10-K 1 d10k.txt 12/31/2000 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, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ] For the Fiscal Year Ended December 31, 2000 Commission File No. 0-13576 ENCORE COMPUTER CORPORATION (Exact name of registrant as specified in its charter) Delaware 04-2789167 ---------------------------------------- ------------------------------------- (State of Incorporation) (I.R.S. EMPLOYER I.D. NO.) 34929 Curtis Boulevard Eastlake, Ohio 44095 ---------------------------------------- ------------------------------------- (Address of Principal Executive Offices) (Zip Code) Telephone: (440) 953-5170 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. ___Yes X 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 May 31, 2001 of Common Stock held by non- affiliates of the registrant: $1,852,000. The number of shares outstanding of the registrant's only class of Common Stock as of May 31, 2001 was 80,746,722. PART OF DOCUMENT DOCUMENTS INCORPORATED BY REFERENCE: IN WHICH INCORPORATED ------------------------------------- A list of all exhibits to this Form 10-K is on Page 41. -1- 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 the Company sold its storage products business and in January 1999 the Company 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, claims and receivables 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 ("Gould") Computer Systems Division, which was significantly larger than Encore. From 1989 through November 1997, Gould (which is a wholly owned subsidiary of Japan Energy Corporation) had been the principal source of the Company's financing. During that period, 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. 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. 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 (to which the balance of the receivable from Sun had been assigned) 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. -2- 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. 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, Encore paid Gould the $7,192,000 balance due as a result of the redemption of convertible preferred stock from Gould, and Gould, among other things, agreed (i) to convert the dividend shares into common stock and (ii) 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 into 13,295,815 shares of common stock. Sale of the Real-Time Business On June 4, 1998, the Company and Gores Technology Group ("Gores") entered into a definitive agreement for the Company to sell its real-time business to Gores 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 -3- 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 these 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. 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. 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 to Encore for the remainder of the balance. In August and October 2000, Encore received payments totaling $500,000 toward the receivable balance. In February 2001, Encore received the remaining $598,000 plus an additional $16,000. Certain disputed items remain, including reimbursement by Gores of amounts received pursuant to a lease termination and indemnification claim by Gores relating to contracts assumed in the acquisition of the real time business. 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 whether the Company will have any indemnification obligations with regard to a pending lawsuit by stockholders of the Company with regard to the Sun transaction and related redemption of convertible preferred stock from Gould (which was tentatively settled in late 2000). 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 substantially smaller space, which it occupied under a short-term lease. Those offices were closed on or about June 30, 1999, and the remaining employees terminated. The Company's further activities are 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, 2000, 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, 2000 balance sheet, plus or minus (iii) 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, 2000 balance sheet, minus (iv) expenses incurred after December 31, 2000 which have not been contemplated in the accruals. -4- Item 2 Properties -------------------- The Company does not own any facilities. On June 19, 2000, the Company terminated its lease at its idle London facility and has no further lease obligations for facilities. -5- Item 3 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 filed an amended complaint adding ----------------------- directors Michael Veysey and Thomas Rich as defendants and eliminating the Company as a defendant. The defendants moved to dismiss the amended complaint and that motion was granted in June 2000. In July 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 is obligated to indemnify its officers and directors against liability for matters such as those which are the subject of the litigation. Late in 2000, the plaintiffs tentatively agreed to settle the suit on a basis that would not require settlement payments by directors and officers that would be subject to indemnification by the Company. Such settlement is subject to documentation and court approval. Item 4 Submissions of Matters to a Vote of Security Holders ------------------------------------------------------------ None -6- 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 2000 and 1999 in the table below: Fiscal 2000 Fiscal 1999 ------------------------- ------------------------ High Low High Low ------------------------- ------------------------ 1/st/ Quarter .0625 .015625 .05 .015625 2nd Quarter .0625 .015625 .04 .015625 3rd Quarter .03125 .015625 .04 .015625 4/th/ Quarter .015625 .015625 .04 .01 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 31, 2001, there were 2,333 holders of record of the Company's common stock. The Company has never paid, and will not pay in the future, cash dividends on its common stock. -7- Item 6 Selected Financial Data ------------------------------

(1) During 1998, 1997, and 1996, preferred stock dividends amounted to $533,000, $29,579,900, and $25,413,000, respectively. All preferred stock dividends were paid in additional shares of preferred stock or were accumulated. (2) The Company ceased operating activities as of December 31, 1998. Additionally, 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. -8- Item 7 Management's Discussion and Analysis of Financial Condition and ------------------------------------------------------------------------- Results of Operations --------------------- Overview and Liquidation The Company conducted no business operations after December 31, 1998. During fiscal 1997, Encore sold substantially all of its assets associated with its storage products business to Sun. During fiscal 1998, the Company sold its real-time computer systems business to 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 Company's Board of Directors expects to reconsider when the Company should be liquidated when various disputed items are determined, including whether the Company will have any indemnification obligations with regard to a pending lawsuit by stockholders of the Company with regard to the Sun transaction and related redemption of convertible preferred stock from Gould. 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. In fiscal 1999, all remaining employees were terminated. 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 in Eastlake, Ohio. Management expects that liquidation of the Company will occur. As a result, the Company 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, 2000, 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, 2000 balance sheet, plus or minus (iii) 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, 2000 balance sheet, minus (iv) expenses incurred after December 31, 2000 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. Comparison of 2000 and 1999 and 1998 The Company ceased operations when the Gores transaction was entered into on December 31, 1998. Throughout 2000 and 1999, the Company continued to settle liabilities. During fiscal 2000 and1999, previously established accruals for termination and wind down costs were adjusted based on revised estimates of the ultimate cost of such activities. Such revisions included reduction for overaccruals of taxes and the cost of closing foreign offices. -9- Liquidity and Capital Resources In fiscal 2000, the Company received $500,000 from Gores as a partial payment of amounts owed. In February 2001, the Company received the remaining amounts due. In fiscal 1999, the Company received $2,750,000 from the sale of its real-time computer systems business. Additionally, the Company received $2,500,000 from the Settlement Agreement and Mutual Release with Sun. The Company does not expect to receive any significant additional amounts of cash as it continues to wind down its affairs. Throughout 2000 and 1999, the Company used its existing cash resources to settle liabilities to further the wind down of its affairs. At December 31, 2000, the Company had cash and cash equivalents totaling $2,556,000 and was owed $614,000 by Gores, which was received in February 2001. Its only need for funds is to pay additional sums in connection with the termination and liquidation of its businesses, which were estimated at $650,000, including ongoing expenses. Year 2000 The Company determined that year 2000 issues had no impact on the Company's future financial statements in light of the Sun Transaction and the Gores Transaction. The Company does not have an ongoing business. 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. 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. The principal factors that could cause the Company's actual results to differ materially from those in the forward-looking statements include material differences between actual liquidation costs and those which have been estimated. (See Exhibit 99 incorporated herein by reference to the Company's Form 10-Q for the period ended June 30, 1996.) -10- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Directors of Encore Computer Corporation In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated net assets in liquidation of Encore Computer Corporation and subsidiaries (collectively the "Company") at December 31, 2000 and 1999, the consolidated changes in net assets in liquidation for the years then ended and the consolidated results of its operations and its cash flows for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America applied on the basis 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 auditing standards generally accepted in the United States of America, 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 our opinion. As described in Note A, management expects that liquidation will occur. As a result, the Company changed its basis of accounting as of and for periods subsequent to December 31, 1998 from a going concern basis to a liquidation basis. PricewaterhouseCoopers LLP Miami, Florida May 30, 2001 -11- ENCORE COMPUTER CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION (In thousands)

The accompanying notes are an integral part of these consolidated financial statements. -12- ENCORE COMPUTER CORPORATION Consolidated Statements of Operations ------------------------------------------------------------------------------- (in thousands except per share data) ------------------------------------------------------------------------------- Year Ended December 31, 1998 -------------------- Net sales: Equipment 8,263 Service 12,172 -------------------- Total 20,435 -------------------- Costs and expenses: Cost of equipment sales 4,492 Cost of service sales 8,246 Research and development 1,213 Sales, general and administrative 8,489 Termination charge (Note B) (62) Liquidation costs 5,531 -------------------- Total 27,909 -------------------- Operating loss (7,474) Interest expense, principally related parties (374) Interest income 847 Other expense, net (140) Gain on Sun Transaction 25,308 Loss on Gores Transaction (1,822) -------------------- Net income before income taxes 16,345 (Benefit) Provision for income taxes (313) -------------------- Net income 16,658 ==================== Net income per common share: Net income attributable to common shareholders 16,125 ==================== Basic earnings per common share 0.24 ==================== Diluted earnings per common share 0.21 ==================== Weighted average shares of common stock-basic 67,451 ==================== Weighted average shares of common stock-diluted 80,747 ==================== The accompanying notes are an integral part of the 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. 13 ENCORE COMPUTER CORPORATION --------------------------- Consolidated Statements of Net Assets in Liquidation -------------------------------------------------------------------------------- (in thousands except share data) --------------------------------

The accompanying notes are an integral part of the consolidated financial statements. 14 ENCORE COMPUTER CORPORATION --------------------------- Consolidated Statements of Cash Flows -------------------------------------------------------------------------------- (in thousands) --------------

The accompanying notes are an integral part of the 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 cash flows for periods subsequent to December 31, 1998 are presented. 15 ENCORE COMPUTER CORPORATION --------------------------- Consolidated Statements of Cash Flows ------------------------------------- Supplemental disclosure of cash flow information (in thousands):

The accompanying notes are an integral part of the consolidated financial statements. 17

18 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 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 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 December 31, 2000, 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, 2000 statement of net assets in liquidation, 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, 2000 statement of net assets in liquidation, 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, 2000 statement of net assets in liquidation, minus (v) expenses incurred after December 31, 2000 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. -19- 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 December 31, 2000. Accounts payable and accrued liabilities as of December 31, 2000 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. The Company provided employees with salary continuation in the event of an employee's involuntary termination. The Company recorded 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. There were no salary continuation costs in fiscal 2000 or 1999. Principles of Consolidation The accompanying financial statements include the accounts of Encore and its wholly owned subsidiaries. All material intercompany transactions have been eliminated. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with maturities at the date of purchase of three months or less. Revenue Recognition Revenue related to equipment and software sales 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 installations and was generally not available for resale. Additions, renewals and improvements were capitalized, and repair and maintenance costs were expensed. Upon an asset 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. -20- Stock-Based Compensation The Company applied APB Opinion No. 25 and related Interpretations in accounting for its stock option and stock purchase plans. Accordingly, no compensation cost was 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 utilized the liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities were 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 were expected to reverse. Deferred tax assets were reduced by a valuation allowance when, in the opinion of management, it was more likely than not that some or all of the deferred tax assets would not be realized. 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 for 1998. All preferred stock dividends were paid in additional shares of the appropriate class of preferred stock. Foreign Currency Translation and Transactions Management determined that the functional currency of each of the Company's subsidiaries was the United States dollar. Consequently, assets and liabilities of foreign operations were translated into U.S. dollars at period end exchange rates, except that inventory and property and equipment were translated at historical exchange rates. Income and expenses were translated at the average rates prevailing during the year, except that cost of sales and depreciation were translated at historical exchange rates. All gains and losses arising from changes in exchange rates were 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 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 was included in cost of sales at the time revenue was recognized. These estimates were based upon historical data for mature products and engineering estimates for new products. Actual warranty costs were reviewed on a quarterly basis and subsequent estimates adjusted appropriately. Management does not expect any significant losses from product warranties in the future. -21- 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. 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 -22- 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. 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 ("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. -23- 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 include 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. Certain disputed items remain, including reimbursement by Gores of amounts received pursuant to a lease termination and indemnification claim by Gores relating to contracts assumed in the acquisition of the real time business. -24- D. Property and Equipment Depreciation expense in 1998 amounted to $736,000. 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. There are no fixed assets as of December 31, 2000 or 1999. -25- E. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following (in thousands): December 31, December 31, 2000 1999 ---- ---- Accrued restructuring costs $150 $3,750 Accrued liquidation costs 500 1,250 ---- ------ $650 $5,000 ==== ====== F. Income Taxes The Company utilized the liability method of accounting for deferred income taxes and recorded a provision of $1,903,000, for the year ended 1997. There was no taxable income for the years ended December 31, 2000, 1999 and 1998. The significant components of the deferred tax assets and liabilities as of December 31, 2000 and 1999 were as follows (in thousands): December 31, December 31, 2000 1999 ------------ ------------ Deferred tax assets: Net operating losses $ 143,849 $ 143,477 Research and experimental credits 2,272 2,272 Accrued restructuring 1,316 1,900 ----- ----- 147,437 147,649 Valuation allowance (147,437) (147,649) ------------ ------------ Net $ -0- -0- ============ ============ For income tax purposes the Company had a change in ownership, as defined by Internal Revenue Code Section 382, in connection with the Gould debt exchange on January 28, 1991. The change in ownership resulted in an annual limitation of approximately $2,000,000 on the amount of net operating losses incurred prior to January 28, 1991 that can be utilized to offset the Company's future taxable income. At December 31, 1997, the Company utilized approximately $14,000,000 of the available pre change net operating losses. -26- At December 31, 2000, the Company has available approximately $50,000,000 of pre change net operating losses. Of this amount, a maximum of 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 $279,900,000 will be available to offset future taxable income. These net operating losses and tax credit carryforwards expire in the years 1999 through 2020. Future changes in share ownership could result in another Section 382 limitation. 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. G. Contingencies 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 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 judgement 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. Nonetheless, the Company does not believe the shareholder suit will have a significant financial impact on the Company. Intellectual Property License 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. -27- H. Earnings Per Share The following table reconciles for the year ended 1998, net income (loss) and weighted average shares outstanding used to calculate basic and diluted earnings (loss) per share (in thousands except per share data): Basic 1998 ----- ---- Net income (loss) $16,658 Series B, D, E, F, and G Preferred Stock Dividends --- Series B, D, E, F, G, H, and I Preferred Stock Dividends (533) ------- Net income (loss) attributable to common shareholders $16,125 ======= Weighted average common shares outstanding 67,451 ------- Basic income (loss) per common share 0.24 ======= -28- Diluted 1998 ------- ---- Net income (loss) $16,658 Weighted average common shares outstanding 67,451 Series A assumed converted ---- Series B assumed converted 2,022 Series D assumed converted 3,246 Series E assumed converted 3,318 Series F assumed converted 1,552 Series G assumed converted 1,666 Series H assumed converted 1,019 Series I assumed converted 473 Exercise of options reduced by the number of shares purchased with proceeds ------ ---- Weighted average shares outstanding 80,747 ====== Diluted income (loss) per common share: 0.21 ====== I. Capital Stock 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 were 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 or 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 1998 net income (loss) and income (loss) per share would have been reduced to the pro forma amounts indicated below: 1998 ---- Net income As reported $16,658 Pro forma $16,438 Income per share As reported $ 0.24 Pro forma $ 0.24 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 1998: risk-free interest rates of 5.625 percent; dividend yield of 0 percent; expected life of 4 years; and volatility of 234.6 percent. -29- A summary of the status of the Company's stock options as of December 31, 2000, 1999 and 1998 and changes during the years ending on those dates is presented below:

The following table summarizes information about stock options outstanding at December 31, 2000:

-30- 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, 2000, 4,614,432 shares had been purchased. Under the terms of the Purchase Plan, employees could 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 was 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 was for a period of approximately six months. The percentage of employees participating in the plan was 1% in 1998. Under the Purchase Plan, the Company issued 3,598 shares at a price of $.23 in 1998. The employee stock purchase plan was discontinued on May 22, 1998. 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: dividend yield of 0 percent; expected life of six months; expected volatility of 234.6%; and risk-free interest rate of 5.6%. For 1998, the pro forma compensation cost under the Purchase Plan was $0. J. 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. However, in fiscal 1998, approximately 40% of its sales were derived either directly or indirectly from various United States government agencies. -31- The Company maintained operations in Europe and Canada principally through consolidated subsidiaries. Far East operations were conducted through distributors throughout the region and until December 5, 1997, a joint venture in Japan. Information by geographic region about the Company's operations for 1998 is presented below (in thousands). Inter-geographic net sales, operating income and assets have been eliminated to arrive at the consolidated amounts.

Inter-geographic net sales were recorded principally at 60% of list price; however, inter-geographic net sales of the Company's storage processor product line were recorded at 85% of end selling price. Identifiable assets were all assets, including corporate assets, identified with operations in each region. K. 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. While it was engaged in business, the Company granted credit terms in the normal course of business to its customers, which were 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 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 have not been excessive. -32- 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 Directors and certain information about them are set forth below: Kenneth G. Fisher, age 70 Mr. Fisher was 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 was terminated 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 65 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 60 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 has 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 60 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. -33- Thomas N. Rich, age 49 Mr. Rich has been a member of the Board of Directors since November 1997 and was named Treasurer of Encore in March 1999. He is also presently Vice President- Finance and Corporate 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 holds a B.A. degree in Accounting from Duke University. Michael C. Veysey, age 57 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 held 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 Encore did not pay any compensation to Mr. Veysey or Mr. Rich in 2000 or 1999. REPORT ON EXECUTIVE COMPENSATION Since June 1999, all the Company's officers have been employees of Gould, who served without compensation from the Company. 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. Everyone who was a director during 2000 and 1999 waived payment of fees for attendance at board meetings. -34- Item 12 Security Ownership of Certain Beneficial Owners and Management PRINCIPAL STOCKHOLDERS The following table sets forth, to the best knowledge of the Company, the beneficial owners of 5% or more of the Company's outstanding Common Stock and equivalents as of December 31, 2000: Shares Percentage of Name and Address of Beneficially Common Stock Beneficial Owner Owned Outstanding ---------------- ----- ----------- Gould Electronics Inc. 45,968,984 56.93% 34929 Curtis Blvd. Eastlake, OH 44095 Japan Energy Corporation 45,968,984 56.93% 10-1, Toranmon 2-chome, Minato-ko, Tokyo, JAPAN Kenneth G. Fisher (1) 5,057,708 6.26% 7786 Wiles Road Coral Springs, FL 33067 (1) Includes 53,764 shares owned by Mr. Fisher's wife. Item 13 Certain Relationships and Related Transactions From 1989 through November 1997, Gould (which is a wholly owned subsidiary of Japan Energy Corporation) had been the principal source of the Company's financing. During that period, 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 -35- 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 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 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 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. Subsequent to June 30, 1999, all of the Company's activities (consisting only of administration of final winding down steps) were moved to Gould's offices in Eastlake, Ohio, where they have been conducted without charge by Gould employees. -36- 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

All 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. -37- (a) 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 None. UNDERTAKINGS 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. -38- 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 June 29, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ----- /s/ Michael C. Veysey ---------------------------- Michael C. Veysey President June 29, 2001 /s/ Thomas N. Rich ---------------------------- Thomas N. Rich Treasurer June 29, 2001 /s/ C. David Ferguson ---------------------------- C. David Ferguson Director June 29, 2001 /s/ Robert J. Fedor ---------------------------- Robert J. Fedor Director June 29, 2001 /s/ Kenneth G. Fisher ---------------------------- Kenneth G. Fisher Director June 29, 2001 /s/ Rowland H. Thomas, Jr. ---------------------------- Rowland H. Thomas, Jr. Director June 29, 2001 -39- (a) Index to Exhibits. ---------------------- The exhibit numbers in the following index correspond to the numbers assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-K. Exhibit No. Description ---------- ----------- 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). 2.4 June 1998 Agreement with Gould Electronics Inc. regarding Accrued Dividend Shares (incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1998) 2.5 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). 2.6 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). 2.7 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). 2.8 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) -40- 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 10-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 10-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. 10.1 The Company's 1983 Incentive Stock Option Plan, as amended (incorporated herein by reference to the Company's Form S-8 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 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 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). *22.0 Subsidiaries of the Company * Filed herewith. -41-

ENCORE COMPUTER CORP /DE/ 10-K