-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CUV/yF0ky+ssprwHhIIkChUy4t5VZczpxOadjC0ORSLaV+HulbroX2uX3agKT8cw r5bDd81JuHchaZQsOWcxDQ== 0001021408-02-007065.txt : 20020515 0001021408-02-007065.hdr.sgml : 20020515 ACCESSION NUMBER: 0001021408-02-007065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENCORE COMPUTER CORP /DE/ CENTRAL INDEX KEY: 0000764037 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 042789167 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13576 FILM NUMBER: 02648763 BUSINESS ADDRESS: STREET 1: 7786 WILES ROAD CITY: CORAL SPRINGS STATE: FL ZIP: 33067 BUSINESS PHONE: 9547570166 MAIL ADDRESS: STREET 1: 7786 WILES ROAD CITY: CORAL SPRINGS STATE: FL ZIP: 33067 10-Q 1 d10q.txt FORM 10-Q 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 March 31, 2002 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 X No ____ --- On April 30, 2002 the registrant had 80,746,722 outstanding shares of common stock, par value $.01 per share. Page 1 ENCORE COMPUTER CORPORATION INDEX PART I. FINANCIAL INFORMATION
Page Number Item 1. Financial Statements Condensed Consolidated Statement of Net Assets in Liquidation 3 Condensed Consolidated Statement of Changes in Net Assets in Liquidation 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14
Page 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ENCORE COMPUTER CORPORATION CONDENSED CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION (In thousands, Except Share Data) March 31, December 31, 2002 2001 ----------- ----------- (Unaudited) ASSETS Cash and cash equivalents $ 3,333 $ 3,291 ---------- ---------- Total assets $ 3,333 $ 3,291 ========== ========== LIABILITIES AND NET ASSETS IN LIQUIDATION Accounts payable and accrued liabilities $ 424 $ 433 ---------- ---------- Total current liabilities 424 433 Net assets in liquidation 2,908 2,858 ---------- ---------- Total liabilities and net assets in liquidation $ 3,333 $ 3,291 ========== ========== Number of Common Shares outstanding 80,746,722 80,746,722 ========== ========== Net assets in liquidation per Common Share $ .036 $ .035 ========== ========== The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 ENCORE COMPUTER CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION (Unaudited) (In thousands) Three Months Ended ------------------ March 31, 2002 April 1, 2001 -------------- ------------- Net assets in liquidation at beginning of period $2,858 $2,520 Interest income 11 39 Other adjustments 39 -- ------ ------ Net assets in liquidation at end of period $2,908 $2,559 ====== ====== The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 ENCORE COMPUTER CORPORATION NOTES TO CONDENSED 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. Significant Accounting Policies 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, 2001. 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 ("Encore" or the "Company") sold substantially all of its storage products business 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. 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 Page 5 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 on or about June 30, 1999, and the Company's further activities are conducted in space provided by Gould Electronics Inc. ("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 March 31, 2002, plus or minus (ii) 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 31, 2002 statement of net assets in liquidation, minus (iii) expenses incurred after March 31, 2002 which have not been contemplated in the accruals. 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 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 31, 2002. Accounts payable and accrued liabilities as of March 31, 2002 include estimates of costs to be incurred in carrying out the liquidation of the Company. 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. Page 6 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. 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. 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. On July 16, 1999, Sun and Encore entered a Settlement Agreement and Mutual Release pursuant to which Sun paid $2,500,000 to Gould as a settlement for the receivable and Sun released these claims. Sun did not release Gould's other indemnification obligations related to Encore's obligations under the Asset Purchase Agreement. 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. Page 7 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 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 ($7,192,000 after the payment of $2,500,000 received on July 16, 1999) plus interest at 8.5% per annum from August 1, 1998. Encore then issued the dividend shares to Gould. 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, when it expired. On December 30, 1999, the Company paid $7,192,000 to Gould to settle its obligation for the amounts withheld by Sun, and Gould, among other things, agreed to convert the dividend shares into common stock and agreed that if Encore were liquidated before November 24, 2000, 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. Additionally, Gould agreed to indemnify Encore for any obligations it might incur to indemnify its current and future directors, up to a total of $7,192,000. On January 20, 2000, Gould converted its convertible preferred stock to 13,295,815 shares of common stock. Page 8 C. Sale to Gores Technology 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. On August 10, 2000, the Company reached an agreement in principle to resolve such items. In connection with the agreement, Encore and Gores agreed to reduce the principal balance of the receivable by (1) $96,000 relating to an uncollectible note receivable purchased by Gores in the acquisition of the real-time business and (2) $150,000 for expenses incurred in the negotiation of this settlement. As a result, the receivable balance due to Encore was $2,979,000. Page 9 In order to reduce this balance, Gores agreed to make payments on Encore's behalf relating to the closing of certain foreign offices. Such payments included lease termination fees and payment of taxes. During fiscal 1999, Gores paid $35,000 relating to the termination of Encore's Belgium office lease. As a result, the outstanding balance of the receivable was $2,944,000 as of December 31, 1999. Subsequent to December 31, 1999, Gores paid approximately $1,845,000 relating to lease termination costs and a tax settlement. After these payments, the receivable balance amounted to $1,098,000. Gores agreed to make cash payments for the remainder of the receivable balance. In August and October 2000, Encore received payments totaling $500,000 toward the receivable balance. In February 2001, the Company received the remaining $598,000 plus an additional $16,000. D. Accounts Payable and Accrued Liabilities During the three months ended March 31, 2002, the Company paid $9,000 of previously accrued liquidation costs. Page 10 E. Other Adjustments During the three months ended March 31, 2002, the Company received $39,000 for various refunds and reimbursements of amounts previously paid. F. 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 were consolidated as Civil Action #16044, In Re Encore Computer --------------------- Corporation Shareholders Litigation. The shareholders filed an amended complaint - ----------------------------------- adding directors Michael Veysey and Thomas Rich as defendants and eliminating the Company as other than a nominal defendant. The defendants moved for summary judgment and that motion was granted on June 16, 2000. Two of the Plaintiffs filed a notice of appeal to the Delaware Supreme Court. Although the Company is not a party to the litigation, the Company has indemnified its officers and directors against liability for matters such as those which are the subject of the litigation. On July 6, 2001, the parties reached a proposed settlement that, upon court approval, would have provided for a repurchase by the Company and redistribution to class members of the defendants' common stock holdings in the Company and the individual defendants' resignation from their positions with the Company in favor of the plaintiffs' nominees. At a hearing on October 12, 2001, the court did not grant its approval to the proposed settlement. Attorneys for parties to the lawsuit and for two shareholders who objected to the settlement have reached an agreement in principle to resolve the litigation and the objectors' contentions under which the Company would be dissolved; $2.1 million of distributable assets (less certain attorneys' fees and expenses) would be distributed to current shareholders, excluding the defendant shareholders, at the time of dissolution; a fund of up to $100,000 would be set aside for certain claims of former shareholders, the balance of the distributable assets would be distributed to Gould and the defendant shareholders; and all claims would be dismissed and released as to the defendants and their privies. The agreement in principle is subject to definitive documentation, shareholder consent, and court approval. Nonetheless, the Company does not believe the shareholder suit will have a significant financial impact on the Company. The defendants own approximately 63% of the outstanding common stock of the Company. Page 11 Management's Discussion and Analysis of Financial Condition and Results of Operations The Company has conducted no business operations after December 31, 1998. 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, 2001. Page 12 PART II OTHER INFORMATION Item 1. Legal Proceedings No legal proceedings were filed against the Company during the quarter ended March 31, 2002. See Note F to Condensed Consolidated Financial Statements for additional information regarding the shareholders' litigation. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K None (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended March 31, 2002. Page 13 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: May 10, 2002 /s/ Michael C. Veysey /s/ Thomas N. Rich - -------------------------- ---------------------------- Michael C. Veysey Thomas N. Rich President Treasurer Page 14 -----END PRIVACY-ENHANCED MESSAGE-----