UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period Ended March 28, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Transition Period from _________ to ___________
Commission File Number: 0-13576
ENCORE COMPUTER CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 04-2789167
(State of Incorporation) (IRS Employer Identification No.)
34929 Curtis Boulevard
Eastlakes, Ohio 44095
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (440) 953-5170
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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. Yes [X] No [ ]
On August 13, 1999 the registrant had 67,450,907 outstanding shares of
common stock, par value $.01 per share.
<PAGE>
ENCORE COMPUTER CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page
No.
Item 1. Financial Statements
Condensed Consolidated Statement of Net Assets in Liquidation 3
Condensed Consolidated Statements of Changes in Net Assets in Liquidation 4
Condensed Consolidated Statement of Operations 5
Condensed Consolidated Statements of Cash Flows at March 29, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENCORE COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
(In thousands, Except Share Data)
<TABLE>
<CAPTION>
28-Mar December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
ASSETS
Cash and cash equivalents $ 11,194 $ 9,290
Restricted cash -- 1,298
Due from Gores 2,704 6,153
Prepaid expenses and other current assets -- 12
------------ ------------
Total assets $ 13,898 $ 16,753
============ ============
LIABILITIES AND NET ASSETS IN LIQUIDATION
Accounts payable and accrued liabilities $ 7,059 $ 10,049
Due to Gould Electronics 9,692 9,692
------------ ------------
Total current liabilities 16,751 19,741
Net assets in liquidation (2,853) (2,988)
------------ ------------
Total liabilities and net assets in liquidation $ 13,898 $ 16,753
============ ============
Number of Preferred Shares outstanding 432,114 432,114
============ ============
Number of Common Shares outstanding 67,450,907 67,450,907
============ ============
Net assets in liquidation per Preferred Share $ (0.01) $ (0.01)
============ ============
Net assets in liquidation per Common Share $ 0.00 $ 0.00
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ENCORE COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
NET ASSETS IN LIQUIDATION (Unaudited)
(In thousands)
Three Months Ended
March 28,
1999
-------
Net assets in liquidation at December 31, 1998 $(2,988)
Interest income 135
-------
Net assets in liquidation at March 28, 1999 $(2,853)
=======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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ENCORE COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, Except Share Data)
Three Months
Ended
March 29, 1998
--------------
Net sales:
Equipment $ 1,543
Service 3,179
--------
Total 4,722
--------
Costs and expenses:
Cost of equipment sales 590
Cost of service sales 1,972
Research and development 416
Sales, general and administrative 1,652
Termination charge 744
--------
Total 5,374
--------
Operating loss (652)
Interest expense (12)
Interest income 226
Other expense, net (324)
Loss before income taxes (762)
Provision for income taxes 4
--------
Net loss $ (766)
========
Net loss per common share:
Net loss attributable to common shareholders $ (766)
========
Basic and diluted loss per common share $ (0.01)
========
Weighted average shares of common stock 67,447
========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
ENCORE COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In thousands)
Three Months
Ended
March 29, 1998
--------------
Cash flows from operating activities:
Net loss $ (766)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 190
Termination charge 744
Net changes in operating assets and liabilities:
Accounts receivable 130
Inventories 132
Prepaid expenses and other current assets 108
Other assets 306
Accounts payable and accrued liabilities (8,576)
--------
Net cash used in operating activities (7,732)
--------
Cash flows from investing activities:
Additions to property and equipment (4)
--------
Increase in cash and cash equivalents (7,736)
Decrease in restricted cash 8,645
--------
909
Cash and cash equivalents, beginning 14,544
--------
Cash and cash equivalents, ending $ 15,453
========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
ENCORE COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The condensed consolidated financial statements include the accounts of Encore
Computer Corporation and subsidiaries ("Encore" or the "Company"). All material
intercompany balances and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements are unaudited and
have been prepared by Encore in accordance with generally accepted accounting
principles. Certain information and footnote disclosures normally included in
the Company's annual consolidated financial statements have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1998.
The condensed consolidated financial statements, in the opinion of the Company,
reflect all adjustments (including normal recurring accruals) necessary for a
fair statement of the results for interim periods. All adjustments made during
the interim periods are normal recurring adjustments. The year end condensed
statement of net assets in liquidation data is derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles.
INTENTION OF LIQUIDATION
During fiscal 1997, Encore Computer Corporation 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
("Gores"). 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.
The Board of Directors terminated the employment of the Company's President on
September 30, 1998 and the employment of the Company's Chief Executive Officer
on November 24, 1998 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 a substantially smaller space, which it
occupied under a short-term lease. Those offices were closed July 30, 1999, and
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.
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
7
<PAGE>
circumstances, the estimated realizable values of assets, and estimated
liabilities and estimated 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 March 28, 1999.
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 March 28, 1999, 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 March 28, 1999
balance sheet, (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 March 28, 1999 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 March 28, 1999 balance sheet, minus (v) expenses incurred after March 28,
1999 which have not been contemplated in the accruals. The amount, if any, of
the assets available for distribution to common shareholders upon liquidation of
Encore will depend on whether Encore is able to repurchase the convertible
preferred stock held by Gould.
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. After negotiations regarding these
issues, Sun and Encore entered a Settlement Agreement and Mutual Release
pursuant to which Sun paid the Company an additional $2,500,000 on July 16, 1999
and released these 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.
8
<PAGE>
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 with 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 was challenged in an insolvency proceeding
relating to Encore commenced within two years after the closing.
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.
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 overdue
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 repurchase 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 March 28, 1999, the amount Encore would have had to pay to repurchase
the dividend shares would have been the full $9,692,000 plus interest of
approximately $541,000. On July 31, 1999, Gould extended Encore's option to
repurchase the dividend shares to October 30, 1999.
Sun and Encore entered a Settlement Agreement and Mutual Release pursuant to
which Sun paid Gould an additional $2,500,000 on July 16, 1999 and released
these claims.
C. SALE TO GORES TECHNOLOGY
On June 4, 1998, the Company and Gores entered into a definitive agreement for
the Company to sell the real-time business to Gores Technology Group for $3
million in cash.
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 August 6, 1999, these items had not yet
been resolved.
9
<PAGE>
D. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
March 28, December 31,
1999 1998
------- -------
Accounts payable $ 327 $ 323
Accrued salaries and benefits 47 299
Accrued restructuring costs 3,612 3,612
Accrued liquidation costs 2,006 4,609
Accrued interest-related parties 823 823
Other accrued expenses 244 383
------- -------
$ 7,059 $10,049
------- -------
E. LEGAL PROCEEDINGS
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. The Company does not believe the shareholder suit will have a significant
financial impact on the Company.
10
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's financial statements are presented on a liquidation basis. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report on Form 10K for the year ended
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 March 28, 1999, 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 March 28, 1999
balance sheet, (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 March 28, 1999 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 March 28, 1999 balance sheet, minus (v) expenses incurred after March 28,
1999 which have not been contemplated in the accruals. The amount, if any, of
the assets available for distribution to common shareholders upon liquidation of
Encore will depend on whether Encore is able to repurchase the convertible
preferred stock held by Gould.
11
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
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. The Company does not believe the shareholder suit will have a significant
financial impact on the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. 27 - Financial Data Schedule. See page 14.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
March 28, 1999.
12
<PAGE>
ENCORE COMPUTER CORPORATION
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.
Encore Computer Corporation
MICHAEL C. VEYSEY THOMAS N. RICH
----------------- ---------------
Date: August 16, 1999 Michael C. Veysey Thomas N. Rich
President Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 - FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-28-1999
<CASH> 11,194
<SECURITIES> 0
<RECEIVABLES> 2,704
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,898
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,898
<CURRENT-LIABILITIES> 6,751
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (2,853)
<TOTAL-LIABILITY-AND-EQUITY> 13,898
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (135)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
