
(b) Except to the extent provided in Paragraph 1(d),
neither this Agreement nor any right of any party under it may be assigned
without the prior written consent of Gould, EFI and Encore.
7. Any notice or other communication required or permitted to
be given under this Agreement must be in writing and will be deemed
effective when delivered in person or sent by facsimile, if promptly
confirmed in writing, or on the third day after the day on which mailed by
first class mail from within the United States of America, to the following
addresses:
If to Gould:
Gould Electronics Inc.
35129 Curtis Boulevard
Eastlake, Ohio 44095
Attention: General Counsel
Facsimile No.: (216) 953-5120
Telephone No.: (216) 953-5000
with a copy to:
David W. Bernstein, Esq.
Rogers & Wells
200 Park Avenue
New York, New York 10166
Facsimile No.: (212) 878-8375
Telephone No.: (212) 878-8342
If to EFI:
EFI International Inc.
c/o Gould Electronics Inc.
35129 Curtis Boulevard
Eastlake, Ohio 44095
Attention: General Counsel
Facsimile No.: (216) 953-5120
Telephone No.: (216) 953-5000
If to Encore or any Management Stockholder:
Encore Computer Corporation
6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33340-9148
Attention: President
Facsimile No.: (305) 797-5719
Telephone No.: (305) 587-2900
<PAGE> with a copy to:
Cameron Read, Esq.
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, Massachusetts 02109
Facsimile No.: (617) 248-4000
Telephone No.: (617) 248-5045
8. This Agreement will be governed by, and construed under, the
laws of the State of New York.
9. Thi
THIRD AMENDMENT
TO THE SECOND
AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT
This Third Amendment to the Second Amended and Restated
Stockholders Agreement ("THIRD AMENDMENT") dated as of March 19, 1997 among
Indian Creek Capital, Ltd. a Texas limited partnership ("Indian Creek"), as
assignee of Kenneth G. Fisher ("Fisher"), Gould Electronics Inc., an Ohio
corporation ("Gould"), for itself and as assignee of Gould Inc., EFI
International Inc. ("EFI"), a Delaware corporation and Encore Computer
Corporation (the "CORPORATION"), a Delaware corporation, amends the Second
Amended and Restated Stockholders Agreement dated as of March 17, 1995
among Indian Creek, Gould, and the Corporation, as amended by the First
Amendment to the Second Amended and Restated Stockholders Agreement, dated
August 17, 1995 and the Second Amendment to the Second Amended and
Restated Stockholders Agreement, dated April 16, 1996, (as so amended, the
"ORIGINAL STOCKHOLDERS AGREEMENT"). Indian Creek, Gould, EFI and the
Corporation agree as follows:
1. AMENDMENT TO ORIGINAL STOCKHOLDERS AGREEMENT. (a) Paragraph
1(c) of the Original Stockholders Agreement is hereby amended by
(i) deleting the word "and" appearing immediately after the words "the
Third Amended and Restated Credit Agreement"; and (ii) adding the words "as
amended on January 9, 1997 and March 19, 1997" immediately after the words,
"the Third Amended and Restated Credit Agreement".
<PAGE>
(b) Paragraph 1(e) of the Original Stockholders Agreement is hereby
amended by adding the words "and Series J Convertible Participating
Preferred Stock" immediately after the words, "GEI will vote all shares of
the Corporation's common stock".
2. RATIFICATION. Except as amended by this Third Amendment,
the Original Stockholders Agreement is hereby ratified and confirmed in all
respects.
3. DELIVERY. Indian Creek, Gould, EFI and the Corporation each
agrees to execute and deliver such other documents or instruments which are
necessary or desirable to evidence the matters referred to in this Third
Amendment.
<PAGE>
4. COUNTERPARTS. This Third Amendment may be executed in
counterparts, each of which will constitute an original but which together
will constitute one and the same Third Amendment.
IN WITNESS WHEREOF, the parties have executed this Third
Amendment as of the date shown on the first page.
INDIAN CREEK CAPITAL, LTD., as
assignee of Kenneth G. Fisher
By: ____________________________
Kenneth G. Fisher,
a General Partner
GOULD ELECTRONICS, INC., as
assignee of Gould Inc.
By: ____________________________
Title:
ENCORE COMPUTER CORPORATION
By: ____________________________
Title:
EFI INTERNATIONAL INC.
By: ____________________________
Title
AMENDMENT NO. 2
TO
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
This is an agreement (the "Amendment") dated as of March , 1997
between ENCORE COMPUTER CORPORATION, a Delaware corporation ("Borrower"),
and GOULD ELECTRONICS, INC., an Ohio corporation ("Lender"), amending a
Third Amended and Restated Credit Agreement, dated as of April 16, 1996, as
previously amended, (the "Restated Credit Agreement") between Borrower and
Lender.
1. The definition of Maximum Amount of Revolving Loans in the
Restated Credit Agreement is deleted and replaced in its entirety by the
following:
"MAXIMUM AMOUNT OF REVOLVING LOANS" shall mean $50,000,000.
-----------------------------------
2. The second and third sentences of Section 3.01, which were
added by Amendment No. 1 to the Restated Credit Agreement ("Amendment No.
1") are deleted and replaced in their entirety by the following:
"Notwithstanding the preceding sentence, Lender will
have no obligation to make any Revolving Loan if, after
Lender makes the Revolving Loan, the total principal
amount of Revolving Loans outstanding would exceed
$41,910,422. Any Revolving Loans which would increase
the outstanding principal amount of the Revolving Loans
above, or are made at a time when the aggregate
outstanding principal amount of the Revolving Loans
exceeds,
$41,910,422 will be made only at the discretion of
Lender.".
3. The language added by Amendment No. 1 to Section 3.02, in
the sixth line from the bottom after the comma that is preceded by "Lender"
is deleted and replaced in its entirety by the following:
"and, if after the requested Revolving Loan is made the
total principal amount of Revolving Loans outstanding
would exceed $41,910,422, if Lender elects to make the
Revolving Loan,"
<PAGE>
4. Simultaneously with the execution of this Amendment,
Borrower is delivering to Lender a new Master Revolving Note dated March
__, 1997 (the "Replacement Note") in the principal amount of $50,000,000, and
Lender is delivering to Borrower the currently outstanding Master Revolving
Note, marked "cancelled."
5. Borrower represents and warrants to Lender that (i) the
execution and delivery of this Amendment and the borrowings contemplated by
it up to the full amended Maximum Amount of Revolving Loans have been duly
authorized by all necessary or proper corporate action with regard to
Borrower, (ii) this Amendment and the Replacement Note each has been duly
executed and delivered on behalf of Borrower and each of them constitutes a
legal, valid and binding obligation of Borrower, enforceable against
Borrower in accordance with its terms, (iii) all the borrowings under the
Restated Credit Agreement as amended by this Amendment will be secured by
the mortgages and security interests created under the Security Agreement
and the other Security Documents (as those terms are defined in the
Restated Credit Agreement) to the same extent the borrowings under the
Restated Credit Agreement were secured by those liens and security
interests prior to the execution of this Amendment, and (iv) each of the
representations and warranties of the Borrower in the Restated Credit
Agreement is true and correct as of the date of this Amendment and applies
to the borrowings under the Restated Credit Agreement, as amended by this
Amendment, to the same extent as though they were made at the date of this
Amendment and specifically referred to in the Restated Credit Agreement as
amended by this Amendment.
6. Except as expressly provided above, the Restated Credit
Agreement remains in full force and effect, and unmodified.
7. The amendment to the Restated Credit Agreement effected by
this Amendment will take effect when a copy of this Amendment and a copy of
the Replacement Note, each executed by Borrower, is delivered to Lender.
IN WITNESS WHEREOF, Borrower and Lender each has executed this
Amendment as of the date stated on the first page.
ENCORE COMPUTER CORPORATION
By: _______________________
Title:
GOULD ELECTRONICS, INC.
By: _______________________
Title:
<PAGE>
Exhibit No.99
Cautionary Statement For Purposes Of The"Safe Harbor"
Provisions Of The Private Securities Litigation Reform Act of 1995
Encore Computer Corporation (the "Company") is filing this
Exhibit in order to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act
of 1995 by setting forth in a readily available document
certain significant risks and uncertainties that are
important considerations to be taken into account in
conjunction with consideration and review of the Company's
reports, registration statements, information statements,
press releases, and other publicly-disseminated documents
and statements that include forward-looking information.
Forward-Looking Statements; Cautionary Statement
When used anywhere in filings by the Company with the
Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an
authorized executive officer of the Company, the words or
phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimated", "project", or
"outlook" or similar expressions (including confirmations by
an authorized executive officer of the Company of any such
expressions made by a third party with respect to the
Company) are intended to identify "forward-looking
statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to
caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date
made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ
materially from historical earnings and those presently
anticipated or projected. These risk factors are described
below. The Company specifically declines any obligation to
publicly release the result of any revisions which may be
made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances
occurring after the date of such statements.
Risk Factors
Losses and Acquisitions of Gould/CSD. In 1989 the Company
acquired the computer systems business of Gould Inc.
("Gould/CSD"), a significantly larger business, and has
subsequently invested heavily in research and development
activities to integrate both businesses' technologies into a
single, high performance open system architecture. Since
the acquisition, the Company has had significant losses in
each of its fiscal years. The losses in 1989 were due in
part to the absorption of acquisition related costs. Since
that time, losses have been due to (i) the termination of a
reseller agreement between the Company and Amdahl
Corporation, (ii) a slower than anticipated acceptance of
the Company's new open system technology products in the
information systems marketplace, (iii) continued heavy
investment in research and development of its open systems
architecture, and (iv) declining equipment sales as certain
of the Company's traditional real-time products have reached
the end of their product life cycle. New product offerings
are available for shipment, however, to date net sales of
such new products have not offset declines realized in other
product offerings. Accordingly, the Company has continued
to experience rapidly declining product and customer service
revenues. Encore plans to return to profitability in the
future, but management is unable to predict when that may
occur. There is no assurance that such plans to return to
profitability can be accomplished.
Product and Market Development. For several years the
Company has been transitioning its product line from a
proprietary to an open systems architecture and its market
focus from its traditional real-time niches to development
of products to compete in the multibillion dollar storage
marketplace. This effort has most recently resulted in the
announcement and delivery of products such as the Infinity
SP and R/T tm. The Company has invested heavily in research
and development of the Infinity SP tm Universal Storage
Processor with DataShare tm Facilities. Currently, these
products are available for sale in this marketplace,
however, at this time demand for such products has not
achieved anticipated levels. The Company's success will
depend on its ability to effectively penetrate storage
products markets presently led by established companies such
as International Business Machines Corporation ("IBM"), EMC
Corporation ("EMC") and Hitachi Data Systems. Many of the
Company's competitors have substantially greater financial,
technical, and marketing resources than the Company. These
established companies command more name recognition among
potential customers, a larger installed base and have
available to them substantially more financial resources
with which to compete.
The Company's ability to increase sales and improve
operating results for future periods is dependent upon the
acceptance of its storage products in the marketplace, and
the timely and successful introduction of additional
functions and features for these products. The Company
continues to seek out strategic distribution partners whose
industry presence, expertise and sales channels will allow
it to more efficiently bring the Company's open system and
storage product offerings to market. There can be no
assurance that the Company's products, which are in the
early stage of market introduction will achieve or sustain
market acceptance or successfully compete against the
products of other larger, better known companies.
Competition. The computer industry is intensely
competitive. The Company's principal competitors within the
storage products marketplace are companies such as IBM, EMC,
Hitachi Data Systems and Storage Technology. The primary
competitors in the Company's real-time markets are also
established companies, such as Silicon Graphics and Harris
Corporation. Competitors in the information processing
market include established companies like Digital Equipment
Corporation, IBM, Hewlett Packard Company and Sequent
Computer Systems, all of which have substantially greater
financial, technical, manufacturing and marketing resources
than the Company. The development and introduction by
competitors of products with superior performance or
substantially lower prices would materially and adversely
affect the Company's business. There can be no assurance
that the Company will be able to compete effectively in the
future.
Financing Requirements. Since 1989, the principal source
of both debt and equity financing for the Company has been
provided by Gould Electronics Inc. ("Gould") and EFI
International Inc., wholly owned subsidiaries of Japan
Energy Corporation ("Japan Energy") (collectively, the
"Japan Energy Group"). The Japan Energy Group has provided
the Company with a credit facility and loan guarantees,
refinanced subordinated debentures of the Company and
entered into various exchanges of indebtedness for the
Company's preferred stock. On March 19, 1997, the Company
and Gould agreed to cancel $40,000,000 of indebtedness owed
to Gould under 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") with a liquidation preference of $40,000,000. In
addition to the exchange of indebtedness for shares of
Series I, 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. As of April 12, 1997 the Company owed to Gould
$45,525,494 under the Credit Agreement, plus $12,974,348 in
accrued interest. All borrowings under the Credit
Agreement, plus accrued interest, are due and payable on May
31, 1997. In the event of default, the rate of interest to
be applied will immediately increase by an additional 2%.
As of the closing date, the Japan Energy Group beneficially
owned 83% of the common stock assuming the full conversion
of all shares of its preferred stock. Until it returns to a
state of sustained profitability, it is unlikely that the
Company will be able to secure additional funding from
unrelated parties or be able to generate the levels of cash
through operations necessary to meet the on-going need of
the business. Accordingly, the Company is and will remain
dependent on the continued financial support of the Japan
Energy Group. Should the Company be unsuccessful in
securing additional future financing from the Japan Energy
Group as is required, it is likely that the Company will
experience a severe liquidity crisis and accordingly be
unable to settle its liabilities in the ordinary course of
business.
Intellectual Property License. In connection with an
exchange of preferred stock for indebtedness, the Company
and Gould entered into an intellectual property licensing
agreement whereby the Company agreed to license
substantially all of its intellectual property to Gould
under certain conditions. The intellectual property license
is royalty free but Gould can, at its option, exercise its
rights to use or otherwise sublicense others to use the
Company's intellectual property. The licensed technology is
being held in escrow and is now subject to release to Gould
upon its request to enable it to exercise its rights. In
accordance with prior agreements made with the United States
Defense Investigative Services ("DIS"), Gould must provide
ninety days notice to DIS in the event it elects to take
possession of the intellectual property. If Gould should
take possession of the intellectual property, the Company
would continue to have the right to use that property, but
such action by Gould would have a material adverse effect on
the Company's business.
Quarterly Performance Fluctuation. Many of the Company's
sales are made to customers who typically place orders for
computer systems on an as required basis. The Company
generally ships products to its customers as promptly as
practicable upon receipt of customer orders. Additionally,
a substantial amount of the Company's sales relate to long
term customer programs with irregular delivery schedules.
As is the case with many companies in the computer business,
a significant portion of the Company's shipments has
typically occurred in the last month of a fiscal quarter.
As a result, revenues and net income can fluctuate
significantly from quarter to quarter, based on customer
requirements and the timing of orders and shipments.
U.S. Government and Foreign Sales. In the fiscal year
ended December 31, 1995, approximately 24% of the Company's
revenues were derived through sales to various United States
government agencies (primarily, the Department of Defense).
Despite the Company's best efforts to comply with all
appropriate regulations and legislation regarding government
contracting, no assurance can be given that the Company's
method of pricing United States government contracts will
not be challenged in the future. Certain government
agencies, such as the Department of Defense, are precluded
from awarding contracts which require access to classified
information to foreign owned or controlled companies. In
May 1989, the Company was notified by DIS that its primary
facility security clearances had been suspended pending
resolution of certain foreign interest and control issues
related to Japan Energy's ownership of the Company's shares.
In August 1989, based upon satisfactory actions taken by the
Company, DIS reinstated the aforementioned security
clearances. Since that time the Company and the Japan
Energy Group have worked to comply with all U.S.
requirements. In particular, the Japan Energy Group has
agreed to accept certain terms and conditions relating to
its equity securities in the Company, including limitations
on the voting rights of its shares, limitations on the
number of seats it may have on the board of directors and
certain restrictions on the conversion of its preferred
shares into common stock. In connection with the various
exchanges of indebtedness for preferred stock discussed
herein and in Note M of the Notes to Consolidated Financial
Statements, 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. The Company
and the Japan Energy Group have worked with DIS to ensure
the Company's continued compliance with U.S. regulations
relating to foreign ownership of U.S. companies. There can
be no assurance, however, that other foreign ownership and
control issues may not arise and adversely impact the
Company's business in the future.
In fiscal 1996, sales to international customers accounted
for approximately 59% of the Company's total revenues.
There can be no assurance that foreign currency exchange
fluctuations will not have an adverse effect on the
Company's future revenues and profits.
Dependence on Key Vendors and Subcontractors. The
Company's business is dependent on the continued, timely and
reliable supply of microprocessors, integrated circuits,
parts, components and certain subassemblies from several key
vendors. The Company has developed multiple commercial
sources for most components and raw materials used in the
manufacture of its computer systems. However, because of
the attractiveness of employing the latest technology in its
product line, the Company does utilize several single source
vendors for certain critical components in its various
product lines. Delays in delivery of any such single source
component could cause unplanned delays in the shipment of
certain products. Failure to obtain sole source components
in adequate quantities on a timely basis could delay
shipments and would have a material adverse effect on the
Company's business and financial results.
In order to minimize its development cycle, development
efforts of the Company may at times be subcontracted to
third parties with particular required technological
expertise. Although the Company takes every reasonable step
to minimize risks associated with this practice, this
increases the Company's reliance on the performance of
others and could result in unplanned delays in the product
development process.
Key Personnel. The success of the Company is dependent
upon the continued employment of its executive officers and
key employees and its ability to attract new employees. The
competition for sales, marketing, engineering and other
personnel in the computer industry is intense. In
particular, there is currently great demand within the
computer industry for qualified personnel with experience in
the areas of parallel and multiprocessing technology. The
Company's inability to retain key employees or to attract
new employees could have a material adverse effect on the
Company's business
