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, 1998
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, 1998
Commission File No. 0-13576
ENCORE COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 04-2789167
<S> <C>
- --------------------------------------------------------- ----------------------------------------
(State of Incorporation) (I.R.S. EMPLOYER I.D. NO.)
7786 Wiles Road
Coral Springs, Florida 33067
- --------------------------------------------------------- ----------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Telephone: (954) 757-0166
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 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. __X__Yes _____No
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 [ ].
Aggregate market value, as of March 25, 1999 of Common Stock held by
non-affiliates of the registrant: $1,317,401.
The number of shares outstanding of the registrant's only class of Common Stock
as of March 25, 1999 was 67,450,907
PART OF DOCUMENT
DOCUMENTS INCORPORATED BY REFERENCE: IN WHICH INCORPORATED
----------------------------
A list of all exhibits to this Form 10-K is on Page 53.
<PAGE>
PART I
ITEM 1 BUSINESS
Until November 1997, Encore Computer Corporation ("Encore" or the "Company") was
engaged in manufacturing, distributing and supporting (i) scalable real-time
computer systems and (ii) data storage products for very large computer systems.
In November 1997 it sold its storage products business and in January 1999 it
completed the sale of its real time computer systems business effective December
31, 1998. Since January 1999, the Company's only assets have been cash and
claims relating to the sales of its storage products and real-time computer
systems businesses.
In 1989, Encore acquired the assets and assumed the liabilities of the Gould
Electronics Inc.'s Computer Systems Division, which was significantly larger
than Encore. Since 1989, Gould (which is a wholly owned subsidiary of Japan
Energy Corporation) had been the principal source of the Company's financing.
From 1989 through November 1997, the Company borrowed a total of $418 million
from Gould and its affiliates. Encore had invested most of this in research and
development. However, despite its efforts, Encore was unable to penetrate the
marketplace for storage products and sales of its real-time computer systems
declined significantly. By mid-1997 Gould had made it clear that it would not
provide further financing to Encore, other than working capital to keep the
storage products business operating for a short period until a pending sale
could be completed.
SALE OF THE STORAGE PRODUCTS BUSINESS
On November 24, 1997, the Company sold substantially all the assets associated
with its storage products business to Sun Microsystems, Inc. ("Sun"). The Asset
Purchase Agreement under which the transaction took place contemplated that Sun
would pay $185 million for the storage products business, of which $150 million
would be paid in cash at the closing and $35 million would be paid on July 1,
1998, subject to Sun's right to make offsets against the second payment. In
fact, because of certain closing adjustments, Sun paid Encore $151,168,227 at
the closing.
Shortly before July 1, 1998, Sun asserted claims against Encore totaling
$9,692,000. Because of that, on July 1, 1998, Sun paid only $25,308,000 of the
$35,000,000 which was due on that date. Since then, Encore and Sun have been
attempting to resolve Sun's claims.
On November 24, 1997, Gould held (i) notes, secured by all of Encore's assets,
under which Encore owed Gould $93.55 million for money Encore had borrowed from
Gould plus unpaid interest, and (ii) convertible preferred stock of Encore with
a liquidation preference totaling $411 million, which Encore had issued to Gould
between 1991 and 1996 in exchange for cancellation of indebtedness for money
Encore had borrowed from Gould and interest on those borrowings. In addition,
Gould held approximately 48.44% of Encore's common stock, which Gould had
obtained as part of the consideration for the sale of its Computer Systems
Division to Encore in 1989 or through conversion of convertible preferred stock.
In connection with the sale of Encore's storage products business to Sun, Encore
and Gould agreed that Encore would repay the secured notes and unpaid interest
thereon and redeem all the convertible preferred stock which Gould held for $60
million, of which $25 million was to be paid at the closing of the Sun
transaction, and the balance was to be satisfied with the second payment due
from Sun. In addition, Gould agreed that if it received the entire $35 million
by July 31, 1998, Gould would waive its right to receive additional shares of
preferred stock with a liquidation preference of approximately $43 million which
were due to it as past-due dividends on the convertible preferred stock which
was being redeemed. Finally, Gould agreed that if Encore were liquidated before
November 24, 1999, Gould would waive any right it had as a holder of Encore's
common stock with regard to the first $30 million of liquidating distributions
made to Encore's common stockholders.
2
<PAGE>
In connection with the sale of Encore's storage business to Sun, Gould also
entered into an agreement with Sun under which Gould guaranteed most of Encore's
obligations under the Asset Purchase Agreement between Encore and Sun, agreed to
provide whatever funds were necessary to ensure that Encore would not become
insolvent within one year after the closing of the sale to Sun, and indemnified
Sun against any losses Sun might incur if the sale of Encore's storage products
business to Sun were challenged in an insolvency proceeding relating to Encore
commenced within two years after the closing.
Because Sun withheld $9,692,000 of the payment due on July 1, 1998, Encore
remained obligated to Gould in that amount and had to either pay that amount to
Gould out of its own funds by July 31, 1998 or issue to Gould the over-due
dividend shares of convertible preferred stock, which had a liquidation
preference of $42,678,400. However, in order to give Encore more time to attempt
to resolve Sun's claims, Gould agreed that if Encore issued those dividend
shares to it, Gould would give Encore the option to re-purchase the dividend
shares on or before July 31, 1999 for an amount equal to the balance of the
$9,692,000 which remained unpaid plus interest at 8.5% per annum from August 1,
1998. At December 31, 1998, the amount Encore would have had to pay to
re-purchase the dividend shares would have been the full $9,692,000 plus
interest of $343,070.
SALE OF THE REAL-TIME BUSINESS
When the Company completed the sale of its storage products business, the Board
of Directors decided that, at least until the Board's January 1998 meeting, the
Company should (a) explore the possibility of attempting to develop and market
clustering software related to Windows NT(R) and (b) explore the feasibility of
the Company's continuing, and attempting to expand, its real-time computer
systems business. In January 1998, the Board of Directors (i) decided the
Company should discontinue its efforts to develop clustering software relating
to Windows NT and (ii) authorized the Company to retain an investment banker to
try to find a purchaser for the real-time computer systems business.
On March 2, 1998, the Company signed a non-binding letter of intent to sell its
real-time computer systems business to Gores Technology Group ("Gores") for
approximately $5.5 million, based on an estimated December 31, 1997 balance
sheet for that business. On June 4, 1998, the Company and Gores entered into a
definitive agreement for the Company to sell the real-time business to Gores for
$3 million in cash. The reduction in price from that contemplated in the letter
of intent reflected operating results during the first quarter of 1998 and
differences between the estimated December 31, 1997 balance sheet and the actual
balance sheet at March 29, 1998.
At the same time the Company entered into the agreement to sell its real-time
computer systems business to Gores, the Company entered into a management
agreement under which Gores took over management of the real-time computer
systems business, retaining any positive cash flow and bearing any negative cash
flow, but receiving a management fee of $100,000 per month, which was to be
refunded to Encore upon closing of the sale of the real-time computer systems
business to Gores. Encore provided a $2 million line of credit to Gores to fund
its operation of the real-time computer systems business until the closing.
The sale of the real-time computer systems business to Gores was approved by the
Company's stockholders on September 11, 1998, and the transaction was completed
on January 6, 1999. At the closing of the sale, the Company received $2,750,000
(with the additional $250,000 set off against the purchase price to resolve an
alleged breach of indemnity claim) and the parties agreed to resolve shortly
after the closing disputed items relating to the sale, including the amounts due
to Encore under the management agreement and the line of credit, and certain
other indemnity claims by Gores. As of March 31, 1999, these items had not yet
been resolved.
3
<PAGE>
It had been contemplated that after the real-time computer systems business was
sold to Gores, Encore would be liquidated. However, because of a provision of
the agreements relating to Encore's sale of its storage products business to
Sun, Encore's stockholders could not vote on the liquidation of Encore at the
meeting on September 11, 1998 at which they approved the sale of the real-time
computer systems business. The Company's Board of Directors expects to
reconsider when the Company should be liquidated when various disputed items are
determined, including the additional amount, if any, which Sun will pay with
regard to its purchase of the storage products business, the additional amount,
if any, which Gores will pay to the Company with regard to its purchase of the
real-time business, and whether the Company will have any liability in the
pending lawsuit by stockholders of the Company with regard to the Sun
transaction and related redemption of convertible preferred stock from Gould.
On, November 24, 1998, the Company's Chief Executive Officer and its President
resigned in view of the fact that the Company no longer had any active business.
The Company's staff was reduced to its General Counsel (who took the position of
President), its Chief Financial Officer, its Vice President of Human Resources
(who continued to be involved in employee compensation matters arising out of
the sales of the storage products and the real-time computer systems businesses)
and a few clerical and administrative employees. The Company also moved its
offices to substantially smaller space which it occupies under a short-term
lease. Those offices will be closed on or about June 30, 1999, and it is likely
that the Company's further activities will be conducted in space provided by
Gould in Eastlake, Ohio.
The assets of the Company available for distribution to shareholders on
liquidation of Encore would be (i) the Company's assets, less its liabilities,
at December 31, 1998, after giving effect to the sale of the real-time computer
systems business to Gores, plus or minus (ii) any sum by which the amount
received from Gores is greater or less than the carrying value on the Company's
December 31, 1998 balance sheet, plus or minus (iii) any amount by which
severance and other costs related to the sale of the Company's businesses are
less or greater than the accruals for them on the December 31, 1998 balance
sheet, plus or minus (iv) any amounts by which the costs of liquidation and
costs related to contingent liabilities, including pending litigation, are less
or greater than the reserves reflected on the December 31, 1998 balance sheet,
minus (v) expenses incurred after December 31, 1998 which have not been
contemplated in the accruals, such as employee costs for the Company's limited
staff. The amount, if any, of the assets available for distribution on
liquidation of Encore will be available to common stockholders will depend on
whether Encore is able to re-purchase the convertible preferred stock held by
Gould.
4
<PAGE>
ITEM 2 PROPERTIES
Listed below are the Company's principal facilities as of December 31, 1998.
<TABLE>
<CAPTION>
OWNED OR APPROXIMATE
LOCATION PRINCIPAL USE LEASED SQUARE FEET
----------------------- ----------------------- --------------- -----------------
<S> <C> <C> <C>
Coral Springs, FL Administrative Leased 2,512
London, England None Leased 35,000
</TABLE>
The Company is currently in discussions with the owner of the London facility to
terminate its lease.
5
<PAGE>
ITEM 3 LEGAL PROCEEDINGS
Shortly before the closing of the sale of the Company's storage products
business to Sun, shareholders of the Company brought a derivative suit in the
Delaware Chancery Court against Gould and the Company's then directors, C. David
Ferguson, Robert Fedor, Rowland Thomas and Kenneth Fisher. Three similar
shareholder suits were also filed and all four suits have been consolidated as
Civil Action #16044, IN RE ENCORE COMPUTER CORPORATION SHAREHOLDERS LITIGATION.
The suit is currently in the discovery stage. In February 1999, a motion for
Summary Judgment was filed by Defendants, Gould, Ferguson, Fedor, Thomas and
Fisher. The motion is now pending in the Delaware Chancery Court. The Company
does not believe the shareholder suit will have a significant financial impact
on the Company.
The Company is subject to other legal proceedings and claims, including the
claims by Sun, as discussed more fully in Part I, Item 1-Business, 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
The Special Meeting in Lieu of Annual Meeting of Shareholders of the Company was
held at the Sheraton Suites in Plantation, Florida September 11, 1998. At the
meeting the shareholders voted: (1) to approve the sale of the real-time
business to Gores; (2) to elect six (6) directors; and (3) to approve the
selection by the Board of Directors of PricewaterhouseCoopers LLP. as the
Company's independent auditors for the fiscal year ending December 31, 1998. The
results of the votes for each of these proposals were as follows:
AGAINST/
FOR ABSTAIN
---------- ----------
1. Sale to Gores 42,556,340 22,562,270
2. Election of Directors
Kenneth G. Fisher 52,535,134 12,583,476
Rowland H. Thomas 52,535,134 12,583,476
Robert J. Fedor 52,535,134 12,583,476
C.David Ferguson 52,535,134 12,583,476
Thomas N. Rich 52,535,134 12,583,476
Michael C. Veysey 52,535,134 12,583,476
3. Approval of Independent Auditors 53,519,058 11,599,552
6
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the OTC Bulletin Board under the symbol
ENCC.
The high and low closing sale prices of Encore's common stock are shown for
fiscal years 1998 and 1997 in the table below:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
------------------------------------- -------------------------------------
HIGH LOW HIGH LOW
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
1st Quarter 5/8 3/16 1 15/16 1 3/16
2nd Quarter 11/32 3/16 2 1/4 1 3/16
3rd Quarter 13/64 1/64 1 3/32 5/8
4th Quarter 1/16 1/64 25/32 9/64
</TABLE>
BankBoston, N.A. 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:
BankBoston, N.A.
c/o Boston EquiServe, L.P.
P.O. Box 8040
Mail Stop 45-02-64
Boston, Massachusetts 02266-8040.
As of May 3, 1999, there were approximately 2,380 holders of record of the
Company's common stock. The Company has never paid cash dividends on its common
stock.
7
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands except FOR THE YEAR ENDED DECEMBER 31,
per share data) --------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $20,435 $29,486 $47,627 $49,328 $76,550
Operating (loss) (7,474) (76,528) (67,218) (77,796) (50,848)
Gain on Sun Transaction 25,308 119,890 - - -
Net income (loss) 16,658 34,164 (70,732) (81,354) (54,556)
Basic income (loss) per common
share (1) 0.24 0.11 (2.61) (2.88) (2.05)
Weighted average shares of
common stock outstanding (1) 67,451 40,568 36,810 34,923 33,391
Working capital (2,988) (21,617) (67,295) 5,490 20,237
Total assets 16,753 37,451 69,256 72,537 99,021
Long term debt - - 476 40,812 89,249
Shareholders' equity
(capital deficiency) (2) (2,988) (19,646) (34,010) 2,514 (22,040)
</TABLE>
(1) During 1998, 1997, 1996, 1995, and 1994, preferred stock dividends amounted
to $533,000, $29,579,900, $25,413,000, $19,061,600, and $13,986,600,
respectively. All preferred stock dividends were paid in additional shares of
preferred stock or were accumulated.
(2) Represents net assets in liquidation as of December 31, 1998.
8
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Encore was founded in May 1983. In 1989, Encore acquired substantially all of
the assets of the Computer Systems Division of Gould. Since 1989, the Japan
Energy Group has been the principal source of financing for the Company by
either directly providing or guaranteeing the Company's loans. Since late 1996
however, the credit agreements did not provide committed financing to the
Company and all financing was solely at the discretion of Gould. From 1989
through November 1997, the Company borrowed a total of $418 million from the
Japan Energy Group.
THE SUN TRANSACTION
On November 24, 1997, the Company sold substantially all the assets associated
with its storage products business to Sun Microsystems, Inc. ("Sun"). The Asset
Purchase Agreement under which the transaction took place contemplated that Sun
would pay $185 million for the storage products business, of which $150 million
would be paid in cash at the closing and $35 million would be paid on July 1,
1998, subject to Sun's right to make offsets against the second payment. In
fact, because of certain closing adjustments, Sun paid Encore $151,168,227 at
the closing.
Shortly before July 1, 1998, Sun asserted claims against Encore totaling
$9,692,000. Because of that, on July 1, 1998, Sun paid only $25,308,000 of the
$35,000,000 which was due on that date. Since then, Encore and Sun have been
attempting to resolve Sun's claims.
On November 24, 1997 Gould held (i) notes, secured by all of Encore's assets,
under which Encore owed Gould $93.55 million for money Encore had borrowed from
Gould plus unpaid interest, and (ii) convertible preferred stock of Encore with
a liquidation preference totaling $411 million, which Encore had issued to Gould
between 1991 and 1996 in exchange for cancellation of indebtedness for money
Encore had borrowed from Gould and interest on those borrowings. In addition,
Gould held approximately 48.44% of Encore's common stock, which Gould had
obtained as part of the consideration for the sale of its Computer Systems
Division to Encore in 1989 or through conversion of convertible preferred stock.
In connection with the sale of Encore's storage products business to Sun, Encore
and Gould agreed that Encore would redeem all the convertible preferred stock
which Gould held for $60 million, of which $25 million was to be paid at the
closing of the Sun transaction, and the balance was to be satisfied with the
second payment due from Sun. In addition, Gould agreed that if it received the
entire $35 million by July 31, 1998, Gould would waive its right to receive
additional shares of preferred stock with a liquidation preference of
approximately $43 million which were due to it as past-due dividends on the
convertible preferred stock which was being redeemed. Finally, Gould agreed that
if Encore were liquidated before November 24, 1999, Gould would waive any right
it had as a holder of Encore's common stock with regard to the first $30 million
of liquidating distributions made to Encore's common stockholders.
In connection with the transaction between Encore and Sun, Gould also entered
into an agreement with Sun under which Gould guaranteed most of Encore's
obligations under the Asset Purchase Agreement between Encore and Sun, agreed to
provide whatever funds were necessary to ensure that Encore would not become
insolvent within one year after the closing of its transaction with Sun, and
indemnified Sun against any losses Sun might incur if the sale of Encore's
storage products business to Sun were challenged in an insolvency proceeding
relating to Encore commenced within two years after the closing.
Because Sun withheld $9,692,000 of the payment due on July 1, 1998, Encore
remained obligated to Gould in that amount and had to either pay that amount to
Gould out of its own funds by July 31, 1998 or issue to Gould the over-due
dividend shares of convertible preferred stock, which had a
9
<PAGE>
liquidation preference of $42,678,400. However, in order to give Encore more
time to attempt to resolve Sun's claims, Gould agreed that if Encore issued
those dividend shares to it, Gould would give Encore the option to re-purchase
the dividend shares on or before July 31, 1999 for an amount equal to the
balance of the $9,692,000 which remained unpaid plus interest at 8.5% per annum
from August 1, 1998. At December 31, 1998, the amount Encore would have had to
pay to re-purchase the dividend shares would have been the full $9,692,000 plus
interest of $343,070.
THE GORES TRANSACTION
When the Company completed the sale of its storage products business, the Board
of Directors decided that, at least until the Board's January 1998 meeting, the
Company should (a) explore the possibility of attempting to develop and market
clustering software related to Windows NT(R) and (b) explore the feasibility of
the Company's continuing, and attempting to expand, its real-time computer
systems business. In January 1998, the Board of Directors (i) decided the
Company should discontinue its efforts to develop clustering software relating
to Windows NT and (ii) authorized the Company to retain an investment banker to
try to find a purchaser for the real-time computer systems business.
On March 2, 1998, the Company signed a non-binding letter of intent to sell its
real-time computer systems business to Gores Technology Group for approximately
$5.5 million, based on an estimated December 31, 1997 balance sheet for that
business. On June 4, 1998, the Company and Gores entered into a definitive
agreement for the Company to sell the real-time business to Gores for $3 million
in cash. The reduction in price from that contemplated in the letter of intent
reflected operating results during the first quarter of 1998 and differences
between the estimated December 31, 1997 balance sheet and the actual balance
sheet at March 29, 1998.
At the same time the Company entered into the agreement to sell its real-time
computer systems business to Gores, the Company entered into a management
agreement under which Gores took over management of the real-time computer
systems business, retaining any positive cash flow and bearing any negative cash
flow, but receiving a management fee of $100,000 per month, which was to be
refunded to Encore upon closing of the sale of the real-time computer systems
business to Gores. Encore provided a $2 million line of credit to Gores to fund
its operation of the real-time computer systems business until the closing. As
of December 31, 1998, the amount of positive or negative cash flow generated
under the management agreement had not been agreed upon. On December 31, 1998
the Company and Gores entered into a reconciliation agreement (the
"Reconciliation Agreement"), whereby the parties agreed to resolve any
differences as quickly as possible. It has been agreed that any positive cash
flow generated internationally would be used by Gores to offset domestic
borrowing of $1,850,000 and that all international cash balances at December 31,
1998 would be transferred by Gores to the Company as soon as practicable.
The sale of the real-time computer systems business to Gores was approved by the
Company's stockholders on September 11, 1998, and the transaction was completed
on January 6, 1999. At the closing of the sale, the Company received $2,750,000
(with the additional $250,000 set off against the purchase price to resolve an
alleged breach of indemnity claim) and the parties agreed to resolve, shortly
after the closing, disputed items relating to the sale, including the amounts
due to Encore in accordance with the Reconciliation Agreement. As of March 31,
1999, these items had not yet been resolved.
It had been contemplated that after the real-time computer systems business was
sold to Gores, Encore would be liquidated. However, because of a provision of
the agreements relating to Encore's sale of its storage products business to
Sun, Encore's stockholders could not vote on the liquidation of Encore at the
meeting on September 11, 1998 at which they approved the sale of the real-time
computer systems business. The Company's Board of Directors expects to
reconsider when the Company should be liquidated when various disputed items
are determined, including the additional
10
<PAGE>
amount, if any, which Sun will pay with regard to its purchase of the storage
products business, the additional amount, if any, Gores will pay to the Company
with regard to the sale of the real-time business, and whether the Company will
have any liability in suits by stockholders of the Company with regard to the
Sun transaction and related redemption of convertible preferred stock from
Gould.
On, November 24, 1998, the Company's Chief Executive Officer and its President
resigned in view of the fact that the Company no longer had any active business.
The Company's staff was reduced to its General Counsel (who took the position of
President), its Chief Financial Officer, its Vice President of Human Resources
(who continued to be involved in employee compensation matters arising out of
the sales of the storage products and the real-time computer systems businesses)
and a few clerical and administrative employees. The Company also moved its
offices to substantially smaller space which it occupied under a short-term
lease. Those offices will be closed on or about June 30, 1999, and the Company's
further activities will be conducted in space provided by Gould in Eastlake,
Ohio.
The assets of the Company available for distribution to shareholders on
liquidation of Encore would be (i) the Company's assets, less its liabilities,
at December 31, 1998, after giving effect to the sale of the real-time computer
systems business to Gores, plus or minus (ii) any sum by which the amount
received from Gores is greater or less than the carrying value on the Company's
December 31, 1998 balance sheet, plus or minus (iii) any amount by which
severance and other costs related to the sale of the Company's businesses are
less or greater than the accruals for them on the December 31, 1998 balance
sheet, plus or minus (iv) any amounts by which the costs of liquidation and
costs related to contingent liabilities, including pending litigation, are less
or greater than the reserves reflected on the December 31, 1998 balance sheet,
minus (v) expenses incurred after December 31, 1998 which have not been
contemplated in the accruals, such as employee costs for the Company's limited
staff. The amount, if any, of the assets available for distribution on
liquidation of Encore will be available to common stockholders will depend on
whether Encore is able to re-purchase the convertible preferred stock held by
Gould.
LIQUIDATION
It had been contemplated that after the real-time computer systems business was
sold to Gores, Encore would be liquidated. However, because of a provision of
the agreements relating to Encore's sale of its storage products business to
Sun, Encore's stockholders could not vote on the liquidation of Encore at the
meeting on September 11, 1998 at which they approved the sale of the real-time
computer systems business. The Company's Board of Directors expects to
reconsider when the Company should be liquidated when various disputed items
are determined, including the additional amount, if any, which Sun will pay with
regard to its purchase of the storage products business, the additional amount
Gores will pay to the Company and whether the Company will have any liability in
suits by stockholders of the Company with regard to the Sun transaction and
related redemption of convertible preferred stock from Gould.
The accompanying consolidated financial statements have been prepared assuming
that the Company will liquidate. As of December 31, 1998, the Company has a net
capital deficiency and a working capital deficiency. If the Company does not
favorably resolve the set-off by Sun and the corresponding obligation to Gould
in the principal amount of $9,692,000, the Company will not be able to satisfy
its obligations. However, the ultimate resolution of these matters is not
presently determinable.
COMPARISON OF 1998 AND 1997
Net sales for 1998 were $20,435,000 compared to net sales for 1997 of
$29,486,000, a decrease of $9,051,000 or 31%. 1998 equipment sales decreased 42%
to $8,263,000 when compared to $14,163,000 in 1997. 1998 equipment sales were
entirely derived from real-time products while
11
<PAGE>
1997 equipment sales included $4,764,000 in storage product revenue. Therefore,
1998 real-time equipment sales decreased by $1,136,000 or 12% from $9,399,000 in
1997. The decrease in real-time equipment sales is primarily due to a lack of
new product development and reliance by the Company on modifications to existing
products nearing the end of their life-cycles. Real-time equipment sales as a
percentage of total net sales were 40% in 1998. In 1997 real-time equipment
sales were 38% of reported net sales less storage product equipment sales.
International equipment sales decreased 64% to $1,933,000 in 1998. In 1997
international storage product sales were $440,000 while there were no
international storage product sales in 1998.
Service revenues for 1998 were $12,172,000, a decrease of $3,151,000 or 21% from
service revenues of $15,323,000 in 1997. 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
and (iii) the completion of long running government programs and subsequent
deinstallation of systems. Service revenues as a percentage of net sales for
1998 and 1997 were 60% and 52%, respectively. International and domestic
real-time service sales were $7,102,000 and $5,070,000, respectively, for 1998,
down 24% and 15%, respectively, from 1997 international real-time service sales
of $9,357,000 and domestic real-time service sales of $5,966,000.
During 1998 one of the Company's customers accounted for approximately 16% of
its sales. During 1997, the Company had 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, sales to various U.S. government agencies
represented approximately 40% and 21% of net sales in 1998 and 1997,
respectively. For the real-time business, the respective percentages were 100%
and 84% of total government sales in 1998 and 1997.
Total cost of sales decreased in 1998 to $12,738,000 from $37,332,000 in 1997.
Cost of storage product net sales were $18,708,000 in 1997 compared to $0 in
1998. The decline in real-time net cost of sales in 1998 was $5,886,000 or 32%
from $18,624,000 in 1997. Cost of real-time equipment sales decreased from
$8,668,000 in 1997 to $4,492,000 in 1998, or 48%. Reduced equipment cost of
sales are attributed to the significant reduction in capacity variances as a
result of consolidating manufacturing in Ft. Lauderdale from the Company's
Melbourne, Florida manufacturing facility which was highly underutilized and
sold to Sun in November 1997, as well as lower product volumes. Real-time
product gross margins increased to 46% of product sales from 8% in 1997 as a
result of these reduced costs.
Cost of service sales decreased from $15,921,000 in 1997 to $8,246,000 in 1998.
In 1997, the Company invested $5,965,000 in various programs and infrastructure
to support the storage product. Real-time service cost of sales decreased
$1,710,000 or 17% from $9,956,000 in 1997. This decrease is a result of lower
service sales. Real-time gross margins decreased to 32% in 1998 when compared to
35% in 1997.
Research and development expenses in 1998 were $1,213,000 compared to
$23,953,000 in 1997. This decrease is a direct result of Sun hiring or
contracting 68% of the total existing research and development personnel at
November 24, 1997, the Board of Directors' decision not to pursue development of
clustering technology in the Windows NT environment and the subsequent
consolidation of technical resources into a shared organization responsible for
manufacturing support as well as pre/post sales support. Research and
development expenses as a percentage of net sales decreased from 81% in 1997 to
6% in 1998.
Sales, general and administrative expenses in 1998 were $8,489,000 compared to
$27,044,000 in 1997. Sun hired 65 storage product sales and marketing personnel
or 45% of the Company's existing sales and marketing employees at November 24,
1997. Subsequently, the Company downsized the real-time sales and marketing and
administrative functions to levels more in line with
12
<PAGE>
future sales expectations. As a result, SG&A expenses as a percentage of net
sales decreased from 92% in 1997 to 42% in 1998.
In the fourth quarter of 1997, in conjunction with the sale of the storage
products business to Sun (the "Sun Transaction") and subsequent reorganization,
the Company recorded a termination charge of $17,685,000 related to: (i)
severance and benefit pay of $6,323,000 as a result of a 542 person reduction in
workforce, including severance for employees contracted by Sun, as the Company
agreed to pay the difference between the completion bonus offered to contractors
by Sun at the end of their contract and the amount of severance they were
entitled to had they been terminated by the Company, (ii) $4,722,000 of
retention payments pursuant to agreements between the Company and each of
approximately 49 employees, (iii) $1,000,000 of incentive bonuses to certain key
employees, (iv) $3,390,000 relating to the termination of European facility and
automobile leases, and $350,000 relating to a domestic equipment lease, (v) an
estimated $500,000 for leasehold improvements to be made at the Company's Fort
Lauderdale facility which is leased from Sun, (vi) $1,150,000 in estimated legal
and other fees associated with the Sun Transaction, and (vii) $250,000 accrued
for legal fees in connection with the shareholders suit. (See Item 3 Legal
Proceedings). Termination charges relating to the Sun Transaction amounting to
$1,656,000 were reversed in the fourth quarter of 1998, as original estimates
were revised.
In the first quarter of 1998, the Company recorded a termination charge of
$743,500 related to severance and benefit pay as a result of a 13 person
reduction in workforce associated with the Board of Directors' decision not to
pursue the NT opportunity.
In December 1998, in conjunction with the sale of the real-time business to
Gores (the "Gores Transaction") and anticipated liquidation, subject to
shareholder approval, the Company recorded a charge for estimated liquidation
costs of $5,531,000 related to: (i) severance and benefit pay of $1,211,000 as a
result of a 7 person reduction in workforce, (ii) $300,000 of retention payments
pursuant to agreements between the Company and each of approximately 16
employees, (iii) $1,824,000 in estimated costs for professional services related
to the Company's winddown, (iv) $500,000 of estimated international taxes which
may be required to be paid to remit cash in Europe to the United States, (v)
$481,000 in accrued interest through July 31, 1999 on the $9,692,000 due to
Gould, (vi) $516,000 of additional accounts receivable reserves and additional
accrued expenses, and (vii) $699,000 of miscellaneous costs related to shutdown
of various facilities including real estate and other taxes.
Interest expense decreased to $374,000 in 1998 from $6,218,000 in 1997 as a
result of the Company's payment to Gould in conjunction with the Sun
Transaction. The 1998 interest expense relates to interest payable to Gould
based on the $9,692,000 owed to Gould as a result of Sun's set-off in the second
payment.
Provision for income taxes decreased $2,216,000 in 1998 from 1997 as a result of
the reversal of an overestimate of the alternative minimum tax to be paid in
connection with the 1997 profit from the Sun Transaction, offset by taxes
payable by foreign subsidiaries.
COMPARISON OF 1997 AND 1996
Net sales for 1997 were $29,486,000 compared to net sales for 1996 of
$47,627,000. 1997 equipment sales decreased 49% to $14,163,000 when compared to
$27,600,000 in 1996. Service revenues for 1997 and 1996 were $15,323,000 and
$20,027,000, respectively. 1997 real-time equipment sales were $9,399,000
compared to $20,997,000 in 1996. 1997 storage product sales were $4,764,000
compared to $6,603,000 in 1996. Real-time service revenues were $15,323,000 in
1997, compared to $20,027,000 in 1996. No service revenues were derived from the
storage product business. The Company's operating loss for 1997 was $76,528,000
compared to operating
13
<PAGE>
losses of $67,218,000 for 1996. The 1997 gain resulting from the Sun Transaction
was $119,890,000.
Equipment sales as a percentage of total net sales in 1997 and 1996 were 48% and
58%, respectively. For real-time equipment sales, the respective percentages
were 32% and 44% of total net sales in 1997 and 1996. For storage product sales
the respective percentages were 16% and 14% in 1997 and 1996. The decrease in
equipment sales in 1997 is primarily due to; (i) the inability of the Company to
penetrate the storage marketplace through its direct and distributor sales
channels, (ii) concerns of potential customers over the financial viability of
the Company and (iii) certain of the Company's traditional real-time products
having reached the end of their product life cycle. Additionally, management
believes the announcement of the Asset Purchase Agreement with Sun on July 17,
1997, adversely affected storage product sales for the balance of 1997.
International equipment sales decreased 67% to $5,297,000 in 1997 as
international storage product sales declined 92% to $440,000 and international
real-time product sales decreased 55% to $4,857,000 when compared to 1996.
Domestic equipment sales decreased 23% to $8,866,000 compared to 1996 with
storage product sales increasing 233% to $4,324,000, while real-time product
sales decreased 56% to $4,542,000.
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. International service sales decreased 24% to $9,357,000 in 1997,
while domestic service sales decreased 23% to $5,966,000 compared to 1996.
International and domestic real-time service sales were $9,357,000 and
$5,966,000, respectively, for 1997, down 24% and 23%, respectively, from 1996
international real-time service sales of $12,277,000 and domestic real-time
service sales of $7,750,000.
International net sales decreased 48% (38% for real-time) in 1997 when compared
to 1996. Domestic net sales decreased 23% (42% for real-time) in 1997, when
compared to 1996. International sales in 1997 and 1996 were $14,654,000 and
$28,327,000, or 50% and 59%, respectively, of total net sales. International
real-time net sales in 1997 and 1996 were $14,214,000 and $23,024,000, or 57%
and 56%, respectively, of total real-time net sales.
During the years ended December 31, 1997 and 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 21% and
22% of net sales in 1997 and 1996, respectively. For the real-time business, the
respective percentages were 84% and 86% of total government sales in 1997 and
1996. The Company recognized that reductions in levels of U.S. government agency
spending on computers and computer related services could adversely affect its
traditional sources of revenue.
Total cost of sales decreased in 1997 to $37,332,000 ($18,624,000 for real-time
and $18,708,000 for storage product), from $53,608,000 ($32,349,000 for
real-time and $21,259,000 for storage product) in 1996. This decrease was due
generally to lower sales volumes and lower spending resulting from the
restructuring of manufacturing and customer service operations during the
period. Since the beginning of 1995, combined manufacturing and customer service
headcount had been reduced by approximately 88%, certain customer service field
operations had been closed or scaled down, and manufacturing operations had been
consolidated in Melbourne, Florida.
Cost of equipment sales exceeded sales by $7,248,000 and $8,186,000, or (51%)
and (30%) of net sales, respectively, in 1997 and 1996. However, gross margins
on real-time equipment sales were $671,000 and $491,000, or 7% and 2% for 1997
and 1996, respectively. Negative gross margins were generated by the storage
product business of $7,949,000 and $8,677,000 in 1997 and 1996,
14
<PAGE>
respectively. In 1997, equipment cost of sales included $684,000 of valuation
reserves for real-time products. 1996 cost of sales included $9,932,000 (28% of
equipment sales) in additional valuation reserves on storage product inventory.
The Company's ISO 9002 certified manufacturing operation was sold to Sun as part
of the Sun Transaction. Pursuant to the "At Will Shared Services Agreement"
dated November 24, 1997, Sun agreed, among other things, to provide
manufacturing support to Encore through February 28, 1998, while the Company was
integrating its manufacturing operation into their Fort Lauderdale facility. At
that time the Company established a real-time technical operations function
responsible for research and development, manufacturing/integration, as well as
pre and post sales support. This organization consists of 28 of the most highly
experienced real-time technical personnel available.
Equipment gross margins were negatively impacted in 1997 and 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
business were also higher than anticipated due to engineering changes on current
installations and spare parts inventory. Factory variances related to lower
production volumes and underutilization of manufacturing capacity also lowered
gross margin in both years.
In 1997, cost of service sales exceeded sales by $598,000, compared to gross
margins on service sales in 1996 of $2,205,000. For 1997 and 1996, service
margins were reduced for investments in various programs and infrastructure
necessary to support the storage product line. The Company invested $5,965,000
(39% of service sales) and $5,979,000 (30% of service sales) in support of the
storage product line during 1997 and 1996, respectively. Sun purchased all fixed
assets and spares inventory related to the storage product and hired all storage
product service personnel.
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. Gross margins on real-time service sales were $5,367,000 (35%) and
$8,184,000 (41%) in 1997 and 1996, respectively.
Research and development expenses in 1997 were $23,953,000 compared to
$30,260,000 in 1996. The decrease in 1997 expenses is primarily the result of
lower labor costs and lower spending on non-recurring engineering associated
with prototype boards. Sun either hired or contracted 147 or 68% of total
research and development personnel. Research and development expenses as a
percentage of net sales increased to 81% in 1997, compared to 64% in 1996.
Subsequent to the Sun Transaction, the Company also established a separate
research and development organization to focus on opportunities in the Microsoft
NT environment. However, in January 1998, the Board of Directors voted not to
pursue the NT opportunity.
Sales, general and administrative ("SG&A") expenses in 1997 were $27,044,000
compared to $30,977,000 in 1996. The decrease in 1997 expenses was due to
reduced headcount, lower commissions and lower advertising and promotion
expenses related to the storage products business. SG&A expenses include
non-cash compensation charges of $589,000 in 1996 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 92% and 65% in 1997, and 1996.
In 1997, Sun hired 65 storage product sales and marketing personnel or 45% of
the Company's total sales and marketing employees. Subsequently, the Company
downsized the real-time sales and marketing organization to 30 employees.
15
<PAGE>
In the fourth quarter of 1997, in conjunction with the Sun Transaction and
subsequent reorganization, the Company recorded a termination charge of
$17,685,000 related to: (i) severance and benefit pay of $6,323,000 as a result
of a 542 person reduction in workforce, including severance for employees
contracted by Sun, as the Company agreed to pay the difference between the
completion bonus offered to contractors by Sun at the end of their contract and
the amount of severance they were entitled to had they been terminated by the
Company, (ii) $4,722,000 of retention payments pursuant to agreements between
the Company and each of approximately 49 employees, (iii) $1,000,000 of
incentive bonuses to certain key employees, (iv) $3,390,000 relating to the
termination of European facility and automobile leases, and $350,000 relating to
a domestic equipment lease, (v) an estimated $500,000 for leasehold improvements
to be made at the Company's Fort Lauderdale facility which is leased from Sun,
(vi) $1,150,000 in estimated legal and other fees associated with the Sun
Transaction, and (vii) $250,000 accrued for legal fees in connection with the
shareholders suit. (See Item 3 Legal Proceedings). Termination charges relating
to the Sun Transaction amounting to $1,656,000 were reversed in the fourth
quarter of 1998, as original estimates were revised.
Interest expense increased in 1997 to $6,218,000 from $3,520,000 in 1996,
primarily due to higher debt levels. Since 1996, Encore has completed a series
of refinancing agreements with the Japan Energy Group resulting in conversions
of $180,000,000 of debt to preferred stock.
Other expense, net, was higher in 1997 than in 1996 due principally to higher
foreign exchange losses and losses on the sale of certain fixed assets.
Income taxes provided in 1997 relate to $503,000 of taxes payable by foreign
subsidiaries as well as $1,400,000 in estimated alternative minimum tax
resulting from the gain on the Sun Transaction. (see Note G of the Notes to
Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1998 and 1997, the Company reported net income
of $16,658,000 and $34,164,000, respectively. Included in net income in 1998 and
1997 were gains on the sale of assets to Sun amounting to $25,308,000 and
$119,890,000, respectively. In 1998, net cash used in operating activities was
$12,959,000 compared to $66,730,000 in 1997. Net income, adjusted for non cash
items, the loss on the Gores Transaction and the gain on the Sun Transaction was
$118,000 in 1998, as the Company recorded estimated liquidation costs of
$5,531,000, depreciation and amortization of $887,000 and the gain on the Sun
Transaction of $25,308,000. Net income adjusted for non cash items in 1997
resulted in a loss of $58,812,000. Working deficit was decreased in 1998
primarily as a result of the payment of $25,308,000 to Gould. As of December 31,
1998, total capital deficiency was $2,988,000 versus $19,646,000 as of December
31, 1997
Net cash provided by investing activities resulted primarily from the receipt of
proceeds from the sale of the storage product business to Sun of $25,308,000 and
$151,168,000 in 1998 and 1997, respectively.
Net cash used in financing activities in 1998 and 1997 was $25,308,000 and
$57,954,000, respectively, resulting principally from a retirement of
$25,000,000 of preferred stock during 1997 and net repayments of loan agreements
of $25,308,000 in 1998 versus $52,659,000 in 1997.
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
16
<PAGE>
which could 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. In a letter to the Company dated July 17, 1997, Gould confirmed that it
was not obligated to provide any additional financing to the Company but that so
long as Gould was convinced that the sale of the storage product business to Sun
would take place, it was likely that Gould would continue to provide financing
to the Company but only to the extent absolutely necessary to enable the
transaction to be consummated. On November 24, 1997 (the "Closing"), the Company
paid to Gould $93,551,000 in principal and accrued interest owed at that date.
Restricted cash of $1,298,000 and $14,083,000 at December 31, 1998 and December
31, 1997, respectively was held in an escrow account pursuant to an escrow
agreement dated November 24, 1997 between the Company and Sun. The escrow
arrangement was established to ensure that certain of the Company's liabilities
at the closing date of the Sun Transaction, would be paid when due. As the
Company pays these liabilities, escrow funds are released to the Company. These
funds were invested in a U.S. Bank money market fund and were made available to
the Company pursuant to the terms of the agreement. At March 31, 1999, no cash
remained in escrow. The majority of cash and cash equivalents at December 31,
1998 consists of cash available to the Company from the payments from the Sun
Transaction and cash at various international subsidiaries.
On January 6, 1999, upon the closing of the Gores Transaction, the Company
received the purchase price of $3 million in cash less $250,000 which was agreed
to be set-off against the purchase price in order to resolve an alleged breach
of an indemnity claim.
At December 31, 1998, the Company had total assets of $16,753,000, including
restricted cash of $1,298,000, and cash and cash equivalents of $9,290,000, and
had liabilities of $19,741,000, including $3,612,000 of estimated severance
costs and other costs related to the sale of the Company's storage products
business, $4,609,000 in estimated liquidation costs and the $9,692,000 principal
amount payable to Gould. The assets of the Company available for distribution to
shareholders on liquidation of Encore would be (i) the Company's assets, less
its liabilities, at December 31, 1998, after giving effect to the sale of the
real-time computer systems business to Gores, plus or minus (ii) any sum by
which the amount received from Gores is greater or less than the carrying value
on the Company's December 31, 1998 balance sheet, plus or minus (iii) any amount
by which severance and other costs related to the sale of the Company's
businesses are less or greater than the accruals for them on the December 31,
1998 balance sheet, plus or minus (iv) any amounts by which the costs of
liquidation and costs related to contingent liabilities, including pending
litigation, are less or greater than the reserves reflected on the December 31,
1998 balance sheet, minus (v) expenses incurred after December 31, 1998 which
have not been contemplated in the accruals, such as employee costs for the
Company's limited staff. The amount, if any, of the assets available for
distribution on liquidation of Encore will be available to common stockholders
will depend on whether Encore is able to re-purchase the convertible preferred
stock held by Gould.
The accompanying consolidated financial statements have been prepared assuming
that the Company will liquidate. As of December 31, 1998, the Company has a net
capital deficiency and a working capital deficit. If Sun does not pay the
$9,692,000 due to Gould, the Company will be obligated to pay the difference to
Gould, in addition to interest on the $9,692,000, and may not be able to satisfy
its obligations. Management intends to make all efforts to collect the
$9,692,000 payment in its entirety. However, the ultimate resolution of these
matters are not presently determinable.
YEAR 2000
The Company has determined that year 2000 issues will have no impact on the
Company's future financial statements in light of the Sun Transaction and the
Gores Transaction. The Company is currently in the process of winding down the
business and has only administrative support
17
<PAGE>
functions. These functions will be accounted for on a small PC system which we
will insure is year 2000 compliant.
CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis of Financial Condition and
Results of Operations contains various "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which represent the
Company's expectations and beliefs concerning future events. The Company
cautions that these statements are further qualified by important factors that
could cause actual results to differ materially from those in the
forward-looking statements, including, without limitation, estimates relating to
the accrual for liquidation costs. These statements by their nature involve
substantial risks and uncertainties and actual events or results may differ as a
result of these and other factors. (See Exhibit 99 incorporated herein by
reference to the Company's Form 10-Q for the period ended June 30, 1996.)
18
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Directors
of Encore Computer Corporation
In our opinion, the accompanying consolidated financial statements and financial
statement schedule listed in item 14(a)(1) and (2) of this Form 10K present
fairly, in all material respects, the consolidated net assets in liquidation of
Encore Computer Corporation and subsidiaries (the "Company") at December 31,
1998 and consolidated financial position at December 31, 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with the basis of
accounting as described in Note A to the financial statements. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note A, management expects that liquidation will occur. As a
result, the Company has changed its basis of accounting from a going concern
basis to a liquidation basis as of December 31, 1998.
PRICEWATERHOUSECOOPERS LLP
Miami, Florida
March 31, 1999
19
<PAGE>
<TABLE>
<CAPTION>
ENCORE COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Net sales:
Equipment $ 8,263 $ 14,163 $ 27,600
Service 12,172 15,323 20,027
--------- --------- ---------
Total 20,435 29,486 47,627
--------- --------- ---------
Costs and expenses:
Cost of equipment sales 4,492 21,411 35,786
Cost of service sales 8,246 15,921 17,822
Research and development 1,213 23,953 30,260
Sales, general and
administrative 8,489 27,044 30,977
Termination charge (Note B) (62) 17,685 --
Liquidation costs 5,531 -- --
--------- --------- ---------
Total 27,909 106,014 114,845
--------- --------- ---------
Operating loss (7,474) (76,528) (67,218)
Interest expense, principally
related parties (374) (6,218) (3,520)
Interest income 847 335 196
Other expense, net (140) (1,412) (554)
Gain on Sun Transaction 25,308 119,890 --
Loss on Gores Transaction (1,822) -- --
--------- --------- ---------
Net inc (loss) before
income taxes 16,345 36,067 (71,096)
(Benefit) Provision for
income taxes (313) 1,903 (364)
--------- --------- ---------
Net income (loss) $ 16,658 $ 34,164 $ (70,732)
========= ========= =========
Net income (loss)
per common share:
Net income (loss)
attributable to common
shareholders $ 16,125 $ 4,584 $ (96,145)
========= ========= =========
Basic earnings
(loss) per common share $ 0.24 $ 0.11 $ (2.61)
========= ========= =========
Diluted earnings (loss)
per common share $ 0.21 $ 0.11 $ (2.61)
========= ========= =========
Weighted average shares
of common stock-basic 67,450 40,568 36,810
========= ========= =========
Weighted average shares
of common stock-diluted 80,747 40,568 181,585
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
<TABLE>
<CAPTION>
ENCORE COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
Cash and cash equivalents $ 9,290
Restricted cash 1,298
Accounts receivable, less allowance of $390 --
Due from Gores 6,153
Prepaid expenses and other current assets 12
------------
Total assets $ 16,753
============
LIABILITIES AND NET ASSETS IN LIQUIDATION
Accounts payable and accrued liabilties $ 10,049
Due to Gould Electronics (Note B) 9,692
------------
Total current liabilities 19,741
Commitments and contingencies (Note H)
Net assets in liquidation (2,988)
------------
Total liablilities and net
assets in liquidation $ 16,753
============
Number of Preferred
Shares outstanding 432,114
============
Number of Common
Shares outstanding 67,450,907
============
Net assets in liquidation per
Preferred Share $ (0.01)
============
Net assets in liquidation per
Common Share $ 0.00
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
<TABLE>
<CAPTION>
ENCORE COMPUTER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,544
Restricted cash 14,083
Accounts receivable, less allowance of $681 5,752
Inventories 246
Prepaid expenses and other current assets 855
---------
Total current assets 35,480
Property and equipment, net 1,063
Other assets 908
---------
Total assets $ 37,451
=========
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 22,097
Due to Gould Electronics (Note B) 35,000
---------
Total current liabilities 57,097
Commitments and contingencies (Note H)
Capital deficiency (Note J):
Common stock, $.01 par value;
authorized 200,000,000 shares;
issued and outstanding
67,447,309 in 1997 674
Additional paid-in capital 427,012
Accumulated deficit (447,332)
---------
Total (19,646)
---------
Total liabilities and capital deficiency $ 37,451
=========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
<TABLE>
<CAPTION>
ENCORE COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(IN THOUSANDS)
- --------------------------------------------------------------------------------
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 16,658 $ 34,164 $ (70,732)
Adjustments to arrive at net cash
used in operating activities:
Depreciation and amortization 887 6,631 10,747
Non cash compensation -- -- 589
Inventory obsolescence and
writedown to lower
of cost or market -- 684 11,013
Equity in loss of joint venture -- 355 253
Bad debt provision (credit) 468 149 (550)
Termination charges (62) 17,685 --
Liquidation costs 5,531 -- --
Gain on Sun Transaction (25,308) (119,890) --
Loss on Gores Transaction 1,822 -- --
Foreign exchange (gain) loss (13) 937 412
Loss on deposal of property and
equipment-Other 135 473 138
Net changes in operating assets
and liabilities:
Accounts receivable (347) 8,106 (1,750)
Inventories (318) 9,093 (8,888)
Prepaid expenses and other
current assets 411 444 (89)
Other assets 292 24 36
Accounts payable and
accrued liabilities (13,115) (23,946) (1,922)
Other liabilities -- (1,639) (1)
--------- --------- ---------
Net cash used in
operating activities (12,959) (66,730) (60,744)
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment (403) (1,525) (7,433)
Proceeds from Sun Transaction 25,308 151,168 --
Advanced to Gores (4,622) -- --
Proceeds from sale of property and
equipment-Other -- 42 114
--------- --------- ---------
Net cash provided (used) in
investing activities 20,283 149,685 (7,319)
--------- --------- ---------
Cash flows from financing activities:
Net (payments) borrowings under
loan agreements (25,308) (32,659) 67,505
Principal payments of long term debt -- (658) (171)
Dividends paid on Preferred Stock -- -- (2)
Retirement of Preferred Stock -- (25,000) --
Issuance of Common Stock -- 363 1,375
--------- --------- ---------
Net cash (used) in provided by
financing activities (25,308) (57,954) 68,707
--------- --------- ---------
Effect of exchange rate changes on cash (55) (310) (198)
--------- --------- ---------
(Decrease) increase in cash
and cash equivalents (18,039) 24,691 446
Restricted cash 12,785 (14,083) --
--------- --------- ---------
(5,254) 10,608 446
Cash and cash equivalents, beginning 14,544 3,936 3,490
--------- --------- ---------
Cash and cash equivalents, ending $ 9,290 $ 14,544 $ 3,936
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
<TABLE>
<CAPTION>
ENCORE COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information (in thousands):
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash paid during the year
for interest $ 32 $17,807 $ 150
Cash paid during the year
for income taxes $ 500 $ 2,099 $ 631
Non cash investing and
financing activities:
Indebtedness exchanged for
preferred stock $ -- $40,000 $35,000
Due to Gould Electronics
in connection with the
sale of assets to Sun $ -- $35,000 $ --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
<TABLE>
<CAPTION>
ENCORE COMPUTER CORPORATION
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
PREFERRED STOCK
---------------------------------------------------------------------------------------------------
SERIES A SERIES B SERIES D SERIES E SERIES F
------------------ ------------------ ----------------- ----------------- -----------------
PAR PAR PAR PAR PAR
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1995 73,641 $ 1 707,345 $ 7 1,082,362 $ 11 1,106,343 $ 11 517,687 $ 5
Common stock options
exercised, $.69 to
$2.00 per share
Shares issued through
employee stock
purchase plan at a
price of $1.52
per share
Issuance of
Series H Convertible
Preferred Stock
Dividends issued
to Preferred
Stockholders in
shares of
Series B, D, E, F
and G 21,377 32,712 33,439 15,646
Cash paid in lieu
of fractional
share dividends
Extension of
expiration date
on outstanding
grant of common
stock options
Net loss
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Balance
December 31, 1996 73,641 1 728,722 7 1,115,074 11 1,139,782 11 533,333 5
Common stock options
exercised, $.69 to
$1.56 per share
Shares issued
through employee
stock purchase
plan at an
average price of
$.74 per share
Issuance of
Series I
Convertible
Preferred Stock
Retirement of
Preferred Stock
relating to the
Sun Transaction (1,115,074) (11) (1,139,782) (11) (533,333) (5)
Conversion of
Series A and B
Preferred Stock
to Common Stock (73,641) (1) (728,722) (7)
Net income
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Balance
December 31, 1997 -- -- -- -- -- -- -- -- -- --
Shares issued
through employee
stock purchase
plan at a price
of $.23 per share
Issuance of
Preferred Stock
Series B, D, E,
F, G, H and I
accumulated
dividends 64,905 1 104,190 1 106,501 1 49,832 --
Dividends issued
to Preferred
Stockholders in
shares of
Series B, D, E,
F, G, H and I 811 -- 1,301 -- 1,331 -- 622 --
Net income
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Balance
December 31, 1998 -- $ -- 65,716 $ 1 105,491 $ 1 107,832 $ 1 50,454 $ --
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
ENCORE COMPUTER CORPORATION
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)--(CONTINUED)
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK
------------------------------------------------------------- ------------------
SERIES G SERIES H SERIES I
------------------ ------------------ -----------------
PAR PAR PAR PAR
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE
---------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1995 555,500 $ 6 -- $ -- -- $ -- 36,067,792 $ 361
Common stock options
exercised, $.69 to
$2.00 per share 808,011 8
Shares issued through
employee stock
purchase plan at a
price of $1.52
per share 394,654 4
Issuance of
Series H Convertible
Preferred Stock 350,000 4
Dividends issued
to Preferred
Stockholders in
shares of
Series B, D, E, F
and G 16,789
Cash paid in lieu
of fractional
share dividends
Extension of
expiration date
on outstanding
grant of common
stock options
Net loss
---------- ----- ---------- ----- ---------- ----- ---------- -----
Balance
December 31, 1996 572,289 6 350,000 4 -- -- 37,270,457 373
Common stock options
exercised, $.69 to
$1.56 per share 51,372
Shares issued
through employee
stock purchase
plan at an
average price of
$.74 per share 339,165
Issuance of
Series I
Convertible
Preferred Stock 400,000 4
Retirement of
Preferred Stock
relating to the
Sun Transaction (572,289) (6) (350,000) (4) (400,000) (4)
Conversion of
Series A and B
Preferred Stock
to Common Stock 29,786,315 298
Net income
---------- ----- ---------- ----- ---------- ----- ---------- -----
Balance
December 31, 1997 -- -- -- -- -- -- 67,447,309 674
Shares issued
through employee
stock purchase
plan at a price
of $.23 per share 3,598 1
Issuance of
Preferred Stock
Series B, D, E,
F, G, H and I
accumulated
dividends 53,474 1 32,702 -- 15,180 --
Dividends issued
to Preferred
Stockholders in
shares of
Series B, D, E,
F, G, H and I 668 -- 408 -- 189 --
Net income
---------- ----- ---------- ----- ---------- ----- ---------- -----
Balance
December 31, 1998 54,142 $ 1 33,110 $ -- 15,369 $ -- 67,450,907 $ 675
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHAREHOLDERS'
ADDITIONAL EQUITY
PAID-IN ACCUMULATED (CAPITAL
CAPITAL DEFICIT DEFICIENCY)
---------- ----------- -------------
<S> <C> <C> <C>
Balance
December 31, 1995 412,876 $(410,764) $ 2,514
Common stock options
exercised, $.69 to
$2.00 per share 767 775
Shares issued through
employee stock
purchase plan at a
price of $1.52
per share 596 600
Issuance of
Series H Convertible
Preferred Stock 32,242 32,246
Dividends issued
to Preferred
Stockholders in
shares of
Series B, D, E, F
and G (1) (1)
Cash paid in lieu
of fractional
share dividends (1) (1)
Extension of
expiration date
on outstanding
grant of common
stock options 589 589
Net loss (70,732) (70,732)
---------- ----------- -------------
Balance
December 31, 1996 447,068 (481,496) (34,010)
Common stock options
exercised, $.69 to
$1.56 per share 59 59
Shares issued
through employee
stock purchase
plan at an
average price of
$.74 per share 301 304
Issuance of
Series I
Convertible
Preferred Stock 39,833 39,837
Retirement of
Preferred Stock
relating to the
Sun Transaction (59,959) (60,000)
Conversion of
Series A and B
Preferred Stock
to Common Stock (290) 0
Net income 34,164 34,164
---------- ----------- -------------
Balance
December 31, 1997 427,012 (447,332) (19,646)
Shares issued
through employee
stock purchase
plan at a price
of $.23 per share -- 1
Issuance of
Preferred Stock
Series B, D, E,
F, G, H and I
accumulated
dividends (4) --
Dividends issued
to Preferred
Stockholders in
shares of
Series B, D, E,
F, G, H and I (1) (1)
Net income 16,658 16,658
---------- ----------- -------------
Balance
December 31, 1998 427,007 $ (430,674) $ (2,988)
========== =========== =============
</TABLE>
The accompanying notes are an intergral part of the condensed consolidated
financial statements.
26
<PAGE>
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,
designed, manufactured, distributed and supported scalable real-time data
systems and advanced clustering technologies. Headquartered in Fort Lauderdale,
Florida, the Company had sales offices and distributors in the United States,
Canada, Europe, and the Far East.
INTENTION OF LIQUIDATION
During fiscal 1997, Encore Computer Corporation ("Encore" or the "Company") sold
substantially all of its assets to Sun Microsystems, Inc. ("Sun"). Furthermore,
during fiscal 1998, the Company sold its real-time computer systems business to
Gores Technology Group. After these transactions, management contemplated that
the Company would be liquidated. However, because of a provision of the
agreements relating to Encore's sale of its storage products business to Sun,
Encore's stockholders could not vote on the liquidation of Encore at the meeting
on September 11, 1998, at which they approved the sale of the real-time computer
systems business. On November 24, 1998, the Company's Chief Executive Officer
and its President resigned in view of the fact that the Company no longer had
any active business. The Company's staff was reduced to its General Counsel
(took the position of President), its Chief Financial Officer, its Vice
President of Human Resources (who continued to be involved in employee
compensation matters arising out of the sales of the storage products and the
real-time computer systems businesses) and a few clerical and administrative
employees. The Company also moved its offices to a substantially smaller space
which it occupies under a short-term lease. Those offices will be closed on or
about June 30, 1999, and it is likely that the Company's further activities will
be conducted in space provided by Gould in Eastlake, Ohio. Management expects
that liquidation of the Company will occur. As a result, the Company has adopted
the liquidation basis of accounting as of December 31, 1998 and for all periods
subsequent to December 31, 1998.
The assets of the Company available for distribution to shareholders on
liquidation of Encore would be (i) the Company's assets, less its liabilities,
at December 31, 1998, after giving effect to the sale of the real-time computer
systems business to Gores, plus or minus (ii) any sum by which the amount
received from Gores is greater or less than the carrying value on the Company's
December 31, 1998 balance sheet, plus or minus (iii) any amount by which
severance and other costs related to the sale of the Company's businesses are
less or greater than the accruals for them on the December 31, 1998 balance
sheet, plus or minus (iv) any amounts by which the costs of liquidation and
costs related to contingent liabilities, including pending litigation, are less
or greater than the reserves reflected on the December 31, 1998 balance sheet,
minus (v) expenses incurred after December 31, 1998 which have not been
contemplated in the accruals, such as employee costs for the Company's limited
staff. The amount, if any, of the assets available for distribution on
liquidation of Encore will be available to common stockholders will depend on
whether Encore is able to re-purchase the convertible preferred stock held by
Gould.
Under the liquidation basis of accounting, assets are stated at their estimated
net realizable value and liabilities are stated at their estimated amounts.
The valuation of assets and liabilities necessarily requires many estimates and
assumptions, and there are substantial uncertainties in liquidating the Company.
The valuations presented in the accompanying Statement of Net Assets in
Liquidation represent estimates based on present facts and circumstances, of the
estimated realizable values of assets, estimated liabilities and estimated
27
<PAGE>
costs associated with carrying out the liquidation of the Company. The actual
values and costs could be higher or lower than the amounts recorded as of
December 31, 1998.
Accounts payable and accrued expenses as of December 31, 1998 include estimates
of costs to be incurred in carrying out the liquidation of the Company. These
costs include a reserve for salary continuation costs and other estimated
liabilities including future non-cancellable lease payments and accrued interest
on the amount due to Gould. The actual costs could vary significantly from the
related provisions due to uncertainty related to the length of time required to
liquidate the Company and complexities and contingencies.
The Company provides employees with salary continuation in the event of an
employee's involuntary termination. The Company records the estimated cost of
post-employment benefits at the date of the event giving rise to the liability
to pay those benefits. The salary continuation costs amounting to approximately
$1,629,000 are included in the 1998 consolidated statement of operations.
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
which was liquidated in 1997 was accounted for under the equity method. The
Company had a commitment to make additional capital contributions to the joint
venture, accordingly, the Company recognized losses in excess of its investment
to the extent of this capital commitment.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities at the
date of purchase of three months or less.
RESTRICTED CASH
Restricted cash was held in an escrow account pursuant to an escrow agreement
dated November 24, 1997 between the Company and Sun. The escrow agreement was
established to ensure that certain of the Company's liabilities at the closing
date of the Sun Transaction, would be paid when due. As the Company paid these
liabilities, escrow funds were released to the Company. As of March 31, 1999,
all funds were released by Sun to the Company.
REVENUE RECOGNITION
Revenue related to equipment and software sales was recognized upon shipment.
With respect to the Company's storage product line, during the product
introductory period, revenue was recognized upon customer acceptance. The
Company expected acceptance to occur within thirty days of shipment. Service
revenue was recognized over the term of the related maintenance agreements which
approximated the timing of services performed.
INVENTORIES
Inventories were stated at the lower of cost or market. Cost was determined by
the first-in, first-out method. Loaned equipment which consisted primarily of
finished computer systems that were loaned to customers for test and evaluation
was classified as inventory only if the equipment was 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 was classified as property
and equipment.
PROPERTY AND EQUIPMENT
Property and equipment was stated at cost. Property and equipment included
customer service inventory which consisted principally of spare parts utilized
to support repairs at customer
28
<PAGE>
installations and was generally not available for resale. Additions, renewals
and improvements were capitalized, and repair and maintenance costs were
expensed. Upon an assets retirement or disposition, the cost and related
accumulated depreciation were removed from the accounts and any resulting gain
or loss was reflected in the results of operations. Depreciation was 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 were amortized over their expected useful
lives or the lease term, whichever was shorter.
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.
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.
EARNINGS PER SHARE
During 1997, the Company adopted SFAS No. 128 "Earnings Per Share ("EPS") ("FAS
128"), which superseded Accounting Principles Board Opinion No. 15, Earnings Per
Share. Basic earnings per common share calculations are determined by dividing
earnings available to common shareholders by the weighted average number of
shares of common stock outstanding during the year. Diluted earnings per common
share calculations are determined by dividing earnings available to common
shareholders by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding.
Preferred stock dividends amounted to $533,000, $29,579,900 and $25,413,000 for
1998, 1997 and 1996, respectively. All preferred stock dividends have been paid
in additional shares of the appropriate class of preferred stock.
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 provided a standard product warranty on its real-time computer
systems for parts and labor which generally extended ninety days from the date
of installation, but on certain products for up to one year. Gores assumed all
warranty obligations relating to the Company's installed real-time
29
<PAGE>
product base. On its storage product line, the standard product warranty for
parts and labor generally extended two, and in some cases, three years from the
date of installation. Sun assumed all warranty obligations relating to the
Company's installed storage product base. The estimated cost of providing
warranty on products sold is included in cost of sales at the time revenue is
recognized. These estimates are based upon historical data for mature products
and engineering estimates for new products. Actual warranty costs are reviewed
on a quarterly basis and subsequent estimates adjusted appropriately. Management
does not expect any significant losses from product warranties in the future.
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior years' data to the
current year presentation.
B. ASSET PURCHASE AGREEMENT WITH SUN MICROSYSTEMS
On November 24, 1997, the Company sold substantially all the assets associated
with its storage products business to Sun Microsystems, Inc. ("Sun"). The Asset
Purchase Agreement under which the transaction took place contemplated that Sun
would pay $185 million for the storage products business, of which $150 million
would be paid in cash at the closing and $35 million would be paid on July 1,
1998, subject to Sun's right to make offsets against the second payment. In
fact, because of certain closing adjustments, Sun paid Encore $151,168,227 at
the closing.
Shortly before July 1, 1998, Sun asserted claims against Encore totaling
$9,692,000. Because of that, on July 1, 1998, Sun paid only $25,308,000 of the
$35,000,000 which was due on that date. Since then, Encore and Sun have been
attempting to resolve Sun's claims.
On November 24, 1997, Gould held (i) notes, secured by all of Encore's assets,
under which Encore owed Gould $93.55 million for money Encore had borrowed from
Gould plus unpaid interest, and (ii) convertible preferred stock of Encore with
a liquidation preference totaling $411 million, which Encore had issued to Gould
between 1991 and 1996 in exchange for cancellation of indebtedness for money
Encore had borrowed from Gould and interest on those borrowings. In addition,
Gould held approximately 48.44% of Encore's common stock, which Gould had
obtained as part of the consideration for the sale of its Computer Systems
Division to Encore in 1989 or through conversion of convertible preferred stock.
In connection with the sale of Encore's storage products business to Sun, Encore
and Gould agreed that Encore would redeem all the convertible preferred stock
which Gould held for $60 million, of which $25 million was to be paid at the
closing of the Sun transaction, and the balance was to be satisfied with the
second payment due from Sun. In addition, Gould agreed that if it received the
entire $35 million by July 31, 1998, Gould would waive its right to receive
additional shares of preferred stock with a liquidation preference of
approximately $43 million which were due to it as past-due dividends on the
convertible preferred stock which was being redeemed. Finally, Gould agreed that
if Encore were liquidated before November 24, 1999, Gould would waive any right
it had as a holder of Encore's common stock with regard to the first $30 million
of liquidating distributions made to Encore's common stockholders.
In connection with the sale of Encore's storage product business to Sun, Gould
also entered into an agreement with Sun under which Gould guaranteed most of
Encore's obligations under the Asset Purchase Agreement between Encore and Sun,
agreed to provide whatever funds were necessary to ensure that Encore would not
become insolvent within one year after the closing of the transaction with Sun,
and indemnified Sun against any losses Sun might incur if the sale of Encore's
storage products business to Sun were challenged in an insolvency proceeding
relating to Encore commenced within two years after the closing.
30
<PAGE>
Because Sun withheld $9,692,000 of the payment due on July 1, 1998, Encore
remained obligated to Gould in that amount and had to either pay that amount to
Gould out of its own funds by July 31, 1998 or issue to Gould the over-due
dividend shares of convertible preferred stock, which had a liquidation
preference of $42,678,400. However, in order to give Encore more time to attempt
to resolve Sun's claims, Gould agreed that if Encore issued those dividend
shares to it, Gould would give Encore the option to re-purchase the dividend
shares on or before July 31, 1999 for an amount equal to the balance of the
$9,692,000 which remained unpaid plus interest at 8.5% per annum from August 1,
1998. At December 31, 1998, the amount Encore would have had to pay to
re-purchase the dividend shares would have been the full $9,692,000 plus
interest of $343,070.
C. SALE TO GORES TECHNOLOGY GROUP
When the Company completed the sale of its storage products business, the Board
of Directors decided that, at least until the Board's January 1998 meeting, the
Company should (a) explore the possibility of attempting to develop and market
clustering software related to Windows NT(R) and (b) explore the feasibility of
the Company's continuing, and attempting to expand, its real-time computer
systems business. In January 1998, the Board of Directors (i) decided the
Company should discontinue its efforts to develop clustering software relating
to Windows NT and (ii) authorized the Company to retain an investment banker to
try to find a purchaser for the real-time computer systems business.
On March 2, 1998, the Company signed a non-binding letter of intent to sell its
real-time computer systems business to Gores Technology Group for approximately
$5.5 million, based on an estimated December 31, 1997 balance sheet for that
business. On June 4, 1998, the Company and Gores entered into a definitive
agreement for the Company to sell the real-time business to Gores for $3 million
in cash. The reduction in price from that contemplated in the letter of intent
reflected operating results during the first quarter of 1998 and differences
between the estimated December 31, 1997 balance sheet and the actual balance
sheet at March 29, 1998.
At the same time the Company entered into the agreement to sell its real-time
computer systems business to Gores, the Company entered into a management
agreement under which Gores took over management of the real-time computer
systems business, retaining any positive cash flow and bearing any negative cash
flow, but receiving a management fee of $100,000 per month, which was to be
refunded to Encore upon closing of the sale of the real-time computer systems
business to Gores. Encore provided a $2 million line of credit to Gores to fund
its operation of the real-time computer systems business until the closing.
The sale of the real-time computer systems business to Gores was approved by the
Company's stockholders on September 11, 1998, and the transaction was completed
on January 6, 1999. At the closing of the sale, the Company received $2,750,000
(with the additional $250,000 set off against the purchase price to resolve an
alleged breach of indemnity claim) and the parties agreed to resolve shortly
after the closing disputed items relating to the sale, including the amounts due
to Encore under the management agreement and the line of credit, and certain
other indemnity claims by Gores. As of March 31, 1999 these items had not yet
been resolved.
31
<PAGE>
D. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-----------
<S> <C>
Purchased parts $ 174
Finished goods 72
-----------
$ 246
===========
</TABLE>
E. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-----------
<S> <C>
Equipment $ 6,986
Customer service inventory 10,112
Furniture and fixtures 1,193
Leasehold improvements 1,327
-----------
19,618
Accumulated depreciation
and amortization (18,555)
-----------
$ 1,063
===========
</TABLE>
Depreciation expense in 1998, 1997 and 1996 amounted to $736,000, $6,175,000 and
$9,380,000, respectively. Fixed assets with a net book value of approximately
$27,148,000 and $595,000 were sold to Sun Microsystems and Gores Technology
Group, respectively.
32
<PAGE>
F. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Accounts payable $ 323 $ 1,064
Accrued salaries and benefits 299 2,355
Accrued restructuring costs 3,612 13,655
Accrued liquidation costs 4,609 --
Accrued interest-related parties 823 --
Accrued taxes -- 1,048
Deferred income, principally
maintenance contracts -- 638
Other accrued expenses 383 3,337
------- -------
$10,049 $22,097
======= =======
</TABLE>
Accrued interest of $343,000 was payable to Gould at December 31, 1998 and
$480,000 was accrued for the period January 1, 1999 through July 31, 1999.
G. INCOME TAXES
The Company utilizes the liability method of accounting for deferred income
taxes and has recorded a provision of $1,903,000, for the year ended 1997.
The significant components of the deferred tax assets and liabilities as of
December 31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 139,250 $ 108,156
Research and experimental credits 2,272 3,150
Allowance for doubtful accounts -- 197
Inventory reserves -- 2,358
Accrued vacation 84 265
Various reserves/other -- 3,491
Depreciation -- 1,274
Accrued restructuring 2,296 5,537
Gain on asset sale 3,683 --
--------- ---------
147,585 124,428
Valuation allowance (147,585) (124,428)
--------- ---------
Net $ -- $ --
========= =========
</TABLE>
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
33
<PAGE>
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, 1997,
the Company utilized approximately $14,000,000 of the available pre change net
operating losses.
At December 31, 1998, the Company has available approximately $50,000,000 of pre
change net operating losses. Of this amount approximately $16,000,000 will be
allowable in future years after application of the Section 382 limitation. In
addition, pre change tax credit carryforwards, principally research and
development credits, of approximately $1,750,000, AMT credits of $522,000 and
post change net operating losses of $275,000,000 will be available to offset
future taxable income. These net operating losses and tax credit carryforwards
expire in the years 1999 through 2018. 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.
H. 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
$756,000, $2,611,000 and $3,003,000 for 1998, 1997, and 1996, respectively.
Approximate future minimum rental payments under operating leases for the next
five years are as follows (in thousands):
YEAR
--------------
1999 $ 868
2000 732
2001 1,353
2002 28
2003 --
At December 31, 1998, the Company has accrued in termination charges $2,981,000
related to international facility and equipment leases.
JOINT VENTURE CAPITAL COMMITMENT
The Company had committed to invest up to a total of $3,250,000 for a Japanese
joint venture, of which $1,640,000 had been accrued in recognition of losses
reported through its dissolution on December 5, 1997. The $1,640,000 less
$181,000 owed to Encore by the joint venture was remitted to Japan Energy
Corporation in January 1998.
LITIGATION
Shortly before the Sun Transaction was closed, shareholders of the Company
brought a derivative suit in the Delaware Chancery Court against Gould and the
Company's then directors, C. David Ferguson, Robert Fedor, Rowland Thomas and
Kenneth Fisher. Three similar shareholder suits were also filed and all four
suits have been consolidated as Civil Action #16044, IN RE ENCORE COMPUTER
CORPORATION SHAREHOLDERS LITIGATION. The suit is currently in the discovery
stage. In February 1999 a Motion for Summary Judgment was filed by defendants
Gould, Ferguson, Fedor, Thomas and Fisher. The motion is now pending in the
Delaware Chancery Court. The Company does not believe the shareholder suit will
have a significant financial impact on the Company.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business, including the set-off by Sun of the $9,692,000.
In the opinion of management, the amount
34
<PAGE>
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 expired and
effective January 1, 1996, both Gould and Encore had the right to use the Encore
intellectual property. The Company maintained the right to terminate the Gould
license if all Gould borrowings were repaid and the commitments under any Gould
credit agreements were terminated and one of the following four conditions was
met; (i) the 6% Cumulative Series B Convertible Preferred Stock ("Series B") was
converted into common stock or Series A Convertible Participating Preferred
Stock, or (ii) the Series B was redeemed; or (iii) the Company paid Gould the
fair value of the license, or (iv) the Company paid 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.
In conjunction with the Sun Transaction, Sun and Encore entered into a
Technology License Agreement pursuant to which Sun granted to Encore a
non-exclusive, non-transferable, royalty free, worldwide license in the
intellectual property sold to Sun as part of the storage products business to
create and distribute real-time products based on the intellectual property for
use by Encore in its real-time business, subject to certain limitations, but not
for any other purpose. Encore also agreed not to use the intellectual property
in any storage products or to compete with Sun's storage products business, and
to grant to Sun a non-exclusive, royalty-free, paid up, non-terminable,
worldwide license in any derivative works created by Encore derived from the
intellectual property, so long as Sun does not use this grant back license to
create or distribute real-time products.
I. EARNINGS PER SHARE
The following table reconciles for the years ended 1998, 1997 and 1996, net
income (loss) and weighted average shares outstanding used to calculate basic
and diluted earnings (loss) per share (in thousands except per share data):
<TABLE>
<CAPTION>
BASIC 1998 1997 1996
- ----- -------- -------- --------
<S> <C> <C> <C>
Net income (loss) $ 16,658 $ 34,164 $(70,732)
Series B, D, E, F and G Preferred
Stock Dividends -- -- (11,996)
Series B, D, E, F, G, H and I
Preferred Stock Dividends (533) (29,580) (13,417)
-------- -------- --------
Net income (loss) attributable to
common shareholders $ 16,125 $ 4,584 $(96,145)
======== ======== ========
Weighted average common
shares outstanding 67,450 40,568 36,810
======== ======== ========
Basic earnings
(loss) per common share $ 0.24 $ 0.11 $ (2.61)
======== ======== ========
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
DILUTED
- -------
<S> <C> <C> <C>
Net loss (loss) $ 16,658 $ 34,164 $(70,732)
======== ======== ========
Weighted verage common
shares outstanding 67,451 40,568 36,810
Series A assumed converted -- -- 7,364
Series B assumed converted 2,022 -- 22,544
Series D assumed converted 3,246 -- 34,496
Series E assumed converted 3,318 -- 35,260
Series F assumed converted 1,552 -- 16,499
Series G assumed converted 1,666 -- 17,704
Series H assumed converted 1,019 -- 7,760
Series I assumed converted 473 -- --
Exercise of options reduced by
the number of shares purchased
with proceeds -- -- 3,158
-------- -------- --------
Weighted average
shares outstanding 80,747 40,568 181,595
======== ======== ========
Diluted income (loss)
per common share $ 0.21 $ 0.11 $ (2.61)
======== ======== ========
</TABLE>
Basic and diluted income (loss) per common share are the same in 1997 and 1996
because the effect of the common stock equivalents would be anti-dilutive.
J. CAPITAL STOCK
On March 19, 1997, 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 a portion of the
indebtedness owed by the company to Gould under the Credit Agreement. Because of
the related party nature of this transaction, 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 effect of this transaction is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-----------
<S> <C>
Reduction of debt $ 40,000
Less:
Par value of shares issued (4)
Reversal of accrued interest on previous
recapitalizations 283
Accrued interest on remaining Gould indebtedness for the
remaining term of the agreements (446)
-----------
Increase in addtional paid-in capital $ 39,833
===========
</TABLE>
36
<PAGE>
IMPACT OF FOREIGN OWNERSHIP
On November 24, 1997, in conjunction with the Sun Transaction, Gould converted
their Series A and Series B Preferred Stock to Common Stock and all other series
of Preferred Stock were retired. As a result, JEC beneficially owns 48.4% of the
Company's common stock. Gould also holds four of the six seats on the Company's
Board of Directors. In light of limitations on the ability of certain U.S.
government agencies to transact business with foreign owned or controlled
companies, Encore and JEC, the parent company of Gould, have proactively worked
to comply with all U.S. requirements. The United States Defense Investigative
Service has accepted the changes in the Company's ownership and control in
conjunction with the Sun and Gores Transactions.
STOCK COMPENSATION PLAN
At December 31, 1998, the Company had a Long Term Performance Plan (the
"Performance Plan") which was approved by the shareholders of the Company on
June 27, 1995 and replaced all previous stock option plans. Shares of common
stock are reserved for issuance to officers, directors, employees and certain
consultants. The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its plan. Accordingly, no compensation cost has been
recognized for its fixed stock option plan and its stock purchase plan. Had
compensation cost for the Company's stock based compensation plan been
determined based on the fair value at the grant dates for awards under the plans
consistent with the method of FASB Statement 123, the Company's net income
(loss) and income (loss) per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- -----------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ 16,658 $ 34,164 $ (70,732)
Pro forma $ 16,438 $ 33,424 $ (71,641)
Income (loss) per share As reported $ 0.24 $ 0.11 $ (2.61)
Pro forma $ 0.24 $ 0.09 $ (2.64)
</TABLE>
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 1996, 1997
and 1998, respectively: risk-free interest rates of 6.0, 6.25 and 5.625 percent;
dividend yield of 0 percent; expected life of 4 years; and volatility of 104.9,
127.7 and 234.6 percent.
During 1996 1,119,000 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 were incurred in connection
with the extension of the expiration dates of the stock options.
37
<PAGE>
A summary of the status of the Company's stock options as of December 31, 1998,
1997 and 1996, and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
-------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 9,020 $1.62 9,582 $1.62 9,946 $1.50
Granted
Price = Fair Value -- 360 $1.60 666 $2.83
Price /greater than/ Fair Value -- -- -- -- -- --
Price /less than/ Fair Value -- 100 $0.39 -- --
Exercised -- (59) $1.00 (808) $0.96
Forfeited (4,102) $2.09 (963) $2.09 (222) $2.47
------ ----- -----
Outstanding at end of year 4,918 $1.56 9,020 $1.56 9,582 $1.62
====== ===== =====
Options exercisable at year end 4,894 8,280 7,445
====== ===== =====
Weighted-average fair value of
options granted during the year -- $1.09 $2.09
====== ===== =====
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------ -----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AS CONTRACTUAL EXERCISE EXERCISABLE AS EXERCISE
EXERCISE PRICES OF 12/31/98 LIFE PRICE OF 12/31/98 PRICE
- -------------------- ------------------ ----------------- --------------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
$0.63-$0.81 300,000 1.12 $0.7969 300,000 $0.7969
$0.94-$0.94 2,988,725 .73 $0.9375 2,988,725 $0.9375
$1.56-$2.88 1,343,719 3.39 $2.0003 1,319,611 $1.9920
$3.56-$3.97 285,525 5.33 $3.8716 285,525 $3.8716
------------------ --------------------
$.625-$3.97 4,917,969 1.75 $1.3896 4,893,861 $1.3844
================== ====================
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Under the 1991 Employee Stock Purchase Plan (the "Purchase Plan"), the Company
was authorized to issue up to 8,000,000 shares of common stock to its full-time
employees. As of December 31, 1998, 4,614,432 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
38
<PAGE>
percentage of employees participating in the plan were 1%, 21%, and 29% in 1998,
1997 and 1996, respectively. Under the Purchase Plan, the Company issued 3,598
shares at a price of $.23 in 1998, 339,165 shares at an average price of $.74 in
1997, and 394,654 shares at a weighted average price of $1.52 in 1996. 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 1998, 1997 and 1996, respectively: dividend yield of 0 percent;
expected life of six months; expected volatility of 234.6%, 127.7% and 104.9%;
and risk-free interest rate of 5.6%, 5.0% and 5.2%. For 1998, 1997 and 1996, the
pro forma compensation costs under the Purchase Plan were $0, $152,000 and
$270,000, respectively. The employee stock purchase plan was discontinued on May
22, 1998.
K. SEGMENT INFORMATION
Prior to January 1999, the Company operated 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. During 1998 one of the Company's customers accounted for
approximately 16% of its sales. During 1996 and 1997, the Company was not
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
1998, 1997 and 1996, approximately 40%, 21%, and 22%, respectively, of its sales
were derived either directly or indirectly from various United States government
agencies.
39
<PAGE>
The Company maintained operations in Europe and Canada principally through
consolidated subsidiaries. Far East operations are through distributors
throughout the region and until December 5, 1997, a joint venture in Japan.
Information about the Company's operations for 1996, 1997, and 1998 is presented
below (in thousands). Inter-geographic net sales, operating income and assets
have been eliminated to arrive at the consolidated amounts.
<TABLE>
<CAPTION>
NET SALES INTER- OPERATING
TO UNRELATED GEOGRAPHIC TOTAL INCOME IDENTIFIABLE
ENTITIES NET SALES NET SALES (LOSS) ASSETS
--------------------------------------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
1996:
United States $ 19,300 $ 12,026 $ 31,326 $ (65,502) $ 46,734
Europe 26,616 -- 26,616 (968) 24,258
Other 1,711 -- 1,711 (79) 103
------------------ ---------------- ---------------- ---------------- ----------------
Geographic Total 47,627 12,026 59,653 (66,549) 71,095
Inter-Geographic -- (12,026) (12,026) (669) (1,839)
------------------ ---------------- ---------------- ---------------- ----------------
Total $ 47,627 $ -- $ 47,627 $ (67,218) $ 69,256
================== ================ ================ ================ ================
1997:
United States $ 14,832 $ (1,193) $ 13,639 $ (67,332) $ 27,909
Europe 14,219 -- 14,219 (10,381) 9,563
Other 435 -- 435 (484) 173
------------------ ---------------- ---------------- ---------------- ----------------
Geographic Total 29,486 (1,193) 28,293 (78,197) 37,645
Inter-Geographic -- 1,193 1,193 1,669 (194)
------------------ ---------------- ---------------- ---------------- ----------------
Total $ 29,486 $ -- $ 29,486 $ (76,528) $ 37,451
================== ================ ================ ================ ================
1998:
United States $ 11,400 $ 776 $ 12,176 $ (7,810) $ 13,659
Europe 8,850 -- 8,850 354 3,089
Other 185 -- 185 (126) 5
------------------ ---------------- ---------------- ---------------- ----------------
Geographic Total 20,435 776 21,211 (7,582) 16,753
Inter-Geographic -- (776) (776) 108 --
------------------ ---------------- ---------------- ---------------- ----------------
Total $ 20,435 $ -- $ 20,435 $ (7,474) $ 16,753
================== ================ ================ ================ ================
</TABLE>
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. 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 granted credit terms in the normal course of business to its
customers which are consistent with industry practices. Generally, the Company's
customers were United States government agencies or substantial international
corporations often included among the Fortune 500. Additionally, as part of its
ongoing control procedures, the Company monitored the credit worthiness
40
<PAGE>
of its major customers and established individual customer credit limits
accordingly. The Company performed in-depth credit evaluations for all new
customers and required letters of credit if deemed necessary. Doubtful accounts
were adequately reserved when identified and bad debts realized by the Company
in prior years were not been excessive.
M. SUBSEQUENT EVENTS
The sale of the real-time computer systems business to Gores was approved by the
Company's stockholders on September 11, 1998, and the transaction was completed
on January 6, 1999. At the closing of the sale, the Company received $2,750,000
(with the additional $250,000 set off against the purchase price to resolve an
alleged breach of indemnity claim) and the parties agreed to resolve shortly
after the closing disputed items relating to the sale, including the amounts due
to Encore under the management agreement and the line of credit, and certain
other indemnity claims by Gores. As of March 31, 1999, these items had not yet
been resolved.
41
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not Applicable.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The names of the Company's Board of Directors and certain information about them
are set forth below:
Kenneth G. Fisher, age 68
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. In November of
1998, Mr. Fisher resigned as Chief Executive Officer of the Company. 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.
Rowland H. Thomas, age 63
Mr. Thomas has been a member of the Board of Directors since December 1987 and
Chief Operating Officer since June 1989. He also served as President of the
Company from January 1991 until September 1998. From June 1989 to January 1991,
Mr. Thomas served as Executive Vice President of the Company. In January 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 January 1988. From May 1983 through June 1985, Mr. Thomas was
Executive Vice President and Senior Vice President at NDC.
Robert J. Fedor, age 58
Dr. Fedor has been a member of the Board of Directors since July 1992. He is
presently Senior Vice President Corporate Development Gould, a position he had
held since July 1992. From December 1989 to July 1992 he was Vice President,
Corporate Business Development at Gould Prior to assuming that position, Dr.
Fedor was General Manager of Gould's U.S. and Far East Foil Business since 1985.
Since joining Gould in 1964, he has served in various senior marketing and
research positions. Dr. Fedor holds a Ph.D. in Metallurgical Engineering from
Case Western Reserve University.
C. David Ferguson, age 58
Mr. Ferguson has been a member of the Board of Directors since April 1989. He is
presently the President and Chief Executive Officer and a director of Gould, a
position he has held since October 1988. Prior to such time, he served as
Executive Vice President, Materials and Components, at Gould's Foil Division
from 1986 until October 1988. He transferred to the Foil Division in 1967 from
the Gould Engine Parts Division where he began his career in 1963.
Thomas N. Rich, age 48
Mr. Rich has been a member of the Board of Directors since November 1997 and was
name Treasurer of Encore in March 1999. He is also presently Vice
President-Finance and Corporate
42
<PAGE>
Controller at Gould, a position he has held at Gould since July 1994. From
December 1991 until July 1994, he was Vice President-Corporate Controller at
Gould. Prior to assuming that position, Mr. Rich was Vice President-Financial
Controller since joining Gould in July 1990. From 1973 through June 1990, Mr.
Rich was employed at Ernst & Young, an international professional services firm.
He hold a B.A. degree in Accounting from Duke University.
Michael C. Veysey, age 55
Mr. Veysey has been a member of the Board of Directors since November 1997. He
is presently Senior Vice President, General Counsel and Secretary at Gould, a
position he has held since July 1992. He also serves as President of Encore
since March 1999. From January 1989 to July 1992, he was Vice President, General
Counsel and Secretary at Gould. Prior to assuming that position, Mr. Veysey had
various positions in Gould's Law Department since 1980. Mr. Veysey holds a J.D.
degree from Boston College Law School.
ITEM 11 EXECUTIVE COMPENSATION
Total compensation paid or accrued for services rendered during the three most
recent fiscal years for the Chief Executive Officer and the two other most
highly compensated executive officers of the Company for the year ended December
31, 1998 was as follows:
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS: NUMBER
OTHER OTHER OF SHARES ALL OTHER
NAME AND ANNUAL ANNUAL UNDERLYING COMPENSATION
PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION OPTIONS
- --------------------------- ---------- ------------ ------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Mary M. Macomber 1998 $ 120,947 $ 105,196 $ - - $ -
President and 1997 $ 117,517 $ 193,321 $ - - $ -
Chief Executive Officer 1996 $ 123,310 $ 12,000 $ - 19,300 $ -
William J. Ruede 1998 $ 128,435 $ 111,474 $ - - $ -
Vice President/Human 1997 $ 125,121 $ 82,661 $ - - $ -
Resources 1996 $ 118,732 $ 13,200 $ - 19,300 $ -
Linda J. Matthews 1998 $ 94,902 $ 57,995 $ - - $ -
Vice President of 1997 $ 85,679 $ 30,875 $ - - $ -
Finance 1996 $ 82,543 $ - $ - - $ -
</TABLE>
The following table sets forth the number of shares of Common Stock and
equivalents of the Company, including shares which may be acquired within sixty
days after March 31, 1999 by exercise of outstanding stock option, which are
beneficially owned by executive officers of the Company named in the Summary
Compensation Table and all directors and executive officers as a group as of
March 31, 1999 along with the percentage of all outstanding shares of Common
Stock and equivalents owned by each officer and director on such date.
43
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK AND PERCENTAGE OF COMMON
EQUIVALENTS STOCK AND EQUIVALENTS
BENEFICIALLY OWNED OUTSTANDING (1)
<S> <C> <C> <C>
Mary M. Macomber 63,400 (2) 0.08%
President and
Chief Executive Officer
William J. Ruede 107,900 (3) 0.13%
Vice President/Human
Resources
Linda J. Matthews 5,575 (4) 0.01%
Vice President of
Finance
Total directors and 5,275,569 (5) 6.51%
executive officers as a
group (5 people)
</TABLE>
(1) For purposes of computing the percentage of Common Stock and equivalents
outstanding, the 13,295,815 shares of Common Stock issuable upon conversion of
the Series B, D, E, F, G, H, and I Convertible Preferred Stock have been
included as well as the 242,602 shares issuable upon exercise of options
exercisable within 60 days after March 31, 1999.
(2) Includes 63,400 shares which may be acquired within 60 days after March 31,
1999 by exercise of stock options.
(3) Includes 107,900 shares which may be acquired within 60 days after March 31,
1999 by exercise of stock options.
(4) Includes 5,575 shares which may be acquired within 60 days after March 31,
1999 by exercise of stock options.
(5) Includes 176,875 shares which may be acquired within 60 days after March 31,
1999 by exercise of stock options.
There were no option grants to those executive officers named in the Summary
Compensation Table during fiscal 1998.
44
<PAGE>
The following table provides information on option exercises in 1998 by the
named executive officers and the value of such officers' unexercised options as
of December 31, 1998.
<TABLE>
<CAPTION>
Aggregated Option Exercises in the year ended December 31, 1998 and
Option Values as of December 31, 1998
VALUE OF
NUMBER OF SHARES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
NUMBER OF AT 12/31/98 12/31/98
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
--------------- -------- ------------------- -------------
<S> <C> <C> <C> <C>
Mary M. Macomber - - 63,400/ -/
10,350 -
William J. Ruede - - 107,900/ -/
10,350 -
Linda J. Matthews - - 5,575/ -/
125 -
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
ENCORE COMPUTER CORPORATION
Executive Compensation Philosophy
It was the goal of the Compensation Committee of the Board of Directors to
provide compensation to the executives of the Company in accordance with the
following considerations:
* to provide compensation that is competitive with other high technology
companies that are of similar size to Encore with similar products and
markets;
* to provide compensation that would attract, retain and reward superior,
industry-knowledgeable executives who could manage the stockholders' short
and long-term interests; and
* to provide total compensation wherein the majority of value to be delivered
was based on the financial performance of the Company and the appreciation
of the Company's stock.
To meet those goals, the Committee established, administered and reviewed
several programs for the Company. Those programs were designed to address the
above considerations and consisted of three major components.
Base Salary
For executives of the Company, base salary was determined by the level of job
responsibility and overall competitive practices in the labor market for the
Company's executive talent. The Committe recognized that there is a scarcity of
executive talent with the technical capabilities that were critical to the
Company's long-term success. The Committee also considered the Company's
location outside of traditional labor markets for technical talent to be a
considerable factor for base salary positioning. As such, the Committee
positioned the Company's executives' base salaries at the 75th percentile of the
competitive market and generally believed that that base salary posture was an
45
<PAGE>
essential factor in maintaining a highly skilled executive team. The Committee
derived competitive data representing the high technology and computer products
sectors from an independent compensation consultant, Towers Perrin. The
Committee believed that most of the companies in the NASDAQ Computer Index,
which is used as the Company's industry camparison line in the performance chart
appearing below, were represented in the various surveys used by the
compensation consultant.
Unique 1997 and 1998 Incentives
The Board established two special incentives to provide the named, and other,
executives with additional incentives to remain employed by the Company and to
assist in the sale or merger of the Company. These incentives were the
following:
A) Retention Agreements
B) Employee Incentives
Comparison of Five Year Cumulative Total Shareholder Return Among Encore
Computer Corporation, the NASDAQ Market Index and the NASDAQ Computer Index.
The following chart depicts the Company's performance for the five year period
ending December 31, 1998, as measured by total shareholder return on the
Company's Common Stock compared with the total return of the NASDAQ Market Stock
Index and the NASDAQ Computer Stock Index.
This chart assumes an investment on December 31, 1993 of $100 in the Company's
Common Stock, the S&P 500 Composite Stock Index and the S&P Computer Stock
Index. See table below:
<TABLE>
<CAPTION>
YEAR 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Encore $100 $238 $148 $ 90 $ 17 $ 1
S&P 500 Market Index $100 $105 $141 $174 $223 $664
S&P Computer Index $100 $130 $172 $243 $316 $571
</TABLE>
The Report of the Compensation Committee on Executive Compensation and
Comparison of Five Year Cumulative Total Shareholder Return above shall not be
deemed to be "soliciting material" or be incorporated by reference into any of
the Company's filings with the Securities and Exchange Commission.
DIRECTORS' COMPENSATION
The Board of Directors has fixed the compensation of non-officer directors at
#2,500 per regular board meeting attended. No compensation is paid for special
meetings held by telephone conference. Messrs. Ferguson, Rich, Veysey, Fisher,
Thomas and Dr. Fedor have waived payment to them of fees for attendance at board
meetings.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth, to the knowledge of the Company, the beneficial
owners of 5% or more of the Company's outstanding Common Stock and equivalents
as of March 31, 1999:
46
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
SHARES COMMON STOCK OF COMMON
NAME AND ADDRESS OF BENEFICIALLY AND EQUIVALENTS STOCK
BENEFICIAL OWNER OWNED OUTSTANDING (1) OUTSTANDING
<S> <C> <C> <C>
Gould Electronics Inc. (1) 45,968,984 56.80% 48.44%
34929 Curtis Blvd.
Eastlake, OH 44095
Japan Energy Corporation (1) 45,968,984 56.80% 48.44%
10-1, Toranmon 2-chome,
Minato-ko, Tokyo, JAPAN
Kenneth G. Fisher (2) 5,057,708 6.20% 7.40%
7786 Wiles Road
Coral Springs, FL 33067
</TABLE>
(1) For purposes of computing the percentage of Common Stock and equivalents
outstanding, the 13,295,815 shares of Common Stock issuable upon conversion of
the Series B, D, E, F, G, H, and I Convertible Preferred Stock by Gould have
been included.
(2) Includes 53,764 shares owned by Mr. Fisher's wife.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since 1989, Gould (which is a wholly owned subsidiary of Japan Energy
Corporation) had been the principal source of the Company's financing. From 1989
through November 1997, the Company borrowed a total of $418 million from Gould
and its affiliates. Encore had invested most of this in research and
development. However, despite its efforts, Encore was unable to penetrate the
marketplace for storage products and sales of its real-time computer systems
declined significantly. By mid-1997 Gould had made it clear that it would not
provide further financing to Encore, other than working capital to keep the
storage products business operating for a short period until a pending sale
could be completed.
On November 24, 1997, Gould held (i) notes, secured by all of Encore's assets,
under which Encore owed Gould $93.55 million for money Encore had borrowed from
Gould plus unpaid interest, and (ii) convertible preferred stock of Encore with
a liquidation preference totaling $411 million, which Encore had issued to Gould
between 1991 and 1996 in exchange for cancellation of indebtedness for money
Encore had borrowed from Gould and interest on those borrowings. In addition,
Gould held approximately 48.44% of Encore's common stock, which Gould had
obtained as part of the consideration for the sale of its Computer Systems
Division to Encore in 1989 or through conversion of convertible preferred stock.
In connection with the sale of Encore's storage products business to Sun, Encore
and Gould agreed that Encore would repay the secured notes and unpaid interest
thereon and redeem all the convertible preferred stock which Gould held for $60
million, of which $25 million was to be paid at the closing of the Sun
transaction, and the balance was to be satisfied with the second payment due
from Sun. In addition, Gould agreed that if it received the entire $35 million
by July 31, 1998, Gould would waive its right to receive additional shares of
preferred stock with a liquidation preference of approximately $43 million which
were due to it as past-due dividends on the convertible preferred stock which
was being redeemed. Finally, Gould agreed that if Encore were liquidated before
November 24, 1999, Gould would waive any
47
<PAGE>
right it had as a holder of Encore's common stock with regard to the first $30
million of liquidating distributions made to Encore's common stockholders.
In connection with the sale of Encore's storage business to Sun, Gould also
entered into an agreement with Sun under which Gould guaranteed most of Encore's
obligations under the Asset Purchase Agreement between Encore and Sun, agreed to
provide whatever funds were necessary to ensure that Encore would not become
insolvent within one year after the closing of the sale to Sun, and indemnified
Sun against any losses Sun might incur if the sale of Encore's storage products
business to Sun were challenged in an insolvency proceeding relating to Encore
commenced within two years after the closing.
Because Sun withheld $9,692,000 of the payment due on July 1, 1998, Encore
remained obligated to Gould in that amount and had to either pay that amount to
Gould out of its own funds by July 31, 1998 or issue to Gould the over-due
dividend shares of convertible preferred stock, which had a liquidation
preference of $42,678,400. However, in order to give Encore more time to attempt
to resolve Sun's claims, Gould agreed that if Encore issued those dividend
shares to it, Gould would give Encore the option to re-purchase the dividend
shares on or before July 31, 1999 for an amount equal to the balance of the
$9,692,000 which remained unpaid plus interest at 8.5% per annum from August 1,
1998. At December 31, 1998, the amount Encore would have had to pay to
re-purchase the dividend shares would have been the full $9,692,000 plus
interest of $343,070.
48
<PAGE>
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
<TABLE>
<CAPTION>
FORM 10-K PAGE NUMBER
--------- -----------
<S> <C>
Report of independent certified public accountants
relating to consolidated financial statements
and financial statement schedule 19
Consolidated statements of operations for the years
ended December 31, 1998, 1997 and 1996 20
Consolidated Statement of Net Assets in Liquidation
at December 31, 1998 21
Consolidated balance sheet at December 31, 1997 22
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996 23-24
Consolidated statements of shareholders' equity (capital
deficiency) for the years ended December 31, 1998,
1997, and 1996 25-26
Notes to consolidated financial statements 27-41
</TABLE>
The following consolidated financial statement schedule is submitted herewith:
FORM 10-K PAGE NUMBER
- --------- -----------
Valuation and qualifying accounts 51
The consolidated financial statement schedule 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.
49
<PAGE>
(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
In January of 1999, the Company filed a report on Form 8-K in connection with
the sale of substantially all of the assets associated with its real-time
business.
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.
50
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
ENCORE COMPUTER CORPORATION
Valuation and qualifying accounts
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT ------------------------------------ BALANCE AT
BEGINNING OF CHARGED TO COSTS CHARGED TO OTHER END OF
PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS (1) PERIOD
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $1,798 $(550) $-- $(634) $614
Year ended December 31, 1997:
Allowance for doubtful accounts $ 614 $ 149 $-- $ (82) $681
Year ended December 31, 1998:
Allowance for doubtful accounts $ 681 $ 468 $-- $(759) $390
</TABLE>
(1) Includes amounts deemed uncollectible and items transferred to Gores
51
<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 /s/ MICHAEL C. VEYSEY By:/s/ THOMAS N. RICH
-------------------- ------------------------
Michael C. Veysey Thomas N. Rich
President Treasurer
April 15, 1999
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ MICHAEL C. VEYSEY
- ------------------------------
Michael C. Veysey President May 18, 1999
/s/ THOMAS N. RICH
- ------------------------------
Thomas N. Rich Treasurer May 18, 1999
/s/ C. DAVID FERGUSON
- ------------------------------
C. David Ferguson Director May 18, 1999
/s/ ROBERT J. FEDOR
- ------------------------------
Robert J. Fedor Director May 18, 1999
/s/ KENNETH G. FISHER Director
- ------------------------------
Kenneth G. Fisher May 18, 1999
/s/ ROWLAND H. THOMAS
- ------------------------------
Rowland H. Thomas, Jr. Director May 18, 1999
</TABLE>
52
<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.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Asset Purchase Agreement dated as of July 17,1997
among the registrant, Encore Computer U.S., Inc.,
Encore Computer International, Inc., Sun
Microsystems, Inc. and Sun Microsystems
International, B.V. (without exhibits), and the
Modification Agreement thereto dated as of November
24, 1997 (incorporated herein by reference to the
Company's Form 8-K dated December 9, 1997).
2.2 Technology License Agreement entered into between the registrant and Sun
(incorporated herein by reference to the Company's Form 8-K dated December
9, 1997).
2.3 The respective Inducement Agreements entered into by
Gould and its affiliates with Sun, and the Gould
Modification Agreement among such parties
(incorporated herein by reference to the Company's
Form 8-K dated December 9, 1997).
2.3a June 1998 Agreement with Gould Electronics Inc. regarding Accrued Dividend Shares
2.4 Asset Purchase Agreement among the Company, certain of the Company's
subsidiaries, Gould Electronics Inc. and the Buyer dated as of June 1,
1998 (incorporated herein by reference to the Company's Proxy Statement
dated August 11, 1998).
2.5 Amendment Number One to Asset Purchase Agreement dated October 27, 1998
among the registrant, Encore Computer U.S., Inc., Encore Computer
International, Inc., Gould Electronics Inc. and Encore Acquisition Corp.
(incorporated herein by reference to the Company Form 8-K dated January
19, 1999).
2.6 Amendment Number Two to Asset Purchase Agreement dated as of December 31,
1998 among the registrant, Encore Computer U.S., Inc., Encore Computer
International, Inc., Gould Electronics Inc. and Encore Acquisition Corp.
(incorporated herein by reference to the Company Form 8-K dated January
19, 1999).
2.7 Reconciliation Agreement dated as of December 31, 1998 among the
registrant, Encore Computer U.S., Inc., Encore Computer International,
Inc., Gould Electronics Inc. and Encore Acquisition Corp. (incorporated
herein by reference to the Company Form 8-K dated January 19, 1999).
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)
53
<PAGE>
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).
54
<PAGE>
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).
55
<PAGE>
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).
56
<PAGE>
#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 (incorporated herein by reference to
the Company's Form l0-K for the period ended December 31, 1997).
*22.0 Subsidiaries of the Company.
*23.1 Consent of Independent Certified 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).
</TABLE>
# Management contract or compensatory plan or arrangement
* Filed herewith.
57
EXHIBIT 22
<TABLE>
<CAPTION>
SUBSIDIARIES OF ENCORE COMPUTER CORPORATION
NAME JURISDICTION OWNERSHIP
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENCORE COMPUTER U.S., INC DELAWARE 100%
ENCORE COMPUTER INTERNATIONAL, INC. DELAWARE 100%
ENCORE COMPUTER LIMITEE CANADA 100%
ENCORE COMPUTER de PUERTO RICO, INC. DELAWARE 100%
ENCORE COMPUTER (IRELAND) LIMITED IRELAND 100%
ENCORE COMPUTER B.V. NETHERLANDS 100%
ENCORE COMPUTER NETHERLANDS, B.V. NETHERLANDS 100%
ENCORE COMPUTER (IRISH PARTNERSHIP) IRELAND 50%
LAUDERDALE COMPUTER A.B. SWEDEN 100%
</TABLE>
58
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC 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 report dated March 31,
1999, on our audits of the consolidated financial statements and financial
statement schedule of Encore Computer Corporation as of December 31, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996, which report is
included in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS, LLP
Miami, Florida
MAY 3, 1999
59
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 10,588
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,753
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,753
<CURRENT-LIABILITIES> 19,741
<BONDS> 0
0
4
<COMMON> 675
<OTHER-SE> 3,667
<TOTAL-LIABILITY-AND-EQUITY> 16,753
<SALES> (8,263)
<TOTAL-REVENUES> (20,435)
<CGS> 4,492
<TOTAL-COSTS> 12,738
<OTHER-EXPENSES> 140
<LOSS-PROVISION> 468
<INTEREST-EXPENSE> 374
<INCOME-PRETAX> (16,345)
<INCOME-TAX> (313)
<INCOME-CONTINUING> 0
<DISCONTINUED> (16,658)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,658)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.21)
</TABLE>
