UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report March 30, 1995
ENCORE COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware Commission File No. 0- 13576 04-2789167
(State of Incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
6901 West Sunrise Blvd.
Fort Lauderdale, Florida 33313
(Address of Principal Executive Offices) (Zip Code)
Telephone: 305-587-2900
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Item 5. Other Events
As of March 17, 1995 (the "Closing Date"), Encore Computer
Corporation ("Company") and Gould Electronics Inc. ("Gould")
consummated the transactions described below.
On the Closing Date, Gould (a wholly-owned subsidiary of
Japan Energy Corporation) exchanged $50,000,000 of
indebtedness owed to it by the Company for 500,000 shares of
the Company's Series F Convertible Preferred Stock ("Series
F") with a liquidation preference of $50,000,000.
Additionally, the Company and Gould agreed to amend and
restate their existing Uncommitted Loan Agreement to provide
the Company with an additional committed borrowing facility
of $25,000,000 (the "Credit Agreement") thereby increasing
the total committed borrowing amount to $80,000,000. In
conjunction with these transactions, Gould (i) waived
compliance by the Company with certain financial covenants
in the Credit Agreement until January 1, 1996, (ii) extended
the Company's exclusive right to use certain technology
licensed to Gould under their Intellectual Property License
Agreement through June 30, 1995 and (iii) agreed that prior
to September 30, 1995 it would not exercise its right under
the terms of the Company's Series B Preferred Stock to elect
a majority of the Company's Board of Directors, due to the
Company's failure to achieve certain levels of operating
income. In addition, on the Closing Date the Company, Gould
and Kenneth G. Fisher, the Company's chief executive
officer, amended their Stockholders Agreement to delete the
transfer restrictions on Gould's shares of Company stock
which, in general had required the Company's prior approval
of any share transfers by Gould with certain exceptions.
Exchange of Indebtedness for Preferred Stock
Gould has provided the Company with its revolving credit
facility since 1989. On the Closing Date, the Company
issued 500,000 shares of Series F with a liquidation
preference of $50,000,000 in exchange for the cancellation
of a portion of the indebtedness owed by the Company to
Gould under the revolving credit facility.
The principal terms of the Series F are:
(i) 6% cumulative annual dividend which the Company
can elect to (i) pay in additional shares of Series F
valued at its liquidation preference until
shareholders' equity exceeds $50,000,000 or (ii)
accumulate and pay in cash when shareholders' equity
exceeds $50,000,000.
(ii) a liquidation preference of $100 per share.
(iii) convertible, at the holder's option, into the
Company's common stock at the liquidation preference
divided by $3.25 per share (subject to potential
adjustments for splits, etc.) only (a) if the
shareholder is a United States citizen or a corporation
or other entity beneficially owned in the majority by
United States citizens; or (b) in connection with an
underwritten public offering.
(iv) convertible, at the Company's option in
accordance with the conversion methodology described in
(iii) above if the price of the common stock exceeds
$3.90 per share for twenty consecutive days and (i) a
buyer is contractually committed to purchase for at
least $3.90 per share at least 50% of the shares into
which all outstanding Series F would be converted; or
(ii) a buyer is contractually committed to purchase for
at least $3.50 per share at least 75% of the shares
into which all outstanding Series F would be converted.
(v) non-voting, except for the right to approve
actions adversely affecting the Series F.
(vi) the Series F preferred stock is senior in
liquidation priority to all other classes of the
Company's preferred and common stock.
Prior to the transaction, Japan Energy Corporation, and its
wholly-owned subsidiaries including Gould (the "Japan Energy
Group") beneficially owned 71.1% of the Company's
outstanding common stock assuming the full conversion of all
outstanding shares of preferred stock. Upon completion of
this transaction, Japan Energy Group's beneficial ownership
on a fully converted basis increased to 74.0%.
The Credit Agreement
On December 21, 1994, the Company and Gould entered into an
Uncommitted Loan Agreement which provided for borrowing by
the Company of up to $55,000,000, at Gould's discretion, for
working capital and general corporate purposes. As of the
Closing Date, the Company had borrowed the full $55,000,000
available under the Uncommitted Loan Agreement and the
Agreement was amended and restated to provide for an
additional $25,000,000 (for a total of $80,000,000)
committed borrowing facility for working capital and general
corporate purposes under a revolving credit agreement (the
"Credit Agreement"). All borrowings under the Credit
Agreement, including the $55,000,000 principal amount
borrowed under the Uncommitted Loan Agreement plus accrued
interest, are due and payable on April 16, 1996.
Borrowings under the Credit Agreement are collateralized by
substantially all of the Company's tangible and intangible
assets and the agreement contains various covenants
including maintenance of cash flow, leverage and tangible
net worth ratios and limitations on capital expenditures,
dividend payments and additional indebtedness. Interest on
the loans are based on the length of time the loan is
outstanding beginning at the prime rate plus 1% and
increasing to prime rate plus 2% for amounts outstanding for
more than 180 days.
In conjunction with the Credit Agreement, Gould (i) waived
compliance by the Company with the financial covenants in
the Credit Agreement until January 1, 1996, (ii) extended
the Company's exclusive right to use certain technology
licensed to Gould under their Intellectual Property License
Agreement from January 31, 1995 until June 30, 1995 and
(iii) agreed not to exercise its right under the terms of
the Company's Series B Preferred Stock to elect a majority
of the Company's Board of Directors, due to the Company's
failure to achieve certain levels of operating income, prior
to September 30, 1995. In addition, on the Closing Date the
Company, Gould and Kenneth G. Fisher, the Company's chief
executive officer amended their Stockholders Agreement to
delete the transfer restrictions on Gould's shares of
Company stock which, in general had required the Company's
prior approval of any share transfers by Gould with certain
exceptions.
Intellectual Property License Extension
As part of their January 1991 exchange of preferred stock
for indebtedness, the Company and Gould entered into an
Intellectual Property Licensing Agreement whereby the
Company agreed to license substantially all of its
intellectual property to Gould under certain conditions.
The intellectual property license is royalty free and
provides that as long as the Company achieved certain
revenue levels, Gould could not use the intellectual
property until January, 1994. Additionally, it allows the
Company to extend its exclusivity period for up to five
additional years by making certain cash payments to Gould.
The exclusivity period is automatically extended however, if
certain operating income levels are achieved by the Company.
The Company has not made the required cash payments nor has
it achieved the net revenue or operating income levels
necessary under the agreement to maintain its exclusive
right to the use of the intellectual property.
In conjunction with execution of the Credit Agreement, the
Company and Gould agreed the Company's period of exclusive
use of its intellectual property shall not terminate prior
to June 30, 1995.
The Company will be unable to extend its exclusivity under
the Intellectual Property License beyond June 30, 1995
without Gould's consent. Should the Company be unable to
negotiate further extensions to its exclusivity period, the
Company could lose the exclusive right to use the
intellectual property and Gould, at its option, could begin
to exercise its rights under the agreement. Such an event
could have a material adverse effect on the Company's
business.
Financial Impact of Transactions
The completion of these transactions has the following
effect on the Company's financial statements:
(i) shareholders equity increases by $43,350,000 as
follows:
Total indebtedness exchanged $ 50,000
Less:
Par value of shares issued
(500,000 shares at $.01par value) ( 5)
Accrued issuance costs ( 600)
Accrued interest on revolving loan
agreement (Note 1) ( 6,050)
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Additional paid in capital $ 43,345
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Note 1 - Because the transaction is considered a
troubled debt restructuring, interest is accrued from
the Closing Date until the loan's maturity on the
outstanding $55,000,000 loan balance for the
remainder of the loan agreement ($55,000,000 at 10%
per annum).
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(ii) the outstanding indebtedness to Gould ($55,000,000 at
the Closing Date) is reclassified from current to long term
as the loan's maturity date is April 16, 1996 and Gould has
provided the Company with waivers of compliance with certain
of the covenants contained in the loan agreements.
(iii) costs to be incurred of $600,000 in connection with
the transaction have been recorded as an accrued expense.
(iv) conversion of the indebtedness into Series F reduces
the Company's annual interest expense by approximately
$5,000,000. However, dividends paid or accumulated to
shareholders of the Series F reduces the net income
available to common shareholders by $3,000,000 thereby
reducing primary earnings per share.
No other changes to the Company's financial statement are
anticipated.
In connection with these transactions, the United States
Defense Investigative Service ("DIS") reviewed the
relationship between the Company, Japan Energy Corporation
(a Japanese corporation) and its wholly-owned subsidiaries
(including Gould), under the United States government
requirements relating to foreign ownership, control or
influence and have indicated that they have no objection to
the business relationship.
<PAGE>
Item 7. Financial Statements and Exhibits
(c) The Company has filed no exhibits with this Form 8-K.
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned hereunto duly
authorized.
Encore Computer Corporation
(Company)
T. MARK MORLEY March 30, 1995
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T. Mark Morley Date
Vice President, Finance
and Chief Financial Officer
