1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
KENTEK INFORMATION SYSTEMS, INC.
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(Name of Registrant as Specified In its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.01 per share
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2) Aggregate number of securities to which transaction applies:
4,604,152
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3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined): $8.29 (the consideration
to be paid per share of Common Stock, par value $0.01 per share, of
KENTEK INFORMATION SYSTEMS, INC. pursuant to the merger described in this
Proxy Statement).
4) Proposed maximum aggregate value of transaction:
$38,168,420
5) Total fee paid:
$7,633.68
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[ ] Fee paid previously with preliminary materials
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$7,633.68
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2) Form, Schedule or Registration Statement No.:
Schedule 13E-3
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3) Filing Parties:
KE Acquisition Corp.
Philip W. Shires
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4) Date filed: June 6, 1999
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[KENTEK LOGO]
[DATE], 1999
Dear Stockholder,
You are cordially invited to attend a special meeting of stockholders of
Kentek Information Systems, Inc. to be held on [DATE], 1999 at 9:00 a.m. at the
offices of Cooley Godward LLP, 2595 Canyon Boulevard, Suite 250, Boulder,
Colorado 80302.
At the special meeting, you will be asked to approve a merger of Kentek
with KE Acquisition Corp. In the merger, shares of Kentek common stock will be
converted into the right to receive $8.29 per share, in cash, without interest.
The merger has been unanimously approved by your Board of Directors, acting
on the unanimous recommendation of an independent Special Committee of the
Board. The Special Committee and the full Board concluded that the proposed
merger is in the best interests of Kentek stockholders, and therefore the Board
unanimously recommends that you vote in favor of the merger.
Details of the proposed merger and other important information are
described in the accompanying Notice of special meeting and proxy statement. You
are urged to read these important documents carefully before casting your vote.
Whether or not you plan to attend the special meeting, we urge you to
complete, sign, date and promptly return the enclosed proxy card. The merger
cannot be completed unless Kentek stockholders adopt the merger agreement.
We thank you for your prompt attention to this matter and appreciate your
support.
Very truly yours,
Howard L. Morgan, Ph.D.
Chairman of the Board of Directors
YOUR VOTE IS IMPORTANT. PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED
PROXY CARD PROMPTLY, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR COMMON STOCK AT THIS TIME. AFTER
THE MERGER IS APPROVED, STOCKHOLDERS WILL RECEIVE A LETTER OF TRANSMITTAL AND
RELATED INSTRUCTIONS.
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KENTEK INFORMATION SYSTEMS, INC.
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
[DATE], 1999
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To the Stockholders of
Kentek Information Systems, Inc.:
Notice is hereby given that a special meeting of Stockholders of Kentek
Information Systems, Inc. ("Kentek") will be held on [DATE], 1999 at 9:00 a.m.
at the offices of Cooley Godward LLP, 2595 Canyon Boulevard, Suite 250, Boulder,
Colorado 80302, for the following purposes:
1. To consider and vote on a proposal to approve and adopt a Merger
Agreement, dated as of May 14, 1999 (the "Merger Agreement")
between Kentek and KE Acquisition Corp. ("KE Acquisition"),
pursuant to which KE Acquisition will be merged with and into
Kentek (the "Merger"). Pursuant to the Merger, each share of
Kentek's common stock, $0.01 par value, issued and outstanding
immediately prior to the effective time of the Merger will be
converted into the right to receive $8.29 in cash, without
interest, other than shares held by Kentek as treasury stock,
shares owned by KE Acquisition, and shares as to which appraisal
rights have been validly exercised. Philip W. Shires, Kentek's
President and Chief Executive Officer and a member of Kentek's
board of directors, is the sole stockholder, officer and director
of KE Acquisition. A copy of the Merger Agreement is included in
the attached proxy statement and is incorporated in the attached
proxy statement by reference.
2. To transact other business as may properly come before the special
meeting or any adjournments or postponements of the special
meeting. Management is not aware of any other business.
Any stockholder who does not wish to accept the merger consideration of
$8.29 per share and who properly demands appraisal under Delaware law will have
the right to have the fair value of his or her shares determined by the Delaware
Chancery Court. A copy of the relevant provisions of Delaware law is included in
the attached proxy statement. This appraisal right is subject to a number of
restrictions and technical requirements described in the attached proxy
statement.
Only stockholders of record as of the close of business on September 15,
1999 will be entitled to notice of the special meeting and to vote at the
special meeting and any adjournment thereof. Any stockholder will be able to
examine a list of holders of record, for any purpose related to the special
meeting, during the 10-day period before the meeting. The list will be available
at Kentek's corporate headquarters located at 2945 Wilderness Place, Boulder,
Colorado 80301. Approval and adoption of the Merger Agreement requires the
affirmative vote by at least a majority of the outstanding shares entitled to
vote at the special meeting.
By Order of the Board of Directors,
James C.T. Linfield
Corporate Secretary
Boulder, Colorado
[DATE], 1999
EACH STOCKHOLDER IS URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. IF A STOCKHOLDER DECIDES TO ATTEND THE SPECIAL MEETING, HE OR SHE MAY,
IF SO DESIRED, REVOKE THE PROXY AND VOTE THE SHARES IN PERSON.
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KENTEK INFORMATION SYSTEMS, INC.
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PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
[DATE], 1999
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This proxy statement is being furnished to holders of common stock, par
value $0.01 per share of Kentek Information Systems, Inc., a Delaware
corporation ("Kentek"), in connection with the solicitation of proxies by the
Board of Directors of Kentek (the "Board") for use at the special meeting of
stockholders, and at any adjournment or postponement thereof, to be held at the
offices of Cooley Godward LLP, 2595 Canyon Boulevard, Suite 250, Boulder,
Colorado 80302 on [DATE], 1999 at 9:00 a.m. The special meeting has been called
to consider and vote upon a proposal to approve and adopt the Merger Agreement,
dated as of May 14, 1999 (as amended from time to time, the "Merger Agreement"),
among Kentek and KE Acquisition Corp. ("KE Acquisition"), pursuant to which KE
Acquisition will be merged with and into Kentek (the "Merger"). Philip W.
Shires, Kentek's President and Chief Executive Officer and a member of Kentek's
board of directors, is the sole stockholder, officer and director of KE
Acquisition. A copy of the Merger Agreement is attached as Annex A.
Pursuant to the Merger, each share of Kentek's common stock issued and
outstanding immediately prior to the effective time of the Merger will be
converted into the right to receive $8.29 in cash, without interest (the "Merger
Consideration"), other than shares held by Kentek as treasury stock, shares
owned by KE Acquisition and shares as to which appraisal rights have been
validly exercised. A Special Committee of the Board (the "Special Committee"),
which is composed solely of directors unaffiliated with KE Acquisition,
negotiated the $8.29 price and the other terms of the Merger Agreement.
During the six month trading period ended April 21, 1999, the last trading
day before the public announcement that Mr. Shires had proposed to acquire the
shares held by the stockholders of Kentek other than Mr. Shires and KE
Acquisition (the "Public Stockholders"), Kentek's common stock closed at prices
between $5.38 per share to $7.00 per share. The average closing price of the
shares during the six month trading period ended April 21, 1999 was $6.25 per
share. On April 21, 1999, the closing bid price of the shares on the Nasdaq
National Market was $6.9375 per share. On May 13, 1999, the last trading day
before public announcement of the execution of the Merger Agreement, the high
and low sale prices and the closing price of the shares on the Nasdaq National
Market were $7.625 per share.
Based on the unaudited financial statements of Kentek as of March 31, 1999,
the net book value per share was $9.66, of which $7.47 per share was
attributable to cash and securities held by Kentek. Kentek has not yet closed
its books for the quarter and fiscal year ended June 30, 1999. However, Kentek
estimates that, as of June 30, 1999, the value of cash and securities per share
was $8.05 and the adjusted value of cash and securities per share was $7.51. The
adjusted value of cash and securities per share reflects certain current
liabilities, obligations and commitments of Kentek including estimated income
taxes currently payable, operating and purchase commitments of Kentek's Japanese
subsidiaries, bonus payments to employees and costs associated with the Merger.
See page [52] of the proxy statement for a more detailed discussion of Kentek's
adjusted value of cash and securities per share as of June 30, 1999.
KE Acquisition and Mr. Shires, as the sole stockholder, officer and
director of KE Acquisition, intend to finance a substantial portion of the
Merger Consideration from cash and securities held by Kentek. As of June 30,
1999, approximately $7.51 per share of the Merger Consideration will be financed
with the cash and securities held by Kentek and approximately $0.78 of the
Merger Consideration will be financed by KE Acquisition and Mr.
Shires.
Subsequent to the consummation of the Merger, the Public Stockholders will
no longer have an interest in Kentek. As of the date of this proxy statement, KE
Acquisition and Mr. Shires beneficially own an aggregate of 298,219 shares
(including shares which Mr. Shires has the option to acquire), representing
approximately 6.5% of
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Kentek's common stock, of which 61,500 shares or approximately 1.3% of the
common stock are eligible to vote at the special meeting.
The Board formed the Special Committee because Philip W. Shires, one of the
five Board members who was serving at the time of the negotiation and execution
of the Merger Agreement, has a direct conflict of interest regarding the Merger
arising from his relationships with Kentek and KE Acquisition. In particular,
Mr. Shires presently serves as the sole stockholder, director and officer of KE
Acquisition as well as the President, Chief Executive Officer and a member of
the board of directors of Kentek. The Special Committee is composed of three
Board members who are not employees of Kentek or KE Acquisition and who do not
have material commercial relationships with Kentek or KE Acquisition.
The Special Committee and the Board retained Janney Montgomery Scott as
their financial advisor to review the Merger and to render an opinion as to the
fairness, from a financial point of view, of the Merger to the Public
Stockholders. On May 14, 1999, Janney Montgomery Scott delivered its written
opinion to the Special Committee and the Board that, as of the date of the
opinion, and based upon and subject to certain matters stated in the opinion,
the Merger was fair, from a financial point of view, to the Public Stockholders.
On May 14, 1999, the Special Committee unanimously determined that the
Merger, the Merger Agreement and the transactions contemplated by the Merger
Agreement are fair to and in the best interests of the Public Stockholders, and
unanimously recommended that the Board and Kentek stockholders approve the
Merger, the Merger Agreement and the transactions contemplated by the Merger
Agreement.
On May 14, 1999, the Board, on the unanimous recommendation of the Special
Committee, unanimously determined that the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of the Public Stockholders and recommended that Kentek stockholders
approve and adopt the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement.
In response to comments received from the Securities and Exchange
Commission, the Board and the Special Committee asked Janney Montgomery Scott to
prepare two supplemental financial analyses of the Merger. The Board and the
Special Committee requested the supplemental analyses because the Board and the
Special Committee believed that the supplemental analyses would provide
additional relevant data regarding the fairness of the Merger to the Public
Stockholders. Notwithstanding the fact that the Board and the Special Committee
requested the supplemental financial analyses, the Board and the Special
Committee continue to believe that Janney Montgomery Scott's original financial
analysis constitutes a relevant analysis of the fairness of the Merger to
Kentek's Public Stockholders.
On August 13, 1999, Janney Montgomery Scott presented its first
supplemental financial analysis to the Special Committee and the Board and
orally confirmed its prior opinion to the Special Committee and the Board that,
as of that date, the Merger was fair, from a financial point of view, to the
Public Stockholders. See pages [23-26], [38-41] and [44] of this proxy statement
for additional information relating to Janney Montgomery Scott's August 13, 1999
supplemental financial analysis.
On August 13, 1999, after reviewing Janney Montgomery Scott's first
supplemental financial analysis, the Board and the Special Committee unanimously
reaffirmed their determinations that the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of the Public Stockholders.
On September 10, 1999, Janney Montgomery Scott presented its second
supplemental financial analysis to the Special Committee and the Board and
orally confirmed its prior opinion to the Special Committee and the Board that,
as of that date, the Merger was fair, from a financial point of view, to the
Public Stockholders. See page [23-26], [38-41] and [44-45] of this proxy
statement for additional information relating to Janney Montgomery Scott's
September 10, 1999 supplemental financial analysis.
On September 10, 1999, after reviewing Janney Montgomery Scott's second
supplemental financial analysis, the Board and the Special Committee unanimously
reaffirmed their determinations that the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of the Public Stockholders.
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Kentek believes that the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement are fair to and in the best interests of
the Public Stockholders, and recommends that Kentek stockholders approve the
Merger, the Merger Agreement and the transactions contemplated by the Merger
Agreement. In addition, as described further in this proxy statement, KE
Acquisition, Philip W. Shires, Donald W. Shires and Renee Bond (collectively,
the "Schedule 13E-3 Filing Parties") also believe that the Merger is fair to the
Public Stockholders.
All shares represented by properly executed proxies received prior to or at
the special meeting and not revoked will be voted in accordance with the
instructions indicated in the proxies. If no instructions are indicated, the
proxies will be voted FOR adoption and approval of the Merger Agreement and in
the discretion of the persons named in the proxy with respect to any other
matters as may properly come before the special meeting. A stockholder may
revoke his or her proxy at any time prior to its use by delivering to the
Secretary of Kentek a signed notice of revocation or a later-dated and signed
proxy or by attending the special meeting and voting in person.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION OF A
PROXY IN ANY JURISDICTION FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE A PROXY
SOLICITATION IN SUCH JURISDICTION. THE INFORMATION IN THIS PROXY STATEMENT MAY
ONLY BE ACCURATE ON THE DATE OF THIS PROXY STATEMENT.
The Board knows of no additional matters that will be presented for
consideration at the special meeting. Execution of a proxy, however, confers on
the designated proxyholders discretionary authority to vote the shares covered
by the proxy on other business, if any, that may properly come before the
special meeting. This proxy statement and the accompanying form of proxy are
first being mailed to stockholders on or about [DATE], 1999.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF THE TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this proxy statement is [DATE], 1999.
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TABLE OF CONTENTS
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER.............................................1
SUMMARY...........................................................................[4]
SELECTED CONSOLIDATED FINANCIAL DATA OF KENTEK...................................[11]
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS........................[12]
THE SPECIAL MEETING..............................................................[13]
SPECIAL FACTORS..................................................................[15]
BACKGROUND OF THE MERGER.........................................................[31]
PRICE OF THE COMMON STOCK........................................................[51]
THE MERGER.......................................................................[52]
CERTAIN PROVISIONS OF THE MERGER AGREEMENT.......................................[56]
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................[62]
REGULATORY CONSIDERATIONS........................................................[64]
BUYER............................................................................[64]
APPRAISAL RIGHTS.................................................................[64]
INDEPENDENT AUDITORS.............................................................[65]
STOCKHOLDER PROPOSALS............................................................[65]
WHERE YOU CAN FIND MORE INFORMATION..............................................[66]
AVAILABLE INFORMATION............................................................[67]
ANNEX A MERGER AGREEMENT.........................................................A-1
ANNEX B OPINION OF JANNEY MONTGOMERY SCOTT INC...................................B-1
ANNEX C SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW......................C-1
ANNEX D MANAGEMENT OF KENTEK AND KE ACQUISITION..................................D-1
ANNEX E ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1998.......E-1
ANNEX F QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999........F-1
8
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT IS THE PROPOSED TRANSACTION?
A: KE Acquisition will acquire Kentek by merging into Kentek, with Kentek as the
surviving corporation.
Q: WHO IS THE BUYER?
A: The buyer is KE Acquisition Corp., which was formed by Philip W. Shires to
acquire Kentek in the Merger. Mr. Shires is the President and Chief Executive
Officer of Kentek and also a director and a stockholder of Kentek. Mr. Shires is
the only director, officer and stockholder of KE Acquisition, and, immediately
after the Merger, he will be the only director and officer of Kentek. Mr. Shires
has had discussions with his son, Donald W. Shires, and another employee of
Kentek, Renee Bond, about their interest in purchasing an equity interest in
Kentek after the Merger of up to 30% in the case of Donald W. Shires and 10% in
the case of Renee Bond. In addition, Philip W. Shires expects that these two
individuals will likely become Vice Presidents and directors of Kentek after the
Merger. Donald W. Shires is currently responsible for Kentek's Boulder, Colorado
operations and engineering and Renee Bond is currently responsible for Kentek's
worldwide consumable supplies sales, but neither are executive officers or
directors of Kentek. Philip W. Shires and KE Acquisition currently do not have
any agreements with these two individuals regarding their equity participation,
employment or director positions. However, Mr. Shires anticipates, based on his
discussions with Donald W. Shires and Renee Bond, that prior to the Merger they
will agree to cancel their existing Kentek options in connection with their
participation in Kentek after the Merger. Donald W. Shires currently holds 7,500
Kentek options, 2,500 of which are vested, and Renee Bond currently holds 10,959
Kentek options, all of which are vested. See pages [5-6] and [56].
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Stockholders of Kentek will be entitled to receive $8.29 in cash, without
interest, for each share of common stock, other than KE Acquisition and
stockholders who dissent and properly seek appraisal of the fair value of their
shares. If you own stock options of Kentek, you will be entitled to receive,
immediately prior to the Merger, the difference between $8.29 and the exercise
price of your vested stock option.
Q: WHY IS THE BOARD OF DIRECTORS RECOMMENDING THAT I VOTE FOR THE MERGER
AGREEMENT?
A: In the opinion of the board of directors, based upon the unanimous
recommendation of an independent special committee of the board of directors,
the terms and provisions of the Merger Agreement and the Merger are fair to and
in the best interests of Kentek's public stockholders, and the board of
directors has accordingly unanimously approved the Merger Agreement and declared
it advisable. The price of $8.29 per share is a 32.6% premium over the average
closing price for the shares on the Nasdaq National Market for the six month
trading period ended April 21, 1999. In addition, the price is a 19.5% premium
over the closing price for the shares on April 21, 1999, the date before Kentek
announced it had received Mr. Shires' initial proposal, and a 8.7% premium over
the closing price for the shares on May 13, 1999, the date before Kentek
announced the execution of the Merger Agreement. To review the background and
reasons for the Merger in greater detail, see pages [15-20] to [31-38].
Q: HOW WILL KE ACQUISITION AND MR. SHIRES FINANCE THE MERGER?
A: KE Acquisition and Mr. Shires, the sole stockholder, officer and director of
KE Acquisition, intend to finance a substantial portion of the Merger
Consideration from the cash and securities held by Kentek. As of June 30, 1999,
Kentek estimates that approximately $7.51 per share of the Merger Consideration
will be financed with the cash and securities currently held by Kentek and
approximately $0.78 of the Merger Consideration will be financed by KE
Acquisition and Mr. Shires. See page [52].
Q: SINCE PHILIP W. SHIRES IS THE SOLE STOCKHOLDER OF KE ACQUISITION, WHAT
CONFLICTS OF INTEREST DOES THE BOARD OF DIRECTORS HAVE IN RECOMMENDING APPROVAL
OF THE MERGER AGREEMENT?
A: Philip W. Shires, the President and Chief Executive Officer of Kentek and a
member of the board of directors, has a direct conflict of interest in
recommending approval of the Merger Agreement because he is the sole
stockholder, director and officer of KE Acquisition. If the Merger occurs, Mr.
Shires will own all of Kentek's common stock following the Merger and as a
result will receive the benefit of future earnings and increased value of
Kentek, while you will no longer receive any such benefit. To counteract this
conflict of interest, the recommendation of the board of directors is based on
1.
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the unanimous recommendation of the special committee. The members of the
special committee did not have a conflict of interest in recommending approval
of the Merger Agreement and the Merger. To review the factors considered by the
special committee and the board of directors in approving the Merger Agreement
and the Merger, see pages [22-29].
Q: HOW DID THE BOARD OF DIRECTORS MAKE SURE THE PRICE PER SHARE I WILL RECEIVE
IN THE PROPOSED MERGER IS FAIR?
A: The board of directors formed a special committee consisting of three
directors who had no conflicts of interest with respect to the transaction to
evaluate and negotiate the terms of the Merger Agreement with KE Acquisition.
The special committee independently selected and retained legal and financial
advisors to assist it in the negotiation, and received written and oral opinions
from its financial advisor, on which the special committee and the entire board
of directors relied, that as of the date of the Merger Agreement and as of
August 13, 1999 and September 10, 1999, the $8.29 per share you will receive in
the proposed Merger is fair to you from a financial point of view.
Q: WHAT ARE THE DISADVANTAGES TO ME OF KENTEK MERGING WITH KE ACQUISITION?
A: Following the proposed Merger, the holders of Kentek's common stock will no
longer benefit from the earnings or increased value, if any, of Kentek. In
addition, the $8.29 per share Merger Consideration is less than the net book
value per share of $9.66 as of March 31, 1999 and is only slightly greater than
the approximately $8.05 per share value of cash and securities held by Kentek as
of June 30, 1999.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE MERGER AGREEMENT?
A: The holders of a majority of all outstanding shares of Kentek's common stock
must vote to approve the Merger Agreement. As of September 10, 1999, directors
and executive officers of Kentek and their affiliates as a group beneficially
owned an aggregate of approximately 25% of the common stock eligible to vote at
the special meeting. The directors and executive officers of Kentek have
indicated that they intend to vote their common stock in favor of the adoption
of the Merger Agreement although they are not obligated to do so. KE
Acquisition, Philip W. Shires, Donald W. Shires and Renee Bond collectively own
approximately 1.3% of Kentek's common stock, which they will vote in favor of
the Merger Agreement.
Q: WHAT DO I NEED TO DO NOW?
A: Please mark your vote on, sign, date and mail your proxy card in the enclosed
return envelope as soon as possible, so that your shares may be represented at
the special meeting.
Q: WHAT RIGHTS DO I HAVE IF I OPPOSE THE MERGER?
A: Stockholders who oppose the Merger may dissent and seek appraisal of the fair
value of their shares, but only if they comply with all of the Delaware law
procedures explained on pages [64-65] and in Annex C to this proxy statement.
Q: WHO CAN VOTE ON THE MERGER?
A: All stockholders of record as of the close of business on September 15, 1999
will be entitled to notice of, and to vote at, the special meeting to approve
the Merger Agreement and the transactions contemplated by the Merger Agreement.
Q: SHOULD I SEND MY STOCK CERTIFICATES NOW?
A: No. After the Merger is completed, Kentek will send you a transmittal form
and written instructions for exchanging your share certificates.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares ONLY if you instruct your broker on how to
vote. You should follow the directions provided by your broker regarding how to
vote your shares.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. Just send in a written revocation or another signed proxy card with a
later date to American Stock Transfer & Trust, Inc., Kentek's transfer agent,
before the special meeting or simply attend the special meeting and vote in
person. American Stock Transfer's address is 40 Wall Street, New York, New York
10005.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing the Merger as quickly as possible. If the
Merger Agreement is approved and the other conditions to the Merger are
satisfied, we expect to complete the Merger on the day of the special meeting.
2.
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Q: WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO ME?
A: The cash you receive for your shares generally will be taxable for U.S.
federal income tax purposes to the extent the cash exceeds your tax basis. To
review the federal income tax consequences to stockholders in greater detail,
see pages [52-53].
Q: WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?
A: We do not expect that any other matters will be voted upon at the special
meeting.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have more questions about the Merger or would like additional copies
of this proxy statement, you should contact Kentek at 303-440-5500.
3.
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SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this proxy statement. This summary is not intended to be
complete and is qualified by the more detailed information contained elsewhere
in this proxy statement, the Annexes hereto and the documents otherwise referred
to in this proxy statement. Stockholders are urged to review this entire proxy
statement carefully, including the Annexes hereto and all documents referenced
in this proxy statement.
OVERVIEW
Kentek is furnishing this proxy statement to allow its stockholders to
consider and vote on a proposal to approve and adopt the Merger Agreement with
KE Acquisition. Pursuant to the Merger Agreement, KE Acquisition will be merged
directly into Kentek and stockholders of Kentek, other than KE Acquisition, who
do not dissent from the Merger will receive $8.29 per share for each share that
they own at the effective time of the Merger.
During the time the Merger Agreement was negotiated and at the time the
Merger Agreement was executed, Philip W. Shires was the President and Chief
Executive Officer and a member of the board of directors of Kentek. Mr. Shires
was also the sole stockholder, officer and director of KE Acquisition. Mr.
Shires, therefore, has a direct conflict of interest with respect to the
proposed transaction. As of the date of this proxy statement, Mr. Shires owns
approximately 1.3% of Kentek's outstanding common stock.
In light of the conflict of interest discussed in the prior paragraph,
Kentek's Board of Directors (the "Board") formed the Special Committee. The
Special Committee is composed of three of Kentek's directors who were not
affiliated with KE Acquisition. The Special Committee negotiated the terms of
the Merger Agreement on behalf of the Board and Kentek. In connection with the
execution of the Merger Agreement, both the Board and the Special Committee
determined that the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement were fair to the Public Stockholders.
For additional information on the directors and executive officers of
Kentek and KE Acquisition, see Annex D attached hereto.
THE COMPANY
Kentek is a supplier of heavy-duty, high reliability, mid-range, non-impact
laser printers and related consumable supplies and spare parts. Printers that
print 30 to 60 pages per minute ("ppm") and 30,000 to 400,000 pages per month
characterize the mid-range market. Kentek manufactures consumable supplies for
its printers, with the exception of toner, which is manufactured for Kentek to
its specifications. Certain additional companies manufacture, remanufacture and
market (i.e., "clone") consumable supplies, including toner, for Kentek
printers. Over the useful life of Kentek's printers, the consumable supplies
must be replaced several times each year under normal use conditions and,
consequently, sales of consumable supplies and spare parts typically generate
revenues in excess of three times the original cost of the printer and represent
approximately 85% of the total cost of ownership of the printer.
Kentek currently sells its products to OEMs, system integrators, and
independent supplies resellers in the mid-range market. Kentek's customers
include BancTec, IBM Global Services, Lexmark, NCR, Oce Printing Systems,
Printer Systems International, Standard Register, Tally and Unisys. Kentek
believes that its printers presently compete only in high-volume production
printing applications which include printing invoices, forms, payroll, direct
mail and check imaging.
Since 1997, Kentek has experienced significant declines in new printer
sales and total revenues as a result of negative competitive trends affecting
the traditional mid-range printer industry. Kentek had hoped to alleviate some
of these negative industry trends with the introduction of its next generation
printer, the KW60. However, in November 1998, Kentek terminated the development
of the KW60. Kentek's management team and Board terminated the development of
the KW60 as a result of the following factors:
o the development of the KW60 would require an additional two years
of engineering;
o the development of the KW60 would require at least an additional
$20 million of capital;
4.
12
o Kentek's principal customer/prospect for the KW60 would not wait
past May 1999 for delivery of the KW60; and
o Kentek's printer sales were declining rapidly as a result of the
competitive pressures and negative industry trends affecting the
traditional mid-range printer industry.
As a result of Kentek's decision to abandon development efforts on the
KW60, Kentek's management team and Board instituted certain restructuring
actions from November 6, 1998 through March 31, 1999 in order to reduce all
expenses associated with the development and the planned manufacture of the
KW60. See page [16] of this proxy statement for additional details relating to
the restructuring actions initiated by Kentek's management team and Board.
In April and May 1999, Kentek's management team concluded that Kentek was
unlikely to sell more than 600 additional printer units prior to June 30, 2001.
This conclusion was based on the factors set forth in the following paragraphs
and Kentek's historical printer unit sales numbers. As of the date of this proxy
statement, Kentek's management team believes that continued declines in Kentek
printer sales may make the manufacture of Kentek printers economically
impractical in the near future. However, Kentek's management team currently
intends to manufacture printers as long Kentek's customers order printers in
economically viable quantities, which Kentek's management team currently
estimates to be approximately 600 printers per year.
As of the date of this proxy statement, substantially all of Kentek's
customers resell or have indicated that they intend to resell the new Xerox 40
ppm light-duty mid-range printer. Kentek believes that its competitors,
including Xerox, will continue to release new lower cost printers with enhanced
features and that its customers will continue to replace Kentek printers with
such lower cost printers. As a result, Kentek anticipates that it will continue
to suffer progressively greater declines in new printer sales. See page [15-17]
of this proxy statement for additional information.
Kentek's sales of consumable supplies and spare parts have also been
declining as its new printer sales have not kept pace with the rate at which
existing Kentek printers have been going out of service. The following table
sets forth Kentek's total sales, printer sales, printer unit sales, and
consumable supplies and spare parts sales since 1996.
NINE MONTHS ENDED
1996 1997 1998 MARCH 31, 1999
----------- ----------- ----------- ---------------
(dollars in thousands)
Total sales $ 74,381 $ 56,460 $ 45,053 $ 28,019
Printer sales $ 18,436 $ 8,370 $ 7,041 $ 3,470
Consumable supplies and
spare parts unit sales $ 55,945 $ 48,090 $ 38,012 $ 24,549
Printer unit sales 3,093 1,464 671 365
The section of this proxy statement entitled "Special Factors--Relevant
Background Information," beginning on page [15], contains a more comprehensive
discussion of the competitive pressures and negative competitive trends
affecting the traditional mid-range printer industry and Kentek's inability to
develop a new faster mid-range printer.
Kentek's principal executive offices are located at 2945 Wilderness Place,
Boulder, Colorado 80301 and its telephone number is (303) 440-5500.
BUYER
KE Acquisition was formed in April 1999 for purposes of the Merger. Philip
W. Shires, the President and Chief Executive Officer and a member of the board
of directors of Kentek, is the sole stockholder, officer and director of KE
Acquisition. KE Acquisition has not carried on any activities to date other than
those incident to its formation, the negotiation and execution of the Merger
Agreement and related financing transactions.
Philip W. Shires expects that, following the Merger, Kentek will elect to
be taxed under Subchapter S of the Internal Revenue Code and that this election
will result in certain tax benefits to Kentek and its stockholders. Because of
the election, the number of type of persons that may hold Kentek stock will be
limited. Mr. Shires has had discussions with his son, Donald W. Shires, and
another employee of Kentek, Renee Bond, about their interest
5.
13
in purchasing an equity interest in Kentek after the Merger of up to 30% in the
case of Donald W. Shires and 10% in the case of Renee Bond. Donald W. Shires is
responsible for Kentek's Boulder, Colorado operations and engineering and Renee
Bond is responsible for Kentek's worldwide consumable supplies sales, but
neither are executive officers or directors of Kentek. Mr. Shires has proposed
that such investments be subject to a vesting schedule based on continued
employment with Kentek. In addition, Mr. Shires expects that these two
individuals will likely become Vice Presidents and directors of Kentek after the
Merger. Mr. Shires and KE Acquisition currently do not have any agreements with
Donald W. Shires and Renee Bond regarding their equity participation, employment
or director positions. However, Mr. Shires anticipates, based on his discussions
with Donald W. Shires and Renee Bond, that prior to the Merger they will agree
to cancel their Kentek options in connection with their participation in Kentek
after the Merger. Donald W. Shires currently holds 7,500 Kentek options, 2,500
of which are vested, and Renee Bond currently holds 10,959 Kentek options, all
of which are vested.
The address of the principal office of KE Acquisition is 2945 Wilderness
Place, Boulder, Colorado 80301 and its telephone number is (303) 440-5500.
THE SPECIAL MEETING
TIME AND PLACE OF MEETING
The special meeting will be held at the offices of Cooley Godward LLP, 2595
Canyon Boulevard, Suite 250, Boulder, CO 80302 on [DATE], 1999, starting at 9:00
a.m., local time.
MATTER TO BE CONSIDERED
The special meeting has been called for the holders of Kentek's common
stock to consider and vote upon a proposal to approve and adopt the Merger
Agreement. See page [13].
RECORD DATE; VOTE REQUIRED
Holders of record of common stock at the close of business on September 15,
1999 (the "Record Date") have the right to receive notice of and to vote at the
special meeting. Each share is entitled to one vote on each matter presented to
the stockholders for a vote at the special meeting. The affirmative vote of the
holders of a majority of the outstanding shares is required to approve and adopt
the Merger Agreement. The Schedule 13E-3 Filing Parties beneficially own an
aggregate of approximately 6.5% of the outstanding common stock (including stock
that can be acquired upon the exercise of options), of which approximately 1.3%
is eligible to vote at the special meeting. The Schedule 13E-3 Filing Parties
will vote their Kentek shares in favor of the proposal to approve and adopt the
Merger Agreement.
SECURITY OWNERSHIP OF MANAGEMENT
As of September 10, 1999, directors and executive officers of Kentek and
their affiliates as a group beneficially owned an aggregate of 1,586,600 shares,
or approximately 34.46% of the common stock, of which 1,157,130 shares, or
approximately 25.13% of the common stock, are eligible to vote at the special
meeting. The directors and executive officers of Kentek have indicated that they
intend to vote their shares in favor of the adoption of the Merger Agreement
although they are not obligated to do so. See page [13].
SECURITY OWNERSHIP OF KENTEK'S PRINCIPAL STOCKHOLDERS
As of September 10, 1999, the four largest holders of Kentek's common stock
beneficially owned an aggregate of 3,004,930 shares, or approximately 65.26% of
the common stock, of which 2,977,687 shares, or approximately 64.67% of the
common stock, are eligible to vote at the special meeting. Kentek believes that
its four largest stockholders will vote their shares in favor of the adoption of
the Merger Agreement although they are not obligated to do so and, as of the
date of this proxy statement, Kentek has not requested any proxy from these
stockholders. See pages [13] and [33-34].
RECOMMENDATION OF THE SPECIAL COMMITTEE AND KENTEK'S BOARD OF DIRECTORS
Because of the direct conflict of Philip W. Shires with respect to any
transaction between Kentek and KE Acquisition, the Board established a special
committee (the "Special Committee") to act on behalf of the Public Stockholders
of Kentek for purposes of negotiating the price and other terms of the
transaction with KE Acquisition
6.
14
and evaluating the fairness of the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement. The Special Committee is
composed solely of directors unaffiliated with KE Acquisition. The members of
the Special Committee will cease to be directors of Kentek upon completion of
the Merger.
The Special Committee and the Board each unanimously determined on May 14,
1999 that the Merger, the Merger Agreement and the transactions contemplated by
the Merger Agreement are fair to and in the best interests of the Public
Stockholders and recommend that holders of shares vote in favor of approval and
adoption of the Merger, the Merger Agreement and the transactions contemplated
by the Merger Agreement. See page [38].
On August 13, 1999 and September 10, 1999, the Special Committee and the
Board each unanimously reaffirmed their prior determinations that the Merger,
the Merger Agreement and the transactions contemplated by the Merger Agreement
are fair to and in the best interests of the Public Stockholders. See page [38].
OPINION OF FINANCIAL ADVISOR
The Special Committee and the Board retained Janney Montgomery Scott as
their financial advisor to review the Merger and to render an opinion as to the
fairness, from a financial point of view, of the Merger to the Public
Stockholders. On May 14, 1999, Janney Montgomery Scott delivered its written
opinion to the Special Committee and the Board that, as of the date of the
opinion, and based upon and subject to certain matters stated in the opinion,
the Merger was fair, from a financial point of view, to the Public Stockholders.
See pages [38-41].
A copy of Janney Montgomery Scott's May 14, 1999 written opinion is
attached to this proxy statement as Annex B. The Janney Montgomery Scott opinion
should be read in its entirety with respect to assumptions made, matters
considered, and limitations on the review undertaken by Janney Montgomery Scott
in rendering its opinion. See pages [38-41] and Annex B.
In response to comments received from the Securities and Exchange
Commission, the Board and the Special Committee asked Janney Montgomery Scott to
prepare two supplemental financial analyses of the Merger. The Board and the
Special Committee requested the supplemental analyses because the Board and the
Special Committee believed that the supplemental analyses would provide
additional relevant data regarding the fairness of the Merger to the Public
Stockholders.
On August 13, 1999, Janney Montgomery Scott presented its first
supplemental financial analysis to the Special Committee and the Board and
orally confirmed its prior opinion to the Special Committee and the Board that,
as of that date, the Merger was fair, from a financial point of view, to the
Public Stockholders. See page [44] of this proxy statement for additional
information relating to Janney Montgomery Scott's August 13, 1999 supplemental
financial analysis.
On September 10, 1999, Janney Montgomery Scott presented its second
supplemental financial analysis to the Special Committee and the Board and
orally confirmed its prior opinion to the Special Committee and the Board that,
as of that date, the Merger was fair, from a financial point of view, to the
Public Stockholders. See pages [44-45] of this proxy statement for additional
information relating to Janney Montgomery Scott's September 10, 1999
supplemental financial analysis.
Notwithstanding the fact that the Board and the Special Committee
requested that Janney prepare its August 13, 1999 and September 10, 1999
supplemental financial analyses, the Board and the Special Committee continue to
believe that Janney Montgomery Scott's May 14, 1999 financial analysis
constitutes a relevant analysis of the fairness of the Merger to Kentek's Public
Stockholders.
Janney Montgomery Scott has agreed to orally update its May 14, 1999
written opinion as of the closing of the proposed merger transaction.
7.
15
THE MERGER
EFFECTIVE TIME OF THE MERGER
Pursuant to the Merger Agreement, KE Acquisition will be merged directly
into Kentek, with Kentek as the surviving corporation (the "Surviving
Corporation"). The Merger will become effective when the certificate of merger
is duly filed with the Secretary of State of the State of Delaware or at a later
time specified in the certificate of merger.
MERGER CONSIDERATION
In the Merger each share shall be converted into the right to receive $8.29
per share in cash, without interest, other than shares owned by KE Acquisition,
shares held in treasury, and shares as to which appraisal rights have been
validly exercised.
The price of $8.29 per share is a 32.6% premium over the average closing
price for the shares on the Nasdaq National Market for the six month trading
period ended April 21, 1999, the day before Kentek announced it had received KE
Acquisition's and Mr. Shires' initial proposal. In addition, the price is a
19.5% premium over the closing price for the shares on April 21, 1999, and a
8.7% premium over the closing price for the shares on May 13, 1999, the day
before Kentek announced the execution of the Merger Agreement.
Based on the unaudited financial statements of Kentek as of March 31, 1999,
net book value per share was $9.66, and $7.47 of the net book value per share
was attributable to cash equivalent assets held by Kentek. Kentek has not yet
closed its books for its fourth quarter and fiscal year ended June 30, 1999.
However, Kentek estimates that, as of June 30, 1999, the cash equivalent value
of each share was $8.05 and the adjusted cash equivalent value of each share was
$7.51. The adjusted cash equivalent value per share reflects certain current
liabilities and commitments of Kentek including estimated income taxes currently
payable, operating and purchase commitments of Kentek's Japanese subsidiaries,
bonus payments to employees, and costs associated with the Merger. See page [52]
of the proxy statement for a more detailed discussion of Kentek's adjusted value
of cash and securities per share as of June 30, 1999.
KE Acquisition and Mr. Shires, as the sole stockholder, officer and
director of KE Acquisition, intend to finance a substantial portion of the
Merger Consideration from the cash and securities held by Kentek. Accordingly,
as of June 30, 1999, Kentek estimates that approximately $7.51 per share of the
Merger Consideration will be financed with the cash and securities currently
held by Kentek and approximately $0.78 of the Merger Consideration will be
financed by KE Acquisition and Mr. Shires. See page [52].
STOCK OPTIONS
Immediately prior to the Merger, each director or employee of Kentek
holding options to acquire Kentek shares will receive cash equal to the excess,
if any, of $8.29 over the per share exercise price of each option, to the extent
the option is then vested and exercisable. With the exception of an option for
30,000 shares held by Dr. Howard L. Morgan, the Chairman of Kentek, the
exercisability of Kentek options will not be accelerated as a result of the
Merger. Any options that are not terminated immediately prior to the Merger will
continue to be outstanding, but, after the Merger, those options, to the extent
they vest, will become the right to receive $8.29 in cash upon payment of the
exercise price.
Prior to the Merger, KE Acquisition may enter into agreements with option
holders to treat options differently than the treatment described above. As of
the date of this proxy statement, KE Acquisition has not agreed and does not
expect that it will agree to treat any options other than as described above. KE
Acquisition does anticipate, however, that Philip W. Shires, Donald W. Shires
and Renee Bond will cancel their Kentek options prior to the Merger. See page
[56].
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The obligations of the parties to the Merger Agreement to consummate the
Merger are subject to the satisfaction or waiver of a number of conditions,
including that Kentek's stockholders adopt the Merger Agreement and KE
Acquisition shall have received the financing necessary to consummate the
transactions contemplated by the Merger Agreement. See pages [58-59].
8.
16
TERMINATION OF THE MERGER AGREEMENT
Either Kentek or KE Acquisition may terminate the Merger Agreement under
certain circumstances, including if the Merger has not been completed by
November 14, 1999. See pages [59-60].
MERGER FINANCING
The total amount of cash required to consummate the transactions
contemplated by the Merger Agreement (the "Merger Financing"), including payment
of related fees and expenses, is estimated to be approximately $39 million. KE
Acquisition and Mr. Shires, the sole stockholder, officer and director of KE
Acquisition, expect that KE Acquisition will finance the Merger from borrowings
under a senior secured credit facility and from cash and securities held by
Kentek. In a commitment letter (the "Commitment Letter") dated April 19, 1999,
US Bank, N.A. committed, subject to certain customary terms and conditions, to
provide up to $6 million of debt financing for purposes of financing the Merger
and paying related fees and expenses. See pages [54-55].
APPRAISAL RIGHTS
If the Merger is consummated, under applicable Delaware law, holders of
common stock who follow the appropriate procedures, including filing a written
demand for appraisal with Kentek prior to the special meeting, and who do not
vote in favor of the Merger, will be entitled to receive payment of the fair
value of their shares as appraised by the Delaware Court of Chancery. Under
certain circumstances, a holder may forfeit the right to appraisal, in which
case the holder's shares will be treated as if they had been converted, in the
Merger, into a right to receive the Merger Consideration, without interest
thereon. See pages [64-65].
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As a result of his relationships with Kentek and KE Acquisition, Philip W.
Shires, Kentek's Chief Executive Officer and President and a director, has
interests that constitute direct conflicts of interest in connection with the
Merger. The Special Committee and the Board were and are aware of the conflicts
and considered them in addition to the other matters described under "Special
Factors--Reasons of Kentek for the Merger; Fairness of the Merger," "Background
of the Merger--Recommendation of the Special Committee and the Board of
Directors" and "The Merger--Interests of Certain Persons in the Merger." See
pages [22-29], [38] and [53-54].
CERTAIN EFFECTS OF THE TRANSACTION
Immediately following the Merger, the Public Stockholders will cease to
have any ownership interest in Kentek or rights as holders of shares. Rather,
Philip W. Shires, the sole stockholder of KE Acquisition, will own 100% of
Kentek.
As a result of the Merger:
o the Public Stockholders will no longer benefit from any profits
or increases in the value of Kentek;
o the Public Stockholders will no longer bear the risk of any
decreases in value of Kentek;
o Kentek will be privately held and there will be no public market
for the common stock;
o KE Acquisition will cause Kentek to terminate the registration of
the common stock under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); and
o Kentek will no longer be required to file periodic reports with
the Securities and Exchange Commission (the "SEC").
See pages [29-30].
PLANS FOR KENTEK AFTER THE MERGER
Kentek's total revenues, printer sales, and consumable supplies and spare
parts sales are decreasing rapidly due to increased competition in the mid-range
printer industry and the introduction, by competitors, of new products. As of
the date of this proxy statement, substantially all of Kentek's customers resell
or have indicated that they intend to resell the new Xerox 40 ppm light-duty
mid-range printer.
9.
17
As of the date of this proxy statement, the Schedule 13E-3 Filing Parties
believe that continued declines in Kentek printer sales may make the manufacture
of Kentek printers economically impractical in the near future. However, the
Schedule 13E-3 Filing Parties currently intend to manufacture printers as long
Kentek's customers order printers in economically viable quantities, which the
Schedule 13E-3 Filing Parties currently estimate to be approximately 600
printers per year. If Kentek terminates the manufacturing of new printers, such
an event would represent a significant departure from Kentek's historical
operations.
The Schedule 13E-3 Filing Parties believe that Kentek's competitors,
including Xerox, will continue to release new lower cost printers with enhanced
features and that Kentek's customers will continue to replace Kentek printers
with such lower cost printers. As a result, the Schedule 13E-3 Filing Parties
anticipate that Kentek will continue to suffer progressively greater declines in
new printer sales. Based on the foregoing and based on Kentek's historical
printer unit sales numbers set forth on page [5] of this proxy statement, the
Schedule 13E-3 Filing Parties estimate that Kentek will not continue to
manufacture and sell printers beyond the next twelve months. In addition, the
Schedule 13E-3 Filing Parties anticipate that Kentek's sales of consumable
supplies and spare parts sales will continue to decline over the course of the
next several years as Kentek's installed base of printers exit their useful life
cycle and as Kentek's new printer sales continue to decline.
The Schedule 13E-3 Filing Parties intend to manage Kentek's business in
response to the increased competition in the mid-range printer industry and the
introduction, by Kentek's competitors, of new products. In particular, the
Schedule 13E-3 Filing Parties intend to:
o manage an orderly liquidation of Kentek's business operations and
assets over the next four to five years;
o reduce expenses ahead of declining revenues in order to maintain
operating profitability;
o manufacture and sell existing models of printers as long as
Kentek's customers continue to order printers in economically
viable quantities, which the Schedule 13E-3 Filing Parties
currently estimate to be approximately 600 printers per year. The
Schedule 13E-3 Filing Parties currently estimate that this level
may be reached in the next twelve months; and
o manufacture and sell consumable supplies and spare parts for
existing Kentek printers as long as Kentek's customers continue
to order consumable supplies and spare parts in economically
viable quantities, which the Schedule 13E-3 Filing Parties
currently estimate to be approximately $2.5 million in consumable
supplies and spare parts orders per year. The Schedule 13E-3
Filing Parties currently estimate that this level may be reached
in approximately four to five years.
The Schedule 13E-3 Filing Parties anticipate that the revenues generated by
Kentek following the Merger will be sufficient to:
o repay Kentek's creditors; and
o enable Kentek to service and support its existing customer
contractual obligations, which typically extend five years from
the end of the contract term or five years after the date that
the last printer is shipped.
The Schedule 13E-3 Filing Parties do not intend to introduce or develop new
products, although they may pursue extensions of existing product lines if those
are feasible.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For a summary of the material U.S. federal income tax consequences of the
Merger, see "The Merger--Certain Federal Income Tax Consequences" on pages
[52-53].
EACH STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING
THE FEDERAL INCOME, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE
MERGER.
10.
18
SELECTED CONSOLIDATED FINANCIAL DATA OF KENTEK
The following table sets forth selected consolidated financial data for
Kentek and its subsidiaries as of and for each of the five fiscal years in the
period ended June 30, 1998 and for the nine months ended March 31, 1999 and
1998. No separate financial information is provided for KE Acquisition since it
is a special purpose entity formed in connection with the Merger and has no
independent operations. No pro forma data giving effect to the Merger is
provided because Kentek does not believe that the information is material to
stockholders in evaluating the Merger and Merger Agreement since the proposed
merger consideration is all cash and the common stock of Kentek will cease to be
publicly traded upon the consummation of the Merger.
The selected data for Kentek as of and for each of the five fiscal years in
the period ended June 30, 1998 has been derived from audited consolidated
financial statements of Kentek. The selected data for the nine months ended
March 31, 1999 and 1998 has been derived from the unaudited consolidated
financial statements of Kentek and, in the opinion of management, reflects all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial data for and at the end of such periods. Results of
operations for the nine months ended March 31, 1999 are not necessarily
indicative of results for the full year. The following financial information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operation" and the Consolidated Financial
Statements of Kentek and the notes thereto included in Kentek's Annual Report on
Form 10-K for the fiscal year ended June 30, 1998 and Form 10-Q for the period
ended March 31, 1999, copies of which are enclosed with this proxy statement.
NINE MONTHS
ENDED MARCH 31, FISCAL YEAR ENDED JUNE 30,
--------------------- ---------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Net sales ........................... $ 28,019 $ 34,682 $ 45,053 $ 56,460 $ 74,381 $ 70,192 $ 78,867
Operating income .................... 1,327 3,666 4,243 7,249 13,277 6,406 10,026
Net income .......................... 3,389 3,939 4,977 4,761 13,102 5,035 9,647
PER SHARE DATA: (a)
Net income per basic
share .......................... $ 0.56 $ 0.56 $ 0.70 $ 0.70 $ 6.59 $ 6.02 $ 11.54
Net income per diluted
share .......................... 0.56 0.55 0.70 0.69 2.45 1.02 2.01
Book Value
per share (b) ............... $ 9.66 $ 7.68 $ 7.81 $ 7.31 $ 6.76 $ 4.90 $ 3.40
Weighted average
shares:
Basic ...................... 6,053 7,048 7,068 6,849 1,987 836 836
Diluted .................... 6,064 7,160 7,143 6,924 5,344(c) 4,934 4,791
Cash dividends
declared ....................... $ 0.06 $ 0.06 $ 0.08 $ 0.08 $ 0.00 $ 0.00 $ 0.00
BALANCE SHEET DATA:
Working capital ..................... $ 42,087 $ 52,309 $ 53,128 $ 48,061 $ 42,860 $ 25,506 $ 17,870
Total assets ........................ 50,084 61,077 61,472 57,652 60,245 39,711 45,450
Long-term debt ...................... -- -- -- -- 115 6,651 5,864
Total liabilities ................... 5,693 6,460 5,755 6,991 14,078 17,027 29,692
Total stockholders'
equity ......................... 44,391 54,617 55,717 50,661 46,167 22,684 15,758
Ratio of earnings to
fixed charges (d) ............. 14.9 24.9 23.6 22.3
- -----------------
(a) Net income per share data has been retroactively restated to give effect
for the adoption of Statement of Financial Accounting Standards No. 128,
"Earnings Per share."
(b) Book value per share has been calculated based on total stockholders'
equity divided by shares issued and outstanding as of the end of the period
presented, including the pro forma conversion of convertible preferred
stock and senior preferred stock to common stock for 1994 and 1995.
11.
19
(c) Weighted average shares have been calculated based on the average market
price per share from the date of the IPO to year-end.
(d) For purposes of computing the ratio of earnings to fixed charges, earnings
consists of income before income taxes plus fixed charges. Fixed charges
consist of interest expense and that portion of rental expenses
representative of the interest factor.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains or incorporates by reference certain
forward-looking statements and information relating to Kentek that are based on
the beliefs of management as well as assumptions made by and information
currently available to Kentek. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance,
and underlying assumptions and other statements which are other than statements
of historical facts, including statements regarding the completion of the
Merger. When used in this document, the words "anticipate," "believe,"
"estimate," "expect," "plan," "intend," "project," "predict," "may," and
"should" and similar expressions, are intended to identify forward-looking
statements. Such statements reflect the current view of Kentek with respect to
future events, including the completion of the Merger, and are subject to
numerous risks, uncertainties and assumptions. Many factors could cause the
actual results, performance or achievements of Kentek to be materially different
from any future results, performance or achievements that may be expressed or
implied by the forward-looking statements, including, among others:
o delays in receiving required regulatory and other approvals;
o the ability of KE Acquisition to obtain funding necessary to
consummate the Merger;
o the failure of stockholders to approve the Merger Agreement;
o general economic or market conditions;
o changes in business strategy;
o availability of financing on acceptable terms to fund future
operations;
o competitive conditions in Kentek's markets;
o general economic or market conditions;
o changes in technology; and
o various other factors, both referenced and not referenced in this
proxy statement including those discussed in Kentek's periodic
and other filings with the SEC.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in this proxy statement as anticipated, believed, estimated,
expected, planned or intended.
Notwithstanding the foregoing, Kentek is not entitled to rely on the
statutory safe harbor of Section 21E of the Securities and Exchange Act of 1934
in relation to the disclosure contained in this proxy statement.
12.
20
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED
The purpose of the special meeting is to vote upon a proposal to approve
and adopt the Merger Agreement. If the Merger Agreement is approved by the
stockholders of Kentek and the other conditions to the Merger are satisfied or
waived, KE Acquisition will merge with and into Kentek and all shares currently
held by stockholders will be converted into the right to receive $8.29 in cash,
without interest, other than shares held by Kentek as treasury stock, shares
owned by KE Acquisition and shares as to which appraisal rights have been
validly exercised. See page [56] of this proxy statement. At the special
meeting, the stockholders will also be asked to transact other business as
properly may come before the meeting. The Board is not presently aware of any
other business.
Representatives of the independent auditors of Kentek are not expected to
be present at the special meeting.
A copy of the Merger Agreement is attached to this proxy statement as Annex
A. See also "The Merger" and "Certain Provisions of the Merger Agreement"
beginning on pages [52] and [56] of this proxy statement. THE SPECIAL COMMITTEE
AND THE BOARD HAVE, BY UNANIMOUS VOTES, APPROVED THE MERGER AGREEMENT AND
RECOMMEND A VOTE FOR ADOPTION AND APPROVAL OF THE MERGER AGREEMENT.
REQUIRED VOTES
The affirmative vote of at least a majority of the outstanding shares
entitled to vote thereon is required to approve and adopt the Merger Agreement
and the transactions contemplated by the Merger Agreement. The transaction is
not structured so that the approval of at least a majority of unaffiliated
security holders is required.
As of September 10, 1999, directors and executive officers of Kentek and
their affiliates were beneficial owners of an aggregate of 1,586,600 shares,
approximately 34.46% of the common stock, of which 1,157,130 shares, or
approximately 25.13% of the common stock, are eligible to vote at the special
meeting. The directors and executive officers of Kentek have determined that the
Merger, the Merger Agreement and the transactions contemplated by the Merger
Agreement are fair to and in the best interests of the Public Stockholders and,
as a result, have indicated that they intend to vote their shares in favor of
the adoption of the Merger Agreement although they are not obligated to do so.
The directors and executive officers of Kentek have not entered into any formal
or informal arrangements relating to the voting of their shares.
As of September 10, 1999, the four largest holders of Kentek's common stock
were beneficial owners of an aggregate of 3,004,930 shares, approximately 65.26%
of the common stock, of which 2,997,687 shares, or approximately 64.67% of the
common stock, are eligible to vote at the special meeting. Kentek believes that
each of its four largest stockholders will vote their shares in favor of the
adoption of the Merger Agreement although they are not obligated to do so and,
as of the date of this proxy statement, Kentek has not requested a proxy from
any of these stockholders. See pages [33-34].
The affirmative vote of a majority of the votes cast at the special meeting
will be required to take action with respect to any other matter as may be
properly brought before the special meeting.
VOTING AND REVOCATION OF PROXIES
Shares that are entitled to vote and are represented by a proxy properly
signed and received at or prior to the special meeting, unless subsequently
properly revoked, will be voted in accordance with the instructions indicated
thereon. IF A PROXY IS SIGNED AND RETURNED WITHOUT INDICATING ANY VOTING
INSTRUCTIONS, SHARES REPRESENTED BY THE PROXY WILL BE VOTED FOR THE PROPOSAL TO
APPROVE AND ADOPT THE MERGER AGREEMENT. The Board is not currently aware of any
business to be acted upon at the special meeting other than as described in this
proxy statement. If, however, other matters are properly brought before the
special meeting or any adjournments or postponements thereof, the persons
appointed as proxies will have the discretion to vote or act thereon in
accordance with their best judgment, unless authority to do so is withheld in
the proxy. The persons appointed as proxies may not exercise their discretionary
voting authority to vote any proxy in favor of any adjournments or postponements
of the special meeting if instruction is given to vote against the approval and
adoption of the Merger Agreement.
13.
21
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the shares represented by the proxy are voted at
the special meeting by:
o attending and voting in person at the special meeting,
o giving notice of revocation of the proxy at the special meeting,
or
o delivering to the Secretary of Kentek a written notice of
revocation or a duly executed proxy relating to the same shares
and matters to be considered at the special meeting, bearing a
date later than the proxy previously executed.
Attendance at the special meeting will not in and of itself constitute a
revocation of a proxy. All written notices of revocation and other
communications with respect to revocation of proxies should be addressed as
follows: Kentek Information Systems, Inc., 2945 Wilderness Place, Boulder,
Colorado 80301, Attention: Corporate Secretary, and must be received before the
taking of the votes at the special meeting.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM; VOTING AT THE SPECIAL MEETING
Only holders of shares at the Record Date will be entitled to receive
notice of and to vote at the special meeting. At the close of business on the
Record Date, there were outstanding and entitled to vote [4,604,152] shares.
Each holder of record of common stock on the Record Date will be entitled to one
vote for each share held on all matters to be voted upon at the special meeting.
The presence, in person or by proxy, at the special meeting of the holders of at
least a majority of the shares entitled to vote is necessary to constitute a
quorum for the transaction of business.
Abstentions will be counted as present for the purpose of determining
whether a quorum is present but will not be counted as votes cast in favor of
the Merger proposal. Abstentions, therefore, will have the same effect as a vote
against the Merger proposal.
Brokerage firms who hold shares in "street name" for customers will not
have the authority to vote those shares with respect to the Merger proposal if
such firms have not received voting instructions from a beneficial owner. The
failure of a broker to vote shares in the absence of instructions (a "broker
non-vote") will be counted as present for the purpose of determining whether a
quorum is present but will not be counted as votes cast in favor of the Merger
proposal. Broker non-votes, therefore, will have the same effect as a vote
against the Merger proposal.
APPRAISAL RIGHTS
Each stockholder has a right to dissent from the Merger, and, if the Merger
is consummated, to receive "fair value" for his or her shares in cash by
complying with the provisions of the Delaware General Corporation Law (the
"DGCL"), including Section 262 of the DGCL. The dissenting stockholder must
deliver to Kentek, prior to the vote being taken on the Merger Agreement at the
special meeting, written notice of his or her intent to demand payment for his
or her shares if the Merger is effected and must not vote in favor of approval
and adoption of the Merger Agreement. The full text of Section 262 of the DGCL
is attached as Annex C hereto. See "Appraisal Rights" for a further discussion
of the rights and the legal consequences of voting shares in favor of the
approval and adoption of the Merger Agreement.
SOLICITATION OF PROXIES
The cost of solicitation of proxies will be borne by Kentek. In addition to
the use of the mails, proxies may be solicited by telephone by officers and
directors and a small number of regular employees of Kentek who will not be
specially compensated for such services. Kentek may also request banks and
brokers to solicit proxies from their customers, where appropriate, and will
reimburse the banks and brokers for reasonable expenses incurred in that regard.
14.
22
SPECIAL FACTORS
RELEVANT BACKGROUND INFORMATION
Prior to its initial public offering in 1996, Kentek was a leading supplier
of heavy-duty, high reliability, mid-range, non-impact laser printers and
related consumable supplies and spare parts. In 1997 and 1998, however, Kentek's
printer sales, consumable supplies sales, revenues and market share began to
decline substantially as trends unfavorable to Kentek and similar mid-range
printer companies accelerated. The major trends that have had the most negative
impact on Kentek include:
o Light-duty printers have been dramatically improved. In
particular, the speed, duty-cycle, and cost-of-operation of
light-duty printers have been significantly improved.
o The initial acquisition cost of light-duty printers has
significantly decreased.
o Distributed network printing, using the new, lower cost, and
faster light-duty printers, has grown tremendously.
o Increased competition between Xerox and Hewlett Packard ("HP")
for dominance in the office and departmental printer market has
negatively impacted the traditional mid-range printer
manufacturers.
Improvement in Light Duty Printers. Historically, lower-end printers were
typically 10 to 20 ppm behind those printers that defined the mid-range market.
Lower-end printers were also rated at approximately one-half of the monthly duty
cycle (capacity of pages per month).
Printer companies specializing in the mid-range market typically were
successful in quickly introducing faster new generation printers, thus
maintaining their advantage over lower-end printers. However, over the past
three years, several product delays in the mid-range market, most notably the
delay of HP's 32 ppm printer, allowed other lower-end competitors, such as
Lexmark and Xerox, to enter the mid-range printer market. As these new market
entrants began to develop faster lower-end printers, competition for market
share increased in the mid-range printer market.
Rapid Growth of Distributed Networks. As networked offices became more
prevalent in the workplace, preference shifted from offices with one or two
centralized, bulky printers for all users, to offices with multiple printers,
each serving a small group of individuals. Because the lower-end printers that
were entering the marketplace were smaller, easier to install, and had a
considerably lower acquisition cost than mid-range printers, higher speed light
duty printers quickly became the leading solution in the new networked office
environment. Although Kentek believes traditional mid-range printers have been
more cost-effective in the long-run, as measured by cost per page where volume
and print coverage are high, customers concerned with current budget
requirements and near term profitability have increasingly opted for lower-end
printers with significantly lower initial acquisition costs.
Increased Market Competition. In the mid-1990s, analog office copier
machines were slowly being replaced by both mid-range printers and new
printer/copiers ("digital copiers") with similar speeds. In response to these
trends, Xerox, the leading supplier of office copiers worldwide, began work on
digital copiers that could compete in the office sector. HP's delay in
introducing its 32 ppm printer in late 1998 permitted new light duty Xerox
products to compete in the mid-range printer market. Xerox has devoted very
substantial resources in developing new digital copiers that have taken market
share away from HP and other industry participants. Xerox's efforts have
recently culminated with the very successful introduction of a line of digital
copiers, including 40 ppm and 60 ppm digital copiers, which were developed at a
cost approaching $500 million. In addition to its substantial investment in
development costs, Xerox, as well as other industry participants, has devoted
substantial resources to extensive marketing efforts.
In comparison with Kentek's 40 ppm printer:
o Xerox's 40 ppm digital copier is priced at approximately $3,000
per unit while Kentek's 40 ppm printer is priced at approximately
$15,000 per unit; and
15.
23
o Xerox's 40 ppm digital copier incorporates nearly all of the
product features of Kentek's printers.
Kentek's mid-range printers have effectively been foreclosed from competing
in the departmental printing and networked office market segments as a result of
the factors set forth above. Kentek's printers, therefore, currently compete
only in high-volume production printing applications which include printing
invoices, forms, payroll, direct mail and check imaging. For these applications,
where aggregate usage exceeds 50,000 pages per month and page coverage (the
percentage of the page covered with toner) is much higher than the 4-5% level of
a standard office memo, Kentek believes its printers can provide a more
efficient and cost-effective solution than multiple low-range or light duty
mid-range printers. This is partly because the consumable supply products for
Kentek printers (individually replaceable photoconductor, toner, developer,
fuser and cleaner) have a lower cost per page than the all-in-one cartridge
designs of the new low-cost digital copiers. As the consumable supply products
for a mid-range printer constitute roughly 85% of the total cost of operation
over a printer's useful life, high print volume customers with high page
coverage requirements can materially reduce annual printing costs by using a
Kentek printer rather than a new low-cost digital copier even though the initial
acquisition cost of a Kentek printer is considerably higher.
The impact of the negative industry trends set forth above on Kentek were
exacerbated in November 1998 when Kentek was unable to successfully introduce
its next generation 60 ppm printer, the KW60. In November 1998, Kentek
determined that the successful development of the KW60 would require at least
two additional years and an additional $20 million of capital and Kentek's
principal customer/prospect for the KW60 would not wait past May 1999 for
delivery of the 60 ppm printer. After considering these factors, the negative
industry trends, and Kentek's declining printer sales, consumable supplies
sales, revenues and market share, Kentek's management team and the Board
determined that it was in Kentek's best interest to halt further development
efforts on the KW60.
As a result of Kentek's decision to abandon development efforts on the
KW60, Kentek's management team and Board instituted the following restructuring
actions from November 6, 1998 through March 31:
o Kentek vacated three of the five buildings it occupied, two of
which were devoted exclusively to the development and planned
manufacture of the KW60;
o Kentek terminated 75 employees associated with the development of
the KW60, thereby reducing its headcount by approximately 58%;
o Kentek commenced the conversion of certain assets, including
accounts receivable and inventory, to cash; and
o Kentek completed a comprehensive review of its inventories and
physically disposed of certain inventories previously provided
for in its historical reserve for excess and obsolete
inventories.
As a direct result of Kentek's abandonment of its development efforts
relating to the KW60 and the restructuring actions set forth above, Kentek
reduced its quarterly operating expenses by approximately $2.8 million, incurred
a third quarter restructuring charge of approximately $1.14 million, reduced its
current tax liability and improved its cash position. Kentek's third quarter
restructuring charge resulted solely from its termination of employees and its
abandonment of three of the five buildings it occupied as set forth above.
Since November 1998, Kentek's profitability has increased as a result of
the expense reductions associated with the termination of the development and
planned manufacture of the KW60. However, Kentek continues to experience
declines in new printer sales as a result of the negative competitive trends
discussed above and the lack of a new faster mid-range printer to address
increasing performance from light duty printers. Kentek's sales of consumable
supplies and spare parts have also been declining as new printer sales have not
kept pace with the rate at which existing Kentek printers have been going out of
service. See "Summary--The Company" on page [5] of this proxy statement for
additional information regarding the decline of Kentek's printer, consumable
supply and spare parts sales.
Kentek believes that substantially all of its customers currently resell
the new Xerox 40 ppm printer or intend to resell the new Xerox 40 ppm printer in
the near future. In addition, Kentek anticipates its competitors will continue
to release new lower cost printers with enhanced features. As a result, Kentek's
management team anticipates that Kentek will continue to suffer progressively
greater declines in new printer sales and, as Kentek's installed base of
16.
24
printers exit their useful life cycle, Kentek's sales of consumable supplies and
spare parts sales will continue to decline over the course of the next several
years.
In April and May 1999, Kentek's management team concluded that Kentek is
unlikely to sell more than 600 additional printer units prior to June 30, 2001.
This conclusion was based on the factors set forth above and on Kentek's
historical printer sales numbers. Kentek's historical printer sales numbers are
set forth on page [5] of this proxy statement.
As of the date of this proxy statement, Kentek's management team believes
that continued declines in Kentek printer sales may make the manufacture of
Kentek printers economically impractical in the near future. This belief is
based on the fact that approximately 40% of Kentek's 160 vendors require Kentek
to place minimum component orders. A key Kentek computer chip vendor, for
instance, presently requires Kentek to purchase a minimum of 1,000 of its
computer chips per order with a $275,000 set up charge. In addition, Kentek's
printers are currently assembled by a sole source third party vendor located in
Japan. In August 1999, this vendor informed Kentek that it would not continue to
assemble Kentek's printers once Kentek ordered less than 50 printer units per
month. As Kentek's printer sales continue to decline, Kentek is finding it
increasingly difficult to meet this sole source vendor's and its other vendor's
minimum order requirements. However, Kentek's management team currently intends
to manufacture printers as long as Kentek's customers order printers in
economically viable quantities, which Kentek's management team currently
estimates to be approximately 600 printers per year.
In response to the trends described above, the public markets have not
placed a significant value on Kentek's printer business. Kentek's common stock
has declined from a high in 1996 of $15.50, and has primarily traded at less
than $8.00 per share since late 1996. From the end of August 1998 until the
announcement of Mr. Shires' merger proposal on April 21, 1999 the shares did not
trade above $7.00 per share. In addition, for the six month trading period ended
April 21, 1999, the average closing price of Kentek common stock was $6.25 per
share.
A significant portion of Kentek's market valuation reflects Kentek's cash
and investment securities. Based on the unaudited financial statements of Kentek
as of March 31, 1999, the cash equivalent value of each share was $7.47. Kentek
has not yet closed its books for the quarter and fiscal year ended June 30,
1999. However, Kentek estimates that, as of June 30, 1999, the cash equivalent
value of each share was $8.05 and the adjusted cash equivalent value of each
share was $7.51. The adjusted cash equivalent value of each share reflects
certain current liabilities and commitments of Kentek including estimated income
taxes currently payable, operating and purchase commitments of Kentek's Japanese
subsidiaries, bonus payments to employees and costs associated with the Merger.
See "The Merger--Merger Consideration" on page [52] of this proxy statement for
a more detailed discussion of Kentek's adjusted value of cash and securities per
share as of June 30, 1999. At times, Kentek's common stock has traded at a
discount to its per share cash value.
In response to the low valuation of Kentek's common stock and in response
to requests from numerous stockholders, Kentek's board authorized a stock buy
back program at its August 28, 1998 meeting. Kentek repurchased a total of
2,589,750 shares at an aggregate cost of $15,179,084, or an average per share
cost of $5.86. The repurchased shares constituted approximately 38% of the
shares outstanding immediately following completion of Kentek's initial public
offering.
The table below sets forth the number of shares purchased, the range of
prices paid, and the average purchase price for shares repurchased by Kentek
during each quarterly period since July 1, 1996. No repurchases occurred within
the past 60 days or subsequent to February 24, 1999, the date on which Dr.
Howard L. Morgan and Philip W. Shires initially discussed Mr. Shires' potential
purchase of Kentek.
17.
25
-----------------------------------------------------------------------------------------
RANGE OF AVERAGE PURCHASE NUMBER OF SHARES
QUARTER ENDED PRICES PAID (1) PRICE (1) REPURCHASED (1)
-----------------------------------------------------------------------------------------
September 30, 1996 -- -- --
through June 30, 1998
-----------------------------------------------------------------------------------------
September 30, 1998 $6.125-6.310 $6.185 202,400
-----------------------------------------------------------------------------------------
December 31, 1998 $5.478-5.925 $5.737 2,009,650
-----------------------------------------------------------------------------------------
March 31, 1999 $6.3125-6.375 $6.350 377,700
-----------------------------------------------------------------------------------------
---------------
(1) Includes sales commissions, where applicable.
PURPOSE OF THE MERGER
In light of the facts and circumstances discussed under "Special
Factors--Relevant Background Information," the Board unanimously concluded in
November 1998 that Kentek should explore strategic transactions, including
transactions that would result in the sale of Kentek or transactions that would
otherwise improve Kentek's financial outlook or provide liquidity to Kentek's
stockholders. Ultimately, Kentek's Board unanimously concluded that the sale of
Kentek in the Merger was in the best interest of Kentek and its stockholders.
The Board's determination to explore strategic transactions for Kentek was not
prompted by a single member of the Board or a group of Board members. Rather,
the Board's determination was the result of a consensus among the Board members
in light of the business considerations described above.
Kentek's principal reasons for the Merger are as follows.
o Financial Performance and Future Prospects. Kentek's financial
condition, business and prospects are not promising as a result
of numerous factors, including:
o Kentek has failed to demonstrate the consistent
profitability, revenue growth and product development
generally expected by the public equity markets for
small capitalization companies and Kentek is not likely
to demonstrate long term increases in profitability or
revenue growth. For instance, Kentek reported a net
profit of $0.04 per share in the first quarter of 1999
and a net loss of $0.05 per share in the second quarter
of 1999. Although Kentek had a net profit of $0.71 per
share in the third quarter of 1999, this resulted
primarily from the conversion of certain assets,
including inventory, to cash. See page [16].
o Kentek has experienced significant declines in its
market share and printer sales over the past several
years and Kentek anticipates it will continue to
experience such declines until it is forced out of the
market by companies such as Xerox, HP and Lexmark.
Prior to its initial public offering in 1996, Kentek's
printers accounted for approximately 37% of the
mid-range printer market. Presently, Kentek's printers
account for less than 1% of the mid-range printer
market.
o Kentek's sales of consumable supplies and spare parts
have been declining due to a shrinking installed base
of printers and will continue to decline as existing
Kentek printers go out of service over the next three
to five years. See pages [16-17].
o During the six month trading period ended April 21,
1999, the average daily trading volume of Kentek common
stock on the Nasdaq National Market was 6,517 shares.
As a result, Kentek believes that its larger
stockholders are not able to sell their holdings in the
market, other than at prices significantly below the
Merger Consideration. In addition, Kentek believes
significant sales would likely decrease the trading
price of Kentek's common stock.
o Kentek currently has a limited institutional following
and a small public float.
o Kentek's market capitalization was approximately $35.8
million as of September 10, 1999. Kentek's market
capitalization is small as compared to other public
companies, including its primary competitors.
18.
26
o Kentek's stock price has not performed well since
Kentek's initial public offering in 1996 at a price of
$8.00 per share. During that period, Kentek's common
stock closed at a high of $15.50 per share and at a low
of $4.25 per share. During the six month trading period
ended April 21, 1999, the shares closed at a high of
$7.00 per share and at a low of $5.38 per share.
o Kentek does not have new products to introduce to the
market since it terminated the development of the KW60
printer and Kentek has no plans to invest the
substantial sums required to develop a new printer
engine platform.
o Kentek is the smallest company remaining in the
traditional mid-range printer manufacturing industry.
o Market Price and Premium. The proposed price of $8.29 per share
constitutes a 32.6% premium over the average closing price for
the shares on the Nasdaq National Market for the six month
trading period ended April 21, 1999, the date before Kentek
announced it had received Mr. Shires' initial proposal. In
addition, the proposed price constitutes a 19.5% premium over the
closing price for the shares on April 21, 1999. The market price
of the common stock indicates the arms-length trading price of
the common stock as determined in the open market.
o Lack of Potential Buyers. No party other than KE Acquisition and
Mr. Shires has shown interest in acquiring Kentek despite the
following factors:
o Broadview Associates, an investment banking firm
engaged by Kentek in 1995 to investigate strategic
alternatives, was unable to locate any financial or
strategic buyers that were interested in acquiring
Kentek prior to its initial public offering in 1996;
o at the request of and on behalf of the Special
Committee, Dr. Morgan contacted substantially all of
Kentek's competitors, as well as certain other
companies that had been contacted in 1995 in connection
with the attempted sale of Kentek prior to its initial
public offering, concerning their interest in pursuing
a strategic or financial transaction;
o Kentek did not enter into a merger agreement with KE
Acquisition until 23 days after the public announcement
of Mr. Shires' indication of interest in Kentek,
providing ample time for interested parties to indicate
their interest in Kentek; and
o the Merger Agreement authorizes Kentek under certain
circumstances to
- engage in negotiations with third parties who
submit proposals for alternative transactions
if the Board and/or the Special Committee
determine in the exercise of their fiduciary
duties that the proposals are in the best
interest of the Public Stockholders, and
- terminate the Merger Agreement at nominal
expense in order to permit Kentek to enter
into an alternative transaction.
o Highest Potential Return; Prompt and Orderly Transfer of
Ownership. The Board and the Special Committee believe that the
Merger presents Kentek's stockholders with the highest potential
investment return available and provides for a prompt and orderly
transfer of the ownership of Kentek. The Board's and the Special
Committee's beliefs are based on:
o their consideration of the projected financial results
of Kentek's operations, as set forth on pages [46-48]
of this proxy statement;
o their consideration of alternative strategic
transactions, as discussed on pages [20-22] of this
proxy statement; and
o their determination that the proposed merger
transaction is preferable to the alternative strategic
transactions and the status quo.
19.
27
o Liquidity. Holders of significant blocks of Kentek common stock
are not able to effectively sell their shares into the available
market as the typical daily trading volume of Kentek's common
stock in recent years has been low. During the six month trading
period ended April 21, 1999, the average daily trading volume of
Kentek common stock was 6,517 shares. Given that Kentek's Public
Stockholders currently hold approximately 4,542,652 shares of
Kentek common stock, approximately 0.0014% of Kentek's common
stock is traded on any given day. Accordingly, Kentek's larger
stockholders are unable to sell a material portion of their
shares, other than at prices significantly below the Merger
Consideration. In addition, Kentek believes significant sales
would likely decrease the trading price of Kentek's common stock.
o Benefits of Being a Private Company. As a privately held company,
Kentek:
o will be able to eliminate the time devoted by its
management and certain other employees to matters which
relate exclusively to Kentek being a public company;
o will be able to eliminate certain other costs which
relate to being a public company, including:
- approximately $250,000 per year relating to
certain accounting, consulting, auditing and
SEC counsel activities,
- approximately $50,000 per year relating to
preparing, printing and mailing corporate
reports and proxy statements,
- approximately $15,000 per year relating to
board of director fees and expenses;
- approximately $10,000 per year relating to
stock transfer and transfer agent fees, and
- approximately $90,000 per year relating to
investor relations activities.
o will be eligible to elect to be taxed under Subchapter
S of the Internal Revenue Code, thereby creating tax
advantages for Kentek's stockholders.
KE Acquisition expects that, over time, it could save up to approximately
$415,000 per year in costs as a result of the acquisition of Kentek. These
savings are expected to result from the elimination of the public company
expenses described above.
ALTERNATIVE STRATEGIC TRANSACTIONS CONSIDERED BY KENTEK
In addition to considering the sale of Kentek to KE Acquisition or a third
party, the Special Committee, Board and Kentek's management team considered the
following alternatives:
o Maintaining the Status Quo. The Special Committee, the Board and
Kentek's management team considered the possibility of
maintaining the status quo. Since November 1998, Kentek has
substantially increased its profitability and is presently
generating positive cash flow. Kentek's increased profitability,
however, is the result of the expense reductions associated with
the termination of the development and planned manufacture of the
KW60 and conversions of inventory and other assets to cash. See
page [16]. The Special Committee, the Board and Kentek's
management team further determined that Kentek cannot maintain
the status quo in the long term because its cash flow will likely
decrease significantly over time as its installed printer base,
printer sales and consumable supply sales continue to decrease.
In addition, the Special Committee, the Board and Kentek's
management team noted that the Merger would provide Kentek's
stockholders with the opportunity to vote for the Merger or to
maintain the status quo.
o Cash Tender Offer. The Special Committee, the Board and Kentek's
management team considered a cash tender offer for all of the
shares held by the Public Stockholders. Each of the Special
Committee, the Board and Kentek's management team ultimately
rejected this alternative in the belief that the Merger would be
more efficient and equitable than a transaction involving a
tender offer. While the Merger will result in an acquisition of
100% of the shares, it is unlikely that a tender offer would
yield the same result. It is almost certain that in order to
obtain 100% of the shares, Kentek would have had
20.
28
to complete a second-step merger after completion of the cash
tender offer. Such a second-step merger would have added time and
expense to the transaction without providing a material benefit
to the Public Stockholders.
o Distribution of Cash and Securities as Dividend. The Special
Committee, the Board and Kentek's management team also considered
distributing a significant portion of the cash and securities
held by Kentek to its stockholders as a special dividend, thereby
allowing Kentek's stockholders to retain an equity interest in
Kentek. Each of the Special Committee, the Board and Kentek's
management team ultimately rejected this alternative because a
significant portion of the dividend would be taxable to Kentek's
stockholders at ordinary income tax rates, which may be
substantially higher than capital gains tax rates. In addition,
the Special Committee, the Board and Kentek's management team
believed that this alternative would result in the trading price
of the shares declining below levels required for the shares to
continue to be quoted on the Nasdaq National Market. This would
result in Kentek's stockholders having a less liquid equity
interest, as compared to the equity interest held by stockholders
as of the date of this proxy statement. The resulting company
would be a very small company with few assets or long term
prospects.
o Merger Combined with Contingent Cash Payment. The Special
Committee, the Board and Kentek's management team considered an
alternative in which the Merger Consideration would have been
structured to provide $7.85 per share in cash at the closing with
the possibility of the Public Stockholders ultimately receiving a
contingent cash payment of up to $0.50 per share plus 12%
interest per annum over a period of four to four and one-half
years after the consummation of the Merger. This "contingent"
cash payment to the Public Stockholders would have been paid from
50% of the "after tax dollars" realized by Kentek. However, there
would have been no guaranteed right of payment in the event
Kentek did not realize sufficient profits. While this alternative
might have resulted in the Public Stockholders receiving a larger
payment than $8.29 per share, most of the additional cash payment
would not have been received until as much as four and one-half
years after the Merger and receipt of the payment would have been
subject to significant uncertainties and contingencies relating
to Kentek's business and liabilities after the Merger. In
addition, subsequent to announcing the proposed merger
transaction on April 21, 1999, Mr. Shires discussed the
possibility of including a contingent payment right in the
proposed merger consideration with representatives of Kentek's
four largest stockholders. Three of the four stockholders
indicated that they would rather receive a lump sum payment upon
the consummation of a merger transaction as opposed to what they
viewed as a speculative and contingent future payment. The
Special Committee, the Board and Kentek's management team did not
discuss other alternative transactions or other aspects of the
proposed transaction with Kentek's stockholders or their
affiliates, excluding Kentek's officers and directors. See page
[33-34] of this proxy statement for more information regarding
Kentek's discussions with its largest stockholders. As a result
of the foregoing factors, the Special Committee determined that
the Merger offered a better transaction for the Public
Stockholders and did not pursue the contingent payment
alternative.
o Liquidation of Kentek. The Special Committee, the Board and
Kentek's management team considered whether Kentek's Public
Stockholders would benefit from a liquidation of the company in
light of the fact that Kentek's cash flow, revenues and profits
will likely decrease significantly over time as Kentek's
installed printer base, printer sales and consumable supply sales
continue to decrease. Each of the Special Committee, the Board
and Kentek's management team considered the following facts in
connection with the potential liquidation of Kentek.
o In order to maximize the value of Kentek's assets and
revenues from the sale of consumable supplies and spare
parts, the liquidation of Kentek would likely take
place over a four to five year period. A liquidation of
Kentek's assets in a shorter period of time would
require Kentek to prematurely shut down its operations
and dispose of its assets, including its accounts
receivable, at a substantial discount to their fair
market value.
o The liquidation of Kentek over a four to five year
period would give rise to adverse tax consequences to
Kentek's stockholders. In particular, the Internal
Revenue Code of 1986, as amended, provides that a
significant portion of the cash distributions to
Kentek's stockholders in connection with such a
liquidation would be taxable to Kentek's stockholders
at ordinary
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income tax rates. For most Kentek stockholders,
ordinary income tax rates are likely to be
substantially higher than the capital gains tax rates
which would otherwise be applicable to a substantial
portion of the distributions received by Kentek's
stockholders in connection with the Merger.
As a result of the foregoing factors, the Special Committee, the
Board and Kentek's management team determined that the liquidation
of Kentek was not an acceptable alternative to the proposed merger
transaction or to maintaining the status quo.
The Special Committee, the Board and Kentek's management team did not
consider a stock-for-stock transaction with KE Acquisition as an alternative to
a cash-out merger. A stock-for-stock transaction would have been inconsistent
with most of the reasons for the Merger described above. Specifically, a
stock-for-stock transaction would not have eliminated the detriments of being a
public company with minority interests and would have eliminated most of the
benefits described below. In addition, since there would have been reduced
liquidity for the stock of Kentek after the Merger, the Public Stockholders
would not have had meaningful liquidity for the stock they would have received.
REASONS OF KENTEK FOR THE MERGER; FAIRNESS OF THE MERGER
Special Committee.
In approving, and recommending that the entire Board approve, the Merger
Agreement, and in declaring, and recommending that the entire Board declare, the
Merger Agreement advisable and the transactions contemplated by the Merger
Agreement to be fair to and in the best interests of Kentek's stockholders, the
Special Committee considered the following facts and circumstances. The Special
Committee concluded that each of the factors set forth below supported its
decision to approve and recommend the Merger Agreement to Kentek's stockholders.
o Limitations as a Public Company. The Special Committee determined
that the factors set forth below had adversely affected the
trading markets for, and the value of, Kentek's common stock.
o The Special Committee believed that Kentek's stock
price performance has not been good since Kentek's
initial public offering in 1996. See pages [19] and
[51].
o The average daily trading volume of Kentek's common
stock is low. See page [18].
o Kentek has limited institutional sponsorship and a
small public float.
o Kentek's market capitalization is small. See page [18].
o Since its initial public offering in 1996, Kentek has
received diminishing research attention from market
analysts.
o In recent years, Kentek's failure to demonstrate
consistent profitability, revenue growth and product
development has highlighted Kentek's inability to
generate and sustain the rate of rapid growth generally
expected by the public equity markets for small
capitalization companies.
The Special Committee also determined that the foregoing factors
were likely to adversely effect the trading markets for, and the
value of, Kentek's common stock in the future. Accordingly, the
Special Committee concluded that the $8.29 per share cash
consideration to be received by the Public Stockholders was
preferable to continuing to hold shares in the public company.
o Financial Performance and Future Prospects. The Special Committee
considered the following information with respect to the
financial performance and future prospects of Kentek.
o The financial condition, results of operations,
business and prospects of Kentek, including the
financial projections supplied to Janney Montgomery
Scott and the inherent uncertainties and contingencies
associated with the financial projections. In
particular, the Special Committee considered the
factors discussed on pages [15-19] and [46-48] of this
proxy statement.
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30
o The fact that Kentek is smaller than all of the remaining
companies in the mid-range printer manufacturing industry. The
Special Committee noted that many of Kentek's competitors,
including Xerox, HP and Lexmark, have substantially greater
resources than Kentek. The Special Committee determined that such
companies are better able to expend the significant resources
that are required to design, manufacture and market mid-range
printers.
o The economic and market conditions affecting Kentek as set forth
on page [15-17] of this proxy statement.
The Special Committee determined that the information relating to the
financial performance and future prospects of Kentek indicated that:
o Kentek does not have favorable long-term business prospects;
o The financial performance and future prospects of Kentek are
likely to continue to depress the trading of Kentek's common
stock if the proposed merger transaction is not consummated; and
o The proposed merger transaction is in the best interest of
Kentek's Public Stockholders.
o Opinion of Janney Montgomery Scott. On May 14, 1999, Janney Montgomery
Scott delivered to the Special Committee the financial presentation and its
written opinion that, as of the date of its opinion and based upon and
subject to the matters stated in its opinion, the $8.29 per share Merger
Consideration to be received by the Public Stockholders in the Merger was
fair to the Public Stockholders from a financial point of view. THE FULL
TEXT OF JANNEY MONTGOMERY SCOTT'S WRITTEN OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY JANNEY MONTGOMERY SCOTT, IS ATTACHED AS ANNEX B TO THIS PROXY
STATEMENT AND IS INCORPORATED IN THIS PROXY STATEMENT BY REFERENCE.
STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION OF JANNEY
MONTGOMERY SCOTT CAREFULLY. In addition, Janney Montgomery Scott delivered
to the Special Committee supplemental financial presentations and an oral
updates of its written opinion on August 13, 1999 and September 10, 1999.
With respect to Janney Montgomery Scott's analyses, written fairness
opinion and oral updates of its fairness determination, the Special
Committee considered the following facts.
o In preparing its original and supplemental financial analyses,
Janney Montgomery Scott utilized management's assessment of
Kentek's business and prospects.
o The projections underlying Janney Montgomery Scott's original
financial analysis assume that the Merger is completed and allow
the Special Committee and the Board to analyze the fairness of
the Merger to the Public Stockholders from the perspective of the
Schedule 13E-3 Filing Parties in order to assess the ability of
the Schedule 13E-3 Filing Parties to pay more than the Merger
Consideration.
o On May 14, 1999, Janney Montgomery Scott presented its original
financial analysis and written fairness opinion to the Special
Committee and the Board that, as of that date, the Merger was
fair, from a financial point of view, to the Public Stockholders.
o Janney Montgomery Scott's original fairness analysis and written
fairness opinion indicated that the $8.29 per share to be paid by
KE Acquisition falls within the fair value per share of Kentek's
common stock.
o In response to comments received by Kentek from the staff of the
Securities and Exchange Commission, the Special Committee and the
Board unanimously requested that Janney Montgomery Scott prepare
two supplemental financial analyses based on financial
projections which do not give effect to the Merger.
o The Special Committee and the Board unanimously requested that
Janney Montgomery Scott prepare the supplemental financial
analyses because they believed that the supplemental
23.
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financial analyses provided additional relevant data regarding
the fairness of the Merger to the Public Stockholders.
o The financial projections relied upon by Janney Montgomery Scott
in preparing its supplemental financial analyses differ from the
projections utilized by Janney Montgomery Scott in connection
with the preparation of its original fairness analysis as set
forth below.
- The projections underlying the supplemental financial
analyses assume that Kentek retains its cash and earns
interest income based on a rate of 5%. The assumptions
underlying Janney Montgomery Scott's original financial
analysis assume that all of the cash held by Kentek is
paid to the Public Stockholders in connection with the
consummation of the Merger.
- The projections underlying the supplemental financial
analyses assume that Kentek does not incur any debt
because its cash is retained and is not used to finance
the Merger. The projections underlying the original
financial analysis assume that Kentek is burdened with
the $6 million of debt that KE Acquisition and Philip
W. Shires propose to borrow from US Bank to consummate
the Merger.
- The ongoing cost of remaining a public company is
included in operating expense projections underlying
the supplemental financial analyses. The ongoing cost
of remaining a public company is not included in the
operating expense projections underlying the original
financial analysis.
- The supplemental financial analyses assume that the tax
rate on pretax income is 37.5%, Kentek's estimated
historical tax rate as a public company. The original
financial analysis assumes that the tax rate on pretax
income is 44.0%, the estimated tax rate applicable to
Kentek after it elects to be treated as an
S-corporation subsequent to the consummation of the
Merger.
- The supplemental financial analyses assume that Kentek
will continue to pay $0.02 per share quarterly
dividends. The original financial analysis assumes that
Kentek will no longer pay dividends.
o On August 13, 1999, Janney Montgomery Scott presented its first
supplemental financial analysis to the Special Committee and the
Board and orally confirmed its prior opinion to the Special
Committee and the Board that, as of that date, the Merger was
fair, from a financial point of view, to the Public Stockholders.
Janney Montgomery Scott's first supplemental financial analysis
presented a discounted cash flow analysis which was prepared
under the assumption that Kentek's cash would be retained and
Kentek would continue to operate its business.
o One of the analyses prepared by Janney Montgomery Scott in
connection with its original financial analysis of the Merger,
the comparable company analysis, was altered by the August 13,
1999 supplemental financial analysis.
o Janney Montgomery Scott's first supplemental fairness analysis
and oral update of its written fairness opinion indicated that
the $8.29 per share to be paid by KE Acquisition falls within the
fair value per share of Kentek's common stock.
o On September 10, 1999, Janney Montgomery Scott presented its
second supplemental financial analysis to the Special Committee
and the Board and orally confirmed its prior opinion to the
Special Committee and the Board that, as of that date, the Merger
was fair, from a financial point of view, to the Public
Stockholders.
o Janney Montgomery Scott's second supplemental financial analysis
presented a discounted cash flow analysis which was prepared
under the assumption that a large portion of Kentek's cash would
be distributed to Kentek's stockholders as a special dividend and
Kentek would continue to operate its business. See pages [44-45]
of this proxy statement for additional details.
24.
32
o Janney Montgomery Scott's second supplemental discounted cash
flow analysis indicates that the $8.29 per share to be paid by KE
Acquisition does not fall within the fair value per share of
Kentek's common stock.
o Janney Montgomery Scott's fairness analysis and May 14, 1999
written opinion were not modified by Janney Montgomery Scott's
two supplemental financial analyses and oral updates of the May
14, 1999 opinion.
o Janney Montgomery Scott's written opinion and oral updates of its
written opinion are limited to the facts and circumstances as
they existed on their respective dates of issuance.
o The written opinion of Janney Montgomery Scott will be orally
updated as of the closing date of Merger.
o $100,000 of the fee payable to Janney Montgomery Scott is
conditioned on the consummation of the Merger.
After considering the foregoing facts and reviewing the materials prepared
by Janney Montgomery Scott, the Special Committee determined that:
o Janney Montgomery Scott's original fairness analysis and written
fairness opinion supported the Special Committee's determination
as to the fairness of the proposed merger transaction because the
analysis and opinion indicated that the $8.29 per share to be
paid by KE Acquisition falls within the fair value per share of
Kentek's common stock;
o Janney Montgomery Scott's first supplemental fairness analysis
and oral update of its written fairness opinion supported the
Special Committee's determination as to the fairness of the
proposed merger transaction because the first supplemental
analysis and oral update did not modify Janney Montgomery Scott's
original fairness analysis or written fairness opinion and
because the first supplemental analysis and oral update indicated
that the $8.29 per share to be paid by KE Acquisition falls
within the fair value per share of Kentek's common stock;
o Janney Montgomery Scott's second supplemental fairness analysis
resulted in a range of estimated per share values for the common
stock of between $9.03 and $9.63, and, as a result, did not
support the Special Committee's determination as to the fairness
of the Merger;
o Janney Montgomery Scott's second supplemental fairness analysis
did not account for the following factors, which the Special
Committee believed were relevant in considering Janney Montgomery
Scott's second supplemental fairness analysis.
- Distributions of cash to Kentek's stockholders as a
special dividend would give rise to adverse tax
consequences for most of Kentek's stockholders. In
particular, it is likely that such special dividends
would be taxed at ordinary income tax rates, which are
likely to be substantially higher than the capital
gains tax rates that will be applicable to a
significant portion of the Merger Consideration.
- Janney Montgomery Scott's second supplemental fairness
analysis assumes that Kentek's management team will
continue to manage Kentek's business operations in the
event that the proposed management buyout is not
consummated. The Special Committee was uncertain
whether Kentek's management team would have an
incentive to continue to manage Kentek's business
operations if the proposed management buyout is not
consummated.
- Distributions of cash to Kentek's stockholders would
likely reduce the trading price for the common stock,
possibly resulting in Kentek ceasing to be eligible to
be traded on the Nasdaq National Market and adversely
affecting the trading market for the common stock.
25.
33
o Janney Montgomery Scott's September 10, 1999 oral update of its
written fairness opinion supported the Special Committee's
determination as to the fairness of the proposed merger
transaction because the oral update indicated that the $8.29 per
share to be paid by KE Acquisition falls within the fair value
per share of Kentek's common stock;
o it is reasonable for Janney Montgomery Scott to qualify its
written opinion and oral updates of its written opinion to the
facts and circumstances as they existed on their respective dates
of issuance;
o the proposed update of Janney Montgomery Scott's fairness opinion
as of the closing of the Merger will provide the Special
Committee with relevant information regarding the fairness of the
Merger to the Public Stockholders immediately prior to the
consummation of the Merger and will provide additional protection
for the interests of the Public Stockholders;
o the contingent nature of Janney Montgomery Scott's fee as
described above may have created a potential conflict of interest
in that Kentek would be unlikely to consummate the Merger unless
Janney Montgomery Scott's fairness opinion had indicated that the
Merger was fair to Kentek's stockholders; and
o the potential conflict of interest relating to the fairness
opinion prepared by Janney Montgomery Scott and presented to the
Special Committee and the Board was not material given the
Special Committee's belief that Janney Montgomery Scott would not
allow the conditional payment of fees to influence its fairness
analysis.
o Market Price and Premium. The Special Committee considered that the
proposed price of $8.29 per share constituted a 32.6% premium over the
average closing price for the shares on the Nasdaq National Market for the
six month trading period ended April 21, 1999, the date before Kentek
announced it had received Mr. Shires' initial proposal. In addition, the
Special Committee considered that the proposed price constituted a 19.5%
premium over the closing price for the shares on April 21, 1999. The market
price of the common stock was deemed relevant because the Special Committee
viewed it as indicating the arms-length trading value of the common stock
as determined in the open market. The Special Committee concluded that the
approximately 20-30% premium of the proposed merger price over the average
closing price of Kentek's common stock supported its determination as to
the fairness of the proposed merger transaction.
o Negotiations with KE Acquisition. The Special Committee considered the
following factors relating to the negotiations with respect to the Merger
Agreement and the transactions contemplated by the Merger Agreement.
o The negotiations were the product of arm's-length discussions
between Mr. Shires, as the sole stockholder, officer and director
of KE Acquisition, and the Special Committee.
o The negotiations led to an increase in KE Acquisition's offer
from $7.85 per share to $8.29 per share to be received by the
Public Stockholders.
o The Special Committee's belief that $8.29 per share was the
highest price that Mr. Shires and KE Acquisition would offer and
that further negotiation with Mr. Shires would not result in an
increase to the proposed purchase price per share. The Special
Committee's belief was based on the fact that Mr. Shires had
indicated that he would not offer to pay more than $8.29 per
share because a higher price did not offer, in Mr. Shires'
opinion, a potential rate of return that would justify the level
of risk assumed in connection with an acquisition of Kentek.
o The fact that Kentek may, under certain circumstances, engage in
discussions or negotiations with, and furnish information or
access to, third parties who submit a written acquisition
proposal for a transaction, together with the ability of the
Board to terminate the Merger Agreement at minimal expense in
order to permit Kentek to enter into a transaction.
In light of the factors set forth above, the Special Committee concluded
that:
26.
34
o The Special Committee's involvement in the negotiations provided
protection for the interests of Kentek's Public Stockholders; and
o $8.29 per share was the highest price that KE Acquisition would
offer in connection with the proposed transaction.
o Financing Commitment. The Special Committee considered the Commitment
Letter received by KE Acquisition from US Bank to fund a certain portion of
the financing for the Merger and KE Acquisition's plan to fund the
remainder of the Merger Consideration with cash and securities currently
held by Kentek. The Special Committee and its financial advisors reviewed
the terms and conditions of the commitment letters and the financing plans
and determined that the financing plans would allow KE Acquisition and Mr.
Shires to make the payments to Kentek's stockholders that are required
under the Merger Agreement.
o Lack of Potential Buyers. The Special Committee believed that the length of
time between the public announcement of Mr. Shires' indication of interest
in Kentek and the date of the Merger Agreement provided a substantial
amount of time within which to gauge the current level of interest in
Kentek and to permit potential buyers to come forward. The Special
Committee also believed, based on discussions with Janney Montgomery Scott,
that the prospects for a transaction between Kentek and potential
unaffiliated strategic or financial third party buyers were limited due to
Kentek's recent and projected future revenues and results of operation. In
addition, the Special Committee considered the provisions of the Merger
Agreement, which legally and practically permit Kentek to meaningfully
respond to third party proposals for alternative transactions. See page
[57-58]. In particular, the terms of the Merger Agreement authorize Kentek
under certain circumstances to engage in negotiations with third parties
who submit proposals for alternative transactions if the Board and/or the
Special Committee determine in the exercise of their fiduciary duties that
the proposals are in the best interest of the Public Stockholders. In
addition, the Merger Agreement may be terminated at a minimal cost in order
to permit Kentek to enter into an alternative transaction. Finally, the
Special Committee considered that Broadview Associates had been unable to
locate any financial or strategic buyers that were interested in acquiring
Kentek prior to its initial public offering in 1995.
As a result of the foregoing, the Special Committee concluded that:
o there are no third parties interested in purchasing Kentek for
more than $8.29 per share; and
o the structure of the proposed merger transaction allows Kentek
the opportunity to pursue an alternative transaction with any
party that is willing to make a superior offer for Kentek prior
to the consummation of the proposed transaction.
o Special Committee Composition and Retention of Advisors. The Special
Committee took into account that it was composed of disinterested
directors, none of who would have equity interests in Kentek subsequent to
the consummation of the Merger. The Special Committee also considered that
it was advised by legal counsel and financial advisors who negotiated on
behalf of the Special Committee, assisted the Special Committee in
evaluating proposed transactions and provided the Special Committee with
financial and legal advice. The Special Committee concluded that these
factors provided protection for the interests of Kentek's Public
Stockholders.
o Availability of Appraisal Rights. The Special Committee considered that
appraisal rights will be available to the Public Stockholders under
Delaware law. The Special Committee concluded that the appraisal rights
allow Kentek's stockholders to dispute the Special Committee's
determination that the Merger is fair to the Public Stockholders.
o Loss of Equity Interest. The Special Committee considered the fact that if
the Merger Agreement is approved the Public Stockholders will not
participate in the earnings or increased value of Kentek, if any. Because
of the risks and uncertainties associated with Kentek's future prospects,
the Special Committee concluded that the Merger was preferable to enabling
the holders of Kentek shares to have a speculative potential future return.
27.
35
In evaluating the Merger Agreement and the transactions contemplated by the
Merger Agreement, the Special Committee also considered the following additional
factors:
o Book Value per Share. The Special Committee considered that the
book value per share as of March 31, 1999 was $9.66,
approximately $1.37 per share higher than the $8.29 per share
Merger Consideration. In addition, the Special Committee
considered that Kentek's common stock has often traded at a
significant discount to book value over the past year. The
Special Committee concluded that these factors did not indicate
that the Merger was unfair to the Public Stockholders given that
the Merger is likely to provide a greater return to Kentek's
stockholders than any of the various alternatives considered by
the Board, including maintaining the status quo.
o Value of Cash Equivalent Assets Per Share. The Special Committee
considered that, as of March 31, 1999, $7.47 of the net book
value per share was attributable to cash equivalent assets held
by Kentek. In addition, the Special Committee considered that KE
Acquisition and Mr. Shires intend to finance a substantial
portion of the Merger Consideration from the cash and securities
held by Kentek and that, as of March 31, 1999, only $0.82 per
share of the Merger Consideration would be financed by KE
Acquisition and Mr. Shires. The Special Committee determined that
these factors did not indicate that the Merger was unfair to the
Public Stockholders given that the Merger is likely to provide a
greater return of the cash equivalent value per share to Kentek's
stockholders than any of the various alternatives considered by
the Board.
o Lack of Neutralized Voting. The Special Committee considered that
the transaction is not structured so that the approval of at
least a majority of unaffiliated security holders is required.
The Special Committee determined that such a transaction
structure would not provide a material benefit to Kentek's
stockholders because:
o the Schedule 13E-3 Filing Parties hold approximately
1.3% of Kentek's outstanding common stock, on a
collective basis, and do not have the ability to
control a significant portion of the shares of common
stock that are eligible to vote with respect to the
proposed transaction; and
o none of Kentek's stockholders, including Kentek's four
largest stockholders, are subject to voting agreements
or are otherwise required to vote in favor of the
Merger.
In view of the various factors considered by the Special Committee in
connection with its evaluation of the Merger and the Merger Consideration, the
Special Committee did not find it necessary to quantify or otherwise attempt to
assign relative importance to the specific factors considered in making its
determination, nor did it evaluate whether the factors were of equal importance.
However, based upon these factors, the evaluation of all the relevant
information provided to them by Janney Montgomery Scott and taking into account
the existing trading ranges for Kentek common stock, the Special Committee
determined that the Merger, including the Merger Consideration, was fair from a
financial point of view, to the Public Stockholders. In considering the factors
described above, individual members of the Special Committee may have given
different weights to different factors. The Special Committee was not aware of
any factors which would lead the Special Committee to believe that the Merger
would be unfair to the Public Stockholders.
Board of Directors.
In reaching its determination that the Merger and the Merger Agreement are
fair and in the best interest of the Public Stockholder, the Board considered
and relied upon the Special Committee's conclusions, recommendations, unanimous
approval of the Merger Agreement, and declaration of the Merger Agreement's
advisability and upon Janney Montgomery Scott's opinion, which opinion was also
addressed to the Board, that, as of the date of the opinion, based upon and
subject to various considerations, assumptions and limitations stated in the
opinion, the $8.29 per share in cash to be received by the Public Stockholders
in the Merger was fair to the stockholders from a financial point of view, and
the related analyses presented by Janney Montgomery Scott.
In view of the wide variety of factors considered by the members of the
Board in connection with their evaluation of the Merger and the complexity of
such matters, the Board did not consider it practical to, nor did it attempt to,
quantify, rank or otherwise assign relative importance to the specific factors
considered in making its determination. The Board also relied on the experience
and expertise of Janney Montgomery Scott for quantitative analysis of the
financial terms of the Merger. See "--Opinion of Financial Advisor to the Board
and the Special
28.
36
Committee" beginning on page [38]. The Board did not find it necessary to
quantify or otherwise attempt to assign relative importance to the specific
factors considered in making its determination, nor did it evaluate whether the
factors were of equal importance. Rather, the Board conducted a discussion of,
among other things, the factors described above, including asking questions of
Kentek's management and legal and financial advisors, and reached a consensus
that the Merger was advisable and in the best interests of Kentek and the Public
Stockholders. In considering the factors described above, individual members of
the Board may have given different weights to different factors. The Board was
not aware of any factors which would lead the Board to believe that the Merger
would be unfair to the Public Stockholders.
Kentek and the Schedule 13E-3 Filing Parties.
Kentek, KE Acquisition, Philip W. Shires, Donald W. Shires and Renee Bond
have also considered the factors considered by the Special Committee and the
Board and believe that the consideration to be received by the Public
Stockholders pursuant to the Merger is fair to the Public Stockholders. Kentek
and the Schedule 13E-3 Filing Parties base their belief as to the fairness of
the Merger on the following factors.
o the Special Committee and the Board, prior to the Merger,
concluded that the Merger is fair to, and in the best interests
of, the Public Stockholders;
o the Special Committee and the Board, prior to the Merger,
received an opinion from Janney Montgomery Scott that, as of the
date of the opinion and based on and subject to certain matters
stated in the opinion, the consideration to be paid in the Merger
is fair to the Public Stockholders from a financial point of
view; and
o the negotiations between Kentek and KE Acquisition, on the one
hand, and the Special Committee, on the other hand, of the terms
of the Merger Agreement were conducted on an arm's-length basis.
Kentek and the Schedule 13E-3 Filing Parties did not find it practicable to
assign, nor did they assign, relative weights to the individual factors
considered in reaching their conclusions as to fairness.
CERTAIN EFFECTS OF THE MERGER TRANSACTION
If the Merger Agreement is approved by the holders of a majority of the
shares, and the other conditions to the closing of the Merger are satisfied or
waived, Kentek and KE Acquisition will close the Merger. At or soon after the
closing of the Merger:
o KE Acquisition will merge with and into Kentek, with Kentek as
the surviving corporation;
o the approximately 4,542,652 shares currently held by the Public
Stockholders, representing approximately 98.7% of the shares
currently issued and outstanding, will be converted into the
right to receive $8.29 in cash per share, without interest;
o the certificate of incorporation of Kentek will be amended to
read substantially in the form of Exhibit A to the Merger
Agreement, a copy of which is attached hereto as Annex A, and the
bylaws of KE Acquisition will be the bylaws of the Surviving
Corporation until amended in accordance with applicable law;
o Kentek will pay the fees and expenses relating to the Merger;
o the Public Stockholders will cease to have any ownership interest
in Kentek or rights as holders of shares;
o the Public Stockholders will no longer benefit from any increases
in the value of Kentek or the payment of dividends on the shares;
o the Public Stockholders will no longer bear the risk of any
decreases in value of Kentek;
o the Schedule 13E-3 Filing Parties aggregate interests in the net
book value and net earnings of Kentek will increase from
approximately 1.3% to 100%;
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o one or more of the Schedule 13E-3 Filing Parties will be the sole
beneficiaries of any future earnings and profits of Kentek and
will have the ability to benefit from any divestitures, strategic
acquisitions or other corporate opportunities that may be pursued
by Kentek in the future;
o Kentek will be privately held, there will be no public market for
the common stock;
o there will not be another meeting of Public Stockholders;
o Mr. Shires will cause Kentek to terminate the registration of the
shares under the Exchange Act as soon as the requirements for
termination of registration are met; and
o Kentek will no longer be required to file periodic reports with
the SEC.
Kentek believes that the Merger will be treated for federal income tax
purposes as a purchase by KE Acquisition of the common stock held by the Public
Stockholders and, therefore, will not give rise to gain, loss or other income to
Kentek. For information regarding certain tax consequences to Public
Stockholders, see "The Merger--Certain Federal Income Tax Consequences."
As described above in "--Purpose of the Merger," KE Acquisition expects
that, over time, it could save up to approximately $415,000 per year in costs as
a result of the acquisition of the Public Stockholder's interest in Kentek.
These savings are expected to result from the elimination of the public company
expenses described above.
30.
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BACKGROUND OF THE MERGER
BACKGROUND OF THE PROPOSED MERGER TRANSACTION
In November 1998, the Board, including Mr. Shires, unanimously concluded
that Kentek should explore strategic transactions, including transactions that
would result in the sale of Kentek or transactions that would otherwise improve
Kentek's financial outlook or otherwise provide liquidity to Kentek's
stockholders. The Board's determination to explore strategic transactions for
Kentek was not prompted by a single member of the Board or a group of Board
members. Rather, the Board's determination was the result of a consensus by all
of the Board members in light of the business considerations discussed in
"Special Factors--Relevant Background Information."
The reasons for the Board's decision to explore strategic transactions were
as follows:
o Since 1996, Kentek has experienced significant declines in new
printer sales as a result of negative competitive trends
affecting the traditional mid-market printer industry and
Kentek's failure to develop a new faster mid-range printer to
address increasing performance from light duty printers. See
pages [4-5] and [15-17] of this proxy statement for more
information.
o Since 1996, Kentek's sales of consumable supplies and spare parts
have declined as its new printer sales have not kept pace with
the rate at which existing Kentek printers have been going out of
service. See pages [5] and [16-17] of this proxy statement for
more information.
o Since 1996, Kentek's total revenues and market share have
declined significantly as a result of the declines in sales of
Kentek's printers, consumable supplies and spare parts. See page
[5] of this proxy statement for more information.
o Kentek's Board believed that substantially all of Kentek's
customers currently resell the new Xerox 40 ppm printer or intend
to resell the new Xerox 40ppm printer in the near future. In
addition, the Board anticipated that Kentek's competitors would
continue to release new lower cost printers with enhanced
features. As a result, the Board believed that it was likely that
Kentek would continue to suffer progressively greater declines in
new printer sales and, as Kentek's installed base of printers
exit their useful life cycle, Kentek's sales of consumable
supplies and spare parts sales would continue to significantly
decline.
In December 1998, January 1999 and February 1999 all of the members of the
Board, including Mr. Shires, discussed the remaining alternatives for Kentek's
business. In addition, Dr. Morgan, acting on behalf of the Board, held
discussions with Janney Montgomery Scott regarding strategic alternatives
available to Kentek. Janney Montgomery Scott ultimately informed Dr. Morgan that
Kentek was not an attractive acquisition candidate as a result of Kentek's
declining sales, the negative competitive trends affecting the traditional
mid-range printer industry and Kentek's failure to develop a new faster
mid-range printer.
During the same period of time, Mr. Shires, acting as a representative of
the Board, held informal discussions with Broadview Associates regarding
strategic alternatives for Kentek. Broadview Associates informed Mr. Shires that
Kentek was not an attractive acquisition candidate as a result of Kentek's
declining sales, the negative competitive trends affecting the traditional
mid-range printer industry and Kentek's failure to develop a new faster
mid-range printer.
Neither Dr. Morgan, Mr. Shires, nor any other member of the Board contacted
any other financial advisors or investment bankers regarding strategic
alternatives for Kentek. In addition, neither Dr. Morgan, Mr. Shires, nor any
other member of the Board contacted any third parties regarding their interest
in pursuing a strategic transaction with Kentek prior to the date on which the
Special Committee instructed Dr. Morgan to contact firms in the printer industry
regarding their potential interest in acquiring Kentek. See page [32] below for
additional details.
On February 24, 1999, Dr. Morgan approached Kentek's President and Chief
Executive Officer, Philip W. Shires, to discuss alternatives for Kentek's
business. In the course of this discussion, Dr. Morgan raised the possibility of
Mr. Shires purchasing Kentek. Subsequent to the meeting, Dr. Morgan notified the
remaining members of the Board of his discussion with Mr. Shires concerning the
sale of Kentek.
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On March 8, 1999, Mr. Shires notified the Board of his potential
willingness to acquire Kentek's outstanding shares at a cash price of $7.85 per
share, or at the option of each stockholder, at a cash price of $7.50 per share
and the contingent right to receive additional cash consideration.
During the next several weeks, Mr. Shires explored the feasibility of a
potential acquisition of Kentek, engaged in discussions with potential financing
sources, and retained legal counsel to assist with the formulation of a formal
proposal to acquire Kentek. During this time, Dr. Morgan consulted with Kentek's
outside legal counsel, Cooley Godward LLP, on behalf of the Board regarding the
possibility of Mr. Shires making a formal proposal to acquire Kentek.
On April 13, 1999, Mr. Shires' legal counsel transmitted to each of
Kentek's directors and to Cooley Godward LLP an initial proposal to acquire
Kentek in the form of a merger agreement. The draft merger agreement
contemplated that KE Acquisition would acquire all outstanding shares at a cash
price of $7.85 per share, or at the option of each stockholder, at a cash price
of $7.50 per share and the contingent right to receive additional cash
consideration. Subsequently, Mr. Shires orally communicated to the Board a
revised proposal which deleted the option for Kentek stockholders to receive the
all cash price of $7.85 per share.
The Board, following consultation with Kentek's outside legal counsel,
Cooley Godward LLP, unanimously determined that, in view of possible conflicts
of interest in connection with any proposal from Mr. Shires, it was advisable to
form a special committee of the Board comprised of disinterested directors. At a
meeting of the Board on April 21, 1999 the Board resolved to form the Special
Committee, consisting of Messrs. Morgan, Weinig and Perreault, for the purpose
of evaluating and negotiating the terms of any potential acquisition proposal
from Mr. Shires or any entity organized by him and any related matters.
At the April 21, 1999 meeting of the Board, the members of the Special
Committee engaged in discussions regarding the retention of an investment bank
and law firm as its financial and legal advisors. The Special Committee
determined to retain Janney Montgomery Scott as financial advisor to the Special
Committee, based upon its familiarity and expertise with Kentek. Janney
Montgomery Scott had served as the managing underwriter for Kentek's initial
public offering and had also been retained by Kentek in late 1996 and early 1997
to analyze trends in the printer market and to identify potential acquisition
candidates that would strengthen Kentek's market position. The Special Committee
also determined to retain Cooley Godward LLP as its legal advisor based upon the
firm's familiarity and expertise with Kentek. Cooley Godward LLP had served as
Kentek's counsel in connection with its 1996 initial public offering and had
subsequently served as Kentek's outside legal counsel, primarily for public
company and securities law advice. In addition, a current partner of Cooley
Godward LLP while working at a previous law firm had served as underwriters'
counsel in Kentek's initial public offering and another partner of Cooley
Godward LLP currently serves as Corporate Secretary of Kentek.
On April 21, 1999, Kentek issued a press release indicating that it had
received a proposal from Mr. Shires to acquire the outstanding shares for a cash
price of $7.50 per share at closing plus an additional consideration in the form
of a contingent cash payment right. The press release also indicated that the
Board of Directors had formed the Special Committee of independent directors to
review the advisability of the proposal and that the Special Committee had
retained Janney Montgomery Scott to serve as independent financial advisor to
the Special Committee and Cooley Godward LLP to serve as independent legal
counsel to the Special Committee.
Between the April 21, 1999 announcement and May 7, 1999, the following
events took place.
o The Special Committee instructed Dr. Morgan to contact firms in
the printer industry on behalf of the Special Committee regarding
their potential interest in acquiring Kentek.
o Dr. Morgan contacted and had discussions with Printronix,
Lexmark, Genicom and Miami Computer Services to solicit their
interest in acquiring Kentek. These companies were contacted
because they had preexisting customer or supplier relationships
with Kentek. Neither Xerox nor HP was a current customer, and
both had previously told Kentek that they would not acquire
assets that generated revenues less than $250 million per year,
or that could not quickly be brought to those levels.
o Each of the parties contacted by Dr. Morgan declined to make an
acquisition proposal and no other parties contacted the Board,
the Special Committee, Kentek or Janney Montgomery Scott
regarding their interest in pursuing an acquisition proposal.
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40
o Based upon discussions among the Special Committee and Janney
Montgomery Scott, the Special Committee concluded not to attempt
to contact potential financial buyers for Kentek. The Special
Committee ultimately determined that the size of the transaction,
the potential profit and potential return on investment were
deemed likely to be too small to interest an institutional
financial buyer, such as a leveraged buy out fund. In addition,
the Special Committee considered that Kentek's lack of growth
prospects would be a significant deterrent for many financial
buyers. Finally, the Special Committee considered that Broadview
Associates, an investment banking firm that was engaged by Kentek
in 1995 to investigate strategic alternatives, had been unable to
locate any financial or strategic buyers that were interested in
acquiring Kentek prior to its initial public offering in 1996.
o Cooley Godward LLP negotiated the terms of the proposed merger
agreement with Mr. Shires' counsel. In particular, Cooley Godward
LLP and Mr. Shires' counsel negotiated open issues relating to
the price per share, the structure and timing of the merger
consideration, the feasibility of contingent value rights, the
necessity of a voting agreement and the scope of break up fees.
o Janney Montgomery Scott met with Kentek officers to prepare its
financial analysis of the proposed acquisition.
o Dr. Morgan updated the Special Committee, Janney Montgomery Scott
and Cooley Godward LLP regarding his discussions with potential
acquirers.
o Mr. Shires, on his own behalf and on behalf of KE Acquisition,
contacted each of Kentek's four largest stockholders regarding
the possibility of including a contingent payment right in the
proposed merger consideration. At the time that Mr. Shires
engaged in discussions with Kentek's four largest stockholders,
such stockholders beneficially owned an aggregate of 3,004,930
shares, or approximately 65.26% of Kentek's shares of common
stock. As of the date of this proxy statement, such stockholders
own approximately 64.67% of the shares entitled to vote at the
special meeting.
Mr. Shires' discussions with Kentek's four largest stockholders
can be summarized as follows.
o James H. Simons - Mr. Shires and Mr. Simons, a member
of Kentek's Board, participated in a telephone
conference during the last week of April 1999 regarding
the desirability of including a contingent payment
right in the merger consideration. At the time of the
telephone conference between Mr. Simons and Mr. Shires,
Mr. Simons beneficially owned approximately 23.17% of
Kentek's common stock. During the course of their
conversation, Mr. Simons indicated to Mr. Shires that
he favored receiving a portion of the merger
consideration as a contingent payment right. In
particular, Mr. Simons indicated to Mr. Shires that he
believed that the proposed payment of $7.50 per share
together with a contingent payment right was worth more
to Kentek's stockholders than a fixed payment of $7.85
per share. Subsequently, Mr. Simons determined that the
payment of $7.50 per share together with a contingent
payment right was not as valuable as a fixed payment of
$8.29 per share.
o Khronos Capital Limited - Mr. Shires and I. Jimmy
Mayer, the principal of Khronos Capital Limited,
participated in a telephone conference during the last
week of April 1999 regarding the desirability of
including a contingent payment right in the merger
consideration. At the time of the telephone conference
between Mr. Mayer and Mr. Shires, Mr. Mayer
beneficially owned approximately 13.03% of Kentek's
common stock. During the course of their conversation,
Mr. Mayer indicated to Mr. Shires that he favored
receiving a fixed payment per share at the closing of
the Merger as opposed to a lower fixed payment per
share together with a contingent payment right. Mr.
Mayer noted that he preferred a fixed payment per share
at the closing of the Merger because the full amount of
the Merger Consideration could be reinvested in other
financial opportunities at that time. In addition, Mr.
Mayer noted that the proposed contingent payment right
was undesirable because it was speculative and
potentially difficult for Khronos Capital Limited to
manage with respect to its investors on a going-forward
basis. Mr. Mayer was a member of Kentek's Board until
his resignation in January 1998.
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41
o Wellington Management Company, LLP - Mr. Shires and
Sandy Green, a principal of Wellington Management
Company, LLP, met in person during the last week of
April 1999 at a financial conference in Vail, Colorado.
At that time, Wellington Management Company, LLP
beneficially owned approximately 14.73% of Kentek's
common stock. During the course of their meeting, Mr.
Shires and Mr. Green discussed the desirability of
including a contingent payment right in the merger
consideration. Mr. Green indicated to Mr. Shires that
he favored receiving a fixed payment per share as
opposed to a lower fixed payment per share together
with a contingent payment right. Mr. Green based his
belief on the fact that the proposed contingent payment
right was speculative, subject to contingencies,
difficult to value and difficult for Wellington
Management Company to manage with respect to its
investors on a going-forward basis.
o ROI Capital Management, Inc. - Mr. Shires and Mark
Boyer, a principal of ROI Capital Management, Inc.,
participated in a telephone conference during the last
week of April 1999 regarding the desirability of
including a contingent payment right in the merger
consideration. At the time of the telephone conference
between Mr. Boyer and Mr. Shires, ROI Capital
Management, Inc. beneficially owned approximately
14.34% of Kentek's common stock. During the course of
their conversation, Mr. Boyer indicated to Mr. Shires
that he favored receiving a fixed payment per share as
opposed to a lower fixed payment per share together
with a contingent payment right. Mr. Boyer based his
belief on the fact that the proposed contingent payment
right was speculative, subject to contingencies,
difficult to value and difficult for ROI Capital
Management to manage with respect to its investors on a
going-forward basis.
No members of the Board, other than Mr. Shires and Mr. Simons,
participated in the discussions regarding the desirability of the
proposed contingent payment right. In addition, no member of the
Board, including Mr. Shires, discussed any other aspects of the
proposed merger transaction or any alternative transactions with
Kentek's four largest stockholders or their affiliates (excluding
Mr. Simons). Accordingly, with the exception of Mr. Simons,
Kentek's largest stockholders and their affiliates did not
participate in any aspect of the negotiations between the Special
Committee, the Board and Mr. Shires that ultimately led to Mr.
Shires' offer of $8.29 per share. Mr. Simons participated in such
negotiations as a member of the Board.
During the course of Mr. Shires discussions with the individuals
set forth above, each of the individuals indicated that they
intended to vote in favor of the proposed merger transaction,
regardless of the structure of the merger consideration. Kentek
and Mr. Shires did not, however, solicit such individuals or
stockholders to vote in favor of the Merger or any other
transaction involving Kentek. None of the stockholders set forth
above or their affiliates are subject to voting agreements or are
otherwise required to vote in favor of the Merger.
On May 7, 1999, the Special Committee met telephonically. Janney Montgomery
Scott and Cooley Godward LLP participated in the May 7, 1999 meeting. Dr. Morgan
updated the Special Committee and its advisors about discussions with potential
acquirors. The Special Committee discussed the proposed terms of Mr. Shires'
proposal, particularly the valuation of the contingent cash payment right
contained in Mr. Shires' proposal. The Special Committee also discussed whether
it was likely that proposals from potential acquirors might be received. The
Special Committee instructed Cooley Godward LLP to proceed with the negotiation
of the proposed merger agreement which had been received from Mr. Shires'
counsel.
Between May 7, 1999 and May 10, 1999, Kentek's counsel and Mr. Shires'
counsel continued to discuss open issues relating to the proposed merger
agreement. In particular, Mr. Shires' counsel and Kentek's counsel discussed the
circumstances under which a break up fee, in the amount of actual expenses
incurred by Mr. Shires in connection with the transaction, would be payable to
Mr. Shires.
On May 10, 1999, the full Board met in New York City. Janney Montgomery
Scott attended this meeting in person, and Cooley Godward LLP participated via
telephone. During the course of the meeting, the following actions took place.
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o The Board members discussed the status of Mr. Shires' proposal,
including the proposed structure of the merger consideration and
Mr. Shires' valuation of the contingent payment right.
o The Board members agreed that the full amount of the merger
consideration would be paid upon the consummation of the
transaction. This agreement resulted from the Board's
determination that the contingent right was less desirable given
that the value of the right was speculative and subject to
contingencies.
o Janney Montgomery Scott presented its preliminary analysis of the
fairness of the proposed merger to the Public Stockholders from a
financial point of view. Based on the financial analyses prepared
for the Board and the Special Committee, Janney Montgomery Scott
indicated that the $7.85 per share price proposed by Mr. Shires
was within the range of fair values for Kentek's common stock.
However, Janney Montgomery Scott noted that the $7.85 per share
price was at the lower end of Kentek's valuation range and that a
higher price would increase the fairness of the proposed merger
to the Public Stockholders.
o The Board members discussed the proposed merger consideration. In
light of Janney Montgomery Scott's preliminary analysis of the
Merger, the disinterested members of the Board and the Special
Committee unanimously determined to attempt to negotiate a higher
price than the $7.85 per share merger consideration proposed by
Mr. Shires. In particular, the disinterested members of the
Board and the Special Committee informed Mr. Shires that they
believed he should pay approximately $8.25 per share. The
disinterested members of the Board and the Special Committee
based their beliefs on the range of fair values established by
Janney Montgomery Scott's financial analysis and the trading
values of Kentek's common stock on the Nasdaq National Market.
Specifically, the disinterested members of the Board and the
Special Committee represented a fair value because it represented
a:
o premium value to Kentek's stockholders as compared to
the $7.93 midpoint of Janney Montgomery Scott's Buyout
Analysis (which is described on page [43] of this proxy
statement);
o 32.6% premium over the average closing price for the
shares on the Nasdaq National Market for the six month
trading period ended April 21, 1999, the day before
Kentek announced it had received KE Acquisition's and
Mr. Shires' initial proposal; and
o 19.5% premium over the closing price for the shares of
Kentek's common stock on April 21, 1999.
In addition, Mr. Simons suggested to the disinterested members of
the Board and the Special Committee that the merger consideration
should reflect an additional payment to account for the fact that
the proposed merger would likely close three to four months after
the execution of a merger agreement. The disinterested members of
the Board and the Special Committee unanimously concurred with
Mr. Simons and determined that an increase of $0.04 per share
represented a reasonable additional payment per share.
Thereafter, the disinterested members of the Board and the
Special Committee informed Mr. Shires that they believed $8.29
per share represented the fair value of Kentek's shares. In
response, Mr. Shires indicated that $8.29 per share was too high
of a price per share given that it was at the higher end of
Janney Montgomery Scott's projected range of fair values. After
further negotiation, however, Mr. Shires agreed to pay $8.29 per
share and noted that he would not, under any circumstances, pay
more than $8.29 per share because he believed that a higher price
did not offer a potential rate of return that would justify the
level of risk assumed in connection with the acquisition of
Kentek.
o Mr. Shires furnished the Special Committee and its advisers with
a commitment letter from US Bank regarding the financing for the
proposed transaction.
o Cooley Godward LLP reported on the status of the negotiations on
the form of definitive merger agreement.
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o The Board, Janney Montgomery Scott and Cooley Godward LLP discussed
the following in relation to the proposed merger agreement:
o No Voting Agreement. The proposed agreement did not require
any of Kentek's major stockholders to vote in favor of the
proposed merger and the related transactions.
o Modest Termination Fees. The proposed agreement did not
require the payment of termination fees in excess of the
reasonable expenses incurred by KE Acquisition in connection
with the preparation and negotiation of the proposed merger
agreement.
o Fiduciary Outs. The proposed agreement provided that the
Board and/or the Special Committee could authorize Kentek to
engage in discussions or negotiations concerning an
unsolicited Acquisition Proposal (and may furnish
information and cooperate in this regard) subsequent to the
execution of the proposed merger agreement. This action
could be taken if the Board and/or the Special Committee
determined in the exercise of its fiduciary duties that the
action was in the best interests of Kentek stockholders. An
"Acquisition Proposal" was defined as any proposal or offer
with respect to:
- a tender or exchange offer, a merger,
consolidation or other business combination
involving Kentek or any of its subsidiaries,
including a merger of equals involving Kentek;
- the acquisition of an equity interest in
Kentek representing in excess of 33% of the
power to vote for the election of a majority
of directors of Kentek, or
- the acquisition of assets of Kentek or its
subsidiaries, including stock of one or more
subsidiaries of Kentek, representing 33% or
more of the consolidated assets of Kentek, in
each case by any person other than KE
Acquisition.
In addition, the proposed agreement provided that following
receipt of an Acquisition Proposal that was financially
superior to the proposed merger, as determined in good faith
by the Board, the Board could withdraw, modify or not make a
recommendation in favor of the proposed merger. This action
could be taken if the Board concluded in good faith that the
action was necessary in order to act in a manner that is
consistent with its fiduciary obligations under applicable
law.
o Confidentiality. Pursuant to the terms of the proposed
agreement, Kentek could not engage in negotiations with, or
disclose any nonpublic information to, any person unless it
received from the person an executed confidentiality
agreement on terms and conditions deemed by the Board to be
appropriate and in Kentek's best interest.
o Notification of Acquisition Proposals. Kentek would be
required to promptly notify KE Acquisition of the receipt of
any Acquisition Proposal not less than two business days
prior to entering into any agreement in connection with the
Acquisition Proposal. Any notice would be required to
include the identity of the person or group making the
Acquisition Proposal and the material terms and conditions
of the Acquisition Proposal. Kentek could not enter into a
definitive agreement in connection with an Acquisition
Proposal unless at least five business days had passed since
Kentek initially notified KE Acquisition of an inquiry or
proposal relating to an Acquisition Proposal. Within the
two-business day or five-business day periods referred to
above, if any, KE Acquisition could propose an improved
transaction. The two and five-business day waiting periods
would not required if the Board or the Special Committee
decided that the waiting periods conflicted with the
exercise of the Board's fiduciary obligations to its
stockholders.
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o Termination Provisions. Kentek could terminate the proposed
agreement at any time if:
- the Board determined in good faith that an
Acquisition Proposal was financially superior
to the proposed merger and was reasonably
capable of being financed, and
- Kentek entered into a definitive agreement to
effect the financially superior Acquisition
Proposal, and Kentek complied with the
covenants set forth below under "Certain
Provisions of the Merger
Agreement--Covenants."
If the Merger Agreement was validly terminated, none of its
provisions would survive, except for miscellaneous
provisions relating to confidentiality, expenses, governing
law, jurisdiction, waiver of a jury trial, and other
matters. Termination would be without any liability on the
part of any party, unless the party is in willful breach of
a provision of the proposed agreement.
o Price. The proposed price of $8.29 per share constituted a
32.6% premium over the average closing price for the shares
on the Nasdaq National Market for the six month trading
period ended April 21, 1999, the day before Kentek announced
it had received KE Acquisition's initial proposal. In
addition, the proposed price constituted a 19.5% premium
over the closing price for the shares on April 21, 1999.
Following the May 10, 1999 meeting, Cooley Godward LLP negotiated with Mr.
Shires' counsel the final terms of a merger agreement reflecting the revised
proposal. Copies of the final merger agreement, the final financial presentation
material of Janney Montgomery Scott, and a draft of Janney Montgomery Scott's
fairness opinion were distributed to all members of the Board.
The Special Committee and the Board next met on May 14, 1999
telephonically. Janney Montgomery Scott and Cooley Godward LLP participated in
the May 14, 1999 meetings. The Special Committee reviewed with counsel a draft
of the Merger Agreement in final form. Janney Montgomery Scott provided a
detailed financial analysis of Kentek and the pending proposal to the Special
Committee and advised the Special Committee that, in its opinion, as of that
date, the $8.29 price was fair, from a financial point of view, to the
stockholders of Kentek other than KE Acquisition. A discussion with and
questions to Janney Montgomery Scott by the Special Committee followed. The
Special Committee then concluded, after also considering Kentek's prospects of
increasing stockholder value as a public company, that in the circumstances then
existing, the $8.29 per share offer was, for stockholders other than KE
Acquisition, preferable to continuing to hold shares in the public company. The
Special Committee then unanimously determined to approve the Merger Agreement
and declare that the Merger Agreement was advisable and fair to and in the best
interests of the stockholders of Kentek other than KE Acquisition, and approved
resolutions recommending that the Board approve the Merger Agreement and cause
Kentek to execute and deliver the Merger Agreement. Immediately thereafter, the
entire Board unanimously resolved to approve the Merger Agreement. Subsequent to
the Board meeting, on May 14, 1999, Kentek and KE Acquisition entered into the
Merger Agreement.
Kentek issued a press release on the morning of May 14, 1999 announcing the
execution of the Merger Agreement.
In connection with the preparation of this proxy statement, the Special
Committee and the Board met telephonically on August 13, 1999 and September 10,
1999. Janney Montgomery Scott and Cooley Godward LLP participated in the August
13, 1999 and September 10, 1999 meetings. At each of the meetings, Janney
Montgomery Scott provided supplemental financial analyses of Kentek and the
transactions contemplated by the Merger Agreement. Janney Montgomery Scott
advised the Special Committee and the Board that its supplemental financial
analyses did not change in any material respect its prior opinion that, as of
that date, the $8.29 price was fair, from a financial point of view, to the
stockholders of Kentek other than KE Acquisition. Janney Montgomery Scott also
reported that it had performed updates to its May 14, 1999 analysis and that no
circumstances had come to its attention that would cause Janney Montgomery Scott
to change its opinion as to the fairness of the Merger from a financial point of
view. At each meeting, discussions with and questions to Janney Montgomery Scott
by the Special Committee followed. The Special Committee then concluded, in each
case, based on Janney Montgomery Scott's supplemental financial presentations
and oral updates of its written opinion, that the proposed merger transaction
was still fair to and in the best interests of the stockholders of Kentek other
than KE Acquisition. In
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addition, the entire Board unanimously determined at each meeting that the
Merger remained fair to and in the best interest of Kentek's Public
Stockholders.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
On May 14, 1999, the Special Committee unanimously determined that the
Merger, the Merger Agreement and the transactions contemplated by the Merger
Agreement are fair to and in the best interests of the Public Stockholders, and
recommended that the Board and the stockholders of Kentek approve and adopt the
Merger, the Merger Agreement and the transactions contemplated by the Merger
Agreement.
On May 14, 1999, the Board, on the unanimous recommendation of the Special
Committee, unanimously determined that the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of the Public Stockholders, and recommended that the stockholders of
Kentek approve and adopt the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement. Prior to participating in the
determinations and recommendations of the Board, Mr. Shires, who is the sole,
stockholder, director and officer of KE Acquisition, identified his affiliations
with KE Acquisition and noted that as a result of the affiliations he had a
direct conflict of interest.
In response to comments received from the Securities and Exchange
Commission, the Board and the Special Committee asked Janney Montgomery Scott to
prepare supplemental financial analyses of the Merger. The Board and the Special
Committee requested the supplemental analyses because the Board and the Special
Committee believed that the supplemental analyses would provide additional
relevant data regarding the fairness of the Merger to the Public Stockholders.
On August 13, 1999, Janney Montgomery Scott presented its first
supplemental financial analysis to the Special Committee and the Board and
orally confirmed its prior opinion to the Special Committee and the Board that,
as of that date, the Merger was fair, from a financial point of view, to the
Public Stockholders. See page [44] of this proxy statement for additional
information relating to Janney Montgomery Scott's August 13, 1999 supplemental
financial analysis.
On August 13, 1999, after reviewing Janney Montgomery Scott's first
supplemental financial analysis, the Board and the Special Committee unanimously
reaffirmed their determinations that the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of the Public Stockholders.
On September 10, 1999, Janney Montgomery Scott presented its second
supplemental financial analysis to the Special Committee and the Board and
orally confirmed its prior opinion to the Special Committee and the Board that,
as of that date, the Merger was fair, from a financial point of view, to the
Public Stockholders. See pages [44-45] of this proxy statement for additional
information relating to Janney Montgomery Scott's September 10, 1999
supplemental financial analysis.
On September 10, 1999, after reviewing Janney Montgomery Scott's second
supplemental financial analysis, the Board and the Special Committee unanimously
reaffirmed their determinations that the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of the Public Stockholders.
The Special Committee and the Board have not revoked or modified their May
14, 1999 determinations that the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of the Public Stockholders.
OPINION OF FINANCIAL ADVISOR TO THE BOARD AND THE SPECIAL COMMITTEE
The Special Committee and the Board retained Janney Montgomery Scott as
their financial advisor to review the Merger and to render an opinion as to the
fairness, from a financial point of view, of the Merger to the Public
Stockholders. As described in this proxy statement, Janney Montgomery Scott's
opinion, dated May 14, 1999, as orally confirmed on August 13, 1999 and
September 10, 1999, together with the related presentations to the Special
Committee and the Board, were only two of many factors taken into consideration
by the Special Committee and the Board in making their determinations to approve
the Merger and the Merger Agreement.
38.
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Janney Montgomery Scott is a nationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and valuations for corporate and other purposes.
Pursuant to the terms of Janney Montgomery Scott's engagement, Kentek paid
Janney Montgomery Scott $25,000 upon commencement of the engagement and agreed
to pay Janney Montgomery Scott an additional $100,000 upon the closing of the
Merger. In addition, Kentek has agreed to reimburse Janney Montgomery Scott for
its out-of-pocket expenses, and to indemnify Janney Montgomery Scott against
certain liabilities, or to contribute to payments Janney Montgomery Scott may be
required to make in respect thereof.
On May 14, 1999, Janney Montgomery Scott delivered its financial analysis
of the Merger to the Special Committee and the Board. At the same time, Janney
Montgomery Scott delivered its written opinion to the Special Committee and the
Board that, as of the date of the opinion, and based upon and subject to certain
matters stated in the opinion, the Merger was fair, from a financial point of
view, to the Public Stockholders.
Thereafter, in response to comments received from the Securities and
Exchange Commission, the Special Committee and the Board asked Janney Montgomery
Scott to prepare two supplemental financial analyses of the Merger. The Special
Committee and the Board requested the supplemental analyses because the Board
and the Special Committee believed that the supplemental analyses would provide
additional relevant data regarding the fairness of the Merger to the Public
Stockholders. On August 13, 1999, Janney Montgomery Scott presented its first
supplemental financial analysis to the Special Committee and the Board and
orally confirmed its prior opinion to the Special Committee and the Board that,
as of that date, the Merger was fair, from a financial point of view, to the
Public Stockholders. See page [44] of this section for additional details
regarding the August 13, 1999 supplemental financial analysis of Janney
Montgomery Scott. On September 10, 1999, Janney Montgomery Scott presented its
second supplemental financial analysis to the Special Committee and the Board
and orally confirmed its prior opinion to the Special Committee and the Board
that, as of that date, the Merger was fair, from a financial point of view, to
the Public Stockholders. See pages [44-45] of this section for additional
details regarding the September 10, 1999 supplemental financial analysis of
Janney Montgomery Scott.
THE FULL TEXT OF JANNEY MONTGOMERY SCOTT'S WRITTEN OPINION, DATED MAY 14,
1999, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON REVIEW UNDERTAKEN, IS ATTACHED TO THIS PROXY STATEMENT AS ANNEX B AND IS
INCORPORATED IN THIS PROXY STATEMENT BY REFERENCE. JANNEY MONTGOMERY SCOTT'S
OPINION IS DIRECTED TO THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS OF
KENTEK AND ADDRESSES THE FAIRNESS OF THE TRANSACTIONS TO THE PUBLIC STOCKHOLDERS
OF KENTEK FROM A FINANCIAL POINT OF VIEW. JANNEY MONTGOMERY SCOTT'S OPINION DOES
NOT ADDRESS THE UNDERLYING DECISION OF KENTEK TO ENGAGE IN THE MERGER AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY PUBLIC STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE OR AS TO ANY OTHER ACTION SUCH STOCKHOLDER SHOULD TAKE
IN CONNECTION WITH THE MERGER. THE SUMMARY OF THE WRITTEN OPINION OF JANNEY
MONTGOMERY SCOTT SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED BY REFERENCE TO
THE FULL TEXT OF THE OPINION.
In connection with its opinion and the updates of its opinion, Janney
Montgomery Scott held discussions with members of management of Kentek regarding
Kentek's business, financial condition and prospects. In addition, Janney
Montgomery Scott reviewed:
o certain publicly available business and financial information
relating to Kentek that Janney Montgomery Scott deemed relevant;
o certain information, including financial forecasts, relating to
the business and prospects of Kentek;
o selected financial and stock market data for certain other
publicly traded companies that Janney Montgomery Scott deemed
relevant;
o the financial terms of certain other business combinations that
Janney Montgomery Scott deemed relevant;
o the recent trading history of the common stock; and
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o other financial studies and analyses as Janney Montgomery Scott
deemed necessary.
In preparing its opinion and the updates of its opinion, Janney Montgomery
Scott assumed and relied on the accuracy and completeness of all information
supplied or otherwise made available to it, discussed with or reviewed by or for
it, or publicly available, and Janney Montgomery Scott has not assumed any
responsibility for independently verifying such information or undertaken any
independent evaluation or appraisal of any of the assets or liabilities of
Kentek or been furnished with any such evaluation or appraisal. In addition,
Janney Montgomery Scott has not assumed any obligation to conduct any physical
inspection of the properties or facilities of Kentek. With respect to the
financial forecast information furnished to or discussed with it by Kentek,
Janney Montgomery Scott has assumed that it was reasonably prepared and
reflected the best currently available estimates and judgment of Kentek's
management as to the expected future financial performance of Kentek. Janney
Montgomery Scott's opinion and updates of its opinion express no view with
respect to how the projections were obtained or the assumptions on which they
were based. Further, Janney Montgomery Scott has relied upon the assurances of
management of Kentek that they are not aware of any facts or circumstances that
would make such forecast inaccurate or misleading. Janney Montgomery Scott's
opinion is necessarily based upon market, economic and other conditions as they
exist and can be evaluated, and on the information made available to it, as of
May 14, 1999. Janney Montgomery Scott's updates of its opinion are necessarily
based upon market, economic and other conditions as they exist and can be
evaluated, and on the information made available to it, as of August 13, 1999
and September 10, 1999.
In arriving at its opinion and the updates of its opinion, Janney
Montgomery Scott did not ascribe a specific range of values to Kentek, but made
its determination as to the fairness, from a financial point of view, of the
Merger Consideration to the Public Stockholders on the basis of a variety of
financial and comparative analyses, including those described below. The summary
of analyses performed by Janney Montgomery Scott as set forth below does not
purport to be a complete description of the analyses underlying Janney
Montgomery Scott's opinion and the updates of its opinion. The presentation of a
fairness opinion is a complex analytic process involving various determinations
as to the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances and, therefore,
such opinions are not readily susceptible to partial or summary description. No
company or transaction used in analyses as a comparison is identical to Kentek
or the Merger, nor is an evaluation of the results of analyses entirely
mathematical; rather, it involves complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies or
transactions being analyzed. The estimates contained in analyses and the ranges
of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by the analyses. In
addition, analyses relating to the value of the business or securities do not
purport to be appraisals or to reflect the prices at which businesses, companies
or securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. In arriving at its opinion and
the updates of its opinion, Janney Montgomery Scott made qualitative judgments
as to the significance and relevance of each analysis and factor considered by
it. Accordingly, Janney Montgomery Scott believes that its analyses must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses and factors, could create an incomplete view of the
processes underlying the analyses, its opinion and the updates of its opinion.
Projections. Janney Montgomery Scott analyzed Kentek's projections in
support of its fairness opinion and the updates to its fairness opinion. The
projections were not reviewed by independent auditors and were not prepared in
accordance with the guidelines established by the American Institute of
Certified Public Accountants. The projections were based on numerous estimates
and other assumptions and are inherently subject to significant uncertainties
and contingencies. Although Kentek believes that it has a reasonable basis for
the projections, there is no assurance that the projections will be achieved and
the use thereof by Janney Montgomery Scott should not be regarded as an
indication that Kentek or any other person considers the estimates an accurate
prediction of future events.
Merger Projections. In connection with its analysis of the Merger, Janney
Montgomery Scott utilized financial projections that gave effect to the Merger
(the "Merger Projections"). The following assumptions were made by Kentek in
connection with its preparation of the Merger Projections.
o The Merger Projections assume that all of the cash held by Kentek
is paid to the Public Stockholders in connection with the
consummation of the Merger.
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o The Merger Projections assume that Kentek is burdened with the $6
million of debt that KE Acquisition and Philip W. Shires propose
to borrow from US Bank to consummate the Merger.
o The ongoing cost of remaining a public company is not included in
the operating expenses set forth in the Merger Projections.
o The Merger Projections assume that the tax rate on pretax income
is 44.0%, the estimated tax rate applicable to Kentek after it
elects to be treated as an S-corporation subsequent to the
consummation of the Merger.
o The Merger Projections assume that Kentek will no longer pay
dividends.
Kentek and Janney Montgomery Scott believe that the financial analyses
based on the Merger Projections provide relevant data regarding the fairness to
the Public Stockholders of the Merger because they allowed the Special Committee
and the Board to compare the Merger Consideration offered to the Public
Stockholders to the estimated, post-Merger value of the Company's common stock
being acquired by KE Acquisition.
Status Quo Projections. In response to comments received from the
Securities and Exchange Commission, the Board and the Special Committee asked
Janney Montgomery Scott to prepare two supplemental financial analyses of the
Merger. The Board and the Special Committee requested the supplemental analyses
because the Board and the Special Committee believed that the supplemental
analyses would provide additional relevant data regarding the fairness of the
Merger to the Public Stockholders. On August 13, 1999 and September 10, 1999,
Janney Montgomery Scott presented its supplemental financial analyses to the
Special Committee and the Board and orally confirmed its prior opinion to the
Special Committee and the Board to the effect that, as of those dates, the
Merger was fair, from a financial point of view, to the Public Stockholders.
In preparing its supplemental financial analyses, Janney Montgomery Scott
utilized financial projections that did not give effect to the Merger (the
"Status Quo Projections"). The following assumptions were made by Kentek in
connection with the preparation of the Status Quo Projections.
o The Status Quo Projections assume that Kentek retains cash and
earns interest income based on a rate of 5%.
o The Status Quo Projections assume that Kentek does not incur any
debt since cash is kept in the business and is not used to
finance the Merger.
o The ongoing cost of remaining a public company is included in the
operating expenses set forth in the Status Quo Projections.
o The Status Quo Projections assume that the tax rate on pretax
income is 37.5%, Kentek's estimated historical tax rate as a
public company.
o The Status Quo Projections assume that Kentek will continue to
pay $0.02 per share quarterly dividends.
Kentek and Janney Montgomery Scott believe that the financial analyses
based on the Status Quo Projections provide relevant data regarding the fairness
to the Public Stockholders of the Merger because they allowed the Special
Committee and the Board to compare the Merger Consideration offered to the
Public Stockholders to the estimated value of the Company as an ongoing concern
without giving effect to the Merger.
The Status Quo Projections and the Merger Projections are set forth on
pages [46-47] and [48] of this proxy statement, respectively.
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ANALYSES PERFORMED BY THE FINANCIAL ADVISOR TO THE BOARD AND THE SPECIAL
COMMITTEE
The following is a summary of the material analyses performed by Janney
Montgomery Scott and presented to the Special Committee and the Board at their
May 14, 1999 meetings.
Historical Stock Price Performance. Janney Montgomery Scott reviewed and
analyzed the reported daily closing market prices and trading volume of the
common stock for the three year period ended May 13, 1999. The common stock
closed at a three year high for that period of $14.25 per share on May 14, 1996,
and at a three year low for that period of $4.25 per share on September 13,
1996. For the 90 trading days from December 10, 1998 through April 21, 1999, the
day before Kentek announced it had received Mr. Shires' initial proposal, the
common stock closed at prices from between $5.50 per share to $7.00 per share.
For the 60 days prior to the announcement, the common stock closed at prices
from between $6.00 per share to $7.00 per share; for the 30 days prior to the
announcement, the common stock closed at prices ranging from between $6.00 per
share to $7.00 per share; and for the 10 days prior to the announcement, the
common stock closed at prices ranging from $6.375 per share to $7.00 per share.
The historical stock performance review was performed to provide background
information and to add context to the other analyses performed by Janney
Montgomery Scott, as described below. This analysis was not used to determine
the overall fairness of the transaction.
Analysis of Selected Publicly Traded Comparable Companies. Using publicly
available information, Janney Montgomery Scott compared the financial
performance and stock market valuation for Kentek with respective corresponding
data and ratios of certain similar publicly traded companies. Janney Montgomery
Scott selected these companies from the universe of possible companies based
upon Janney Montgomery Scott's view as to the comparability of financial and
operating characteristics of these companies to Kentek. With respect to each
analysis, Janney Montgomery Scott made comparisons among the following
companies: Axiohm Transaction Solutions, Bull Run Corp., Genicom Corp., Lexmark
International Group Inc., Printronix Inc., QMS Inc., Transact Technologies Inc.,
Tridex Corp. and Zebra Technologies (the "Comparable Companies").
Among other multiples calculated and reviewed by Janney Montgomery Scott
were the Comparable Companies' (i) stock price multiples to historical and
estimated net income and (ii) enterprise value (total stock market value
adjusted for debt and cash) multiples to latest twelve months ("LTM") revenues,
earnings before interest and taxes ("EBIT") and earnings before interest, taxes,
depreciation and amortization ("EBITDA"). All of the trading multiples of the
Comparable Companies were based on closing stock prices on May 3, 1999.
The Comparable Companies were found to have the following trading ranges:
ENTERPRISE VALUE / EQUITY VALUE /
---------------------------------------------- -------------------------------
LTM LTM LTM 1999 (P) 2000 (P)
REVENUE EBITDA EBIT NET INCOME NET INCOME
----------- ----------- ----------- ------------- ---------------
High 2.7x 74.4x 42.7x 28.6x 24.0x
Median 0.9x 6.1x 16.7x 15.2x 13.5x
Low 0.3x 3.5x 7.7x 9.0x 7.7x
Applying the median values to Kentek's historical and projected financials
resulted in an implied valuation range of $4.01 to $7.62 per share.
Based on the foregoing comparisons, Janney Montgomery Scott noted that the
$8.29 per share value of the consideration to be received by the Public
Stockholders represented an equity value which, as a multiple of the Company's
historical and estimated future financial results, was within or above the
valuation range of the Comparable Companies and that this fact supported a
determination that the consideration to be received in the Merger was fair to
the Public Stockholders from a financial point of view.
Analyses of Selected Comparable Transactions. Janney Montgomery Scott also
reviewed publicly available information relating to certain merger and
acquisition transactions in respect of companies primarily in industries related
to Kentek's business ("Comparable Transactions"). With respect to Kentek, Janney
Montgomery Scott examined multiples of the value of common equity and
indebtedness assumed in each of the transactions to, among other measures, the
acquired companies' revenue, EBITDA and
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EBIT. For each measure, revenue, EBITDA and EBIT consisted of the latest twelve
months of available financial information on the respective date of each
transaction.
Janney Montgomery Scott identified and examined nineteen Comparable
Transactions which occurred during the past three years. The following chart
identifies the transactions that Janney Montgomery Scott deemed most relevant.
TARGET ACQUIROR
----------------------------------------------------------------------------------------
Texas Instrument - Worldwide Printer Division Genicom Corporation
Digital Equipment - Printing Systems Division Genicom Corporation
DH Technology Inc. Axiohm SA
International Imaging Materials Paxar Corporation
Computer Vision Corporation Parametric Technology Corp.
Eltron International Inc. Zebra Technologies Corp.
Raster Graphics Inc. Gretag Imaging Group Inc.
The transaction values of the Comparable Transactions were found to have
the following multiples of the target's revenues, EBITDA and EBIT:
DEAL VALUE /
--------------------------------------------------
LTM LTM LTM
REVENUE EBITDA EBIT
-------------- ------------- -------------
High 2.3x 13.0x 14.9x
Median 1.2x 9.6x 12.9x
Low 0.3x 9.3x 3.3x
Applying the median values to Kentek's historical financials resulted in an
implied valuation range of $5.12 to $10.25 per share.
Based on the foregoing comparisons, Janney Montgomery Scott noted that the
$8.29 per share value of the consideration to be received by the Public
Stockholders represented an equity value which, as a multiple of the Company's
historical financial results, was within or above the valuation range of the
Comparable Transactions, and that this fact supported a determination that the
consideration to be received in the Merger was fair to the Public Stockholders
from a financial point of view.
Buyout Analysis. Janney Montgomery Scott prepared a buyout analysis of the
future unleveraged free cash flows that Kentek's operations could be expected to
generate during various periods using Merger Projections provided to Janney
Montgomery Scott by Kentek, including management's projections of sales, cost of
goods sold, operating expenses, capital expenditures, accounts receivable,
inventory, accounts payable and tax rate. See the footnotes on page [48] of this
proxy statement for additional information relating to the Merger Projections
provided to Janney Montgomery Scott by Kentek.
In the buyout analysis, unleveraged free cash flows of Kentek were
projected over a period ending June 30, 2004. A terminal value was calculated
utilizing an exit multiple between 0.0x and 4.0x projected EBITDA in fiscal
2004. The exit multiple range selected by Janney Montgomery Scott was based on
then current industry EBITDA multiples, adjusted for company specific
considerations. The estimated future unleveraged free cash flows and the
terminal value were discounted to present values using a range of discount rates
from between 12.5% and 22.5%. The discount rate range selected by Janney
Montgomery Scott was based on an estimate of the weighted average cost of
capital for small capitalization stocks, adjusted for company specific
considerations. After subtracting the present value of payments due debtholders,
Janney Montgomery Scott arrived at a range of estimated per share values for the
common stock of between $7.57 and $8.42. Based on a midpoint exit multiple of
2.0x EBITDA in the fiscal year 2004, and a midpoint discount rate of 17.5%, this
analysis produced a midpoint per share value for the common stock of $7.93.
Based on the foregoing analysis, Janney Montgomery Scott noted that the
$8.29 per share value of the consideration to be received by the Public
Stockholders represented an equity value which was within the valuation range of
the buyout analysis, and that this fact supported a determination that the
consideration to be received in the Merger was fair to the Public Stockholders
from a financial point of view.
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Liquidation Analysis. Janney Montgomery Scott conducted an analysis to
estimate the net amount of cash which would be realized in an orderly
liquidation of certain of Kentek's assets and satisfaction of certain of its
liabilities, excluding costs related to dissolving Kentek as a corporate entity.
In performing its analysis, Janney Montgomery Scott relied on Kentek
management's estimates of the net amount which would be realized from the
disposal of certain of Kentek's assets and the satisfaction of certain of its
liabilities. The liquidation analysis resulted in an equity value range of
Kentek from $5.00 per share to $8.25 per share.
Based on the foregoing orderly liquidation analysis, Janney Montgomery
Scott noted that the $8.29 per share value of the consideration to be received
by the Public Stockholders represented an equity value which was above the
valuation range of the orderly liquidation analysis, and that this fact
supported a determination that the consideration to be received in the Merger
was fair to the Public Stockholders from a financial point of view.
The following is a summary of the first supplemental analyses performed by
Janney Montgomery Scott and presented to the Special Committee and the Board at
their August 13, 1999 meetings.
Supplemental Analysis of Selected Publicly Traded Comparable Companies. In
connection with its supplemental analysis of the Comparable Companies, Janney
Montgomery Scott utilized the methodology described on page [42] of this proxy
statement. Janney Montgomery Scott's supplemental analysis of the Comparable
Companies resulted in an implied valuation range of $4.01 to $10.85 per share,
as compared to the implied valuation range of $4.01 to $7.62 per share that
resulted from Janney Montgomery Scott's original analysis of Comparable
Companies using the Merger Projections. This difference resulted from a higher
projected net income for Kentek in 1999 and 2000.
Based on the foregoing analysis, Janney Montgomery Scott noted that the
$8.29 per share value of the consideration to be received by the Public
Stockholders represented an equity value which, as a multiple of the Company's
historical and estimated future financial results, was within or above the
valuation range of the Comparable Companies and that this fact supported a
determination that the consideration to be received in the Merger was fair to
the Public Stockholders from a financial point of view.
Discounted Cash Flow Analysis. Janney Montgomery Scott prepared a
discounted cash flow analysis of the future unleveraged free cash flows that
Kentek's operations could be expected to generate during various periods using
the Status Quo Projections provided to Janney Montgomery Scott by Kentek,
including management's projections of sales, cost of goods sold, operating
expenses, capital expenditures, accounts receivable, inventory, accounts payable
and tax rate. See page [41] of this proxy statement for additional information
relating to the Status Quo Projections provided to Janney Montgomery Scott by
Kentek.
In connection with Janney Montgomery Scott's discounted cash flow analysis,
unleveraged free cash flows of Kentek were projected over a period ending June
30, 2004. A terminal value was calculated utilizing an exit multiple between
0.0x and 4.0x projected EBITDA in fiscal 2004. The exit multiple range selected
by Janney Montgomery Scott was based on then current industry EBITDA multiples,
adjusted for company specific considerations. The estimated future unleveraged
free cash flows and the terminal value were discounted to present values using a
range of discount rates from between 12.5% and 22.5%. The discount rate range
selected by Janney Montgomery Scott was based on an estimate of the weighted
average cost of capital for small capitalization stocks, adjusted for company
specific considerations. After adding the present value of cash accumulated by
the end of the forecasted period, Janney Montgomery Scott arrived at a range of
estimated per share values for the common stock of between $5.79 and $8.53.
Based on a midpoint exit multiple of 2.0x EBITDA in the fiscal year 2004, and a
midpoint discount rate of 17.5%, this analysis produced a midpoint per share
value for the common stock of $6.99.
Based on the foregoing analysis, Janney Montgomery Scott noted that the
$8.29 per share value of the consideration to be received by the Public
Stockholders represented an equity value which was above the valuation range of
the Discounted Cash Flow Analysis, and that this fact supported a determination
that the consideration to be received in the Merger was fair to the Public
Stockholders from a financial point of view.
The following is a summary of the second supplemental analyses performed by
Janney Montgomery Scott and presented to the Special Committee and the Board at
their September 10, 1999 meetings.
Modified Discounted Cash Flow Analysis. Janney Montgomery Scott prepared a
discounted cash flow analysis of the future unleveraged free cash flows that
Kentek's operations could be expected to generate during various periods using
the Status Quo Projections provided to Janney Montgomery Scott by Kentek,
including management's projections of sales, cost of goods sold, operating
expenses, capital expenditures, accounts receivable, inventory,
44.
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accounts payable and tax rate. See page [41] of this proxy statement for
additional information relating to the Status Quo Projections provided to Janney
Montgomery Scott by Kentek.
In connection with Janney Montgomery Scott's discounted cash flow analysis,
unleveraged free cash flows of Kentek were projected over a period ending June
30, 2004. A terminal value was calculated utilizing an exit multiple between
0.0x and 4.0x projected EBITDA in fiscal 2004. The exit multiple range selected
by Janney Montgomery Scott was based on then current industry EBITDA multiples,
adjusted for company specific considerations. The estimated future unleveraged
free cash flows and the terminal value were discounted to present values using a
range of discount rates from between 12.5% and 22.5%. The discount rate range
selected by Janney Montgomery Scott was based on an estimate of the weighted
average cost of capital for small capitalization stocks, adjusted for company
specific considerations. After adding the June 30, 1999 adjusted cash equivalent
value of each share of Kentek's common stock, Janney Montgomery Scott arrived at
a range of estimated per share values for the common stock of between $9.03 and
$9.63. Based on a midpoint exit multiple of 2.0x EBITDA in the fiscal year 2004,
and a midpoint discount rate of 17.5%, this analysis produced a midpoint per
share value for the common stock of $9.29.
Based on the foregoing analysis, Janney Montgomery Scott noted that the
$8.29 per share value of the consideration to be received by the Public
Stockholders represented an equity value which was below the valuation range of
the Modified Discounted Cash Flow Analysis, and that this fact did not support a
determination that the consideration to be received in the Merger was fair to
the Public Stockholders from a financial point of view.
CERTAIN PROJECTIONS
Kentek does not as a matter of course make public projections as to future
sales, earnings, or other results. However, in April 1999, the management of
Kentek prepared the prospective financial information set forth below for Janney
Montgomery Scott in connection with its analysis of KE Acquisition's and Mr.
Shires' proposal and the financial evaluation of Kentek at that time. The
accompanying prospective financial information was not prepared with a view
toward public disclosure or with a view toward complying with the guidelines
established by the American Institute of Certified Public Accountants with
respect to prospective financial information, but, in the view of Kentek's
management, was prepared on a reasonable basis, reflected the best available
estimates and judgments and presented, to the best of management's knowledge and
belief, the expected course of action and the expected future financial
performance of Kentek. However, this information is not fact and should not be
relied upon as necessarily indicative of future results, and readers of this
proxy statement are cautioned not to place undue reliance on the prospective
financial information.
Neither Kentek's independent auditors, nor any other independent
accountants, have compiled, examined, or performed any procedures with respect
to the prospective financial information contained in this proxy statement, nor
have they expressed any opinion or any other form of assurance on such
information or its achievability, and assume no responsibility for, and disclaim
any association with, the prospective financial information.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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STATUS QUO PROJECTIONS
The Status Quo Projections prepared by Kentek and used in Janney Montgomery
Scott's supplemental financial analyses are set forth below. The Status Quo
Projections reflect the best available estimates and judgements of Kentek's
management regarding the future financial performance of Kentek assuming that
the Merger is not consummated and Kentek continues as a public company.
See pages [40-41] of this proxy statement for additional details regarding
the Status Quo Projections and the differences between the Status Quo
Projections and the Merger Projections.
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
(dollars in thousands)
REVENUES:
Printers - IBM (a) $ -- $ -- $ -- $ -- $ --
Printers - OEM (b) 3,400 1,600 -- -- --
Supplies - Lexmark (c) 4,500 2,000 1,000 500 500
Supplies - OEM (d) 12,494 10,000 8,000 5,000 2,000
Supplies - OEM New (e) 1,006 2,515 3,018 3,018 3,018
Parts - IBM (f) 750 350 250 100 100
Parts - OEM (g) 1,501 1,000 1,000 500 500
Other (h) 48 30 15 10 5
Total Revenue $ 23,699 $ 17,495 $ 13,283 $ 9,128 $ 6,123
INCOME STATEMENT DATA:
Total Revenue $ 23,699 $ 17,495 $ 13,283 $ 9,128 $ 6,123
Cost of Sales (i) 12,323 9,097 6,907 4,746 3,184
Operating Expenses (j) 7,306 5,485 4,515 3,295 2,265
Operating Income (EBIT) 3,505 2,612 1,561 786 474
BALANCE SHEET DATA:
Accounts Receivable, Net (k) $ 2,922 $ 2,157 $ 1,638 $ 1,125 $ 755
Inventory, Net (l) 4,220 3,115 2,365 1,625 1,090
Total Assets 50,547 52,915 55,013 56,721 58,370
Accounts Payable (m) 1,215 897 681 468 314
Total Liabilities 3,583 2,940 2,574 2,201 1,882
Total Stockholders' Equity 46,964 49,974 52,439 54,520 56,488
CASH FLOW STATEMENT:
Cash - End of Period $ 39,731 $ 44,098 $ 47,660 $ 50,845 $ 53,499
OTHER RELEVANT DATA:
Capital Expenditures (n) $ 361 $ 260 $ 200 $ 200 $ 200
Tax Rate (o) 37.5% 37.5% 37.5% 37.5% 37.5%
Interest Rate on Cash 5.0% 5.0% 5.0% 5.0% 5.0%
- --------------------
(a) Kentek has not sold printers to IBM since fiscal year 1996.
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(b) Kentek estimates that it is not likely to sell more than 600 printer units
prior to June 30, 2001. See page [17] for more information regarding
Kentek's projected sales of printers.
(c) Supplies provided by Kentek to Lexmark support IBM's installed base of
Kentek printers. Kentek's projections are based on information provided by
IBM to Kentek regarding the number of Kentek printers subject to service
contracts that are contained in IBM's installed base. Kentek's projections
are also based on twelve month rolling forecasts of supplies sales provided
to Kentek by Lexmark. In addition, Kentek's projections are based on
historical Lexmark supplies sales of $20.5 million in 1994, $22.2 million
in 1995, $23.7 million in 1996, $19.4 million in 1997, $12.7 million in
1998 and approximately $8.3 million in 1999.
(d) Based on historical sales of $16.3 million in 1994, $16.2 million in 1995,
$20.8 million in 1996, $20.2 million in 1997, $18.7 million in 1998 and
approximately $17.4 million in 1999. Kentek does not have accurate data
available as to how many printers remain in its non-IBM installed base;
therefore, they are unable to project these revenues utilizing unit data.
(e) Assumes that each new printer sold after fiscal year 1999 will produce
$5,029 in annual supplies revenues, after adjusting for potential cloning
of 15%. Assumes the revenues will continue over the seven year life of the
printers, with the Company only realizing 50% of these revenues in years
one and seven and 100% of these revenues in years two through six.
"Cloning" refers to sales by Kentek's competitors of manufactured and
remanufactured consumable supplies for Kentek printers.
(f) Kentek assumes that IBM is close to announcing end-of-life on Kentek
printers, as evidenced by significant decreases in parts sales to IBM in
recent years. The Company assumes that minimal, declining sales of certain
replacement parts will occur over the next five years as independent
resellers form some sort of sales channel for these parts
(g) Based on Kentek's estimate as to the amount of parts that will be sold in
conjunction with the sale of 600 additional printers.
(h) Primarily reflects Kentek's sales of printer components to its Japanese
subsidiary for assembly of printers. Based on historical sales and Kentek's
forecast of future printer sales. See footnote (b) above.
(i) Assumes that gross margins stay constant at 48%, the average of Kentek's
gross margins for fiscal year 1998 (50%) and 1997 (46%).
(j) Assumes that operating expenses will decline at a rate consistent with the
winding down of the printer business. Includes costs of being a public
company which are assumed to be $415 per year throughout the forecast
period.
(k) Assumes 45-day turnover consistent with current operating results.
(l) Assumes 125-day turnover, based on 126-day turnover for fiscal year 1998.
(m) Assumes 36-day turnover consistent with current results.
(n) Based on management's projections. Assumes that capital expenditures will
initially decline in conjunction with the winding down of the printer
business.
(o) Assumes estimated historical rate of 37.5%.
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MERGER PROJECTIONS
The Merger Projections prepared by Kentek and used by Janney Montgomery
Scott in connection with its original financial analysis are set forth below.
The Merger Projections reflect the best available estimates and judgements of
Kentek's management regarding the future financial performance of Kentek giving
effect to the Merger.
See pages [40-41] of this proxy statement for additional details regarding
the Merger Projections and the differences between the Merger Projections and
the Status Quo Projections.
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
(dollars in thousands)
INCOME STATEMENT DATA:
Total Revenue (a) $ 23,699 $ 17,495 $ 13,283 $ 9,128 $ 6,123
Cost of Sales (b) 12,323 9,097 6,907 4,746 3,184
Operating Expenses (c) 6,891 5,070 4,100 2,880 1,850
Operating Income (EBIT) 3,920 3,027 1,976 1,201 889
BALANCE SHEET DATA:
Accounts Receivable, Net (d) $ 2,922 $ 2,157 $ 1,638 $ 1,125 $ 755
Inventory, Net (e) 4,220 3,115 2,365 1,625 1,090
Total Assets (f) 15,696 14,536 15,164 15,073 14,607
Accounts Payable (g) 1,215 897 681 468 314
Total Liabilities (h) 7,683 4,940 4,574 3,914 3,031
Total Stockholders' Equity (i) 8,012 9,596 10,590 11,159 11,576
CASH FLOW STATEMENT:
Cash - End of Period $ 4,880 $ 5,720 $ 7,811 $ 9,197 $ 9,737
OTHER RELEVANT DATA:
Capital Expenditures (j) $ 361 $ 260 $ 200 $ 200 $ 200
Tax Rate (k) 44.0% 44.0% 44.0% 44.0% 44.0%
- ------------------
(a) See Revenues line items and footnotes (a) - (h) of Status Quo Projections.
(b) Assumes that gross margin stays constant at 48%, the average of Kentek's
gross margins for fiscal years 1998 (50%) and 1997 (46%).
(c) Assumes that operating expenses will decline at a rate consistent with the
winding down of the printer business. The costs of being a public company,
approximately $415 per year, are not included.
(d) Assumes 45-day turnover consistent with current results.
(e) Assumes 125-day turnover, based on 126-day turnover for fiscal year 1998.
(f) Represents the total assets of Kentek subsequent to the payment of the
merger consideration in connection with the proposed merger transaction.
(g) Assumes 36-day turnover consistent with current results.
(h) Assumes that Kentek borrows $6.0 million subsequent to the consummation of
the proposed merger to fund Kentek's operations on a going-forward basis.
(i) Represents the total stockholders' equity subsequent to the payment of the
merger consideration in connection with the proposed merger transaction.
(j) Based on management's projections. Assumes that capital expenditures will
initially decline in conjunction with the winding down of the printer
business.
(k) Assumes tax rate applicable after Kentek elects to be treated as an
S-Corporation.
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CERTAIN TRANSACTIONS
Kentek entered into an Employment Agreement with Mr. Shires on April 1,
1989 (the "Employment Agreement"). The Employment Agreement, which pursuant to
its terms has been amended by the Board, provided in fiscal 1998 for an annual
salary of $252,000, an annual bonus equal to 1.5% of Kentek's pre tax profit for
each fiscal year and a leased or purchased automobile or an automobile allowance
of $800 per month. The Employment Agreement can be terminated by Kentek by
written notice at any time, and in such event, Mr. Shires is entitled to a
monthly severance payment equal to his then current monthly salary, exclusive of
any incentive compensation or bonus, for a period of six months after
termination. Mr. Shires is obligated not to solicit any employees to leave
employment of Kentek for a period of three years after termination of his
employment.
From July 1, 1997 through the date of this proxy statement, Kentek paid The
Arca Group, Inc. approximately $179,000 for consulting services provided by Dr.
Morgan, Chairman of the Board. Dr. Morgan is President of The Arca Group, Inc.
Kentek does not anticipate that it will engage The Arca Group subsequent to the
consummation of the Merger.
Cooley Godward LLP, counsel to the Special Committee in connection with the
Merger, has represented Kentek in various legal matters since 1994.
PLANS FOR KENTEK AFTER THE MERGER; CONDUCT OF THE BUSINESS OF KENTEK IF THE
MERGER IS NOT CONSUMMATED
Kentek's total revenues, printer sales, and consumable supplies and spare
parts sales are decreasing rapidly due to increased competition in the mid-range
printer industry and the introduction, by competitors, of new products. As of
the date of this proxy statement, Kentek believes that substantially all of its
customers resell the new Xerox 40 ppm printer or intend to begin reselling the
new Xerox 40 ppm printer in the near future.
As of the date of this proxy statement, the Schedule 13E-3 Filing Parties
believe that continued declines in Kentek printer sales may make the manufacture
of Kentek printers economically impractical in the near future. However, the
Schedule 13E-3 Filing Parties currently intend to manufacture printers as long
as Kentek's customers order printers in economically viable quantities, which
the Schedule 13E-3 Filing Parties currently estimate to be approximately 600
printers per year. If, as expected, Kentek terminates the manufacturing of new
printers, such an event would represent a significant departure from Kentek's
historical operations.
The Schedule 13E-3 Filing Parties believe that Kentek's competitors,
including Xerox, will continue to release new lower cost printers with enhanced
features and that Kentek's customers will continue to replace Kentek printers
with such lower cost printers. As a result, the Schedule 13E-3 Filing Parties
anticipate that Kentek will continue to suffer progressively greater declines in
new printer sales. Based on the foregoing and based on Kentek's historical
printer unit sales numbers set forth on page [5] of this proxy statement, the
Schedule 13E-3 Filing Parties estimate that Kentek will not continue to
manufacture and sell printers beyond the next twelve months. In addition, the
Schedule 13E-3 Filing Parties anticipate that Kentek's sales of consumable
supplies and spare parts sales will continue to decline over the course of the
next several years as Kentek's installed base of printers exit their useful life
cycle and as Kentek printer sales continue to decline.
The Schedule 13E-3 Filing Parties intend to manage Kentek's business in
response to the increased competition in the mid-range printer industry and the
introduction, by Kentek's competitors, of new products. In particular, the
Schedule 13E-3 Filing Parties intend to:
o manage an orderly liquidation of Kentek's business operations and
assets over the next four to five years;
o reduce expenses ahead of declining revenues in order to maintain
operating profitability;
o manufacture and sell existing models of printers as long as
Kentek's customers continue to order printers in economically
viable quantities, which the Schedule 13E-3 Filing Parties
currently estimate to be approximately 600 printers per year. The
Schedule 13E-3 Filing Parties currently estimate that this level
may be reached in the next twelve months; and
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o manufacture and sell consumable supplies and spare parts for
existing Kentek printers as long as Kentek's customers continue
to order consumable supplies and spare parts in economically
viable quantities, which the Schedule 13E-3 Filing Parties
currently estimate to be approximately $2.5 million in consumable
supplies and spare parts orders per year. The Schedule 13E-3
Filing Parties currently estimate that this level may be reached
in approximately four or five years.
The Schedule 13E-3 Filing Parties anticipate that the revenues generated by
Kentek following the Merger will be sufficient to:
o repay Kentek's creditors; and
o enable Kentek to service and support its existing customer
contractual obligations, which typically extend five years from
the end of the contract term or five years after the date that
the last printer is shipped.
The Schedule 13E-3 Filing Parties do not intend to introduce or develop new
products, although they may pursue extensions of existing product lines if those
are feasible.
Other than as discussed above, Kentek has no current plans or proposals
relating to any extraordinary corporate transactions, such as a merger,
reorganization or liquidation involving Kentek or any of its subsidiaries, any
sale or transfer of a material amount of the assets of Kentek or any of its
subsidiaries or any other material change in Kentek's corporate structure or
business. Kentek, however, will continue to be open to reviewing and exploring
any opportunities to maximize stockholder value and will evaluate any
transactions involving its business as they arise. The Schedule 13E-3 Filing
Parties have no plans, other than pursuant to the Merger Agreement, to acquire
the shares held by the Public Stockholders.
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PRICE OF THE COMMON STOCK
Kentek's common stock began trading publicly on the Nasdaq National Market
under the ticker symbol KNTK on April 17, 1996. Prior to that date, there was no
public market for the common stock. The initial offering price per share was
$8.00. As of September 10, 1999, 4,604,152 shares were outstanding and Kentek
had approximately 250 holders of record of the common stock, which figure does
not include those stockholders whose certificates are held by nominees. The
table below sets forth the per share quarterly high and low closing prices of
the common stock since Kentek's initial public offering on April 17, 1996 as
reported on the Nasdaq National Market.
HIGH LOW
---------- ---------
FISCAL YEAR ENDED JUNE 30, 1996
Fourth Quarter...................................................................... $ 15.50 $ 8.00
FISCAL YEAR ENDED JUNE 30, 1997
First Quarter....................................................................... $ 10.75 $ 4.25
Second Quarter...................................................................... 6.50 4.38
Third Quarter....................................................................... 7.38 5.63
Fourth Quarter...................................................................... 8.25 6.19
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter....................................................................... $ 10.38 $ 6.75
Second Quarter...................................................................... 9.38 6.25
Third Quarter....................................................................... 8.88 6.75
Fourth Quarter...................................................................... 9.38 7.88
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter....................................................................... $ 8.66 $ 6.00
Second Quarter...................................................................... 6.63 5.38
Third Quarter....................................................................... 6.75 5.88
Fourth Quarter...................................................................... 7.88 6.31
FISCAL YEAR ENDED JUNE 30, 2000
First Quarter (1)................................................................... $ 8.03 $ 7.75
- -------------------
(1) Through September 10, 1999
On April 21, 1999, the last trading day before the public announcement that
Mr. Shires had proposed to acquire the shares held by the Public Stockholders
for $7.50 per share, the closing bid price of the common stock was $6.9375 per
share.
On May 13, 1999, the last trading day before public announcement of the
execution of the Merger Agreement, the high and low sale prices and the closing
price of the common stock were $7.625 per share.
On [DATE], 1999, the closing price of the common stock as reported was
$[_____] per share.
On [DATE], 1999, there were approximately [_______] holders of common
stock.
Stockholders should obtain current market price quotations for the common
stock in connection with voting their shares.
A cash dividend of $.02 per share for the third quarter was declared May
10, 1999. A quarterly cash dividend of $.02 per share has been paid for each
quarter during the last two years. Pursuant to the Merger Agreement, no further
dividends will be paid. Kentek anticipates that it would likely continue to pay
a quarterly cash dividend of $0.02 per share in the event that the Merger is
terminated.
Upon consummation of the Merger, the shares will cease to be traded on the
Nasdaq National Market.
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THE MERGER
OVERVIEW
For a description of the principal terms of the Merger and the Merger
Agreement, including the consideration to be received by the Public
Stockholders, see "Certain Provisions of the Merger Agreement."
MERGER CONSIDERATION
The Merger Agreement provides that each share outstanding will be converted
into the right to receive cash in an amount equal to $8.29 per share, without
interest. All shares that are owned by Kentek as treasury stock will be canceled
and no payment will be made for the shares. All shares owned by KE Acquisition
shall be canceled and no payment will be made for the shares. If the appraisal
rights of any shares are perfected, then those shares will be treated as
described under "Appraisal Rights."
The Merger Consideration will be paid promptly after the Merger and after
Kentek receives stock certificates and appropriate documentation from you. After
the Merger you will be given instructions explaining how to send stock
certificates and other required documents to the exchange agent.
The aggregate Merger Consideration, including amounts necessary to cash out
director and employee stock options, is estimated to be approximately $39
million.
The price of $8.29 per share is a 32.6% premium over the average closing
price for the shares on the Nasdaq National Market for the six month trading
period ended April 21, 1999, the date before Kentek announced it had received
Mr. Shires' initial proposal. In addition, the price is a 19.5% premium over the
closing price for the shares on April 21, 1999, and a 8.7% premium over closing
price for the shares on May 13, 1999, the date before Kentek announced the
execution of the Merger Agreement.
Based on the unaudited financial statements of Kentek as of March 31, 1999,
the net book value of Kentek approximated $44,391,000, or $9.66 per share, and
net earnings of Kentek for the nine months ended March 31, 1999 approximated
$3,389,000. As of March 31, 1999, $7.47 of the net book value per share was
attributable to cash and securities held by Kentek. Kentek has not yet closed
its books for the quarter and fiscal year ended June 30, 1999. However, Kentek
estimates that, as of June 30, 1999, the value of Kentek's cash and securities
approximated $37,067,509, or $8.05 per share. Payment for certain obligations is
imminent. Accordingly, approximately $2,974,800 of Kentek's cash balance will be
used in a very short period of time to satisfy certain liabilities and
commitments, including:
o $1,364,000 for estimated income taxes currently payable;
o $600,000 for operating and purchase commitments of Kentek's
Japanese subsidiary;
o $661,000 for costs associated with the Merger; and
o $349,800 for year-end bonuses paid to employees.
After adjusting Kentek's June 30, 1999 cash and securities balances for
these obligations and commitments, the value of the cash and securities held by
Kentek would have approximated $34,092,709, or $7.51 per share. This adjusted
value represents a $248,291 decrease in the amount of cash and securities held
by Kentek as of March 31, 1999. Given that KE Acquisition and Mr. Shires intend
to finance a substantial portion of the Merger Consideration from cash and
securities held by Kentek, as of June 30, 1999 (as adjusted), approximately
$7.51 per share of the Merger Consideration will be financed with the cash and
securities held by Kentek and approximately $0.78 of the Merger Consideration
will be financed by KE Acquisition and Mr. Shires.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences of
the Merger to holders of common stock. The discussion is for general information
only and does not purport to consider all aspects of federal income taxation
that might be relevant to holders of common stock. The discussion is based on
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing regulations promulgated thereunder and
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administrative and judicial interpretations thereof, all of which are subject to
change, possibly with retroactive effect. The discussion applies only to
stockholders who hold shares as capital assets within the meaning of Section
1221 of the Code, and may not apply to common stock received pursuant to
compensation arrangements, common stock held as part of a "straddle," "hedge,"
"conversion transaction," "synthetic security," or other integrated investment,
or to certain types of stockholders, such as financial institutions, insurance
companies, tax-exempt organizations and broker-dealers, who may be subject to
special rules. This discussion does not address the federal income tax
consequences to a stockholder who, for federal income tax purposes, is a
non-resident alien individual, a foreign corporation, a foreign partnership or a
foreign estate or trust (as defined in the Code), nor does it consider the
effect of any foreign, state, local or other tax laws.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH HOLDER OF COMMON STOCK
SHOULD CONSULT HIS OWN TAX ADVISOR TO DETERMINE THE TAX EFFECTS TO SUCH
STOCKHOLDER OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN,
STATE, LOCAL AND OTHER TAX LAWS.
The receipt of cash for shares pursuant to the Merger will be a taxable
transaction for federal income tax purposes, and may also be a taxable
transaction under applicable foreign, state, local or other tax laws. In
general, for federal income tax purposes, a stockholder will recognize capital
gain or loss equal to the difference between the stockholder's adjusted tax
basis in his common stock and the amount of cash received therefor. Gain or loss
must be determined separately for shares acquired at the same cost in a single
transaction.
Capital gain in excess of capital loss recognized by an individual investor
upon a disposition of common stock that has been held for more than 12 months
will generally be subject to a maximum tax rate of 20% or, in the case of common
stock that has been held for 12 months or less, will be subject to tax at
ordinary income tax rates. There are also limitations on a stockholder's
deductibility of capital losses.
Payments in connection with the Merger may be subject to "backup
withholding" at a rate of 31%. Backup withholding does not apply if a
stockholder is a corporation or comes within certain exempt categories and, when
required, demonstrates this fact. Backup withholding also does not apply if the
stockholder provides a correct taxpayer identification number or social security
number to the Transfer Agent identified below, and otherwise complies with
applicable requirements of the backup withholding rules. A stockholder who does
not provide a correct taxpayer identification number may be subject to penalties
imposed by the Internal Revenue Service. Any amount paid as backup withholding
does not constitute an additional tax and will be creditable against the
stockholder's federal income tax liability, provided that the required
information is furnished to the IRS. Each stockholder should consult with his
own tax advisor as to his qualification or exemption from backup withholding and
the procedure for obtaining an exemption. Stockholders may prevent backup
withholding by completing a Substitute Form W-9 provided by the Transfer Agent
and submitting it to the Transfer Agent.
ACCOUNTING TREATMENT
KE Acquisition will account for the Merger as "purchase" in accordance with
generally accepted accounting principles. Therefore, the aggregate consideration
paid by KE Acquisition in connection with the Merger will be allocated to
Kentek's assets and liabilities based upon their fair values, with any excess
being treated as goodwill.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Stockholders should be aware that, as a result of his relationships with
Kentek and KE Acquisition, Philip W. Shires, Kentek's Chief Executive Officer
and President and a director, has interests that are different from, or in
addition to, the interests of holders of shares generally. These interests have
presented Mr. Shires with direct conflicts of interest in connection with the
Merger. The Special Committee and the Board were and are aware of the interests
and conflicts described below and elsewhere in this proxy statement and
considered them in addition to the other matters described under "Background of
the Merger-Recommendation of the Special Committee and the Board of Directors"
and "--Reasons of Kentek for the Merger; Fairness of Merger." For information on
the role of the Special Committee, see also "Background of the Merger."
The members of the Special Committee were compensated as follows: the
chairman was paid $30,000 and the other two members of the Special Committee
were paid $25,000 for serving as members of the Special Committee.
Pursuant to the Merger Agreement, Kentek has agreed for two years after the
Merger to indemnify all present directors and officers of Kentek and, subject to
certain limitations, use its best efforts to maintain for two years a
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directors' and officers' insurance and indemnification policy and a fiduciary
liability policy on terms with respect to coverage and amount not less favorable
in any material respect, than any policies in effect on May 14, 1999. See
"Certain Provisions of the Merger Agreement--Covenants."
As of September 10, 1999, the executive officers and directors of Kentek
beneficially owned an aggregate of 1,586,600 shares of which 1,157,130 are
entitled to vote at the special meeting. Based on the merger consideration of
$8.29 per share, the aggregate consideration which would be received in the
Merger by the executive officers and directors of Kentek in respect of the
shares would be $9,592,607. See "Security Ownership of Certain Beneficial Owners
and Management."
The members of the Special Committee will not serve as directors of KE
Acquisition subsequent to the MERGER. All unvested stock options held by Dr.
Howard L. Morgan, the Chairman of Kentek, will vest upon the consummation of the
Merger. Except as set forth in the preceding sentence, none of the officers or
directors of Kentek will receive a compensation package or severance payments as
a result of the Merger.
MERGER FINANCING
The total amount of cash required to consummate the transactions
contemplated by the Merger Agreement is estimated to be approximately $39
million. This includes approximately $37.7 million to be paid to Kentek
stockholders, approximately $410,000 to be paid to Kentek option holders, and
approximately $735,000 for fees and expenses, including fees of Janney
Montgomery Scott, legal and accounting fees, printing and mailing costs, and
other expenses. KE Acquisition and Philip W. Shires expect to obtain all of the
Merger Financing from cash and securities held by Kentek and from borrowings
under a senior secured loan facility to be entered into with US Bank pursuant to
the Commitment Letter.
Subject to the terms and conditions of the Commitment Letter, US Bank has
agreed to provide up to $6 million of debt financing for purposes of financing
the Merger, paying related fees and expenses, and providing working capital for
Kentek. The Commitment Letter is subject to customary conditions, including the
negotiation, execution and delivery of definitive documentation with respect to
the commitment. The Commitment Letter was extended by US Bank on August 18, 1999
and will expire on October 31, 1999.
The Commitment Letter provides that:
o Kentek may borrow up to $4 million in the form of a term loan;
o the outstanding principal amount of the term loan together with
accrued interest will be payable in 24 equal monthly
installments;
o Kentek will pay a $10,000 commitment fee to US Bank with respect
to the term loan;
o Kentek may borrow up to $2 million against a revolving line of
credit;
o the outstanding principal amount of the revolving line of credit
will be due no later than November 30, 2000;
o all accrued amounts of interest relating to amounts outstanding
under the revolving line of credit will be payable in full on a
monthly basis;
o Kentek will pay a commitment fee of 0.25% per quarter to US Bank
on the unused portion of the revolving line of credit;
o the term and revolving loans will be secured by a first priority
perfected security interest in Kentek's accounts, inventory and
general intangibles;
o Philip W. Shires will personally guarantee the full amount of the
outstanding term and revolving loans, and Donald W. Shires and
Renee Bond will personally guarantee a portion of the term and
revolving loans which has yet to be determined;
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o the term and revolving loans will bear interest at US Bank's
floating reference rate on a 360-day year basis;
o Kentek will be subject to certain covenants governing its future
operations, including restrictions on other indebtedness and
liens, investments, sale of assets, mergers, guarantees,
distributions, and changes of control of ownership or management;
o Kentek will be subject to certain financial tests, including
ratios of earnings to expenses and net worth to debt and a
requirement that Kentek be profitable.
KE Acquisition and Philip W. Shires anticipate that the financing will be
repaid from amounts generated from Kentek's operations.
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CERTAIN PROVISIONS OF THE MERGER AGREEMENT
This section of the proxy statement describes some aspects of the proposed
Merger, including some of the provisions of the Merger Agreement. This
description of the Merger Agreement is not complete and is qualified by
reference to the Merger Agreement, a copy of which is attached to this proxy
statement as Annex A and which is incorporated by reference. You are urged to
read the entire Merger Agreement carefully.
STRUCTURE; TIMING
The Merger Agreement provides for the merger of KE Acquisition into Kentek.
Kentek will survive the Merger and continue to exist after the Merger. The
Merger will become effective at the time a certificate of merger is filed with
the Secretary of State of the State of Delaware, or a later time if agreed in
writing by the parties and specified in the certificate of merger. The Merger is
expected to occur as soon as practicable after all conditions to the Merger have
been satisfied or waived.
EMPLOYEE AND DIRECTOR STOCK OPTIONS
Immediately prior to the merger, each director or employee of Kentek
holding options to acquire Kentek shares will receive cash equal to the excess,
if any, of $8.29 over the per share exercise price of each option, to the extent
the option is then vested and exercisable. With the exception of an option for
30,000 shares held by Dr. Howard L. Morgan, the Chairman of Kentek, the
exercisability of Kentek options will not be accelerated as a result of the
Merger. Any options that are not terminated immediately prior to the Merger will
continue to be outstanding, but, after the Merger, those options, to the extent
they vest, will become the right to receive $8.29 in cash upon payment of the
exercise price.
At Kentek's August 26, 1998 Board meeting, Kentek's Board unanimously
approved the grant of 30,000 options to acquire common stock to Dr. Morgan. The
exercise price of the options granted to Dr. Morgan is $6.81 per share, which
equals the closing price of Kentek common stock on the date of issuance. At that
time, the Board determined that the options would be exercisable by Dr. Morgan
upon the earlier of the following dates:
o the first date subsequent to the grant of the options on which
Kentek's average six month stock price is greater than $10.00 per
share,
o the date on which a sale or merger of Kentek is consummated, and
o the date that is ten years from the date of issuance of the stock
options.
The 30,000 options granted to Dr. Morgan by the Board on August 26, 1998
will be fully vested upon the consummation of the proposed merger transaction.
Prior to the Merger, KE Acquisition may enter into agreements with option
holders to treat options differently than the treatment described above. As of
the date of this proxy statement, KE Acquisition has not agreed and does not
expect that it will agree to treat any options other than as described above. KE
Acquisition does anticipate, however, that Philip W. Shires will terminate,
prior to the Merger, all 236,719 options to acquire Kentek shares that he
presently holds. In addition, Donald W. Shires and Renee Bond have indicated
that they intend to terminate, prior to the Merger, all of the vested options to
acquire Kentek shares that they currently hold. Donald W. Shires currently holds
7,500 options to acquire Kentek shares, 2,500 of which are vested, and Renee
Bond currently holds 10,959 options to acquire Kentek shares, all of which are
vested.
CONVERSION OF SHARES
Kentek will appoint an exchange agent who will pay the Merger Consideration
in exchange for certificates representing shares of common stock. Kentek will
make cash available to the exchange agent in order to permit the exchange agent
to pay the Merger Consideration. Promptly after the Merger, Kentek or the
exchange agent will send record holders of common stock a letter of transmittal
and instructions explaining how to send stock certificates to the exchange
agent. The exchange agent will receive all certificates for shares that are
exchanged for the Merger Consideration. If you send your stock certificates to
the exchange agent, together with a properly completed letter of transmittal,
then promptly after the exchange agent receives and processes your documents, a
check for the Merger Consideration will be mailed to you, subject to any tax
withholding required by law.
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COVENANTS
Interim Operations of Kentek. Until the Merger, Kentek and its subsidiaries
are required to comply with covenants concerning the operation of their
businesses, compliance with applicable laws, corporate structure, governance and
financing, and compensation of management. In general, Kentek must operate
during this period in all material respects in the usual and ordinary course,
consistent with past practices. Kentek must also obtain KE Acquisition's consent
for some actions such as significant acquisitions or incurring indebtedness
other than in the ordinary course of business, and afford KE Acquisition access
to Kentek's properties and records.
Other Covenants. The Merger Agreement contains mutual covenants of KE
Acquisition and Kentek applicable to consummating the Merger and all related
transactions. These include covenants relating to public announcements;
notification if some matters occur; and cooperation in connection with
governmental filings and in obtaining consents.
Special Meeting; Proxy Material. Kentek and KE Acquisition agreed to
prepare this proxy statement, and Kentek agreed to mail this proxy statement to
each holder of common stock and call and hold the special meeting. Kentek also
agreed to use all commercially reasonable efforts to obtain stockholder adoption
of the Merger Agreement.
No Solicitation by Kentek. Subject to exceptions summarized below, Kentek
agreed that it will not directly or indirectly, solicit, encourage or initiate
any Acquisition Proposal or negotiate with any prospective buyer in connection
with any Acquisition Proposal. Kentek also agreed it will not authorize or
permit any of the officers, directors, employees, agents and other
representatives of Kentek and its subsidiaries to take any of the actions set
forth in the preceding sentence. An "Acquisition Proposal" is any proposal or
offer with respect to:
o a tender or exchange offer, a merger, consolidation or other
business combination involving Kentek or any of its subsidiaries,
including a merger of equals involving Kentek,
o the acquisition of an equity interest in Kentek representing in
excess of 33% of the power to vote for the election of a majority
of directors of Kentek, or
o the acquisition of assets of Kentek or its subsidiaries,
including stock of one or more subsidiaries of Kentek,
representing 33% or more of the consolidated assets of Kentek, in
each case by any person other than KE Acquisition or Philip W.
Shires.
Kentek agreed to cease any solicitation of, and any discussion or
negotiation conducted prior to the date of the Merger Agreement with respect to,
any Acquisition Proposal. As indicated above, Kentek ceased such activities,
prior to the signing of the Merger Agreement, when the Special Committee
concluded its process of review. At that time, the Special Committee had not
received offers for or indications of interest with respect to Kentek from any
parties other than KE Acquisition, and the Special Committee was not in the
process of discussing or negotiating any such offers or indications of interest.
However, the Merger Agreement provides that the Board and/or the Special
Committee may authorize Kentek to engage in discussions or negotiations
concerning an unsolicited Acquisition Proposal, and may furnish information and
cooperate in this regard. This action can be taken if the Board and/or the
Special Committee determines in the exercise of its fiduciary duties that such
action is in the best interests of Kentek stockholders.
In addition, the Merger Agreement provides that following receipt of an
Acquisition Proposal that is financially superior to the Merger, as determined
in good faith by the Board, the Board may withdraw, modify or not make its
recommendation in favor of the Merger. This action can be taken if the Board
concludes in good faith that such action is necessary in order to act in a
manner that is consistent with its fiduciary obligations under applicable law.
Kentek has agreed not to engage in negotiations with, or disclose any
nonpublic information to, any person unless it receives from the person an
executed confidentiality agreement on terms and conditions deemed to be
appropriate and in Kentek's best interest by the Board.
Kentek will promptly notify KE Acquisition of the receipt of any
Acquisition Proposal not less than two business days prior to entering into any
agreement in connection with the Acquisition Proposal. The notice must
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include the identity of the person or group making the Acquisition Proposal and
the material terms and conditions of the Acquisition Proposal. Kentek agreed not
to enter into a definitive agreement in connection with an Acquisition Proposal
unless at least five business days have passed since Kentek initially notified
KE Acquisition of an inquiry or proposal relating to an Acquisition Proposal.
Within the two-business day or five-business day period referred to above, if
any, KE Acquisition may propose an improved transaction. The two and
five-business day waiting periods are not required if the Board or the Special
Committee decides that the waiting periods conflict with the exercise of the
Board's fiduciary obligations to its stockholders.
Antitakeover Statutes. Kentek and the Board agreed to act to eliminate or
minimize the effects of any takeover statute on the Merger and all related
transactions.
Indemnification and Insurance of Kentek's Directors and Officers. Kentek
will continue to indemnify its present and former officers and directors, and
those of its subsidiaries, in respect of acts or omissions occurring prior to
the Merger. This indemnification obligation applies to the extent provided under
Kentek's certificate of incorporation and bylaws as of May 14, 1999, and until
any applicable statute of limitations has expired. The indemnification
obligation is also subject to any limitation imposed under applicable law.
At least until two years after the Merger, KE Acquisition will provide
officers' and directors' liability insurance for acts or omissions occurring
prior to the Merger. The insurance will cover each person currently covered by
Kentek's officers' and directors' liability insurance policy, and will be on
terms with respect to coverage and amount no less favorable than those of
Kentek's policy in effect on May 14, 1999. In satisfying this obligation, KE
Acquisition shall not be obligated to pay premiums in excess of 150% of the
amount per annum that Kentek paid for this purpose in its last full fiscal year.
If the premium would exceed the 150% level, KE Acquisition is obligated to get
the coverage that can be obtained at the 150% level.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains a number of representations and warranties by
both parties. The representations and warranties do not survive the Merger.
Kentek and KE Acquisition each made reciprocal representations and warranties on
matters such as corporate organization, authorization, authorization of the
merger transactions, and governmental approvals. Kentek also represented and
warrantied to KE Acquisition as to a number of other matters relating to
Kentek's corporate structure, SEC filings, business operations, financial
statements, assets, liabilities and litigation. With respect to the Merger,
Kentek warranted to KE Acquisition that Section 203 of the DGCL does not apply
to the Merger and all related transactions.
CONDITIONS TO THE MERGER
Conditions to Kentek's and KE Acquisition's Obligations to Effect the
Merger. The obligations of Kentek and KE Acquisition to consummate the Merger
are subject to the satisfaction of the following conditions:
o Kentek's stockholders must adopt the Merger Agreement;
o no existing law and no court action may prohibit or threaten to
prohibit the Merger;
o all consents from any governmental authority required to permit
the Merger must be obtained;
o the Merger must not be prevented by any governmental authority,
and no governmental authority can be seeking to prevent the
Merger;
o KE Acquisition must not be prohibited from exercising all
material rights pertaining to ownership of Kentek or any of its
subsidiaries, and no government authority can be seeking such a
prohibition;
o KE Acquisition must not be compelled to dispose of or hold
separate all or any portion of the business or assets of Kentek
or any of its subsidiaries, and no government authority can be
seeking such disposition; and
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o no statute, rule, regulation or order can have been enacted or
proposed that would make the consummation of the Merger illegal.
Conditions to the Obligations of KE Acquisition. The obligations of KE
Acquisition to effect the Merger are subject to the satisfaction of the
following additional conditions:
o Kentek must have performed in all material respects its
obligations under the Merger Agreement;
o the representations and warranties of Kentek must be true in all
material respects as if made as of the date of the Merger;
o Kentek must obtain all consents and make all filings required for
the Merger, other than where failing to have such consents or
make such filings would not reasonably be expected to have a
material adverse effect on Kentek;
o KE Acquisition must receive all documents it reasonably requests
relating to Kentek and Kentek's authorization of the Merger
Agreement;
o KE Acquisition shall have received the financing necessary to
consummate the transactions contemplated by the Merger Agreement
and to fund the working capital needs of Kentek, on terms and
conditions reasonably acceptable to KE Acquisition; and
o no more than 5% of the shares shall exercise appraisal rights.
Conditions to the Obligations of Kentek. The obligation of Kentek to effect
the Merger is further subject to the satisfaction of the following additional
conditions:
o KE Acquisition must have performed in all material respects its
obligations under the Merger Agreement;
o the representations and warranties of KE Acquisition must be true
in all material respects as if made as of the date of the Merger;
o KE Acquisition must obtain all consents and make all filings
required for the Merger, other than where not having such
consents or making such filings would not reasonably be expected
to impede the receipt of the Merger Consideration by Kentek's
stockholders; and
o Kentek must receive all documents it reasonably requests relating
to KE Acquisition and KE Acquisition's authorization of the
Merger Agreement.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Merger as
follows:
o by mutual written consent of Kentek and KE Acquisition;
o by either Kentek or KE Acquisition:
o if the Merger has not been consummated by November 14, 1999;
o if any law or regulation makes consummation of the Merger illegal
or otherwise prohibited;
o if any judgment, injunction, order or decree enjoining Kentek or
KE Acquisition from consummating the Merger is entered and such
injunction, judgment, order or decree has become final and
non-appealable; or
o if Kentek's stockholders do not approve the Merger Agreement; or
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o by KE Acquisition if:
o any person, entity or group other than KE Acquisition has
increased its beneficial ownership of common stock by an
amount equal to 15% or more of the outstanding common stock,
as compared with its level of ownership on the date of the
Merger Agreement;
o any representation or warranty of Kentek under the Merger
Agreement is untrue when made or any covenant of Kentek
under the Merger Agreement is breached, which, in either
case, would result in a closing condition not being
satisfied, subject to a 60-day cure period;
o the Board withdraws or modifies in a manner adverse to KE
Acquisition its approval or recommendation of the Merger;
o the Board approves, recommends or endorses any Acquisition
Proposal other than the Merger; or
o by Kentek if:
o the Board determines in good faith that an Acquisition
Proposal is financially superior to the Merger and is
reasonably capable of being financed, and
o Kentek enters into a definitive agreement to effect the
financially superior Acquisition Proposal, and Kentek has
complied with the covenant set forth above under
"--Covenants."
If the Merger Agreement is validly terminated, none of its provisions
survive, except for miscellaneous provisions relating to confidentiality,
expenses, governing law, jurisdiction, waiver of a jury trial, and other
matters. Termination shall be without any liability on the part of any party,
unless such party is in willful breach of a provision of the Merger Agreement.
PAYMENT OF FEES AND EXPENSES
The fees and expenses of the Merger and all related transactions will be
paid by Kentek and KE Acquisition, and will not reduce the Merger Consideration.
Kentek agreed to pay KE Acquisition's expenses relating to the Merger and all
related transactions if the Merger is not completed, if KE Acquisition has not
materially breached its representations and warranties or obligations and if:
o Kentek enters into an agreement to consummate an Acquisition
Proposal and the transaction is subsequently consummated;
o the Merger Agreement is terminated by KE Acquisition because a
representation or warranty of Kentek was untrue when made or any
covenant of Kentek under the Merger Agreement was breached,
which, in either case, resulted in a closing condition not being
satisfied;
o the Merger Agreement is terminated by KE Acquisition because the
Board withdrew or modified in a manner adverse to KE Acquisition
its approval or recommendation of the Merger;
o the Merger Agreement is terminated by KE Acquisition or Kentek
because the Board approved an Acquisition Proposal other than the
Merger; or
o an Acquisition Proposal is made and, within 12 months after
termination of the Merger Agreement, Kentek enters into a
definitive agreement to consummate a type of transaction
contemplated by an Acquisition Proposal, and later consummates
the transaction.
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The following is an estimate of fees and expenses to be incurred in
connection with the Merger:
Legal Fees and Expenses of KE Acquisition's Counsel............. $ 180,000
Accountants' Fees and Expenses.................................. 25,000
Financing Costs and Fees........................................ 25,000
Financial Advisor to Special Committee.......................... 150,000
Legal Fees and Expenses of Special Committee Counsel............ 150,000
Special Committee Fees and Expenses............................. 80,000
Printing........................................................ 75,000
Filing Fees..................................................... 7,500
Transfer Agent.................................................. 25,000
Mailing......................................................... 7,500
Miscellaneous................................................... 10,000
-----------
TOTAL........................................................... $ 735,000
===========
Kentek currently expects that approximately $39 million will be required to
pay the Merger Consideration to the Public Stockholders, assuming no holders
exercise appraisal rights. For a description of the sources of the funds, see
"The Merger--Merger Financing."
AMENDMENTS; WAIVERS
The provisions of the Merger Agreement may be amended or waived if, and
only if, the amendment or waiver is in writing and signed. However, after the
adoption of the Merger Agreement by Kentek's stockholders, the stockholders must
approve amendments or waivers that adversely affect the Merger Consideration,
any term of the certificate of incorporation of Kentek or any of the terms or
conditions of the Merger Agreement.
CONSEQUENCES OF THE MERGER
After the Merger, Kentek's stockholders will no longer have any interest in
Kentek or its future earnings or increase in value. The shares will be
deregistered under the federal securities laws and will no longer be quoted on
the Nasdaq National Market or any exchange.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of Kentek's common stock as of September 10, 1999 by:
o each member of the Board;
o each of the current executive officers of Kentek;
o all current executive officers and directors of Kentek as a
group;
o all those known by Kentek to be beneficial owners of more than
five percent of its common stock; and
o Each of the Schedule 13E-3 Filing Parties
BENEFICIAL OWNERSHIP (1)
---------------------------
NUMBER PERCENT
NAME OF BENEFICIAL OWNER OF SHARES OF TOTAL
----------------------------- ----------- ----------
James H. Simons, Ph.D. (2).................................................. 1,066,630 23.17%
c/o Renaissance Technologies Corp.
800 Third Avenue
New York, New York 10022
Murdoch & Co. (3)........................................................... 1,028,082 22.33%
c/o Bermuda Trust Company, Ltd.
6 Front Street
Hamilton HM11 Bermuda
Khronos Capital Limited (4)................................................. 600,000 13.03%
Tropic Isle Building
Wickhams Cay
Road Town, Tortola
British Virgin Islands
Wellington Management Company, LLP (5)...................................... 678,000 14.73%
75 State Street
Boston, Massachusetts 02109
Wellington Trust Company, NA (6)............................................ 488,000 10.60%
75 State Street
Boston, Massachusetts 02109
ROI Capital Management, Inc (7)............................................. 660,300 14.34%
17 E. Sir Francis Drake Boulevard, #225
Larkspur, California 94939
ROI Partners, L.P........................................................... 286,200 6.22%
17 E. Sir Francis Drake Boulevard, #225
Larkspur, California 94939
Howard L. Morgan, Ph.D. (8)................................................. 174,902 3.80%
Justin J. Perreault (9)..................................................... 19,849 *
Philip W. Shires (10)....................................................... 298,219 6.48%
Sheldon Weinig (9).......................................................... 27,000 *
All directors and executive officers as a group
(5 persons) (11)....................................................... 1,586,600 34.46%
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BENEFICIAL OWNERSHIP (1)
---------------------------
NUMBER PERCENT
NAME OF BENEFICIAL OWNER OF SHARES OF TOTAL
----------------------------- ----------- ----------
Donald W. Shires (9)........................................................ 7,500 *
Renee Bond (9).............................................................. 10,959 *
KE Acquisition Corp......................................................... 61,500 1.34%
- --------------------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares subject to options
currently exercisable within 60 days of [DATE], 1999, are deemed
outstanding for computing the percentage of the person or entity holding
the securities but are not outstanding for computing the percentage of any
other person or entity. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares
shown as beneficially owned by them. Percentage of ownership is based on
4,604,152 shares outstanding on [DATE], 1999.
(2) Includes 1,028,082 shares held by Murdoch & Co. as nominee of a trust for
the benefit of Dr. Simons and members of his immediate family. Also
includes 27,243 shares issuable upon exercise of options.
(3) Consists solely of shares held as nominee of a trust for the benefit of
James H. Simons and members of his immediate family.
(4) I. Jimmy Mayer deemed to be the beneficial owner of these shares. Mr.
Mayer was a member of the Board until his resignation in January 1998.
(5) Includes 488,000 shares beneficially owned by Wellington Trust Company,
NA. Reflects 418,000 shares as to which Wellington Management Company, LLP
has shared voting power and 678,000 shares with shared dispositive power.
(6) Reflects 228,000 shares as to which Wellington Trust Company, NA has
shared voting power and 488,000 shares with shared dispositive power.
(7) Includes 286,200 shares beneficially owned by ROI Partners, L.P. According
to ROI Capital Management's filing on Schedule 13G dated February 19,
1999, pursuant to their ownership interest in ROI Capital Management,
Inc., Mitchell J. Soboleski and Mark T. Boyer may be deemed to
beneficially own the number of Kentek shares listed.
(8) Includes 118,659 shares issuable upon exercise of options.
(9) Consists solely of shares issuable upon exercise of options.
(10) Includes 61,500 shares held by KE Acquisition and 236,719 shares issuable
upon exercise of options. Mr. Shires is deemed to be the beneficial owner
of the shares held by KE Acquisition.
(11) Includes shares included pursuant to notes (2) and (8) through (10) above.
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REGULATORY CONSIDERATIONS
Under the Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act") and
the rules promulgated thereunder (the "Rules"), certain merger transactions may
not be consummated unless certain information has been furnished to the
Antitrust Division and the Federal Trade Commission and certain waiting periods
have expired. The Merger is not subject to the filing requirements of the HSR
Act and the Rules. However, there can be no assurance that a challenge to the
Merger on antitrust grounds will not be made, or if a challenge is made, what
the result will be.
BUYER
KE Acquisition was organized in connection with the Merger and has not
carried on any activities to date other than those incident to its formation and
the transactions contemplated by the Merger Agreement. Philip W. Shires, the
President and Chief Executive Officer and a member of the board of directors of
Kentek, is the sole stockholder, officer and director of KE Acquisition.
Philip W. Shires expects that, following the Merger, Kentek will elect to
be taxed under Subchapter S of the Internal Revenue Code and that this election
will result in certain tax benefits to Kentek and its stockholders. Because of
the election, the number of type of persons that may hold Kentek stock will be
limited. Mr. Shires has had discussions with his son, Donald W. Shires, and
another employee of Kentek, Renee Bond, about their interest in purchasing an
equity interest in Kentek after the Merger of up to 30% in the case of Donald W.
Shires and 10% in the case of Renee Bond. Donald W. Shires is responsible for
Kentek's Boulder, Colorado operations and engineering and Renee Bond is
responsible for Kentek's worldwide consumable supplies sales, but neither are
executive officers or directors of Kentek. Mr. Shires has proposed that such
investments be subject to a vesting schedule based on continued employment with
Kentek. In addition, Mr. Shires expects that these two individuals will likely
become Vice Presidents and directors of Kentek after the Merger. Mr. Shires and
KE Acquisition currently do not have any agreements with Donald W. Shires and
Renee Bond regarding their equity participation, employment or director
positions. However, Mr. Shires anticipates, based on his discussions with Donald
W. Shires and Renee Bond, that prior to the Merger they will agree to cancel
their Kentek options in connection with their participation in Kentek after the
Merger. Donald W. Shires currently holds 7,500 Kentek options, 2,500 of which
are vested, and Renee Bond currently holds 10,959 Kentek options, all of which
are vested.
The principal executive offices of KE Acquisition are located at 2945
Wilderness Place, Boulder, Colorado 80301 and its telephone number is (303)
440-5500.
APPRAISAL RIGHTS
If you hold common stock and you do not wish to accept the Merger
Consideration, then Section 262 of the DGCL provides that you may elect to have
the fair value of your shares, exclusive of any element of value arising from
the accomplishment or expectation of the Merger, determined by the Delaware
Chancery Court. This amount would then be paid in cash, together with a fair
rate of interest. Section 262 is set forth in its entirety in Annex C to this
proxy statement.
If you wish to exercise your appraisal right or to preserve the right to do
so, you should carefully review Annex C. If you fail to comply with the
procedures specified in Section 262 in a timely manner you may lose your
appraisal right. Because of the complexity of these procedures, you should seek
the advice of counsel if you are considering exercising your appraisal rights.
If you wish to exercise the right to demand appraisal under Section 262,
you must satisfy each of the following conditions:
o You must not vote in favor of the Merger.
o You must deliver to Kentek a written demand for appraisal of your
common stock before the vote on the Merger Agreement at the
special meeting. This written demand for appraisal must be in
addition to and separate from any proxy or vote against the
Merger Agreement. Merely voting against, or abstaining from
voting, or failing to vote in favor of adoption of the Merger
Agreement will not constitute a demand for appraisal within the
meaning of Section 262.
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o You must continuously hold your common stock from the date you
make your demand through the Merger. If you transfer your common
stock before the Merger, you will lose your right to appraisal.
o You must file a petition in the Delaware Court of Chancery
demanding a determination of the fair value of your common stock
within 120 days after the Merger.
Demands for appraisal must be made in writing and must be mailed or
delivered to: Corporate Secretary, Kentek Information Systems, Inc., 2945
Wilderness Place, Boulder, Colorado 80301.
IF YOU ARE CONSIDERING SEEKING APPRAISAL, YOU SHOULD BE AWARE THAT THE FAIR
VALUE OF YOUR SHARES OF COMMON STOCK AS DETERMINED UNDER SECTION 262 COULD BE
GREATER THAN, THE SAME AS, OR LESS THAN THE MERGER CONSIDERATION. THE JANNEY
MONTGOMERY SCOTT OPINIONS ARE NOT OPINIONS AS TO FAIR VALUE UNDER SECTION 262.
If you demand appraisal of your common stock under Section 262 and you fail
to perfect, or withdraw or lose, your right to appraisal, your common stock will
be converted into the Merger Consideration. You may withdraw a demand for
appraisal by delivering to Kentek a written withdrawal of the demand and
acceptance of the Merger Consideration, except that if you try to withdraw more
than 60 days after the Effective Time, Kentek must give its consent.
The foregoing is a summary of the provisions of Section 262 of the General
Corporation Law of the State of Delaware and is qualified by reference to the
full text of the Section, which is included as Annex C.
INDEPENDENT AUDITORS
The firm of Deloitte & Touche LLP has served as Kentek's independent
auditors since May 9, 1997. The consolidated financial statements and the
related financial statement schedules as of June 30, 1998 and 1997 and for each
of the two years in the period ended June 30, 1998 included in this proxy
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports, which are included and incorporated by reference in
this proxy statement. It is not expected that representatives of Deloitte &
Touche LLP will be present at the special meeting.
The firm of BDO Seidman, LLP served as Kentek's independent auditors prior
to May 9, 1997. The consolidated financial statements of Kentek for the year
ended June 30, 1996 included in Kentek's Annual Report on Form 10-K for the
fiscal year ended June 30,1998 attached hereto as Annex E, have been audited by
BDO Seidman, LLP, independent auditors, as stated in their reports appearing
therein. It is not expected that representatives of BDO Seidman, LLP will be
present at the special meeting.
STOCKHOLDER PROPOSALS
If the Merger is consummated, there will be no public stockholders of
Kentek and no public participation in any future meetings of stockholders of
Kentek. However, if the Merger is not consummated, Kentek's public stockholders
will continue to be entitled to attend and participate in Kentek stockholders'
meetings. Pursuant to Rule 14a-8 under the Exchange Act promulgated by the SEC,
any stockholder of Kentek who wishes to present a proposal at the next Annual
Meeting of Stockholders of Kentek, in the event the Merger is not consummated,
and who wishes to have the proposal included in Kentek's proxy statement for
that meeting, must have delivered a copy of the proposal to Kentek at 2945
Wilderness Place, Boulder, Colorado 80301, Attention: Corporate Secretary, so
that it is received no later than June 25, 1999. In order for proposals by
stockholders not submitted in accordance with Rule 14a-8 to have been timely
within the meaning of Rule 14a-4(c) under the Exchange Act, the proposal must
have been submitted so that it was received no later than September 22, 1999.
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WHERE YOU CAN FIND MORE INFORMATION
The SEC allows Kentek to "incorporate by reference" information into this
proxy statement, which means that Kentek can disclose important information by
referring you to another document filed separately with the SEC. The following
documents previously filed by Kentek with the SEC are incorporated by reference
in this proxy statement and are deemed to be a part hereof:
o Kentek's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998;
o Kentek's Quarterly Report on Form 10-Q for the period ended March
31, 1999;
o Kentek's Quarterly Report on Form 10-Q for the period ended
December 31, 1998;
o Kentek's Quarterly Report on Form 10-Q for the period ended
September 30,1998; and
o Kentek's Current Report on Form 8-K dated May 14, 1999.
Specifically, the information set forth in the following sections of
Kentek's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 is
incorporated by reference in this proxy statement and deemed to be a part
hereof:
Item 1: Business;
Item 2: Properties;
Item 7: Management's Discussions and Analysis of Financial
Condition and Results of Operations; and
Item 7a: Quantitative and Qualitative Disclosures about Market
Risk;
Item 8: Financial Statements and Supplementary Data; and
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Kentek's Annual Report on Form 10-K for the fiscal year ended June 30, 1998
and Quarterly Report on Form 10-Q for the period ended March 31, 1999 are
enclosed with this proxy statement. Any statement contained in a document
incorporated by reference in this proxy statement shall be deemed to be modified
or superseded for all purposes to the extent that a statement contained in this
proxy statement modifies or replaces the statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute part of this proxy statement.
Kentek undertakes to provide by first class mail, without charge and within
one business day of receipt of any written or oral request, to any person to
whom a copy of this proxy statement has been delivered, a copy of any or all of
the documents referred to above which have been incorporated by reference in
this proxy statement, other than exhibits to the documents, unless the exhibits
are specifically incorporated by reference therein. Requests for copies should
be directed to Corporate Secretary, Kentek Information Systems, Inc., 2945
Wilderness Place, Boulder, Colorado 80301; telephone number: (303) 440-5500.
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AVAILABLE INFORMATION
No person is authorized to give any information or to make any
representations, other than as contained in this proxy statement, in connection
with the Merger Agreement or the Merger, and, if given or made, such information
or representations may not be relied upon as having been authorized by Kentek or
by KE Acquisition or Philip W. Shires. The delivery of this proxy statement
shall not, under any circumstances, create any implication that there has been
no change in the information set forth in this proxy statement or in the affairs
of Kentek since the date hereof.
Because the Merger is a "going private" transaction, KE Acquisition, Philip
W. Shires, Donald W. Shires and Renee Bond have filed with the SEC a Rule 13e-3
Transaction Statement on Schedule 13E-3 under the Exchange Act with respect to
the Merger. This proxy statement does not contain all of the information set
forth in the Schedule 13E-3 and the exhibits thereto. Copies of the Schedule
13E-3 and the exhibits thereto are available for inspection and copying at the
principal executive offices of Kentek during regular business hours by any
interested stockholder of Kentek, or a representative who has been so designated
in writing, and may be inspected and copied, or obtained by mail, by written
request directed to Corporate Secretary, Kentek Information Systems, Inc., 2945
Wilderness Place, Boulder, Colorado 80301, or from the SEC as described below.
Kentek is currently subject to the information requirements of the Exchange
Act and in accordance therewith files periodic reports, proxy statements and
other information with the SEC relating to its business, financial and other
matters. Copies of the reports, proxy statements and other information, as well
as the Schedule 13E-3 and the exhibits thereto, may be copied, at prescribed
rates, at the public reference facilities maintained by the SEC at:
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, NY 10048
Washington, D.C. 20549 Chicago, IL 60661
For further information concerning the SEC's public reference rooms, you
may call the SEC at 1-800-SEC-0330. Information may also be accessed on the
World Wide Web through the SEC's Internet address at "http://www.sec.gov."
Kentek's common stock is listed on the Nasdaq National Market (ticker
symbol: KNTK), and materials may also be inspected at:
The National Association of Securities Dealers
1735 K Street, N.W.
Washington, D.C. 20006
A copy of the written opinion of Janney Montgomery Scott Inc., the
financial advisor to the Special Committee and the Board, is attached as Annex B
to this proxy statement. The opinion is also available for inspection and
copying during regular business hours at the principal executive offices of
Kentek by any interested stockholder of Kentek or the representative of any
stockholder who has been so designated in writing.
67.
75
ANNEX A
MERGER AGREEMENT
between
KENTEK INFORMATION SYSTEMS, INC.,
and
KE ACQUISITION CORP.
dated as of
MAY 14, 1999
76
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 THE MERGER............................................................................1
SECTION 1.1. The Merger...........................................................................1
SECTION 1.2. Conversion of Shares.................................................................2
SECTION 1.3. Surrender and Payment................................................................3
SECTION 1.4. Dissenting Shares....................................................................4
SECTION 1.5. Stock Options........................................................................4
SECTION 1.6. Transfer Taxes, etc..................................................................5
ARTICLE 2 THE SURVIVING CORPORATION.............................................................5
SECTION 2.1. Certificate of Incorporation.........................................................5
SECTION 2.2. By-laws..............................................................................5
SECTION 2.3. Directors and Officers...............................................................5
SECTION 2.4. Director and Officer Liability.......................................................5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................................5
SECTION 3.1. Corporate Existence and Power........................................................5
SECTION 3.2. Corporate Authorization..............................................................6
SECTION 3.3. Governmental Authorization...........................................................6
SECTION 3.4. Non-Contravention....................................................................6
SECTION 3.5. Capitalization.......................................................................6
SECTION 3.6. Subsidiaries.........................................................................7
SECTION 3.7. SEC Filings..........................................................................7
SECTION 3.8. Financial Statements.................................................................7
SECTION 3.9. Disclosure Documents.................................................................8
SECTION 3.10. Absence of Certain Changes...........................................................8
SECTION 3.11. Litigation; Compliance..............................................................10
SECTION 3.12. Taxes...............................................................................10
SECTION 3.13. ERISA...............................................................................11
SECTION 3.14. Permits ............................................................................12
SECTION 3.15. Required Stockholder Vote...........................................................12
SECTION 3.16. Finders' Fees.......................................................................12
SECTION 3.17. Environmental Matters...............................................................12
SECTION 3.18. Restrictions on Business Activities.................................................12
SECTION 3.19. Property............................................................................12
SECTION 3.20. Interested Party Transactions.......................................................13
SECTION 3.21. Insurance...........................................................................13
SECTION 3.22. Opinion of Financial Advisor........................................................13
SECTION 3.23. Intellectual Property...............................................................13
SECTION 3.24. Material Contracts..................................................................14
SECTION 3.25. Takeover Statutes...................................................................14
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ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF MERGERCO.............................................14
SECTION 4.1. Corporate Existence and Power.........................................................14
SECTION 4.2. Corporate Authorization...............................................................14
SECTION 4.3. Governmental Authorization............................................................15
SECTION 4.4. Non-Contravention.....................................................................15
SECTION 4.5. Disclosure Documents..................................................................15
SECTION 4.7. Finders' Fees.........................................................................15
SECTION 4.8. Litigation............................................................................15
ARTICLE 5 COVENANTS OF THE COMPANY...............................................................16
SECTION 5.1. Affirmative Covenants of the Company..................................................16
SECTION 5.2. Negative Covenants of the Company.....................................................16
SECTION 5.3. No Solicitation.......................................................................18
SECTION 5.4. Settlement of Certain Claims..........................................................19
SECTION 5.5. Antitakeover Statutes.................................................................19
SECTION 5.6. Access to Information.................................................................19
ARTICLE 6 COVENANTS OF EACH PARTY................................................................20
SECTION 6.1. Reasonable Efforts....................................................................20
SECTION 6.3. Public Announcements..................................................................21
SECTION 6.4. Notification of Certain Matters.......................................................21
SECTION 6.5. Proxy Statement; Stockholder Meeting..................................................21
ARTICLE 7 CONDITIONS.............................................................................22
SECTION 7.1. Conditions to the Obligations of Each Party...........................................22
SECTION 7.2. Conditions to the Obligations of MergerCo.............................................22
SECTION 7.3. Conditions to the Obligations of the Company..........................................23
ARTICLE 8 TERMINATION............................................................................24
SECTION 8.1. Termination...........................................................................24
SECTION 8.2. Effect of Termination.................................................................25
SECTION 8.3. Certain Fees..........................................................................26
ARTICLE 9 MISCELLANEOUS..........................................................................26
SECTION 9.1. Notices...............................................................................26
SECTION 9.2. Amendments; No Waivers................................................................27
SECTION 9.3. Rules of Construction.................................................................27
SECTION 9.4. Successors and Assigns................................................................27
SECTION 9.5. Governing Law; etc....................................................................27
SECTION 9.6. Counterparts; Effectiveness...........................................................28
SECTION 9.7. Parties in Interest...................................................................28
SECTION 9.8. Severability..........................................................................28
SECTION 9.9. Entire Agreement......................................................................28
SECTION 9.10. Survival of Representations and Warranties...........................................29
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EXHIBIT
Exhibit A Amended Certificate of Incorporation of the Company
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79
MERGER AGREEMENT
MERGER AGREEMENT dated as of May 14, 1999 among KENTEK INFORMATION
SYSTEMS, INC., a Delaware corporation (the "COMPANY"), and KE ACQUISITION CORP.,
a Delaware corporation ("MERGERCO"). Certain capitalized terms used in this
Agreement shall have the meanings assigned to them in Annex I.
WHEREAS, the Boards of Directors of each of MergerCo and the Company
have determined to engage in the transactions contemplated by this Agreement,
pursuant to which, among other things, at the Effective Time, (i) MergerCo shall
merge with and into the Company, and (ii) each share of Common Stock, par value
$.01 per share, of the Company ("COMPANY COMMON SHARES") (except for Company
Common Shares owned by the Company, Company Common Shares owned by MergerCo, and
Company Common Shares as to which appraisal rights have been perfected) shall be
converted, as set forth in this Agreement, into the right to receive, in
exchange for each such Company Common Share, cash in an amount equal to $8.29,
without interest, (such cash, the "MERGER CONSIDERATION");
WHEREAS, the Board of Directors of the Company (at a meeting duly
called and held, and acting on the unanimous recommendation of a special
committee of the Board of Directors of the Company comprised entirely of
non-management independent directors (the "SPECIAL COMMITTEE"), has approved
this Agreement and the Merger contemplated by this Agreement and resolved to
recommend, subject to its fiduciary duties, that stockholders of the Company
approve and adopt this Agreement and the Merger;
WHEREAS, the Board of Directors of MergerCo has approved the
transactions contemplated by this Agreement; and
WHEREAS, MergerCo and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
transactions contemplated by this Agreement and also to prescribe certain
conditions to the transactions contemplated by this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the warranties,
covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.1. The Merger. (a) At the Effective Time, MergerCo shall be
merged (the "MERGER") with and into the Company in accordance with the General
Corporation Law of the State of Delaware (the "DELAWARE LAW"), whereupon the
separate existence of MergerCo shall cease, and the Company shall be the
surviving corporation (the "SURVIVING CORPORATION").
(b) The Closing shall take place at the offices of Bartlit Beck Herman
Palenchar & Scott in Denver, Colorado at 10:00 a.m. on the second business day
following the fulfillment or waiver of each of the conditions precedent to the
Merger set forth in Article 7, or at such other place, time and date as the
parties hereto may agree.
80
(c) At the Closing, upon fulfillment or waiver of the conditions
precedent to the Merger set forth in Article 7, the parties shall cause a
Certificate of Merger to be filed with the Secretary of State of the State of
Delaware, in such form as required by, and duly executed in accordance with, the
relevant provisions of the Delaware Law using the procedures permitted in
Section 251 of the Delaware Law. The Merger shall become effective at such time
as the certificate of merger is duly filed with the Secretary of State of the
State of Delaware or at such later time as the Company and MergerCo agree to
specify in the certificate of merger (the "EFFECTIVE TIME").
(d) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to all
of the restrictions, disabilities and duties of the Company and MergerCo, all as
provided under Delaware Law.
(e) The Surviving Corporation may, at any time after the Effective
Time, take any action (including the execution and delivery of any document) in
the name and on behalf of either of the Company and MergerCo in order to carry
out and effectuate the transactions contemplated by this Agreement.
(f) The Company hereby represents that (x) the Special Committee has
unanimously (i) determined that this Agreement and the Merger are fair to and in
the best interests of the Company's stockholders, and (ii) recommended that this
Agreement and the Merger be approved by the full Board of Directors and (y) its
Board of Directors, at a meeting duly called and held, and acting on such
unanimous recommendation of the Special Committee, has unanimously (i)
determined that this Agreement and the Merger are fair to and in the best
interests of the Company's stockholders, (ii) approved this Agreement and the
Merger, which approval satisfies in full the requirements of the Delaware Law
that the Agreement be approved by the Company's Board of Directors, and (iii)
resolved to recommend approval and adoption of this Agreement and the Merger by
its stockholders; provided, that such recommendation may be withdrawn, modified
or amended to the extent the Board of Directors of the Company deems it
necessary to do so in the exercise of its fiduciary obligations to the Company's
stockholders. The Company further represents that Janney Montgomery Scott Inc.
(the "FINANCIAL ADVISOR") has delivered to the Company's Board of Directors its
written opinion that, as of the date of such opinion, the Merger Consideration
to be paid in the Merger was fair to the holders of Company Common Shares from a
financial point of view.
SECTION 1.2. Conversion of Shares. At the Effective Time:
(a) each Company Common Share held by the Company as treasury stock
shall be canceled and no payment shall be made with respect thereto;
(b) each Company Common Share owned by MergerCo shall be canceled and
no payment shall be made with respect thereto;
(c) each Company Common Share outstanding immediately prior to the
Effective Time shall (except as otherwise provided in Section 1.2(a), Section
1.2(b) or as provided in Section 1.4 with respect to Company Common Shares as to
which appraisal rights have been perfected) be converted into the right to
receive the Merger Consideration in exchange for such Company Common Share. If,
subsequent to the date of this Agreement but prior to the Effective Time, the
Company changes the number of Company Common Shares outstanding as a result of
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any stock split, stock dividend, recapitalization or similar transaction, the
Merger Consideration obtainable upon conversion of a Company Common Share as
provided in this Section 1.2(c) shall be appropriately adjusted;
(d) each share of common stock, par value $.01 per share, of MergerCo
outstanding immediately prior to the Effective Time shall be automatically
converted into one validly issued, fully paid and nonassessable share of common
stock, par value $.01 per share, of the Surviving Corporation.
SECTION 1.3. Surrender and Payment. (a) Promptly after the Effective
Time, the Surviving Corporation shall transmit funds and securities to the
Exchange Agent, by wire or other acceptable means, as required for payment, in
accordance with this Agreement, of the Merger Consideration. Promptly after the
Effective Time, the Surviving Corporation will send, or cause the Exchange Agent
to send, to each holder of Company Common Shares at the Effective Time a letter
of transmittal for use in exchanging certificates evidencing such Company Common
Shares for the Merger Consideration (which letter shall specify that the
delivery shall be effected, and risk of loss shall pass, only upon proper
delivery of the certificates representing Company Common Shares to the Exchange
Agent).
(b) Each holder of Company Common Shares that have been converted into
the right to receive the Merger Consideration in exchange for each Company
Common Share, upon surrender to the Exchange Agent of a certificate or
certificates representing such Company Common Shares, together with a properly
completed letter of transmittal covering such Company Common Shares, will be
entitled immediately upon such surrender to receive the Merger Consideration
payable in respect of such Company Common Shares; provided that the Exchange
Agent will withhold from payment all amounts required to be withheld by
applicable law, including, without limitation, under the provisions of Code
section 1445, unless the holder of Company Common Shares makes applicable
affidavits or certifications reasonably satisfactory to the Exchange Agent
(based on instructions from the Surviving Corporation) that the Merger
Consideration is not subject to withholding. Until so surrendered, each
certificate representing Company Common Shares that have been converted into the
right to receive in exchange for each Company Common Share the Merger
Consideration shall, after the Effective Time, represent for all purposes, only
the right to receive the Merger Consideration.
(c) If any portion of the Merger Consideration is to be paid to a
Person other than the registered holder of the Company Common Shares, it shall
be a condition to such payment that the certificate or certificates so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the Person requesting such payment shall pay to the Exchange
Agent any transfer or other taxes required as a result of such payment to a
Person other than the registered holder of such Company Common Shares or
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
(d) After the Effective Time, there shall be no further registration
of transfers of Company Common Shares. If, after the Effective Time,
certificates representing Company Common Shares are presented to the Surviving
Corporation, they shall be exchanged for the consideration provided for, and in
accordance with the procedures set forth, in this Article 1.
(e) Any Merger Consideration that remains unclaimed by the holders of
Company Common Shares six months after the Effective Time shall be returned to
the Surviving
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Corporation, upon demand, and any such holders who have not exchanged their
Company Common Shares for the Merger Consideration in accordance with this
Section prior to that time shall thereafter look only to the Surviving Company
for payment of the Merger Consideration in respect of their Company Common
Shares, subject to applicable abandoned property, escheat and other similar
laws. Notwithstanding the foregoing, the Surviving Company shall not be liable
to any former holder of Company Common Shares for any amount paid to a public
official pursuant to applicable abandoned property, escheat or other similar
laws. Any Merger Consideration remaining unclaimed by holders of Company Common
Shares one day prior to such time as such amounts would otherwise escheat to or
become property of any governmental entity shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation free and clear
of any claims or interest of any Person previously entitled to such amounts.
(f) Any Merger Consideration made available to the Exchange Agent
pursuant to Section 1.3(a) to pay for Company Common Shares for which appraisal
rights have been perfected shall be returned to the Surviving Corporation upon
its demand.
(g) MergerCo and the Company shall use all reasonable efforts to take
all such action as may be necessary or appropriate in order to effectuate the
Merger as promptly as possible, subject, in the case of the Company, to
applicable fiduciary duties as provided in Section 5.3. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges,
immunities, powers and franchises of either of the Company or MergerCo, the
officers and directors of the Surviving Corporation are fully authorized in the
name of either of the Company or the MergerCo or otherwise to take, and shall
take, all such action.
SECTION 1.4. Dissenting Shares. Notwithstanding Section 1.2, Company
Common Shares outstanding immediately prior to the Effective Time and held by a
holder who has not voted in favor of the Merger or consented thereto in writing
and who has demanded appraisal for such Company Common Shares in accordance with
Delaware Law ("DISSENTING SHARES") shall not be converted into a right to
receive the Merger Consideration, unless such holder fails to perfect or
withdraws or otherwise loses its right to appraisal or it is determined that
such holder does not have appraisal rights in accordance with Delaware Law. If
after the Effective Time such holder fails to perfect or withdraws or loses its
right to appraisal, or if it is determined that such holder does not have an
appraisal right, such Company Common Shares shall be treated as if they had been
converted as of the Effective Time into a right to receive in exchange for each
Company Common Share the Merger Consideration.
SECTION 1.5. Stock Options. Except as otherwise agreed in writing prior
to the Effective Time between MergerCo and the holder of any stock option, each
stock option to purchase Company Common Shares outstanding at the Effective Time
shall be adjusted such that the holder of any such option shall have the right,
upon due exercise of such option (to the extent such option is then vested and
exercisable), to receive from the Surviving Corporation an amount equal to the
excess, if any, of the amount of the Merger Consideration over the applicable
per share exercise price of such option for each Company Common Share such
holder could have purchased had such holder exercised such option in full
immediately prior to the Effective Time.
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SECTION 1.6. Transfer Taxes, etc. Except as set forth in Section
1.3(c), the Surviving Corporation shall bear and be responsible for the payment
of all transfer, stamp, documentary, sales, use, registration and other similar
Taxes (but excluding any federal, state, or local taxes measured by the income
of the Person responsible for paying such Taxes) incurred in connection with the
exchange of Company Common Shares for the Merger Consideration.
ARTICLE 2
THE SURVIVING CORPORATION
SECTION 2.1. Certificate of Incorporation. At the Effective Time, the
certificate of incorporation of the Company shall be amended to read in its
entirety substantially in the form set forth in Exhibit A and as so amended
shall be the certificate of incorporation of the Surviving Corporation until
thereafter amended in accordance with applicable law.
SECTION 2.2. By-laws. The by-laws of MergerCo in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.
SECTION 2.3. Directors and Officers. From and after the Effective Time,
the directors and officers of MergerCo shall be the directors and officers of
the Surviving Corporation.
SECTION 2.4. Director and Officer Liability. The Surviving Corporation
will indemnify and hold harmless the present and former officers and directors
of the Company and its Subsidiaries (the "COVERED EMPLOYEES") in respect of acts
or omissions occurring prior to the Effective Time to the extent provided under
the Company's certificate of incorporation and bylaws in effect on the date
hereof until any applicable statute of limitations has expired; provided that
such indemnification shall be subject to any limitation imposed from time to
time under applicable Law. For not less than two years after the Effective Time,
MergerCo will provide officers' and directors' liability insurance in respect of
acts or omissions occurring prior to the Effective Time covering each such
Person currently covered by the Company's officers' and directors' liability
insurance policy on terms with respect to coverage and amount no less favorable
than those of the Company's policy in effect on the date hereof; provided that
in satisfying its obligation under this Section, MergerCo shall not be obligated
to pay premiums in excess of 150% of the amount per annum that the Company paid
for this purpose in its last full fiscal year; but provided further, that
MergerCo shall be obligated to provide such coverage as may be obtained for such
amount. The provisions of this Section 2.4 are for the benefit of and may be
enforced after the Effective Time by the Covered Employees.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to MergerCo as follows:
SECTION 3.1. Corporate Existence and Power. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted. The Company is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction where the
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character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Company Material Adverse Effect.
SECTION 3.2. Corporate Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the transactions contemplated by this Agreement are within the Company's
corporate powers and, except for any required approval by the Company's
stockholders in connection with the consummation of the Merger, have been duly
authorized by all necessary corporate action. This Agreement constitutes a valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency or other
similar laws relating to or affecting the enforcement of creditors' rights
generally and to legal principles of general applicability governing the
application and availability of equitable remedies.
SECTION 3.3. Governmental Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation of the
transactions contemplated by this Agreement by the Company require no action or
waiting period by or in respect of, or filing with, any governmental body,
agency, official or authority other than (a) the filing of a certificate of
merger in accordance with Delaware Law; (b) compliance with any applicable
requirements of the Securities Act, the Exchange Act or any Blue Sky Laws; and
(c) compliance with those Laws, Regulations and Orders noncompliance with which
would not reasonably be expected to have a Company Material Adverse Effect or to
prevent, impair or result in significant delay of the consummation of the
Merger.
SECTION 3.4. Non-Contravention. The execution, delivery and performance
by the Company of this Agreement and the consummation by the Company of the
transactions contemplated by this Agreement do not and will not (a) contravene
or conflict with the certificate of incorporation or bylaws of the Company or
(b) assuming effectuation of all filings and registrations with, the termination
or expiration of any applicable waiting periods imposed by, and receipt of all
Permits and Orders of, Governmental Authorities indicated as required in Section
3.3, (i) constitute a default under or give rise to (A) a right of termination,
cancellation, acceleration, amendment or modification with respect to the
Company or any of its Subsidiaries, (B) a loss of any benefit to which the
Company or any of its Subsidiaries is entitled or (C) an increase in the
obligations of the Company or any of its Subsidiaries, in each case, under any
provision of any Material Contract of the Company or any of its Subsidiaries
which, in any such case, individually or in the aggregate, would have a Company
Material Adverse Effect, (ii) result in the creation or imposition of any
material Lien (other than any Permitted Encumbrances) on any material asset of
the Company or any of its Subsidiaries or (iii) violate or cause a breach under
any Law, Regulation, Order or Permit applicable to the Company, its Subsidiaries
and their respective assets except for any such matters that would not
reasonably be expected, individually or in the aggregate, to have a Company
Material Adverse Effect.
SECTION 3.5. Capitalization. The authorized capital stock of the
Company consists of 12,000,000 authorized Company Common Shares. As of the date
of this Agreement, there were issued and outstanding 4,604,152 Company Common
Shares and options to purchase an aggregate of 538,017 Company Common Shares.
All outstanding shares of capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. Except as set forth in
this Section and except for changes since the date of this Agreement resulting
from the exercise of employee stock options outstanding on such date, there are
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outstanding (i) no shares of capital stock or other voting securities of the
Company, (ii) no securities of the Company convertible into or exchangeable for
shares of capital stock or voting securities of the Company, and (iii) no
options or other rights to acquire from the Company, and no obligation of the
Company to issue, any capital stock, voting securities or securities convertible
into or exchangeable for capital stock or voting securities of the Company.
There are no outstanding obligations of the Company or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any Company Common Shares.
SECTION 3.6. Subsidiaries. (a) Each of the Company's Subsidiaries is a
corporation or other legal entity duly incorporated or organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has all corporate or entity powers and all
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted, except to the extent the failure to have such
licenses, authorizations, consents and approvals would not, individually or in
the aggregate, have a Company Material Adverse Effect, and is duly qualified to
do business as a foreign corporation or entity and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except for those
jurisdictions where failure to be so qualified would not, individually or in the
aggregate, have a Company Material Adverse Effect.
(b) The Company owns all of the issued and outstanding shares of
capital stock of, or other equity interests in, each of the Subsidiaries of the
Company (other than directors' qualifying shares), and such shares and interests
have been duly authorized and are validly issued, and, with respect to capital
stock, are fully paid and nonassessable, and were not issued in violation of any
preemptive or similar rights of any past or present equity holder of such
Subsidiary.
SECTION 3.7. SEC Filings. (a) The Company has delivered to MergerCo (i)
its annual reports on Form 10-K for its fiscal years ended June 30, 1996, 1997
and 1998, (ii) its quarterly reports on Form 10-Q for its fiscal quarters ended
September 30, 1998, December 31, 1998 and March 31, 1999 ("COMPANY 10-Q"), (iii)
its proxy or information statements relating to meetings of, or actions taken
without a meeting by, the stockholders of the Company held since April 17, 1996,
and (iv) all of its other reports, statements, schedules and registration
statements filed with the Securities and Exchange Commission (the "SEC") since
January 1, 1996 ("COMPANY SEC REPORTS").
(b) As of its filing date, each such report or statement filed
pursuant to the Exchange Act, and each registration statement, as amended or
supplemented, if applicable, filed pursuant to the Securities Act, as of the
date such statement or amendment became effective, did not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
SECTION 3.8. Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company included in its annual reports on Form 10-K and the quarterly reports on
Form 10-Q referred to in Section 3.7 fairly present, in conformity with
generally accepted accounting principles applied on a consistent basis (except
as may be indicated in the notes thereto), the consolidated financial position
of the Company and its consolidated subsidiaries as of the dates thereof and
their consolidated results
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of operations and changes in financial position for the periods then ended
(subject to normal year-end adjustments in the case of any unaudited interim
financial statements). For purposes of this Agreement, "COMPANY BALANCE SHEET"
means the consolidated balance sheet of the Company as of March 31, 1999 set
forth in the Company 10-Q and "COMPANY BALANCE SHEET DATE" means March 31, 1999.
As of the date of this Agreement, there exist no liabilities or obligations of
the Company and its Subsidiaries, whether accrued, absolute, contingent or
threatened, which would be required to be reflected, reserved for or disclosed
under generally accepted accounting principles in the financial statements of
the Company as of and for the period ended March 31, 1999, other than (i)
liabilities or obligations which are adequately reflected, reserved for or
disclosed in the March 31, 1999 financial statements of the Company, (ii)
liabilities incurred in the ordinary course of business since March 31, 1999 and
(iii) such as would not have a Company Material Adverse Effect.
SECTION 3.9. Disclosure Documents. (a) Each document required to be
filed by the Company with the SEC in connection with the transactions
contemplated by this Agreement, including, without limitation, the Schedule
13E-3 filing and proxy statement (the "PROXY STATEMENT") to be filed with the
SEC in connection with the Merger and any amendments or supplements thereto
will, when filed, comply as to form in all material respects with the applicable
requirements of the Exchange Act and the Securities Act, except that no warranty
is made hereby with respect to any information supplied by MergerCo expressly
for inclusion in the Proxy Statement.
(b) At the time the Proxy Statement or any amendment or supplement
thereto is first mailed to stockholders of the Company, and at the time such
stockholders vote on adoption of this Agreement, the Proxy Statement, as
supplemented or amended, if applicable, will not contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading, except that no warranty is made hereby with respect
to any information supplied by MergerCo for inclusion in the Proxy Statement.
SECTION 3.10. Absence of Certain Changes. Except for this Agreement,
from the Company Balance Sheet Date, the Company and its Subsidiaries have
conducted their business in all material respects in the ordinary course
consistent with past practice and there has not been:
(a) any event, occurrence or development (including the
commencement of any action, suit or proceedings or, to the Knowledge of
the Company, any investigation) of a state of circumstances or facts
which, individually or together with other similar events, has had or
reasonably would be expected to have a Company Material Adverse Effect;
(b) any declaration, setting aside or payment of any dividend
or other distribution with respect to any shares of capital stock of
the Company, or any repurchase, redemption (other than the receipt of
Company Common Shares in payment of the exercise price of employee or
director stock options and Taxes in respect of such exercise and other
than the Company's regular quarterly dividend to be paid to
stockholders of record on May 31, 1999) or other acquisition by the
Company or any of its Subsidiaries of any outstanding shares of capital
stock or other securities of, or other ownership interests in, the
Company or any of its Subsidiaries;
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(c) any amendment of any material term of any outstanding
security of the Company or any of its Subsidiaries other than
amendments to the terms of the existing credit facilities of the
Company or its Subsidiaries or borrowings under such facilities;
(d) any incurrence, assumption or guarantee by the Company or
any of its Subsidiaries of any indebtedness for borrowed money other
than in the ordinary course of business and in amounts and on terms
consistent with past practices;
(e) any creation or assumption by the Company or any of its
Subsidiaries of any Lien (other than Permitted Encumbrances) on any
material asset of the Company or any of its Subsidiaries other than in
the ordinary course of business consistent with past practices;
(f) any making of any loan, advance or capital contribution to
or investment in any Person other than loans, advances or capital
contributions to or investments in wholly-owned Subsidiaries made in
the ordinary course of business consistent with past practices;
(g) any damage, destruction or other casualty loss (whether or
not covered by insurance) affecting the business or assets of the
Company or any of its Subsidiaries which, individually or in the
aggregate, has had or would reasonably be expected to have a Company
Material Adverse Effect;
(h) any transaction or commitment made, or any contract or
agreement entered into, by the Company or any of its Subsidiaries
relating to its assets or business (including the acquisition or
disposition of any assets) or any relinquishment by the Company or any
of its Subsidiaries of any contract or other right, in either case,
material to the Company and its Subsidiaries taken as a whole, other
than transactions and commitments in the ordinary course of business
consistent with past practice and those contemplated by this Agreement;
(i) any change in any method of accounting or accounting
practice by the Company or any of its Subsidiaries, whether or not any
such change is required by reason of a concurrent change in generally
accepted accounting principles;
(j) any (iv) grant of any severance or termination pay to any
director, officer or employee of the Company or any of its
Subsidiaries, (v) entering into of any employment, deferred
compensation or other similar agreement (or any amendment to any such
existing agreement) with any director, officer or employee of the
Company or any of its Subsidiaries, (vi) increase in benefits payable
under any existing severance or termination pay policies or employment
agreements or (vii) increase in compensation, bonus or other benefits
payable to directors, officers or employees of the Company or any of
its Subsidiaries except for such grants, payments, increases or changes
in the ordinary course of business consistent with past practice; or
(k) any labor dispute, other than routine individual
grievances, or any activity or proceeding by a labor union or
representative thereof to organize any employees of
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the Company or any of its Subsidiaries, which employees were not
subject to a collective bargaining agreement at the Company Balance
Sheet Date, or any lockouts, strikes, slowdowns, work stoppages or
threats thereof by or with respect to such employees, which in any such
case would reasonably be expected to have a Company Material Adverse
Effect.
During the period from March 31, 1999, neither the Company nor any of its
Subsidiaries has engaged in any conduct that is proscribed during the period
from the date of this Agreement to the Effective Time by Section 5.2 or agreed
in writing during such period prior to the date of this Agreement to engage in
any such conduct.
SECTION 3.11. Litigation; Compliance. (a) There is no action, suit or
proceeding pending against, or (to the Knowledge of the Company) threatened
against or affecting, or (to the Knowledge of the Company) any pending
investigation against, the Company or any of its Subsidiaries or any of their
respective properties before any court or arbitrator or any governmental body,
agency or official which would reasonably be expected, individually or in the
aggregate, to have a Company Material Adverse Effect or which in any manner
challenges or seeks to prevent, enjoin, alter or materially delay the Merger or
any of the other transactions contemplated by this Agreement.
(b) The Company and its Subsidiaries are in substantial compliance
with all applicable Laws and Regulations and are not in default with respect to
any Order applicable to the Company or any of its Subsidiaries, except such
events of noncompliance or defaults that, individually or in the aggregate,
would not reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.12. Taxes. (a) The Company and its Subsidiaries have timely
filed all required United States federal, state, local and foreign and other Tax
Returns and such Tax Returns are true, complete and correct, and the Company and
its Subsidiaries have timely paid and discharged all Taxes due in connection
with or with respect to the periods or transactions covered by such Tax Returns
and have paid all other Taxes as are due, except such as are being contested in
good faith by appropriate proceedings (to the extent that any such proceedings
are required) and there are no other Taxes that would be due if asserted by a
taxing authority, except Taxes with respect to which the Company is maintaining
reserves to the extent required by generally accepted accounting principles,
except where the failure of any of the foregoing to be true would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. Except as does not involve or would not result in
liability to the Company or any of its Subsidiaries that would reasonably be
expected to have a Company Material Adverse Effect, (i) there are no Tax Liens
on any assets of the Company or any of its Subsidiaries (other than Permitted
Encumbrances); and (ii) there is no written claim against the Company or any of
its Subsidiaries for any Taxes, and no assessment, deficiency or adjustment has
been asserted or proposed with respect to any Tax Return. The accruals and
reserves (including deferred taxes) reflected in the Company Balance Sheet are
in all material respects adequate to cover all Taxes accruable through the date
thereof (including interest and penalties, if any, thereon and Taxes being
contested) in accordance with generally accepted accounting principles.
(b) Neither the Company nor any of its Subsidiaries is obligated under
any agreement with respect to industrial development bonds or other obligations
with respect to which the
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excludability from gross income of the holder for federal or state income tax
purposes could be affected by the transactions contemplated by this Agreement,
and to the Knowledge of the Company, neither the Company nor any of its
Subsidiaries owns any property of a character, the indirect transfer of which,
as a consequence of the Merger, would give rise to any material documentary,
stamp or other transfer tax.
(c) The Company is not a United States real property holding
corporation (as defined in Section 897(c)(2) of the Code).
SECTION 3.13. ERISA. (a) Each Company Employee Plan has been
administered and is in compliance with the terms of such plan and all applicable
laws, rules and regulations where the failure thereof would result in liability
that would be reasonably expected to have a Company Material Adverse Effect.
Each Company Employee Plan intended to be qualified has received a favorable
determination from the IRS and, to the Company's Knowledge, nothing has occurred
since that would adversely affect such qualification. No litigation or
administrative or other proceeding involving any Company Employee Plans has
occurred or, to the Company's Knowledge, is threatened where an adverse
determination would result in liability that would be reasonably expected to
have a Company Material Adverse Effect. The Company has not contributed to any
"multiemployer plan", within the meaning of section 3(37) of ERISA. No condition
exists and no event has occurred that would be expected to constitute grounds
for termination of any Company Employee Plan and neither the Company nor any of
its affiliates has incurred any liability arising in connection with the
termination of, or complete or partial withdrawal from, any plan covered or
previously covered by Title IV of ERISA. For purpose of this Section,
"AFFILIATE" of any Person means any other Person which, together with such
Person, would be treated as a single employer under Section 414 of the Code.
(b) Each enforceable employment, severance or other similar contract,
arrangement or policy and each plan or arrangement providing for insurance
coverage (including any self-insured arrangements), workers' compensation,
disability benefits, supplemental unemployment benefits, vacation benefits,
retirement benefits or for deferred compensation, profit-sharing, bonuses, stock
options, stock appreciation or other forms of incentive compensation or
post-retirement insurance, compensation or benefits which (i) is not a Company
Employee Plan, (ii) is entered into, maintained or contributed to, as the case
may be, by the Company or any of its affiliates and (iii) covers any employee or
former employee of the Company or any of its affiliates (a "COMPANY EMPLOYEE
ARRANGEMENT") has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations that are applicable to such Company Employee Arrangement except for
failures to comply which, singly or in the aggregate, would not have a Company
Material Adverse Effect.
(c) The Company has not established, and does not maintain, any
post-retirement benefits for its employees, including but not limited to
post-retirement life insurance or post-retirement medical.
(d) Other than stock option agreements with Howard Morgan and Philip
Shires, the Company has no agreements that provide for the payment of income or
the provision of benefits (including vesting, entitlement, receipt, creation or
transfer of any rights, privileges, income or title to property or beneficial
ownership) to any employees of the Company as a result of a change of control of
the Company.
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SECTION 3.14. Permits. To the Knowledge of the Company, the Company and
its Subsidiaries have all Permits as are necessary to carry on their businesses
as currently conducted, except for any such Permits for which the Company has
made due application and except for any such Permits that the failure to possess
which, individually or in the aggregate, would not reasonably be expected to
have a Company Material Adverse Effect. The Company has not received notice from
any Governmental Authority (i) that such Permits are not in full force and
effect or have been violated, in either case in any respect that would
reasonably be expected to have a Company Material Adverse Effect or (ii)
threatening to suspend, revoke or suspend any such Permits which, in any such
case, would reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.15. Required Stockholder Vote. The affirmative vote by
stockholders of the Company Common Shares of the Company representing a majority
of the outstanding Company Common Shares is the only vote of the Company
stockholders required by Law for the adoption and approval of this Agreement,
the Merger and the transactions contemplated by this Agreement.
SECTION 3.16. Finders' Fees. There is no investment banker, broker,
finder or other intermediary which has been retained by or is authorized to act
on behalf of the Company or any of its Subsidiaries who might be entitled to any
fee or commission from MergerCo or any of its Subsidiaries in connection with
the transactions contemplated by this Agreement. The parties acknowledge that
the Special Committee has retained the Financial Advisor as financial advisor
and that the fees and expenses of the Financial Advisor will be paid by the
Company.
SECTION 3.17. Environmental Matters. Except for matters that,
individually or in the aggregate, would not reasonably be expected to have a
Company Material Adverse Effect, (a) to the Knowledge of the Company, the
properties, operations and activities of the Company and its Subsidiaries are in
compliance with all applicable Environmental Laws; (b) the Company and its
Subsidiaries and the properties and operations of the Company and its
Subsidiaries are not subject to any existing, pending or, to the Knowledge of
the Company, threatened action, suit, or proceeding by or before any Court or
Governmental Authority under any Environmental Law; and (c) all Permits, if any,
required to be obtained or filed by the Company or any of its Subsidiaries under
any Environmental Law in connection with the business of the Company and its
Subsidiaries have been obtained or filed and are valid and currently in full
force and effect.
SECTION 3.18. Restrictions on Business Activities. Except for this
Agreement, there is no agreement, judgment, injunction, order or decree binding
upon the Company or any of its Subsidiaries which has or would reasonably be
expected to have the effect of prohibiting any acquisition of property by the
Company or any of its Subsidiaries or the conduct of business by the Company or
any of its Subsidiaries as currently conducted or as proposed to be conducted by
the Company, except for any prohibition or impairment as would not reasonably be
expected to have a Company Material Adverse Effect.
SECTION 3.19. Property. The Company or its Subsidiaries, individually
or together, hold under valid lease agreements all real and personal properties
reflected in the Company 10-K or the Company 10-Q as being held under
capitalized leases, and all real and personal property that is subject to the
operating leases to which reference is made in the notes to the Company 10-K or
the Company 10-Q, and enjoy peaceful and undisturbed possession of such
properties under such
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leases, other than (i) any properties as to which such leases have terminated in
the ordinary course of business since the date of the Company 10-K or the
Company 10-Q and (ii) any matters that, individually or in the aggregate, would
not reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.20. Interested Party Transactions. Except as a result of the
transactions contemplated by this Agreement or the Company SEC Reports, since
October 23, 1998 (the date of the Company's 1998 proxy statement), no event has
occurred that would be required to be reported as a Certain Relationship or
Related Transaction pursuant to Item 404 of Regulation S-K promulgated by the
SEC.
SECTION 3.21. Insurance. All insurance policies maintained by the
Company or any of its Subsidiaries (i) are with reputable insurance carriers,
(ii) provide adequate coverage for all normal risks incident to the business of
the Company and its Subsidiaries and their respective properties and assets and
(iii) are in character and amount at least equivalent to that carried by
entities engaged in similar businesses and subject to the same or similar perils
or hazards.
SECTION 3.22. Opinion of Financial Advisor. The Special Committee has
received an opinion dated May 14, 1999 of the Financial Advisor, that, as of
such date, the Merger Consideration was fair to the Company's stockholders from
a financial point of view.
SECTION 3.23. Intellectual Property. (a) The Company and/or each of its
Subsidiaries owns, or is licensed or otherwise possesses legally enforceable
rights to use all patents, trademarks, trade names, service marks, copyrights,
and any applications therefor, technology, know-how, computer software programs
or applications, and tangible or intangible proprietary information or material
that are used in the business of the Company and its Subsidiaries as currently
conducted, except as would not reasonably be expected to have a Company Material
Adverse Effect.
(b) Except as would not reasonably be expected to have a Company
Material Adverse Effect: (i) the Company is not, nor will it be as a result of
the execution and delivery of this Agreement or the performance of its
obligations hereunder, in violation of any licenses, sublicenses and other
agreements as to which the Company is a party and pursuant to which the Company
is authorized to use any Third-Party Intellectual Property Rights; (ii) no
claims with respect to the Company Intellectual Property Rights, any trade
secret material to the Company, or Third-Party Intellectual Property Rights to
the extent arising out of any use, reproduction or distribution of such
Third-Party Intellectual Property Rights by or through the Company or any of its
Subsidiaries, are currently pending or, to the Knowledge of the Company, are
overtly threatened by any Person; and (iii) to the Company's Knowledge, there
are no valid grounds for any bona fide claims (A) to the effect that the
manufacture, sale, licensing or use of any product as now used, sold or licensed
or proposed for use, sale license by the Company or any of its Subsidiaries
infringes on any Third-Party Intellectual Property Right; (B) against the use by
the Company or any of its Subsidiaries of any trademarks, trade names, trade
secrets, copyrights, patents, technology, know-how or computer software programs
and applications used in the business of the Company or any of its Subsidiaries
as currently conducted or as proposed to be conducted; (C) challenging the
ownership, validity or effectiveness of any part of the Company Intellectual
Property Rights or other trade secret material to the Company, or (D)
challenging the license or legally enforceable right to use of the Third-Party
Intellectual Rights by the Company or any of its Subsidiaries.
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(c) (i) all patents, registered trademarks and copyrights held by the
Company and its Subsidiaries are valid and subsisting, except as would not
reasonably be expected to have a Company Material Adverse Effect, and (ii) to
the Company's Knowledge, there is no material unauthorized use, infringement or
misappropriation of any of the Company Intellectual Property by any third party,
including any employee or former employee of the Company or any of its
Subsidiaries.
SECTION 3.24. Material Contracts. All Material Contracts relating to
the Company or any of its Subsidiaries are in full force and effect, the Company
and its Subsidiaries have performed their obligations thereunder to date and, to
the Knowledge of the Company, each other party thereto has performed its
obligations thereunder to date, other than any failure of a Material Contract to
be in full force and effect or any nonperformance thereof that would not
reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.25. Takeover Statutes. The action of the Board of Directors
of the Company in approving the Merger and this Agreement for purposes of
Section 203 of the Delaware Law is sufficient to render inapplicable to the
Merger and this Agreement (and the transactions provided for herein) the
provisions of Section 203 of the Delaware Law.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MERGERCO
MergerCo hereby represents and warrants to the Company as follows:
SECTION 4.1. Corporate Existence and Power. MergerCo is a corporation
or other legal entity duly incorporated or organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization, and has all corporate or entity powers and all governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted, except to the extent the failure to have such
licenses, authorizations, consents and approvals would not, individually or in
the aggregate, be reasonably expected to prevent, impair or result in
significant delay of the consummation of the Merger. MergerCo is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except for those
jurisdictions where the failure to be so qualified would not, individually or in
the aggregate, be reasonably expected to prevent, impair or result in
significant delay of the consummation of the Merger.
SECTION 4.2. Corporate Authorization. The execution, delivery and
performance of this Agreement by MergerCo and the consummation by MergerCo of
the transactions contemplated by this Agreement are within MergerCo's corporate
powers and have been duly authorized by all necessary corporate or other action.
This Agreement constitutes the valid and binding agreement of MergerCo,
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency or other similar laws relating to or affecting the
enforcement of creditors' rights generally and to legal principles of general
applicability governing the application and availability of equitable remedies.
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SECTION 4.3. Governmental Authorization. The execution, delivery and
performance by MergerCo of this Agreement and the consummation of the
transactions contemplated by this Agreement by MergerCo require no action or
waiting period by or in respect of, or filing with, any governmental body,
agency, official or authority other than (a) the filing of a certificate of
merger in accordance with Delaware Law; (b) compliance with any applicable
requirements of the Securities Act, the Exchange Act or any Blue Sky Laws; and
(c) compliance with those Laws, Regulations and Orders noncompliance with which
would reasonably be expected to prevent, impair or result in significant delay
of the consummation of the Merger.
SECTION 4.4. Non-Contravention. The execution, delivery and performance
by MergerCo of this Agreement and the consummation by MergerCo of the
transactions contemplated by this Agreement do not and will not (a) contravene
or conflict with the certificate of incorporation or bylaws or other
organizational documents of MergerCo or (b) assuming effectuation of all filings
and registrations with, the termination or expiration of any applicable waiting
periods imposed by, and receipt of all Permits and Orders of, Governmental
Authorities indicated as required in Section 4.3, (i) constitute a default under
or give rise to (A) a right of termination, cancellation, acceleration,
amendment or modification with respect to any assets or liabilities of MergerCo,
(B) a loss of any benefit to which MergerCo is entitled or (C) an increase in
the obligations of MergerCo, in each case under any provision of any Material
Contract of MergerCo, which, in any such case, individually or in the aggregate,
would prevent, impair or result in significant delay of the consummation of the
Merger, (ii) result in the creation or imposition of any material Lien (other
than a Permitted Encumbrance) on any material assets of MergerCo or (iii)
violate or cause a breach under any Law, Regulation, Order or Permit applicable
to MergerCo, except for any such matters that would not reasonably be expected,
individually or in the aggregate, to prevent, impair or result in significant
delay of the consummation of the Merger.
SECTION 4.5. Disclosure Documents. At the time the Proxy Statement or
any amendment or supplement thereto is first mailed to stockholders of the
Company and at the time such stockholders vote on adoption of this Agreement,
the information supplied by MergerCo for inclusion in the Proxy Statement will
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.
SECTION 4.6. Finders' Fees. There is no investment banker, broker,
finder or other intermediary which has been retained by, or is authorized to act
on behalf of, MergerCo who might be entitled to any fee or commission from the
Company or any of its Subsidiaries in connection with the transactions
contemplated by this Agreement.
SECTION 4.7. Litigation. There is no action, suit or proceeding pending
against, or (to the Knowledge of MergerCo) threatened against or affecting, or
(to the Knowledge of MergerCo) any pending investigation against MergerCo or any
of its properties before any court or arbitrator or any governmental body,
agency or official which in any manner challenges or seeks to prevent, enjoin,
alter or materially delay the Merger or any of the other transactions
contemplated by this Agreement.
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ARTICLE 5
COVENANTS OF THE COMPANY
SECTION 5.1. Affirmative Covenants of the Company. Except as expressly
contemplated by this Agreement or consented to in writing by MergerCo, during
the period from the execution of this Agreement by the Company to the Effective
Time, the Company will, and will cause its Subsidiaries to:
(a) operate their businesses in all material respects in the
usual and ordinary course consistent with past practices;
(b) use all reasonable efforts to preserve substantially
intact their business organizations, maintain the rights and franchises
that are material to the Company, retain the services of their officers
and maintain the relationships with the customers and suppliers that
are material to the Company;
(c) use all reasonable efforts to sell all obsolete inventory
so as to realize the value of the Company's deferred tax assets, and
maintain supplies and other inventories in quantities deemed
appropriate by the Company;
(d) maintain and keep the properties and assets that are
material to the Company in as good repair and condition in all material
respects as on the date of this Agreement, ordinary wear and tear
excepted;
(e) use all commercially reasonable efforts to keep in full
force and effect insurance comparable in amount and scope of coverage
to that set forth in Section 3.21; and
(f) use all commercially reasonable efforts to comply in all
material respects with all applicable Laws, Regulations and Orders.
SECTION 5.2. Negative Covenants of the Company. Except as expressly
contemplated by this Agreement, or otherwise consented to in writing by
MergerCo, from the execution of this Agreement by the Company until the
Effective Time, the Company will not, and will not permit any of its
Subsidiaries to:
(a) adopt or propose any change in the certificate of
incorporation or bylaws of the Company or any of its Subsidiaries;
(b) (i) acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or in
any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets of any other Person,
(ii) incur any Indebtedness or issue any debt securities or assume,
guarantee or endorse or otherwise become responsible for the
obligations of any other Person or make any loans or advances, except
in each case in the ordinary course of business and consistent with
past practice, (iii) make or authorize any capital expenditures other
than capital expenditures in accordance with the Company's existing
capital plan, capital expenditures to repair or
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replace casualty losses or other capital expenditures in the ordinary
course of the Company's business or (iv) enter into or amend in any
material respect any contract, agreement, commitment or arrangement
with respect to any of the matters set forth in this Section 5.2(b);
(c) sell, lease, license or otherwise dispose of any material
assets or property except (i) pursuant to existing contracts or
commitments, (ii) in the ordinary course consistent with past practice,
and (iii) as contemplated or permitted by this Agreement;
(d) (i) take or agree or commit to take any action that would
make any warranty of the Company hereunder inaccurate in any respect
at, or as of any time prior to, the Effective Time such that the
conditions set forth in Section 7.2(a) would not be satisfied or (ii)
omit or agree or commit to omit to take any action necessary to prevent
any such warranty from being inaccurate in any respect at any such time
such that the conditions set forth in Section 7.2(a) would not be
satisfied;
(e) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock (other than the Company's regular
quarterly cash dividend to stockholders of record on May 31, 1999 and
other than cash dividends and distributions by a wholly owned
Subsidiary of the Company to the Company or to a Subsidiary, all of the
capital stock of which is owned directly or indirectly by the Company),
or redeem, repurchase or otherwise acquire or offer to redeem,
repurchase or otherwise acquire any of its securities or any securities
of its Subsidiaries;
(f) adopt any change in executive compensation except in the
ordinary course consistent with past practices or adjust or amend any
bonus, profit sharing, compensation, severance, termination, stock
option, pension, retirement, deferred compensation, employment or
employee benefit plan, agreement, trust, plan, fund or other
arrangement for the benefit and welfare of any director, officer or
employee (except as contemplated by this Agreement or as required to
comply with ERISA or to continue then existing tax and securities law
status);
(g) revalue in any material respect any significant portion of
its assets, including, without limitation, writing down the value of
inventory in any material manner or writing-off of notes or accounts
receivable in any material manner except as required by generally
accepted accounting principles;
(h) pay, discharge or satisfy any material claims, liabilities
or obligations (whether absolute, accrued, asserted or unasserted,
contingent or otherwise) other than the payment, discharge or
satisfaction in the ordinary course of business, consistent with past
practices, of liabilities reflected or reserved against in the
consolidated financial statements of the Company referred to in Section
3.8 or incurred in the ordinary course of business, consistent with
past practices;
(i) make any tax election with respect to or settle or
compromise any material income tax liability;
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(j) offer, sell, issue or grant, or authorize the offering,
sale, issuance or grant, of any shares of capital stock of, or other
equity interests in, any securities convertible into or exchangeable
for any shares of capital stock of, or other equity interests (or
phantom equity interests) in, or any options, warrants or rights of any
kind to acquire any shares of capital stock of, or other equity
interests (or phantom equity interests) in, the Company or any of its
Subsidiaries (other than the issuance of Company Common Shares upon the
exercise of outstanding options);
(k) grant any Lien (except Permitted Encumbrances) with
respect to any material assets including any shares of capital stock
of, or other equity interests in, any Subsidiary of the Company;
(l) (i) change any of its policies or practices with respect
to business transactions between the Company and its Subsidiaries, on
the one hand, and the Company's Affiliates (other than the Company and
its Subsidiaries), on the other hand, (ii) change any of its methods of
accounting in effect at March 31, 1999 except as may be required to
comply with generally accepted accounting principles, or (iii) change
any of its methods of reporting income or deductions for federal income
tax purposes from those employed in the preparation of the federal
income tax returns for the taxable year ending June 30, 1998, except,
in each case, as may be required by Law;
(m) except to the extent the Board of Directors of the Company
deems it necessary to do so in the exercise of its fiduciary
obligations to its stockholders, adopt any shareholder rights plan;
(n) enter into or adopt any agreements or arrangements that
provide for the payment of income or the provision of benefits
(including vesting, entitlement, receipt, creation or transfer of any
rights, privileges, income or title to property or beneficial
ownership) to employees of the Company as a result of a change of
control of the Company; or
(o) agree or commit to do any of the foregoing.
SECTION 5.3. No Solicitation. From and after the date of this
Agreement, the Company will not, and will not authorize or permit any of the
officers, directors, employees, agents and other representatives of the Company
and its Subsidiaries (collectively, the "REPRESENTATIVES") to, directly or
indirectly, solicit, encourage or initiate any Acquisition Proposal or negotiate
with any prospective buyer in connection therewith; provided, however, that (a)
nothing herein shall restrict the Company from filing a Current Report on Form
8-K describing this Agreement, the Merger and the transactions contemplated by
this Agreement and by any other agreements being entered into by the Company on
the date of this Agreement (which filing may include this Agreement as an
exhibit) promptly after the date of this Agreement or from complying with its
obligations under the Securities Act, the Exchange Act and any other applicable
Law; (b) the Company's Board of Directors and/or the Special Committee may
authorize the Company to engage in discussions or negotiations with any Person
who (without any solicitation or initiation, directly or indirectly, by the
Company or any Representative after the date of this Agreement) seeks to
initiate such discussions or negotiations and may furnish such third party
information
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concerning and access to the Company and its Subsidiaries and their respective
businesses, properties and assets, and the Company's Board of Directors and/or
the Special Committee may direct the Company's Representatives to cooperate with
and be available to consult with any such Person; provided that in the case of
this clause (b), the Company's Board of Directors and/or the Special Committee
shall have determined in the exercise of its fiduciary duties that such action
is in the best interests of the Company's stockholders, (c) following receipt of
an Acquisition Proposal that is financially superior to the Merger (as
determined in good faith by the Company's Board of Directors), the Board of
Directors of the Company may withdraw, modify or not make its recommendation in
favor of the Merger; provided that in the case of this clause (c), the Company's
Board of Directors shall have concluded in good faith that such action is
necessary in order for the Company's Board of Directors to act in a manner that
is consistent with its fiduciary obligations under applicable law, and (d) the
Company's Board of Directors may take and disclose to the Company's stockholders
any position required under the Exchange Act; provided that, in each case
referred to in the foregoing clauses (a), (b), (c) and (d), the Company shall
not engage in negotiations with, or disclose any nonpublic information to, any
Person unless it receives from such Person an executed confidentiality agreement
on terms and conditions deemed to be appropriate and in the Company's best
interests by the Board of Directors and its counsel and financial advisors. The
Company shall immediately cease and cause to be terminated any existing
solicitation of, and any discussion or negotiation conducted prior to the date
of this Agreement by the Company or any of the Company's Representatives with
respect to any Acquisition Proposal. Except to the extent the Company's Board of
Directors or the Special Committee deems it necessary not to do so in the
exercise of its fiduciary obligations to its stockholders, the Company will
promptly notify MergerCo of the receipt of any Acquisition Proposal (in any
event not less than two business days prior to entering into any agreement in
connection with the Acquisition Proposal), including the identity of the Person
or group making such Acquisition Proposal and the material terms and conditions
of such Acquisition Proposal; provided that, except to the extent the Company's
Board of Directors deems it necessary not to do so in the exercise of its
fiduciary obligations to its stockholders, in no event shall the Company enter
into a definitive agreement in connection with the Acquisition Proposal less
than five business days after the Company's initial notification to MergerCo of
an inquiry or proposal relating to an Acquisition Proposal. Within the
two-business-day or five-business-day period referred to above, if any, MergerCo
may propose an improved transaction.
SECTION 5.4. Settlement of Certain Claims. Without the prior written
agreement of MergerCo, prior to the Effective Time, the Company shall not settle
or compromise any claim brought by any present, former or purported holder or
owner of Company Common Shares or other securities of the Company, or by any
other Person, which relates to or seeks to challenge or enjoin the transactions
contemplated by this Agreement.
SECTION 5.5. Antitakeover Statutes. If any takeover statute is or may
become applicable to the transactions contemplated by this Agreement, the
Company and the members of its Board of Directors shall use all reasonable
efforts to grant such approvals and to take such actions as are necessary so
that the transactions contemplated by this Agreement may be consummated as
promptly as practicable on the terms contemplated by this Agreement and
otherwise act to eliminate or minimize the effects of any takeover statute on
any of the transactions contemplated by this Agreement.
SECTION 5.6. Access to Information. From the date of this Agreement
until the Effective Time, the Company shall (i) afford MergerCo and its
officers, directors, employees,
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accountants, consultants, legal counsel, agents and other representatives,
including environmental engineers (collectively, the "MERGERCO
REPRESENTATIVES"), reasonable access at reasonable times, upon reasonable prior
notice, to the officers, employees, agents, properties, offices and other
facilities of the Company and its Subsidiaries and to the books and records
thereof and (ii) furnish promptly to MergerCo and the MergerCo Representatives
such information concerning the business, properties, contracts, records and
personnel of the Company and its Subsidiaries (including financial, operating
and other data and information) as may be reasonably requested, from time to
time, by MergerCo.
ARTICLE 6
COVENANTS OF EACH PARTY
Each party agrees that:
SECTION 6.1. Reasonable Efforts. (a) Subject to the terms and
conditions of this Agreement, each party shall use, and shall cause each of its
respective Subsidiaries to use, all commercially reasonable efforts (i) to take,
or to cause to be taken, all appropriate action, and to do, or to cause to be
done, all things necessary, proper or advisable under applicable Law or
otherwise to consummate and make effective the transactions contemplated by this
Agreement, (ii) to obtain from any Governmental Authorities any Licenses,
Permits or Orders required to be obtained by such party or any of its
Subsidiaries in connection with the authorization, execution and delivery of
this Agreement and the performance of its obligations hereunder and (iii) to
make all necessary filings and thereafter to make promptly any other required
submissions, with respect to this Agreement required under any other applicable
Law, Regulation or Order; provided, that the Company and MergerCo shall
cooperate with each other in connection with the making of all such filings and
in supplying any information requested supplementally or by second request from
any Governmental Authority.
(b) The parties agree to cooperate and to cause their respective
Subsidiaries to cooperate with respect to, and agree to use all commercially
reasonable efforts vigorously to contest and resist and to have vacated, lifted,
reversed or overturned, any action, including legislative, administrative or
judicial action, including any Order (whether temporary, preliminary or
permanent) of any Governmental Authority, that is in effect and that restricts,
prevents or prohibits the consummation of the transactions contemplated by this
Agreement. Each of the parties also agrees to take any and all commercially
reasonable actions that may be required by any Governmental Authority as a
condition to the granting of any Permit or Order required in order to permit the
consummation of the transactions contemplated by this Agreement or as may be
required to vacate, lift, reverse or overturn any administrative or judicial
action that would otherwise cause any condition to the Effective Time not to be
satisfied; provided, however, that in no event shall either party be required to
take any action that could reasonably be expected to have a Company Material
Adverse Effect or to result in a breach of this Agreement.
(c) Each of the parties shall use, and shall cause its Subsidiaries to
use, all commercially reasonable efforts to obtain from all Persons (other than
Governmental Authorities) all consents that are (i) necessary, proper or
advisable or (ii) otherwise required under any contracts, licenses, leases,
easements or other agreements to which such party or any
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of its Subsidiaries is a party or by which it is bound, in order to permit such
party to perform its obligations hereunder.
(d) If any party shall fail to obtain any third party consent
described in Section 6.1(c), such party shall use all commercially reasonable
efforts, and shall take any such actions reasonably requested by the other
parties, to limit the adverse effect upon the Company and its Subsidiaries, and
MergerCo and its Subsidiaries, and each of their respective businesses
resulting, or which could reasonably be expected to result after the Effective
Time, from the failure to obtain such consent.
(e) Upon learning thereof, each party shall promptly notify the other
parties of (i) any complaints, investigations or hearings (or communications
indicating that the same may be contemplated) from or by any Governmental
Authorities with respect to the transactions contemplated by this Agreement or
(ii) the institution or the threat of litigation involving this Agreement or the
transactions contemplated by this Agreement.
SECTION 6.2. Public Announcements. Each party will consult with each
other before issuing any press release or making any public statement with
respect to this Agreement and the transactions contemplated by this Agreement
and, except as may be required by applicable Law or regulations of the NASDAQ
National Market, will not issue any such press release or make any such public
statement prior to such consultation; provided, however, that following the
execution hereof the Company and MergerCo may issue a press release mutually
acceptable to both parties.
SECTION 6.3. Notification of Certain Matters. Each party shall use all
commercially reasonable efforts to give prompt notice to the other parties of
(i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence
of which would be likely to cause any warranty contained in this Agreement to be
materially untrue or inaccurate, or (ii) any failure of any party materially to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section shall not limit or otherwise affect the remedies
available hereunder to the parties receiving such notice; and provided further
that failure to give such notice shall not be treated as a breach of covenant
for the purposes of Sections 7.2(a) or 7.3(a) hereof unless the failure to give
such notice results in material prejudice to the other parties.
SECTION 6.4. Proxy Statement; Stockholder Meeting. (a) As promptly as
practicable after the execution of this Agreement, the Company and MergerCo
shall prepare, and the Company shall file with the SEC, the preliminary Proxy
Statement relating to the adoption of this Agreement and approval of the
transactions contemplated by this Agreement by the stockholders of the Company,
subject to Section 5.3. As promptly as practicable after all comments are
received from the SEC on the preliminary Proxy Statement and after the
furnishing by the Company and MergerCo of all information required to be
contained therein, the Company shall file with the SEC a revised definitive
Proxy Statement, subject to Section 5.3.
(b) Subject to Section 5.3, the Company shall cause a meeting of its
stockholders to be duly called and held as soon as reasonably practicable after
the SEC completes its review process in connection with the Proxy Statement for
the purpose of voting on the approval and adoption of this Agreement and the
Merger and will (i) thereafter mail to its stockholders as promptly as
practicable the Proxy Statement, (ii) include in the Proxy Statement the Board's
recommendation
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set forth in Section 1.1(f), (iii) use all commercially reasonable efforts to
obtain the necessary approval by its stockholders of this Agreement and the
transactions contemplated by this Agreement and (iv) otherwise comply with all
legal requirements applicable to such meeting.
ARTICLE 7
CONDITIONS
SECTION 7.1. Conditions to the Obligations of Each Party. The
obligations of the Company and MergerCo to consummate the Merger are subject to
the satisfaction of the following conditions:
(a) this Agreement and the Merger shall have been adopted and
approved by the stockholders of the Company in accordance with the
Delaware Law;
(b) no provision of any existing law or regulation and no
judgment, injunction, order or decree shall prohibit or threaten to
prohibit the consummation of the Merger or the other transactions
contemplated by this Agreement;
(c) all material actions by or in respect of or filings with
any governmental body, agency, official or authority required to permit
the consummation of the Merger and the other transactions contemplated
by this Agreement shall have been obtained;
(d) there shall not be pending any action or proceeding (or
any investigation or other inquiry that might result in such an action
or proceeding) by any governmental authority or administrative agency
before any governmental authority, administrative agency or court of
competent jurisdiction, domestic or foreign, nor shall there be in
effect any judgment, decree or order of any governmental authority,
administrative agency or court of competent jurisdiction, or any other
legal restraint, (i) preventing or seeking to prevent consummation of
the Merger or the other transactions contemplated by this Agreement,
(ii) prohibiting or seeking to prohibit or limiting or seeking to limit
any party from exercising all material rights and privileges pertaining
to its ownership of the Company or any of its Subsidiaries, or (iii)
compelling or seeking to compel MergerCo, the Company or any of their
Subsidiaries to dispose of or hold separate all or any material portion
of the business or assets of the Company or any of its Subsidiaries
(including the Surviving Corporation and its Subsidiaries), in each
case as a result of the Merger or the other transactions contemplated
by this Agreement, nor shall there be any threat of any matter of a
type referred to in clauses (ii) or (iii) above which would reasonably
be expected to have a Company Material Adverse Effect; and
(e) no statute, rule, regulation or order shall be enacted,
entered, proposed, enforced or deemed applicable to the Merger which
makes the consummation of the transactions contemplated by this
Agreement illegal.
SECTION 7.2. Conditions to the Obligations of MergerCo. The obligations
of MergerCo to consummate the Merger and the other transactions contemplated by
this Agreement, are subject to the satisfaction of the following further
conditions:
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(a) (i) the Company shall have performed in all material
respects all of its obligations under this Agreement required to be
performed by it at or prior to the Effective Time, and (ii) except for
such inaccuracies or omissions the consequences of which do not singly
or in the aggregate constitute a Company Material Adverse Effect, the
representations and warranties of the Company contained in this
Agreement and in any certificate or other writing delivered by the
Company pursuant hereto shall be true in all respects at and as of the
Effective Time as if made at and as of such time (except to the extent
such representation and warranty is made as of an earlier date, in
which case the representation and warranty shall be true in all
respects as of such date) and MergerCo shall have received a
certificate signed by the Chairman or the Chief Financial Officer of
the Company to the foregoing effect;
(b) all consents, waivers, approvals, authorizations or orders
required to be obtained, and all filings required to be made, by the
Company for the consummation by it of the transactions contemplated by
this Agreement shall have been obtained and made by the Company, except
where the failure to receive such consents, etc. would not reasonably
be expected to have a Company Material Adverse Effect;
(c) MergerCo shall have received all documents it may
reasonably request relating to the Company and its authority to enter
into this Agreement, all in form and substance satisfactory to
MergerCo;
(d) MergerCo shall have received the financing necessary to
consummate the transactions contemplated by this Agreement and to fund
the working capital needs of the Surviving Corporation, on terms and
conditions reasonably acceptable to MergerCo; and
(e) no more than 5% of the Company Common Shares shall be
Dissenting Shares.
SECTION 7.3. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the Merger are subject to the
satisfaction of the following further conditions:
(a) (i) MergerCo shall have performed in all material respects
all of its obligations under this Agreement required to be performed by
it at or prior to the Effective Time, and (ii) except for such
inaccuracies or omissions the consequences of which would not singly or
in the aggregate reasonably be expected to impede the receipt of the
Merger Consideration by the Company's stockholders, the representations
and warranties of MergerCo contained in this Agreement and in any
certificate or other writing delivered by MergerCo pursuant hereto
shall be true in all respects at and as of the Effective Time as if
made at and as of such time (except to the extent such representation
and warranty is made as of an earlier date, in which case the
representation and warranty shall be true in all respects as of such
date) and the Company shall have received a certificate signed by the
President, any Vice President or the Treasurer of MergerCo to the
foregoing effect;
(b) all consents, waivers, approvals, authorizations or orders
required to be obtained, and all filings required to be made, by
MergerCo for the consummation by it of
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the transactions contemplated by this Agreement shall have been
obtained and made by MergerCo, except where the failure to receive such
consents, etc. would not reasonably be expected to impede the receipt
of the Merger Consideration by the Company's stockholders; and
(c) the Company shall have received all documents it may
reasonably request relating to the authority of MergerCo for this
Agreement, all in form and substance satisfactory to the Company.
ARTICLE 8
TERMINATION
SECTION 8.1. Termination. This Agreement may be terminated and the
Merger and the other transactions contemplated by this Agreement may be
abandoned at any time prior to the Effective Time (notwithstanding any approval
of this Agreement by the stockholders of the Company):
(a) by mutual written consent of the Company and MergerCo;
(b) by either the Company or MergerCo, if the Merger has not
been consummated within six months of the date of this Agreement;
(c) by either the Company or MergerCo, if there shall be any
law or regulation that makes consummation of the Merger illegal or
otherwise prohibited or if any judgment, injunction, order or decree
enjoining MergerCo or the Company from consummating the Merger is
entered and such judgment, injunction, order or decree shall become
final and nonappealable;
(d) by MergerCo, if any Person, entity or Group other than
MergerCo and its Affiliates shall have increased its beneficial
ownership (calculated in accordance with Rule 13d-3 under the Exchange
Act) of Company Common Shares by an amount equal to 15% or more of the
outstanding Company Common Shares compared with its level of ownership
on the date of this Agreement;
(e) (i) by MergerCo if any representation and warranty of the
Company set forth in this Agreement shall be untrue when made such that
the condition set forth in Section 7.2(a) would not be satisfied;
provided that, if such warranty is curable prior to the date 60 days
after notice to the Company by MergerCo of such breach, through the
exercise by the Company of its reasonable best efforts, so that the
condition in Section 7.2(a) would be satisfied, and for so long as the
Company continues to exercise such reasonable best efforts, MergerCo
will not have the right to terminate this Agreement under this Section,
or (ii) by the Company if any representation and warranty of MergerCo
set forth in this Agreement shall be untrue when made such that the
condition set forth in Section 7.3(a) would not be satisfied; provided
that, if such warranty is curable prior to the date 60 days after
notice to MergerCo by the Company of such breach, through the exercise
by MergerCo of its reasonable best efforts, so that the condition in
Section 7.2(a) would be satisfied, and so long as MergerCo continues to
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exercise such reasonable best efforts, the Company will not have the
right to terminate this Agreement under this Section;
(f) (i) by MergerCo upon a breach of any covenant or agreement
on the part of the Company set forth in this Agreement such that the
condition set forth in Section 7.2(a) would not be satisfied; provided
that, if such breach is curable prior to the date 60 days after notice
to the Company by MergerCo of such breach, through the exercise by the
Company of its reasonable best efforts, so that the condition in
Section 7.2(a) would be satisfied, and for so long as the Company
continues to exercise such reasonable best efforts, MergerCo will not
have the right to terminate this Agreement under this Section, or (ii)
by the Company upon a breach of any covenant or agreement on the part
of MergerCo set forth in this Agreement such that the condition set
forth in Section 7.3(a) would not be satisfied; provided that, if such
breach is curable prior to the date 60 days after notice to MergerCo by
the Company of such breach, through the exercise by MergerCo of its
reasonable best efforts, so that the condition in Section 7.3(a) would
be satisfied, and for so long as MergerCo continues to exercise such
reasonable best efforts, the Company will not have the right to
terminate this Agreement under this Section;
(g) by MergerCo (i) if the Board of Directors of the Company
shall have withdrawn or modified or amended, in a manner adverse in any
material respect to MergerCo, its approval of this Agreement and the
Merger or its recommendation set forth in Section 1.1(f), (ii) if the
Board of Directors of the Company shall have approved, recommended or
endorsed any Acquisition Proposal other than the Merger, or (iii) if
the Company shall have failed to call the Company Stockholders Meeting
within a reasonable time after completion of the SEC review process or
shall have failed as promptly as reasonably practicable thereafter to
mail the Proxy Statement to its stockholders or (iv) if the Company
shall have failed to include in such Proxy Statement the recommendation
referred to above;
(h) by the Company if (i) its Board of Directors determines
in good faith that an Acquisition Proposal is financially superior to
the transactions contemplated by this Agreement and is reasonably
capable of being financed, (ii) the Company has complied with the
requirements of Section 5.3, (iii) concurrently with such termination,
the Company makes all payments required by Section 8.3(b), and (iv)
concurrently with such termination, the Company enters into a
definitive agreement to effect the financially superior Acquisition
Proposal; and
(i) by MergerCo or the Company if, at a duly held
stockholders meeting of the Company or any adjournment thereof at which
this Agreement and the Merger is voted upon, the requisite stockholder
adoption and approval shall not have been obtained.
The party desiring to terminate this Agreement pursuant to clauses 8.1(b)
through 8.1(i) shall give written notice of such termination to the other
parties in accordance with Section 9.1.
SECTION 8.2. Effect of Termination. If this Agreement is terminated
pursuant to Section 8.1, this Agreement shall become void and of no effect with
no liability on the part of any party hereto, except for liability or damages
resulting from a willful breach of this Agreement and
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except that the agreements contained in this Section 8.2 and in Sections 6.6 and
8.3 and Article 9 shall survive the termination hereof.
SECTION 8.3. Certain Fees. (a) Except as provided in Section 8.3(b),
all costs and expenses incurred in connection with this Agreement shall be paid
by the party incurring such cost or expense.
(b) So long as MergerCo shall not have materially breached its
warranties or obligations under this Agreement, the Company agrees to pay
MergerCo a fee in immediately available funds equal to MergerCo's Expenses in
the following circumstances and at the following times only:
(i) promptly, but in no event later than two business days
after the termination by MergerCo of this Agreement pursuant to Section
8.1(e), (f) or (g);
(ii) concurrently with any termination of this Agreement by the
Company pursuant to Section 8.1(h); and
(iii) if (A) any Acquisition Proposal shall have been made prior
to the termination of this Agreement, (B) either MergerCo or the
Company subsequently terminates this Agreement pursuant to Section
8.1(a), (b) or (d), (C) MergerCo shall not have breached any
representation and warranty, covenant or agreement set forth in this
Agreement in any material respect, (D) within 12 months after the
termination of this Agreement, the Company shall have entered into an
agreement to consummate a transaction contemplated by an Acquisition
Proposal, and (E) such transaction shall subsequently be consummated,
then such payment to be made upon such acquisition of Company Common
Shares or the consummation of such Acquisition Proposal.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including telecopy or similar writing)
and shall be given:
if to MergerCo, to:
Philip W. Shires
KE Acquisition Corp.
2945 Wilderness Place
Boulder, CO 80301
Telecopy: (303) 440-9600
with a copy to:
Thomas R. Stephens
Bartlit Beck Herman Palenchar & Scott
The Kittredge Building
511 Sixteenth Street, Suite 700
Denver, CO 80202
Telecopy: (303) 592-3140
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if to the Company, to:
Chairman, Kentek Information
Systems, Inc.
2945 Wilderness Place
Boulder, CO 80301
Telecopy: (303) 440-9600
with a copy to:
James H. Carroll
Cooley Godward LLP
2595 Canyon Blvd, Suite 250
Boulder, CO 80301
Telecopy: (303) 546-4099
or such other address or telecopy number as such party may hereafter specify for
the purpose by notice to the other parties hereto. Each such notice, request or
other communication shall be effective (a) if given by telecopy, when such
telecopy is transmitted to the telecopy number specified in this Section and the
appropriate telecopy confirmation is received or (b) if given by any other
means, when delivered at the address specified in this Section.
SECTION 9.2. Amendments; No Waivers. (a) Any provision of this
Agreement may be amended or waived prior to the Effective Time if, and only if,
such amendment or waiver is in writing and signed, in the case of an amendment,
by the parties hereto, in the case of a waiver, by the party against whom the
waiver is to be effective; provided that after the adoption of this Agreement by
the stockholders of the Company, no such amendment or waiver shall, without the
further approval of such stockholders, alter or change (i) the Merger
Consideration, (ii) any term of the certificate of incorporation of the
Surviving Corporation or (iii) any of the terms or conditions of this Agreement
if such alteration or change would adversely affect the holders of any shares of
capital stock of the Company.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
SECTION 9.3. Rules of Construction. Unless the context otherwise
requires, as used in this Agreement: (i) all defined terms used herein and not
otherwise defined have the meanings assigned to such terms in Annex I hereto,
(ii) an accounting term not otherwise defined has the meaning ascribed to it in
accordance with generally accepted accounting principles; (iii) "or" is not
exclusive; (iv) "including" means "including, without limitation," (v) words in
the singular include the plural and words in the plural include the singular,
and (vi) masculine pronouns shall be deemed to include the feminine counterpart
and vice versa.
SECTION 9.4. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto.
SECTION 9.5. Governing Law; etc. (a) Governing Law. The terms of this
Agreement shall be construed in accordance with and governed by the law of the
State of Delaware (without regard to principles of conflict of laws).
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(b) Jurisdiction. Each of the parties hereto agrees that any suit,
action or proceeding seeking to enforce any provision of, or based on any matter
arising out of or in connection with, this Agreement or the transactions
contemplated by this Agreement may be brought against any of the parties in the
United States District Court for the District of Delaware or the District of
Colorado or any state court sitting in the City of Wilmington, Delaware, and
each of the parties hereby consents to the exclusive jurisdiction of such courts
(and of the appropriate appellate courts) in any such suit, action, or
proceeding and waives any objection to venue laid therein. Process in any suit,
action or proceeding may be served on any party anywhere in the world, whether
within or without the State of Delaware or the State of Colorado. Without
limiting the foregoing, each of the parties hereto agrees that service of
process upon such party at the address referred to in Section 9.1, together with
written notice of such service to such party, shall be deemed effective service
of process upon such party.
(c) Specific Performance. Each of the parties acknowledges and agrees
that the parties' respective remedies at law for a breach or threatened breach
of any of the provisions of this agreement would be inadequate and, in
recognition of that fact, each agrees that, in the event of a breach or
threatened breach by any party of the provisions of this Agreement, in addition
to any remedies at law, each party, respectively, without posting any bond,
shall be entitled to obtain equitable relief in the form of specific
performance, a temporary restraining order, a temporary or permanent injunction
or any other equitable remedy which may then be available.
(d) Waiver of Jury Trial. Each of the parties hereto hereby
irrevocably waives all right to trial by jury in any action, proceeding or
counterclaim (whether based on contract, tort or otherwise) arising out of or
relating to this Agreement or the actions of any of them in the negotiation,
administration, performance and enforcement thereof.
SECTION 9.6. Counterparts; Effectiveness. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
counterparts (or signature pages) hereof signed by all of the other parties
hereto.
SECTION 9.7. Parties in Interest. Except as expressly provided in
Article 1 and Section 2.4 in this Agreement, express or implied, is intended to
or shall confer upon any other Person, other than the parties hereto and their
respective permitted successors and assigns, any right, benefit or remedy of any
nature or kind whatsoever under or by reason of this Agreement.
SECTION 9.8. Severability. If any provisions of this Agreement or the
application thereof to either party or set of circumstances shall in any
jurisdiction and to any extent, be finally held invalid or unenforceable, such
term or provision shall only be ineffective as to such jurisdiction, and only to
the extent of such invalidity or unenforceability, without invalidating or
rendering unenforceable any other terms or provisions of this Agreement or under
any other circumstances, and the parties shall negotiate in good faith a
substitute provision which comes as close as possible to the invalidated or
unenforceable term or provision, and which puts each party in a position as
nearly comparable as possible to the position it would have been in but for the
finding of invalidity or unenforceability, while remaining valid and
enforceable.
SECTION 9.9. Entire Agreement. This Agreement constitutes the entire
agreement among the parties to this Agreement with respect to the subject matter
of this Agreement and
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supersedes all prior agreements and undertakings, both written and oral, among
the parties with respect to the subject matter of this Agreement.
SECTION 9.10. Survival of Representations and Warranties. The
representations and warranties contained herein and in any certificate or
writing delivered pursuant hereto shall not survive the Effective Time or, if
earlier, the termination of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
KENTEK INFORMATION SYSTEMS, INC.
By:
------------------------------------
Name: Howard L. Morgan
Title: Chairman of the Board
KE ACQUISITION CORP.
By:
-------------------------------------
Name: Philip W. Shires
Title: President
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DEFINED TERMS
The following terms when used in the Agreement shall have the meanings
set forth below unless the context shall otherwise require:
"ACQUISITION PROPOSAL" shall mean any proposal or offer with respect to
(i) a tender or exchange offer, a merger, consolidation or other business
combination involving the Company or any of its Subsidiaries (including a merger
of equals of the Company), or (ii) the acquisition of an equity interest in the
Company representing in excess of 33% of the power to vote for the election of a
majority of directors of the Company or (iii) the acquisition of assets of the
Company or its Subsidiaries (including stock of one or more Subsidiaries of the
Company) representing 33% or more of the consolidated assets of the Company, in
each case by any Person other than MergerCo or its Affiliates.
"AFFILIATE" shall, with respect to any Person, mean any other Person
that controls, is controlled by or is under common control with the former. The
term "CONTROL" and correlative terms shall have the meanings ascribed to them in
Rule 405 under the Securities Act.
"BLUE SKY LAWS" shall mean any applicable state securities laws.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
"COMPANY 10-K" means the Company's annual report on Form 10-K for the
fiscal year ended June 30, 1998.
"COMPANY EMPLOYEE PLAN" means each "EMPLOYEE BENEFIT PLAN", as defined
in Section 3(3) of ERISA, which (i) is subject to any provision of ERISA and
(ii) is maintained, administered or contributed to by the Company or any
affiliate (as defined in Section 3.13) and covers any director, officer or
employee or former director, officer or employee of the Company or of any
affiliate, or under which the Company or any affiliate has any liability.
"COMPANY INTELLECTUAL PROPERTY RIGHTS" means patents, registered and
material unregistered trademarks and service marks, registered copyrights, trade
names and any applications therefor and trade secrets owned by the Company or
any of its Subsidiaries.
"COMPANY MATERIAL ADVERSE EFFECT" shall mean a material adverse effect
on the condition (financial or otherwise), business, assets or results of
operations or prospects of the Company and its Subsidiaries, taken as a whole,
other than changes in general economic conditions or in the economic conditions
affecting the printer industry.
"COMPANY PROPRIETARY INFORMATION" means documents containing operating,
financial, technical or other information relating to the Company's evaluation
of the transactions contemplated by this Agreement.
"COMPANY REPRESENTATIVES" shall mean the officers, directors,
employees, accountants, consultants, legal counsel, agents and other
representatives, including environmental engineers, of the Company.
"COURT" shall mean any court, federal, state or local, or arbitration
tribunal.
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"ENVIRONMENTAL LAW OR LAWS" shall mean any and all laws, statutes,
ordinances, rules, regulations, or orders of any Governmental Authority
pertaining to the protection of the environment, as in effect at the applicable
time and that are applicable to a specified Person and such Person's
Subsidiaries, including the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as
amended, the Federal Water Pollution Control Act, as amended, the Resource
Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking
Water Act, as amended, the Toxic Substances Control Act, as amended, the
Hazardous & Solid Waste Amendments Act of 1984, as amended, the Superfund
Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, and any state laws implementing the foregoing
federal laws, and all other environmental conservation or protection laws. For
purposes of the Agreement, "ENVIRONMENTAL LAWS" shall not include laws primarily
related to the protection of human health and safety and the terms "hazardous
substance" and "releases" have the meanings specified in CERCLA (but without
regard to the exclusions set forth in the definition of hazardous substance);
provided, however, that to the extent other federal laws or the laws of the
state in which the property is located establish a meaning for "hazardous
substance" or "release" that is broader than that specified in CERCLA, such
broader meaning shall apply, and the term "hazardous substance" shall include
all dehydration and treating wastes, and (to the extent in excess of background
levels) radioactive material, even if such items are not classified as hazardous
substances or wastes pursuant to CERCLA, or RCRA or the analogous statutes of
any applicable jurisdiction.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"EXCHANGE AGENT" means a national bank or trust company or other
financial institution or transfer agent designated by MergerCo prior to the
Effective Time to act as exchange agent in exchanging Company Common Shares for
the Merger Consideration.
"EXPENSES" shall mean all of actual, documented and reasonable
out-of-pocket expenses (including all reasonable fees and expenses of counsel,
accountants, investment bankers, experts and consultants to MergerCo and its
Affiliates) incurred by MergerCo or on its behalf in connection with or related
to the authorization, preparation, negotiation, execution and performance of
this Agreement, and all other matters related to the consummation of the
transactions contemplated by this Agreement.
"GOVERNMENTAL AUTHORITY" shall mean any federal, state or local
governmental agency or authority (other than a Court).
"GROUP" shall have the meaning set forth in Section 13(d)(3) of the
Exchange Act.
"IRS" shall mean the Internal Revenue Service.
"KNOWLEDGE OF THE COMPANY" (and any other phrase to substantially
similar effect) means the actual knowledge of either Howard L. Morgan or Philip
W. Shires, in each case after reasonable inquiry with any person who is
principally responsible for the subject matter of any representation and
warranty given to the Knowledge of the Company.
"LAW" shall mean all laws, statutes, ordinances, rules and regulations
of the United States, any foreign country, or any domestic or foreign state, and
any political subdivision or agency thereof, including all decisions of Courts
having the effect of law in each such jurisdiction.
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"LIEN" shall mean, with respect to any asset, any mortgage, pledge,
security interest, encumbrance, lien or charge of any kind (including any
agreement to give any of the foregoing), any conditional sale or other title
retention agreement, any lease in the nature thereof or the filing of or
agreement to give any financing statement under the Uniform Commercial Code of
any jurisdiction, with respect to such an asset.
"MATERIAL" shall mean material to the condition (financial and other),
results of operations, prospects or business of a specified Person and its
Subsidiaries, if any, taken as a whole.
"MATERIAL CONTRACT" shall mean, as between any Person (the "DISCLOSING
PERSON") or any of its Subsidiaries, on the one hand, and any other Person other
than any other member of the group consisting of the Disclosing Person and its
Subsidiaries, on the other hand:
(1) Any collective bargaining agreement or other agreement
with any labor union;
(2) Any employment or consulting agreement, contract or
commitment between the Disclosing Person or any of its Subsidiaries and
any employee, officer or director thereof (i) having more than one year
to run from the date hereof, (ii) providing for an obligation to pay or
accrue compensation of $100,000 or more per annum or (iii) providing
for the payment or accrual of any additional compensation upon a change
in control of the Disclosing Person or any of its subsidiaries or upon
any termination of such employment or consulting relationship following
a change in control of the Disclosing Person or any of its
Subsidiaries;
(3) Any agency or representation agreement with any Person
which is not terminable by the Disclosing Person or one of its
Subsidiaries without penalty upon not more than ninety (90) days'
notice providing for the payments to such person of $100,000 or more;
(4) Any partnership, joint venture or profit sharing
agreement between the Disclosing Person or its Subsidiaries with any
Person involving aggregate payments in excess of $100,000;
(5) Any agreement, contract, commitment, indenture or other
instrument relating to the borrowing of money in a principal amount of
$100,000 or more or any direct or indirect guarantee of any obligation
of any other Person or Governmental Authority for, or agreement to
service the repayment of, borrowed money in a principal amount of
$100,000 or more, including any agreement or arrangement (i) relating
to the maintenance of compensating money balances, (ii) with respect to
lines of credit or letters of credit, (iii) relating to the purchase or
repurchase obligations of any other Person or Governmental Authority,
(iv) to advance or supply funds to or to invest in any other Person or
Governmental Authority, (v) to pay for property, products or services
of any other Person or Governmental Authority even if such property,
products or services are not conveyed, delivered or rendered and (vi)
to guarantee any lease or other similar periodic payments to be made by
any other Person or Governmental Authority;
(6) Any lease with annual rental payments aggregating
$100,000 or more that is not terminable without premium or penalty on
ninety (90) days' or less notice;
(7) Any agreement, contract or commitment for the disposition
or acquisition of any investment in any Person if such investment
requires payment of $100,000 or more;
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(8) Any other agreement, contract or commitment which
involves payment or potential payment, pursuant to the terms of such
agreement, contract or commitment, by or to the Disclosing Person or
any of its Subsidiaries of $100,000 or more within any twelve month
period commencing after the date of the Agreement.
"ORDER" shall mean any judgment, order or decree of any court,
arbitration tribunal or Governmental Authority, federal, state or local.
"PERMIT" shall mean any and all permits, licenses, authorizations,
orders, certificates, registrations or other approvals granted by any federal,
state, local or foreign Governmental Authority.
"PERMITTED ENCUMBRANCES" shall mean the following:
(1) Liens for taxes, assessments and other governmental
charges not delinquent or which are currently being contested in good
faith by appropriate proceedings; provided that, in the latter case,
adequate reserves shall have been set aside with respect thereto;
(2) all rights, if any, to consent by, required notices to,
filings with, or other actions by any Governmental Authority in
connection with the contribution or the operation of any assets;
(3) mechanics', repairmen's, employees', contractors',
materialmen's or other similar Liens not filed of record and similar
charges not delinquent or which are filed of record but are being
contested in good faith by appropriate proceedings; provided that, in
the latter case, adequate reserves shall have been set aside with
respect thereto;
(4) Liens in respect of judgments or awards currently being
prosecuted in good faith on an appeal or other proceeding for review
and with respect to which a stay of execution pending such appeal or
such proceeding for review shall have been secured; provided that
adequate reserves shall have been set aside with respect thereto;
(5) easements, leases, reservations or other rights of others
in, or minor defects and irregularities in title to, property or
assets; provided that such easements, leases, reservations, rights,
defects or irregularities do not materially impair the use of such
property or assets for the purposes for which they are held; and
(6) any lien or privilege vested in any lessor, licensor or
permittor for rent or other obligations, so long as the payment of such
rent or the performance of such obligations is not delinquent.
"PERSON" shall mean an individual, partnership, limited liability
company, corporation, joint stock company, trust, estate, joint venture,
association or unincorporated organization, or any other entity or organization,
including a government or political subdivision or any agency or instrumentality
thereof.
"REGULATION" shall mean any rule or regulation of any Governmental
Authority having the effect of law.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
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"SUBSIDIARY" shall mean any corporation or other entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are directly or indirectly owned by a Person.
"TAX" or "TAXES" shall mean taxes, fees, levies, duties, tariffs,
imposts, and governmental impositions or charges of any kind in the nature of
(or similar to) taxes, payable to any federal, state, local or foreign taxing
authority, including (without limitation) (i) income, franchise, profits, gross
receipts, ad valorem, net worth, value added, sales, use, service, real or
personal property, special assessments, capital stock, license, payroll,
withholding, employment, social security, workers' compensation, utility,
severance, production, excise, stamp, occupation, premiums, windfall profits,
alternative or add-on minimum, estimated, environmental (including taxes under
Code section 59A), unemployment, transfer and gains taxes, and (ii) interest,
penalties, additional taxes, fines and other additions to tax imposed with
respect thereto and any interest in respect of such penalties, additional taxes,
fines and other additional amounts; and "TAX RETURNS" shall mean returns,
reports, and information statements with respect to Taxes required to be filed
with the IRS or any other taxing authority, domestic or foreign, including,
without limitation, consolidated, combined and unitary tax returns (including
returns required in connection with any Company Employee Plan).
"THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS" means patents, registered
and material unregistered trademarks and service marks, registered copyrights,
trade names and any applications therefor and trade secrets owned by a Person
other than the Company and its Subsidiaries.
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Each of the following terms is defined in the Section set forth opposite such
term:
TERM SECTION
affiliate 3.13(a)
Company Recitals
Company Balance Sheet 3.8
Company Balance Sheet Date 3.8
Company Employee Arrangements 3.13(b)
Company Common Shares Recitals
Company SEC Reports 3.7(a)
Company 10-Q 3.7(a)
Covered Employees 2.4
Delaware Law 1.1(a)
Dissenting Shares 1.4
Effective Time 1.1(c)
The Financial Advisor 1.1(f)
Merger 1.1(a)
Merger Consideration Recitals
MergerCo Recitals
MergerCo Representatives 5.6
Proxy Statement 3.9
Representatives 5.3
SEC 3.7(a)
Special Committee Recitals
Surviving Corporation 1.1(a)
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ANNEX B
May 14, 1999
Special Committee of the Board of Directors
Kentek Information Systems, Inc.
2945 Wilderness Place
Boulder, CO 80301
Board of Directors
Kentek Information Systems, Inc.
2945 Wilderness Place
Boulder, CO 80301
Gentlemen:
It is our understanding that on May 14, 1999, Kentek Information Systems, Inc.
(the "Company") entered into a merger agreement (the "Agreement") with KE
Acquisition Corp. ("MergerCo") to (i) have MergerCo merge with and into the
Company, and (ii) have each share of the Company's par value $0.01 per share
Common Stock ("Company Common Shares") (except for Company Common Shares owned
by the Company, Company Common Shares owned by MergerCo, and Company Common
Shares as to which appraisal rights have been perfected) convert, as set forth
in the Agreement, into the right to receive, in exchange for each such Company
Common Share, cash in an amount equal to $8.29, without interest ("Cash Merger
Consideration").
The merger of the Company and MergerCo in exchange for the Cash Merger
Consideration is hereinafter referred to as the "Transaction". You have
requested our opinion with respect to the fairness of the Transaction, from a
financial point of view, to the stockholders of the Company.
In arriving at our opinion, we undertook the following activities:
1. Analyzed and reviewed the terms and conditions of the Agreement;
2. Investigated the business, financial condition, results of operations
and prospects of the Company;
3. Investigated the financial terms of certain business combinations that
we deemed relevant;
4. Reviewed selected financial and stock market data for certain publicly
traded companies that we deemed relevant; and
5. Performed such other financial studies and analyses as we deemed
necessary.
116
In connection with our review, we have relied upon the accuracy and completeness
of all information provided to us by the Company and its representatives, and we
have not attempted to independently verify any such information. We have also
relied upon the assessment of the management of the Company regarding the
Company's business and prospects, and also assumed that the budgets and
financial projections of the Company were reasonably prepared by management on
bases reflecting the best currently available estimates and good faith judgments
of the future financial performance of the Company. We have not made an
independent evaluation or appraisal of the Company's assets and liabilities. Our
opinion is necessarily based on financial, market, economic and other conditions
as they exist and can be evaluated as of the date of this letter.
Janney Montgomery Scott Inc. ("Janney") is acting as the financial advisor to
the Company in connection with the Transaction and will receive customary fees
upon the completion of the Transaction. In addition, the Company has agreed to
indemnify Janney against certain liabilities arising out of the rendering of
this opinion. Janney is a nationally recognized investment banking firm and, as
part of its investment banking activities, is regularly engaged in the valuation
of businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and valuations for corporate and other purposes. Janney co-managed
the Company's initial public offering in April 1996 and, in the ordinary course
of its trading and brokerage activities, Janney makes a market in the stock of
the Company.
This opinion is for the use and benefit of the Board of Directors of the Company
in evaluating the Transaction and does not constitute a recommendation to any
shareholder of the Company as to how such shareholder should vote their shares
in the Transaction. This opinion may not be used for any other purpose, and may
not be quoted or referred to, in whole or in part, without our prior written
consent, except that this opinion may be included in its entirety in any filing
with the Securities and Exchange Commission in connection with the Transaction.
Based upon and subject to the foregoing, we are of the opinion as of the date
hereof that the Transaction is fair from a financial point of view to the
stockholders of the Company.
Very truly yours,
JANNEY MONTGOMERY SCOTT INC.
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ANNEX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Sections 252, 254, 257, 258, 263 or 264 of this
title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title is not
owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to take
such action must do so by a separate written demand as provided herein. Within
10 days after the effective date of such merger or consolidation, the surviving
or resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in favor of
or consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of stock of
such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section; provided
that, if the notice is given on or after the effective date of the merger or
consolidation, such notice shall be given by the surviving or resulting
corporation to all such holders of any class or series of stock of a constituent
corporation that are entitled to appraisal rights. Such notice may, and, if
given on or after the effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger or consolidation.
Any stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the
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merger or consolidation, any stockholder shall have the right to withdraw his
demand for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or publication as the
Court deems advisable. The forms of the notices by mail and by publication shall
be approved by the Court, and the costs thereof shall be borne by the surviving
or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
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120
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-4
121
ANNEX D
MANAGEMENT OF KENTEK AND KE ACQUISITION
Set forth below are the name, business address and age of each person or
entity who is a director, executive officer or general partner of Kentek and KE
Acquisition, as of the date of this proxy statement and (i) the present
principal occupation or employment of each person and the name, principal
business and address of the corporation or other organization in which the
occupation or employment of each person is conducted and (ii) the material
occupations, positions, offices and employment and the name, principal business
and address of any corporation or other organization in which any material
occupation, position, office or employment of each person was held during the
last five years. Each person listed below is a citizen of the United States.
DIRECTORS OF KENTEK
NAME AGE ADDRESS OFFICE HELD PRINCIPAL OCCUPATIONS
Howard L. Morgan 53 c/o Kentek Information Chairman of the Board Howard L. Morgan has served as a
Systems, Inc. of Directors Director of Kentek since 1982.
2945 Wilderness Place Since 1989, Dr. Morgan has been
Boulder, CO 80301 President of Arca Group, Inc., a
consulting and investment
management company specializing
in the areas of computer and
communications technologies. Dr.
Morgan also has served as
General Partner of idealab!
Corporation, an incubator of
internet and e-commerce
companies, since January 1999.
Dr. Morgan was Professor of
Decision Sciences at the Wharton
School of the University of
Pennsylvania from 1972 through
1986. He serves a as a director
for a number of public
companies, including Cylink
Corp., Franklin Electronic
Publishers, Inc., Infonautics
Corporation, MetaCreations
Corporation, MyPoints.com, Inc.,
Segue Software, Inc., Tickets.com,
Inc. and Unitronix Corp.
Philip W. Shires 58 c/o Kentek Information President, Chief Philip W. Shires has served as
Systems, Inc. Executive Officer and President since April 1989 and
2945 Wilderness Place Director as Chief Executive Officer since
Boulder, CO 80301 October 1991. Prior to joining
Kentek, he served as President of
the Data Products Division of
Lear Siegler Corporation,
President of the ITT Qume Division
of International Telephone and
Telegraph Corporation and
President of Optotech, Inc., an
optical disk drive manufacturer.
D-1
122
NAME AGE ADDRESS OFFICE HELD PRINCIPAL OCCUPATIONS
Justin J. Perreault 36 c/o Kentek Information Director Justin J. Perreault has served
Systems, Inc. as a director since February
2945 Wilderness Place 1994. Mr. Perreault presently
Boulder, CO 80301 serves as the Chief Executive
Officer of Object Design, Inc.,
an object oriented database
company. Previously, Mr.
Perreault served as Executive
Vice President and Chief
Operating Officer of Object
Design, Inc. From 1992 to
November 1995, he was a Vice
President at the Harvard Private
Capital Group, Inc., an
investment affiliate of Aeneas
Venture Corp. and the Harvard
Management Company. Prior to
joining the Harvard Private
Capital Group, Mr. Perreault was
a consultant with McKinsey &
Co., Inc. from 1990 to 1992.
James H. Simons, Ph.D. 60 c/o Kentek Information Director James H. Simons, Ph.D. has
Systems, Inc. served as a director since 1982.
2945 Wilderness Place Since 1982, he has served as the
Boulder, CO 80301 President and Chairman of
Renaissance Technologies Corp.
Dr. Simons also serves as a
director of Franklin Electronic
Publishers, Inc., Cylink
Corporation, Segue Software
Corporation and Numar Corp.
Sheldon Weinig, Ph.D. 70 c/o Kentek Information Director Sheldon Weinig, Ph.D. has served
Systems, Inc. as a director since June 1997.
2945 Wilderness Place Dr. Weinig has been an Adjunct
Boulder, CO 80301 Professor at Columbia University
since 1995 and at The State University of New
York at Stony Brook since 1994. From 1989 to
1996, Dr. Weinig was employed by the Sony
Corporation as Vice Chairman of Sony Engineering
and Manufacturing of America. Dr. Weinig founded
Materials Research Corporation in 1957, and
served as Chairman of that multinational company
until it was purchased by Sony Corporation. He
serves as a director for Aseco, Insituform
Technologies Corporation and Intermagnetics
General Corporation.
D-2
123
EXECUTIVE OFFICERS OF KENTEK
NAME AGE ADDRESS OFFICE HELD PRINCIPAL OCCUPATIONS
Philip W. Shires 58 2945 Wilderness Place President, Chief See "Directors of Kentek."
Boulder, CO 80301 Executive Officer,
Acting Chief
Financial Officer and
Director
DIRECTOR OF KE ACQUISITION
NAME AGE ADDRESS OFFICE HELD PRINCIPAL OCCUPATIONS
Philip W. Shires 58 2945 Wilderness Place President, Secretary See "Directors of Kentek."
Boulder, CO 80301 and Director
EXECUTIVE OFFICER OF KE ACQUISITION
NAME AGE ADDRESS OFFICE HELD PRINCIPAL OCCUPATIONS
Philip W. Shires 58 2945 Wilderness Place President, Secretary See "Directors of Kentek."
Boulder, CO 80301 and Director
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124
ANNEX E
[ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JUNE 30, 1998]
125
ANNEX F
[QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999]
126
PROXY-KENTEK INFORMATION SYSTEMS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Kentek Information System, Inc. ("Kentek")
hereby appoints Philip W. Shires, Dr. Howard L. Morgan and James C.T. Linfield,
and each of them acting singly, with full power of substitution, to be its proxy
and to vote for the undersigned on all matters arising at the Special Meeting of
Stockholders of Kentek (or any adjournments or postponements thereof) to be held
on [________], 1999, at the offices of Cooley Godward llp, 2595 Canyon
Boulevard, Suite 250, Boulder, Colorado 80302 and to represent the undersigned
at such meeting.
The shares represented hereby will be voted with the instructions contained
herein. If no instruction is given, the shares will be voted FOR proposal 1 on
the reverse hereof. Proposal 1 is fully described in the notice of the special
meeting and the accompanying proxy statement, receipt of which is hereby
acknowledged. The undersigned ratifies and confirms all that the proxies or
their substitutes may lawfully do by virtue hereof.
(Continued, and to be marked, dated and signed, on the other side)
SEE REVERSE SIDE
127
Please mark your vote as
[X]
indicated in this example.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy will
be voted FOR proposal 1.
[ ] FOR [ ] AGAINST
1. To approve and adopt the proposed Merger Agreement, dated as of May 14,
1999, between Kentek and KE Acquisition Corp., pursuant to which KE
Acquisition Corp. will be merged with and into Kentek, and to approve the
transactions contemplated thereby.
The undersigned hereby authorizes the proxies
to vote in their discretion on any other
business which may properly be brought before
the meeting or any adjournments or postponements
thereof.
(Name of stockholder)
Dated:____________________________________, 1999
By:
---------------------------------------------
PLEASE SIGN, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.