UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period Ended June 27, 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 Eastlake, 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 [ ] No [X]
On December 22, 1999 the registrant had 67,450,907 outstanding shares of common
stock, par value $.01 per share.
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ENCORE COMPUTER CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page Number
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statement of Net Assets in Liquidation 3
Condensed Consolidated Statement of Changes in Net Assets in Liquidation 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statement of Cash Flows at June 30, 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
</TABLE>
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<PAGE>
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>
JUNE 27, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,863 $ 9,290
Restricted cash -- 1,298
Due from Gores 2,758 6,753
Prepaid expenses and other current assets -- 12
------------ ------------
Total assets $ 13,621 $ 16,753
============ ============
LIABILITIES AND NET ASSETS IN LIQUIDATION
Accounts payable and accrued liabilities $ 6,657 $ 10,049
Due to Gould Electronics 9,692 9,692
------------ ------------
Total current liabilities 16,349 19,745
Net assets in liquidation (2,728) (2,988)
------------ ------------
Total liabilities and net assets
in liquidation $ 13,621 $ 15,753
============ ============
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.
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<PAGE>
ENCORE COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
IN LIQUIDATION (Unaudited)
(In thousands)
SIX MONTHS ENDED
JUNE 27, 1999
----------------
Net assets in liquidation at December 31, 1998 $(2,988)
Interest income 260
Net assets in liquidation at June 30, 1999 $(2,728)
========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ENCORE COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, Except Share Data)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 28, 1998 JUNE 28, 1998
------------- -------------
Net sales:
Equipment $ 1,526 $ 3,369
Service 3,055 6,234
-------- --------
Total 4,661 9,603
-------- --------
Costs and expenses:
Cost of equipment sales 1,109 1,699
Cost of service sales 2,130 4,102
Research and development 296 712
Sales, general and administrative 2,452 4,104
Termination charge 826 1,570
-------- --------
Total 6,813 12,187
-------- --------
Operating loss (1,932) (2,584)
Interest expense (9) (21)
Interest income 246 472
Other expense, net 19 (305)
Gain on Sun transaction 25,308 25,308
-------- --------
Income before income taxes 23,632 22,870
Credit for income taxes (112) (108)
-------- --------
Net income $ 23,744 $ 22,978
======== ========
Net loss per common share:
Net loss attributable to common shareholders $ 23,744 $ 22,978
======== ========
Basic and diluted loss per common share $ 0.35 $ 0.34
======== ========
Weighted average shares of common stock 67,449 67,450
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
The Company has adopted the liquidation basis of accounting as of December 31,
1998 and for all periods subsequent to December 31, 1998. Therefore, no
statements of operations for periods subsequent to December 31, 1998 are
presented.
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ENCORE COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In thousands)
SIX MONTHS ENDED
JUNE 28, 1998
----------------
Cash flows from operating activities:
Net income $ 22,978
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on Sun transaction (25,308)
Depreciation and amortization 586
Termination charge 1,570
Net changes in operating assets and liabilities:
Accounts receivable (298)
Inventories (461)
Prepaid expenses and other current assets (19)
Other assets 298
Accounts payable and accrued liabilities (10,027)
--------
Net cash used in operating activities (10,681)
--------
Cash flows from investing activities:
Proceeds from Sun transaction 25,308
Additions to property and equipment (194)
--------
Net cash provided by investing activities 25,114
--------
Cash flows from financing activities:
Net advances under revolving loan agreement (287)
Payment of Due to Gould (25,308)
--------
Net cash used in financing activities (25,595)
--------
Decrease in cash and cash equivalents (11,162)
Decrease in restricted cash 12,812
--------
1,650
Cash and cash equivalents, beginning 14,544
--------
Cash and cash equivalents, ending $ 16,194
========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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 June 30, 1999 and
all employees were terminated. Certain Gould Electronics Inc. executives were
elected to serve without pay as President and Treasurer of the Company, and the
Company's further activities are 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.
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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, 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 June
27, 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 June 27, 1999, plus or minus (ii) any sum by which the amount received from
Gores is less than the full amount of the receivable reflected on the Company's
June 27, 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 June 27, 1999 balance sheet, plus or minus (iv) any
amount 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 June 27, 1999 balance sheet, minus (v) expenses incurred after
June 27, 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 may depend on whether Encore repurchases 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.
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In connection with the sale of Encore's storage products 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 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. By June 27, 1999, all
the restricted funds had been 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 June 27, 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 $800,000. On July 31, 1999, Gould extended Encore's option to
repurchase the dividend shares to October 30, 1999; Gould subsequently extended
Encore's option to December 15, 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. Therefore, the amount Encore would have to pay Gould to repurchase
the dividend shares is $7,192,000 plus interest of approximately $800,000.
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 December 21, 1999, these items had not
yet been fully resolved.
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D. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following (in
thousands):
JUNE 27, DECEMBER 31,
1999 1998
-------- ------------
Accounts payable $ 327 $ 323
Accrued salaries and benefits -- 299
Accrued restructuring costs 3,612 3,612
Accrued liquidation costs 1,651 4,609
Accrued interest-related parties 823 823
Other accrued expenses 244 383
------- -------
$ 6,657 $10,049
======= =======
During the six months ended June 27, 1999, the Company paid $3,392,000 of
previously accrued expenses.
E. Legal Proceedings
Shortly before the Sun transaction was closed, shareholders of the Company
brought a lawsuit 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 shareholders have filed an amended complaint adding
directors Michael Veysey and Thomas Rich as defendants and eliminating the
Company as other than a nominal defendant. 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.
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<PAGE>
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 June 27, 1999, plus or minus (ii) any sum by which the amount received from
Gores is less than the full amount of the receivable reflected on the Company's
June 27, 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 June 27, 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 June 27, 1999 balance sheet, minus (v) expenses incurred after
June 27, 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 may depend on whether Encore repurchases the convertible
preferred stock held by Gould.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
No legal proceedings were filed against the Company, and there were no material
developments in any pending legal proceedings, during the quarter ended June 27,
1999.
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 June 27, 1999.
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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
Date: December 22, 1999
/s/ Michael C. Veysey /s/ Thomas N. Rich
- ----------------------------------- ---------------------------------------
Michael C. Veysey Thomas N. Rich
President Chief Financial Officer
Page 13
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> MAR-29-1999
<PERIOD-END> JUN-27-1999
<CASH> 10,863
<SECURITIES> 0
<RECEIVABLES> 2,758
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,621
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,621
<CURRENT-LIABILITIES> 16,349
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (2,728)
<TOTAL-LIABILITY-AND-EQUITY> 13,621
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (260)
<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>
