1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
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.
- --------------------------------------------------------------------------------
(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).
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(4) Proposed maximum aggregate value of transaction:
$38,168,420
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(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]
SEPTEMBER 28, 1999
Dear Stockholder,
You are cordially invited to attend a special meeting of stockholders of
Kentek Information Systems, Inc. to be held on October 28, 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.
---------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
OCTOBER 28, 1999
---------------------------------
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 October 28, 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
September 28, 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.
---------------------------------
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
OCTOBER 28, 1999
---------------------------------
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 October 28, 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"). 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.
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.
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.
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 September 28, 1999.
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(continued from cover page)
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.
The Special Committee, the Board and Kentek believe 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
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.
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.
Janney Montgomery Scott orally updated its written opinion on August 13, 1999
and September 10, 1999. See pages [38-45] of this proxy statement for additional
information relating to Janney Montgomery Scott's fairness analysis.
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.
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 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.
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 September 28, 1999.
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TABLE OF CONTENTS
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PAGE
----
Questions and Answers about the Merger...................... 1
Summary..................................................... 4
Selected Consolidated Financial Data of Kentek.............. 12
Cautionary Statement Regarding Forward-Looking Statements... 13
The Special Meeting......................................... 14
Special Factors............................................. 16
Background of the Merger.................................... 32
Price of the Common Stock................................... 54
The Merger.................................................. 55
Certain Provisions of the Merger Agreement.................. 59
Security Ownership of Certain Beneficial Owners and
Management................................................ 65
Regulatory Considerations................................... 67
Buyer....................................................... 67
Appraisal Rights............................................ 67
Independent Auditors........................................ 68
Stockholder Proposals....................................... 68
Where You Can Find More Information......................... 69
Available Information....................................... 69
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
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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].
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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 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.
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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.
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.
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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.
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11
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:
- the development of the KW60 would require an additional two years of
engineering;
- the development of the KW60 would require at least an additional $20
million of capital;
- Kentek's principal customer/prospect for the KW60 would not wait past May
1999 for delivery of the KW60; and
- 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.
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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 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 October 28, 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.
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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 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. See pages [39-45].
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.
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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.
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].
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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].
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
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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:
- the Public Stockholders will no longer benefit from any profits or
increases in the value of Kentek;
- the Public Stockholders will no longer bear the risk of any decreases in
value of Kentek;
- Kentek will be privately held and there will be no public market for the
common stock;
- 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
- 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.
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:
- manage an orderly liquidation of Kentek's business operations and assets
over the next four to five years;
- reduce expenses ahead of declining revenues in order to maintain
operating profitability;
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- 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
- 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:
- repay Kentek's creditors; and
- 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.
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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.
(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.
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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:
- delays in receiving required regulatory and other approvals;
- the ability of KE Acquisition to obtain funding necessary to consummate
the Merger;
- the failure of stockholders to approve the Merger Agreement;
- general economic or market conditions;
- changes in business strategy;
- availability of financing on acceptable terms to fund future operations;
- competitive conditions in Kentek's markets;
- general economic or market conditions;
- changes in technology; and
- 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.
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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
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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.
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:
- attending and voting in person at the special meeting,
- giving notice of revocation of the proxy at the special meeting, or
- 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
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proxies from their customers, where appropriate, and will reimburse the banks
and brokers for reasonable expenses incurred in that regard.
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:
- 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.
- The initial acquisition cost of light-duty printers has significantly
decreased.
- Distributed network printing, using the new, lower cost, and faster
light-duty printers, has grown tremendously.
- 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.
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In comparison with Kentek's 40 ppm printer:
- 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
- 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:
- Kentek vacated three of the five buildings it occupied, two of which were
devoted exclusively to the development and planned manufacture of the
KW60;
- Kentek terminated 75 employees associated with the development of the
KW60, thereby reducing its headcount by approximately 58%;
- Kentek commenced the conversion of certain assets, including accounts
receivable and inventory, to cash; and
- 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
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"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
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
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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.
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.
- Financial Performance and Future Prospects. Kentek's financial condition,
business and prospects are not promising as a result of numerous factors,
including:
- 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].
- 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.
- 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].
- 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.
- Kentek currently has a limited institutional following and a small
public float.
- 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.
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- 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.
- 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.
- Kentek is the smallest company remaining in the traditional mid-range
printer manufacturing industry.
- 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.
- Lack of Potential Buyers. No party other than KE Acquisition and Mr.
Shires has shown interest in acquiring Kentek despite the following
factors:
- 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;
- 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;
- 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
- 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.
- 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:
- their consideration of the projected financial results of Kentek's
operations, as set forth on pages [46-48] of this proxy statement;
- their consideration of alternative strategic transactions, as discussed
on pages [20-22] of this proxy statement; and
- their determination that the proposed merger transaction is preferable
to the alternative strategic transactions and the status quo.
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- 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.
- Benefits of Being a Private Company. As a privately held company, Kentek:
- 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;
- 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.
- 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:
- 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.
- 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
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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.
- 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.
- 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 that was difficult to value. 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 pages [28] and [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.
- 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.
- 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.
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- 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 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.
- 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.
- 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].
- The average daily trading volume of Kentek's common stock is low. See
page [18].
- Kentek has limited institutional sponsorship and a small public float.
- Kentek's market capitalization is small. See page [18].
- Since its initial public offering in 1996, Kentek has received
diminishing research attention from market analysts.
- 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.
- Financial Performance and Future Prospects. The Special Committee
considered the following information with respect to the financial
performance and future prospects of Kentek.
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- 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.
- 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.
- 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:
- Kentek does not have favorable long-term business prospects;
- 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
- The proposed merger transaction is in the best interest of Kentek's
Public Stockholders.
- 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.
- In preparing its original and supplemental financial analyses, Janney
Montgomery Scott utilized management's assessment of Kentek's business
and prospects.
- 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.
- 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.
- 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.
- 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.
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- The Special Committee and the Board unanimously requested that Janney
Montgomery Scott prepare the supplemental financial analyses because
they believed that the supplemental financial analyses provided
additional relevant data regarding the fairness of the Merger to the
Public Stockholders.
- 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.
- 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 and comparable Company
analysis which were prepared under the assumption that Kentek's cash
would be retained and Kentek would continue to operate its business.
- 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.
- 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. Janney Montgomery Scott confirmed
its prior fairness opinion notwithstanding the fact that the modified
discounted cash analysis presented in its September 10, 1999 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.
- 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.
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- 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.
- 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.
- The written opinion of Janney Montgomery Scott will be orally updated as
of the closing date of Merger.
- $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:
- 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;
- 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;
- 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;
- Janney Montgomery Scott's second supplemental fairness analysis did not
change the Special Committee's determination regarding the fairness of
the Merger to the Public Stockholders because:
-- the modified discounted cash flow analysis contained in Janney
Montgomery Scott's second supplemental financial presentation to the
Special Committee and the Board provided only one of several
valuation data points considered by Janney Montgomery Scott in
relation to its determination regarding the fairness of the Merger to
the Public Stockholders from a financial point of view; and
-- most of the valuation data points considered by Janney Montgomery
Scott in relation to its review of the fairness of the Merger
indicated that values less than $8.29 per share were fair to the
Public Stockholders.
Janney Montgomery Scott's second supplemental financial 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
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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.
- 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;
- 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;
- 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;
- 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
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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- 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:
- The Special Committee's involvement in the negotiations provided
protection for the interests of Kentek's Public Stockholders; and
- $8.29 per share was the highest price that KE Acquisition would offer in
connection with the proposed transaction.
- 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.
- 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:
- there are no third parties interested in purchasing Kentek for more than
$8.29 per share; and
- 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.
- 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.
- 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.
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- 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.
In evaluating the Merger Agreement and the transactions contemplated by the
Merger Agreement, the Special Committee also considered the following additional
factors:
- 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.
- 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.
- Stockholder Support for Transaction Structure. The Special Committee
considered that three of Kentek's four largest stockholders indicated
that they preferred 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. In light of Kentek's largest stockholders
preferences regarding the structure of the merger consideration and in
light of the Special Committee's independent consideration of the
proposed structure of the merger consideration, the Special Committee
determined that the full amount of the merger consideration should be
paid upon the consummation of the merger transaction. The Special
Committee based its determination on its belief that the inclusion of a
contingent payment right presented a less desirable alternative because
the contingent payment right would be speculative, subject to
contingencies, illiquid and difficult for stockholders to value. Although
Kentek's stockholders influenced the Special Committee's determination
regarding the structure of the merger consideration, the stockholders did
not influence the Special Committee's decision to recommend the proposed
merger transaction to Kentek's stockholders because the Special Committee
believed that each of the proposed structures provided significant
liquidity and fair value to Kentek's stockholders.
- 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:
- 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
- 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
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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 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.
- 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;
- 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
- 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.
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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:
- KE Acquisition will merge with and into Kentek, with Kentek as the
surviving corporation;
- 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;
- 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;
- Kentek will pay the fees and expenses relating to the Merger;
- the Public Stockholders will cease to have any ownership interest in
Kentek or rights as holders of shares;
- the Public Stockholders will no longer benefit from any increases in the
value of Kentek or the payment of dividends on the shares;
- the Public Stockholders will no longer bear the risk of any decreases in
value of Kentek;
- 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%;
- 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;
- Kentek will be privately held, there will be no public market for the
common stock;
- there will not be another meeting of Public Stockholders;
- 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
- 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.
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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:
- 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.
- 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.
- 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.
- 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 40 ppm 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
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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.
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.
- 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.
- 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
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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.
- 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.
- 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.
- 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.
- Janney Montgomery Scott met with Kentek officers to prepare its financial
analysis of the proposed acquisition.
- Dr. Morgan updated the Special Committee, Janney Montgomery Scott and
Cooley Godward LLP regarding his discussions with potential acquirers.
- 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.
- 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.
- 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
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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.
- 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.
- 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
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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.
- 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.
- The Board determined that each of the proposed structures for the payment
of the merger consideration (i.e., the payment of a lump sum upon the
consummation of the merger transaction and the payment of a lower fixed
amount together with a contingent payment right) provided significant
liquidity and fair value to Kentek's stockholders. However, the Board
ultimately determined that the full amount of the merger consideration
should be paid in a lump sum upon the consummation of the transaction
because the contingent payment right contained in the alternative payment
structure was speculative, subject to contingencies, illiquid and
difficult for stockholders to value.
- 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.
- 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:
- 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);
- 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
- 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
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price did not offer a potential rate of return that would justify the
level of risk assumed in connection with the acquisition of Kentek.
- Mr. Shires furnished the Special Committee and its advisers with a
commitment letter from US Bank regarding the financing for the proposed
transaction.
- Cooley Godward LLP reported on the status of the negotiations on the form
of definitive merger agreement.
- The Board, Janney Montgomery Scott and Cooley Godward LLP discussed the
following in relation to the proposed merger agreement:
- 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.
- 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.
- 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.
- 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.
- 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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- 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.
- 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
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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 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.
See pages [39-45].
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
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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.
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 believed that Janney Montgomery Scott's original
fairness opinion should be supplemented by additional financial analyses because
the supplemental analyses would provide additional relevant data regarding the
fairness of the Merger to the Public Stockholders. In particular, the two
supplemental analyses used financial projections prepared as if Kentek were to
continue as a public company. See the Status Quo Projections on page [41] of the
proxy statement. This enabled the Special Committee, the Board and Janney
Montgomery Scott to compare the Merger Consideration offered to the Public
Stockholders to the estimated value of Kentek as an ongoing concern. This
differed from Janney Montgomery Scott's May 14, 1999 financial analysis which
was prepared using financial projections giving effect to the consummation of
the Merger. As opposed to the supplemental financial analyses, Janney Montgomery
Scott's May 14, 1999 financial analysis allowed the Special Committee, the Board
and Janney Montgomery Scott to compare the Merger Consideration to the estimated
post-Merger value of Kentek.
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
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 [45-46] of this proxy statement 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
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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:
- certain publicly available business and financial information relating to
Kentek that Janney Montgomery Scott deemed relevant;
- certain information, including financial forecasts, relating to the
business and prospects of Kentek;
- selected financial and stock market data for certain other publicly
traded companies that Janney Montgomery Scott deemed relevant;
- the financial terms of certain other business combinations that Janney
Montgomery Scott deemed relevant;
- the recent trading history of the common stock; and
- 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
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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.
- 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.
- 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.
- The ongoing cost of remaining a public company is not included in the
operating expenses set forth in the Merger Projections.
- 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.
- 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 Kentek'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.
- The Status Quo Projections assume that Kentek retains cash and earns
interest income based on a rate of 5%.
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- 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.
- The ongoing cost of remaining a public company is included in the
operating expenses set forth in the Status Quo Projections.
- 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.
- 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 Kentek 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.
ANALYSES PRESENTED 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.
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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 Kentek'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 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 Kentek's
historical financial results, was within or above the valuation range of the
Comparable
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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. This buyout analysis originally
appeared under the title "DCF" in Janney Montgomery Scott's May 14, 1999
financial presentation to the Special Committee and the Board and was
subsequently re-titled "Buyout Analysis" in Janney Montgomery Scott's September
10, 1999 financial presentation. Janney Montgomery Scott believes that the term
"Buyout Analysis" more accurately reflects this valuation methodology because it
allows the Special Committee, the Board and Janney Montgomery Scott to compare
the Merger Consideration to the estimated post-Merger value of Kentek. 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.
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 first supplemental financial analysis prepared by Janney Montgomery
Scott and presented to the Special Committee and the Board on August 13, 1999
was based on financial projections prepared as if Kentek were to continue as a
public company. See the Status Quo Projections on pages [47-48]. This enabled
the Special Committee, the Board and Janney Montgomery Scott to compare the
Merger Consideration offered to the Public Stockholders to the estimated value
of Kentek as an ongoing concern. The first supplemental financial analysis
introduced three new valuation data points which are summarized below.
Supplemental Analysis of Selected Publicly Traded Comparable Companies. In
connection with its August 13, 1999 supplemental analysis of Comparable
Companies, Janney Montgomery Scott utilized the methodology described on page
[42] of this proxy statement. Under the Status Quo Projections, the projected
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net income figures for Kentek in 1999 and 2000 were significantly higher than
the projected net income figures for Kentek under the Merger Projections. This
difference resulted primarily from the fact that the Status Quo Projections
include the interest income that Kentek would earn on the significant cash
balances that it would continue to hold if the Merger was not consummated. This
resulted in a higher 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 May 14, 1999 analysis of Comparable
Companies using the Merger Projections.
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 Kentek'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. Janney Montgomery Scott utilized the Status Quo Projections to
compare the Merger Consideration to the estimated value of Kentek as an ongoing
concern. In preparing the discounted cash flow analysis, Janney Montgomery Scott
assumed that Kentek retains all of its cash throughout the forecast period. This
enabled the Special Committee, the Board and Janney Montgomery Scott to compare
the Merger Consideration to the estimated value of Kentek as an ongoing concern,
while also assigning a value to the estimated cash accumulated by the end of the
forecast period. 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 second supplemental analysis prepared by Janney Montgomery Scott and
presented to the Special Committee and the Board on September 10, 1999 was based
on financial projections prepared as if Kentek were to continue as a public
company. See the Status Quo Projections on pages [47-48]. This enabled the
Special Committee, the Board and Janney Montgomery Scott to compare the Merger
Consideration to the estimated value of Kentek as an ongoing concern. This
analysis introduced one new valuation data point which is summarized below.
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,
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accounts receivable, inventory, accounts payable and tax rate. Janney Montgomery
Scott utilized the Status Quo Projections to compare the Merger Consideration to
the estimated value of Kentek as an ongoing concern. In preparing its modified
discounted cash flow analysis, Janney Montgomery Scott assumed that Kentek's
adjusted cash balance as of June 30, 1999 was paid out as a special dividend to
the Public Stockholders. This enabled the Special Committee, the Board and
Janney Montgomery Scott to compare the Merger Consideration to the value that
could be realized through an immediate special dividend plus the estimated value
of Kentek as an ongoing concern. 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. Notwithstanding the fact
that the modified discounted cash flow analysis did not support a determination
that the Merger was fair to the Public Stockholders, Janney Montgomery Scott
orally confirmed its prior fairness opinion to the Special Committee and the
Board. Janney Montgomery Scott based the update of its fairness opinion on the
following factors.
- Janney Montgomery Scott's modified discounted cash flow analysis provided
only one of several valuation data points considered by Janney Montgomery
Scott in relation to its determination regarding the fairness of the
Merger to the Public Stockholders from a financial point of view.
- Most of the valuation data points considered by Janney Montgomery Scott
in relation to its review of the fairness of the Merger indicated that
values less than $8.29 per share were fair to the Public Stockholders.
- The background and industry factors considered by Janney Montgomery Scott
in connection with the preparation of its May 14, 1999 fairness opinion
and the August 13, 1999 update of its fairness opinion. See page [39] of
this Proxy Statement.
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
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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.
(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.
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(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 Kentek 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. Kentek 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%
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(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:
- manage an orderly liquidation of Kentek's business operations and assets
over the next four to five years;
- reduce expenses ahead of declining revenues in order to maintain
operating profitability;
- 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
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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
- 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:
- repay Kentek's creditors; and
- 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).......................................... $8.063 $7.75
- ---------------
(1) Through September 24, 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 September 27, 1999, the closing price of the common stock as reported
was $[ ] per share.
On September 27, 1999, there were approximately [250] 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:
- $1,364,000 for estimated income taxes currently payable;
- $600,000 for operating and purchase commitments of Kentek's Japanese
subsidiary;
- $661,000 for costs associated with the Merger; and
- $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
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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
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
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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 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:
- Kentek may borrow up to $4 million in the form of a term loan;
- the outstanding principal amount of the term loan together with accrued
interest will be payable in 24 equal monthly installments;
- Kentek will pay a $10,000 commitment fee to US Bank with respect to the
term loan;
- Kentek may borrow up to $2 million against a revolving line of credit;
- the outstanding principal amount of the revolving line of credit will be
due no later than November 30, 2000;
- all accrued amounts of interest relating to amounts outstanding under the
revolving line of credit will be payable in full on a monthly basis;
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- Kentek will pay a commitment fee of 0.25% per quarter to US Bank on the
unused portion of the revolving line of credit;
- the term and revolving loans will be secured by a first priority
perfected security interest in Kentek's accounts, inventory and general
intangibles;
- 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;
- the term and revolving loans will bear interest at US Bank's floating
reference rate on a 360-day year basis;
- 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;
- 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:
- 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,
- the date on which a sale or merger of Kentek is consummated, and
- 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
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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.
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:
- 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 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.
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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 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:
- Kentek's stockholders must adopt the Merger Agreement;
- no existing law and no court action may prohibit or threaten to prohibit
the Merger;
- all consents from any governmental authority required to permit the
Merger must be obtained;
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- the Merger must not be prevented by any governmental authority, and no
governmental authority can be seeking to prevent the Merger;
- 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;
- 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
- 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:
- Kentek must have performed in all material respects its obligations under
the Merger Agreement;
- the representations and warranties of Kentek must be true in all material
respects as if made as of the date of the Merger;
- 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;
- KE Acquisition must receive all documents it reasonably requests relating
to Kentek and Kentek's authorization of the Merger Agreement;
- 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
- 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:
- KE Acquisition must have performed in all material respects its
obligations under the Merger Agreement;
- the representations and warranties of KE Acquisition must be true in all
material respects as if made as of the date of the Merger;
- 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
- 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:
- by mutual written consent of Kentek and KE Acquisition;
- by either Kentek or KE Acquisition:
- if the Merger has not been consummated by November 14, 1999;
- if any law or regulation makes consummation of the Merger illegal or
otherwise prohibited;
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- 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
- if Kentek's stockholders do not approve the Merger Agreement; or
- by KE Acquisition if:
- 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;
- 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;
- the Board withdraws or modifies in a manner adverse to KE Acquisition
its approval or recommendation of the Merger;
- the Board approves, recommends or endorses any Acquisition Proposal
other than the Merger; or
- by Kentek if:
- the Board determines in good faith that an Acquisition Proposal is
financially superior to the Merger and is reasonably capable of being
financed, and
- 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:
- Kentek enters into an agreement to consummate an Acquisition Proposal and
the transaction is subsequently consummated;
- 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;
- 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;
- the Merger Agreement is terminated by KE Acquisition or Kentek because
the Board approved an Acquisition Proposal other than the Merger; or
- 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 24, 1999 by:
- each member of the Board;
- each of the current executive officers of Kentek;
- all current executive officers and directors of Kentek as a group;
- all those known by Kentek to be beneficial owners of more than five
percent of its common stock; and
- 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 MM11 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%
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 September 24, 1999, are deemed
outstanding for
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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
September 24, 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:
- You must not vote in favor of the Merger.
- 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
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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.
- 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.
- 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:
- Kentek's Annual Report on Form 10-K for the fiscal year ended June 30,
1998;
- Kentek's Quarterly Report on Form 10-Q for the period ended March 31,
1999;
- Kentek's Quarterly Report on Form 10-Q for the period ended December 31,
1998;
- Kentek's Quarterly Report on Form 10-Q for the period ended September
30,1998; and
- 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.
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
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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.
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ANNEX A
MERGER AGREEMENT
BETWEEN
KENTEK INFORMATION SYSTEMS, INC.,
AND
KE ACQUISITION CORP.
DATED AS OF
MAY 14, 1999
78
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 THE MERGER.................................................. A-1
Section 1.1. The Merger.................................................. A-1
Section 1.2. Conversion of Shares........................................ A-2
Section 1.3. Surrender and Payment....................................... A-2
Section 1.4. Dissenting Shares........................................... A-3
Section 1.5. Stock Options............................................... A-4
Section 1.6. Transfer Taxes, etc......................................... A-4
ARTICLE 2 THE SURVIVING CORPORATION................................... A-4
Section 2.1. Certificate of Incorporation................................ A-4
Section 2.2. By-laws..................................................... A-4
Section 2.3. Directors and Officers...................................... A-4
Section 2.4. Director and Officer Liability.............................. A-4
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-5
Section 3.1. Corporate Existence and Power............................... A-5
Section 3.2. Corporate Authorization..................................... A-5
Section 3.3. Governmental Authorization.................................. A-5
Section 3.4. Non-Contravention........................................... A-5
Section 3.5. Capitalization.............................................. A-5
Section 3.6. Subsidiaries................................................ A-6
Section 3.7. SEC Filings................................................. A-6
Section 3.8. Financial Statements........................................ A-6
Section 3.9. Disclosure Documents........................................ A-6
Section 3.10. Absence of Certain Changes.................................. A-7
Section 3.11. Litigation; Compliance...................................... A-8
Section 3.12. Taxes....................................................... A-8
Section 3.13. ERISA....................................................... A-9
Section 3.14. Permits..................................................... A-9
Section 3.15. Required Stockholder Vote................................... A-9
Section 3.16. Finders' Fees............................................... A-10
Section 3.17. Environmental Matters....................................... A-10
Section 3.18. Restrictions on Business Activities......................... A-10
Section 3.19. Property.................................................... A-10
Section 3.20. Interested Party Transactions............................... A-10
Section 3.21. Insurance................................................... A-10
Section 3.22. Opinion of Financial Advisor................................ A-10
Section 3.23. Intellectual Property....................................... A-10
Section 3.24. Material Contracts.......................................... A-11
Section 3.25. Takeover Statutes........................................... A-11
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF MERGERCO.................. A-11
Section 4.1. Corporate Existence and Power............................... A-11
Section 4.2. Corporate Authorization..................................... A-11
Section 4.3. Governmental Authorization.................................. A-12
Section 4.4. Non-Contravention........................................... A-12
Section 4.5. Disclosure Documents........................................ A-12
Section 4.6. Finders' Fees............................................... A-12
Section 4.7. Litigation.................................................. A-12
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PAGE
----
ARTICLE 5 COVENANTS OF THE COMPANY.................................... A-13
Section 5.1. Affirmative Covenants of the Company........................ A-13
Section 5.2. Negative Covenants of the Company........................... A-13
Section 5.3. No Solicitation............................................. A-14
Section 5.4. Settlement of Certain Claims................................ A-15
Section 5.5. Antitakeover Statutes....................................... A-15
Section 5.6. Access to Information....................................... A-15
ARTICLE 6 COVENANTS OF EACH PARTY..................................... A-16
Section 6.1. Reasonable Efforts.......................................... A-16
Section 6.2. Public Announcements........................................ A-16
Section 6.3. Notification of Certain Matters............................. A-17
Section 6.4. Proxy Statement; Stockholder Meeting........................ A-17
ARTICLE 7 CONDITIONS.................................................. A-17
Section 7.1. Conditions to the Obligations of Each Party................. A-17
Section 7.2. Conditions to the Obligations of MergerCo................... A-18
Section 7.3. Conditions to the Obligations of the Company................ A-18
ARTICLE 8 TERMINATION................................................. A-19
Section 8.1. Termination................................................. A-19
Section 8.2. Effect of Termination....................................... A-20
Section 8.3. Certain Fees................................................ A-20
ARTICLE 9 MISCELLANEOUS............................................... A-21
Section 9.1. Notices..................................................... A-21
Section 9.2. Amendments; No Waivers...................................... A-21
Section 9.3. Rules of Construction....................................... A-22
Section 9.4. Successors and Assigns...................................... A-22
Section 9.5. Governing Law; etc.......................................... A-22
Section 9.6. Counterparts; Effectiveness................................. A-22
Section 9.7. Parties in Interest......................................... A-22
Section 9.8. Severability................................................ A-22
Section 9.9. Entire Agreement............................................ A-23
Section 9.10. Survival of Representations and Warranties.................. A-23
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EXHIBIT
EXHIBIT
NUMBER DESCRIPTION
------- -----------
Exhibit A -- Amended Certificate of Incorporation of the Company
81
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.
(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.
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(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
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
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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 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.
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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.
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.
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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
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
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
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(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 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
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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;
(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;
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(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 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 excludability from gross income of the holder for federal
or state income tax purposes could be affected by the transactions contemplated
by
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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.
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.
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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 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
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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.
(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.
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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.
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 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
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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;
(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
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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
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, 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
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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 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
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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 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
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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:
(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 the transactions contemplated by this Agreement shall
have been obtained and made by MergerCo, except where the failure to
receive such
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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 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;
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(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 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.
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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
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.
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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).
(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
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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 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: /s/ HOWARD L. MORGAN
----------------------------------
Name: Howard L. Morgan
Title: Chairman of the Board
KE ACQUISITION CORP.
By: /s/ PHILIP W. SHIRES
----------------------------------
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.
"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
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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.
"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
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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;
(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;
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(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.
"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.
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
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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,
/s/ JANNEY MONTGOMERY SCOTT INC.
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
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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 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,
C-3
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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.
(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.
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116
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 Howard L. Morgan has served as a
Systems, Inc. the Board of Director of Kentek since 1982.
2945 Wilderness Place Directors 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 President since April 1989 and as
2945 Wilderness Place and Director 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
117
NAME AGE ADDRESS OFFICE HELD PRINCIPAL OCCUPATIONS
- ---- --- ------- ----------- ---------------------
Justin J. Perreault...... 36 c/o Kentek Information Director Justin J. Perreault has served as
Systems, Inc. a director since February 1994.
2945 Wilderness Place Mr. Perreault presently serves as
Boulder, CO 80301 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 served
Systems, Inc. as a director since 1982. Since
2945 Wilderness Place 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.
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
D-2
118
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
D-3
119
ANNEX E
ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JUNE 30, 1998
E-1
120
ANNEX F
[QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999]
121
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER:
KENTEK INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3577 22-2406249
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
2945 WILDERNESS PLACE,
BOULDER, CO 80301
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 440-5500
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act: COMMON STOCK, $.01 PAR
VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
On September 20, 1998, the bid and ask prices of the Common Stock were
$6.38 and $6.50, respectively. The aggregate market value of the voting stock of
the Issuer held by non-affiliates based on the average bid and ask prices on
September 20, 1998 was $37,562,150.
ON SEPTEMBER 20, 1998, 7,181,197 SHARES OF THE REGISTRANT'S
COMMON STOCK WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Item 10, Item 11, Item 12 and Item 13 of Part
III of this Form 10-K are incorporated by reference from the Registrant's
definitive proxy statement to be filed in accordance with Rule 142-101, Schedule
14A, in connection with the Registrant's November 20, 1998 Annual Meeting of
Stockholders for fiscal year ended June 30, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
122
KENTEK INFORMATION SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE NO
-------
PART I.
Item 1. Business.................................................... E-3
Item 2. Properties.................................................. E-10
Item 3. Legal Proceedings........................................... E-10
Item 4. Submission of Matters to a Vote of Security Holders......... E-10
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... E-11
Item 6. Selected Consolidated Financial Data........................ E-11
Item 7. Management's Discussions and Analysis of Financial Condition
and Results of Operations................................. E-12
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... E-16
Item 8. Financial Statements and Supplementary Data.................
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. E-37
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... E-38
Item 11. Executive Compensation...................................... E-38
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ E-38
Item 13. Certain Relationships and Related Transactions.............. E-38
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... E-38
SIGNATURES............................................................. E-41
E-2
123
THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K WHICH ARE NOT
HISTORICAL FACTS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS FOUND IN ITEM
1 -- BUSINESS, ITEM-3 -- LEGAL PROCEEDINGS AND ITEM 7 -- MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE
FORWARD-LOOKING STATEMENTS OR DISCUSSIONS OF TRENDS WHICH BY THEIR NATURE
INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES THAT COULD SIGNIFICANTLY IMPACT
EXPECTED RESULTS. ACTUAL FUTURE RESULTS COULD DIFFER MATERIALLY FROM THOSE
DESCRIBED IN SUCH FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE RISKS AND UNCERTAINTIES DISCUSSED IN
THIS ANNUAL REPORT, INCLUDING IN THE PORTIONS REFERENCED ABOVE AND THOSE
DESCRIBED FROM TIME TO TIME IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION, SUCH AS SIGNIFICANT COMPETITION, INTERNATIONAL
OPERATIONS AND CURRENCY FLUCTUATIONS, DEPENDENCE ON NEW PRODUCTS, RAPID
TECHNOLOGICAL CHANGE, DEPENDENCE ON KEY CUSTOMERS AND AVAILABILITY OF ADEQUATE
SOURCES OF SUPPLY.
PART I.
ITEM 1. BUSINESS
Kentek Information Systems, Inc. ("Kentek" or the "Company") is a leading
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. The Company's printers are designed primarily for high-volume
printing requirements, including (i) production printing applications which
include printing invoices, forms, payroll, direct mail and check imaging, (ii)
print-on-demand applications characterized by the use of a printer rather than a
copy machine to generate multiple originals from digitally-stored data on an
as-needed basis and (iii) computer network applications for connecting multiple
users on a network in order to share a single heavy-duty printer. The Company
was incorporated under the laws of the state of Delaware in 1981. Its principal
offices are located at 2945 Wilderness Place, Boulder, CO 80301. On April 17,
1996, the Company completed its initial public offering ("IPO") of 2,200,000
shares of its common stock at $8 per share. The Company received $15,623,000 in
proceeds net of offering costs of $1,977,000.
The Company is the exclusive manufacturer of consumable supplies for its
printers, with the exception of toner, which is manufactured exclusively for
Kentek to its specifications. Kentek estimates that its printers have an average
useful life of approximately seven years. Over the useful life of these
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 a broad base of 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. The Company believes its product offerings compete on the basis of its
high printer reliability, the low total cost of ownership of its printers and
consumable supplies, and the attractive pricing Kentek offers its customers.
INDUSTRY OVERVIEW
The market for non-impact printers can be segmented based upon users' need
for speed (ppm), duty cycle (capacity of pages per month), functionality
(network connectivity, forms and fonts, and paper handling features) and cost of
ownership (average cost per page over the life of a printer). The average cost
per page
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takes into account the initial purchase price, the cost of consumable supplies
and maintenance costs. At present, non-impact printers generally can be divided
into the following market segments:
Low-Range. This market segment, defined by printing speeds of less than 30
ppm, is appropriate for personal/desktop applications and small workgroup
applications. Personal/desktop printing for small and home offices typically
requires a relatively inexpensive dot matrix, ink-jet or non-impact printer that
is connected to a single personal computer. Small workgroup printing
environments generally serve several personal computers or a small local area
network. The Company believes that the primary selection criteria for low-range
printers are print speed and initial acquisition price.
Mid-Range. This market segment has broadened over the last 24 months.
Historically, it included printers with speeds of 30 to 60 ppm, that provided
enhanced features such as continuous operation and higher duty cycle. The past
two years has seen the introduction of light duty, higher speed machines from
companies such as Hewlett Packard, Lexmark and Xerox. Targeted for the
requirements of the average networked office environment, these printers
typically have many features in common with copiers including stapling,
collating and duty cycles of less than 100,000 pages per month. These printers
are often referred to as digital copiers or "mopiers".
The heavy-duty portion of the mid-range segment includes printers with
speeds of 30-60 ppm with duty cycles of 200,000 to 750,000 pages per month.
These printers typically demonstrate high reliability, high duty cycle, low cost
per printed page and low maintenance. They can handle complex print jobs, run
continuously, and often have advanced computer and network connectivity.
Printers in this range are typically utilized in three distinct applications:
production systems, print-on-demand applications and networks. Production
systems serve specific, print intensive applications such as general accounting,
invoicing, payroll, direct mail, check imaging and generation of mortgage or
insurance forms and documents. These operations share a need for either long
periods of continuous operation or heavy use spread over the month and low cost
per page. The systems are typically connected to a mainframe, mini-computer, or
high-end Windows NT network. Print-on-demand applications use a printer as a
digital copier for users who need to generate multiple custom documents on
demand from a template stored on disk. Network applications use a printer to
serve the print needs of multiple users connected to a network.
For many business applications, when aggregate usage exceeds 50,000 pages
per month and/or, page coverage (the percentage of the page covered with toner)
is higher than 4-5% (a standard office memo), a heavy-duty, mid-range printer
can provide a more efficient and cost-effective solution than multiple low-
range printers or multiple light duty mid-range printers. Additionally, a
single, heavy duty mid-range printer can offer a lower cost of ownership than
multiple low-range printers while providing the convenience of higher speed,
high print quality and enhanced features such as duplex printing, advanced paper
handling and larger memory capacity for storing fonts and customized forms.
Heavy duty mid-range printers can run continuously and hold sufficient paper and
consumables to require only infrequent operator attention.
The consumable supply products for a mid-range printer are a significant
cost to the end-user over the life of the printer and are roughly 85% of the
total cost of operation over the printer's useful life. The consumable supply
products include the photoconductor, toner, developer, fuser and cleaner.
End-users typically purchase consumable supply products from the company that
sold them the printer. As one moves from the low-range printer market to the
mid-range and high-range markets, the revenues generated by sales of consumable
supplies over the life of a printer increasingly exceed the revenues generated
by the initial printer sale.
High-Range. This market segment, defined by printing speeds of 60 ppm or
greater, provides higher duty cycle than the other categories. High-range
printer applications include very high volume applications such as direct mail,
public utility invoices and credit card statements.
PRINCIPAL PRODUCTS
The Company's objective is to provide a complete printer hardware, software
and consumable supplies package that enables Kentek's customers to easily
install Kentek printers within their systems and to meet
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125
the end-user's ongoing supplies needs. Kentek's printers are designed to provide
high print quality, ease of use and reliable operation under the conditions of
continuous use found in production system, print-on-demand and network
environments. The Company's printers typically have a usable life of seven
years.
Kentek printers employ technologies that result in lower incidence of paper
jams and better durability than many other printers in the industry. For
example, the Company utilizes a simple printer engine design incorporating a
straight paper path that permits the use of a wide variety of printable media
with an incidence of paper jams of approximately 1-in-10,000 printed pages. This
characteristic, in conjunction with high volume paper handling accessories,
permits Kentek printers to operate continuously, unattended at full speed.
Kentek pioneered the use of light emitting diode ("LED") technology in printhead
design. This technology is used to generate the individual pixels on the
photoconductor. The LED array technology uses no moving parts and provides
simple, direct and precise beam alignment from the diode array to the
photoconductor. In contrast, a laser beam printer utilizes a motor to drive a
rotating polygon mirror at speeds of as high as 35,000 rpm and directs the
scanning beam across the width of the photoconductor. As the beam moves from one
side to the other, the spot size modulation and magnification must be managed.
The Company believes that its simple printer engine design and LED array
technology is more durable than laser beam technology, permitting higher duty
cycles at lower costs.
The following descriptions illustrate the principal features of Kentek's
K30/K30D, K31/K31D, K40D and K40DX printers. All printers in the Company's
current line have a rated duty cycle of at least 300,000 pages per month and
interface with IBM, HP, DEC and UNIX platforms through serial, parallel or
network interfaces.
K30 Printer/K30D Printer. The K30/K30D incorporates the Company's standard
design features, including a straight paper path and LED array printhead. The
K30 is capable of full-page graphics printing at 300 dots per inch ("dpi"). The
standard K30 configuration includes a Motorola 68020 microprocessor and 8
megabytes of RAM. An optional controller contains an Intel i860 microprocessor
and up to 16 megabytes of RAM. The K30 includes two internal floppy disk drives
and offers an optional 540-megabyte hard disk drive. The K30 includes standard
dual cassette input trays containing a total of 800 sheets and an output tray.
The K30D printer offers the duplex printing feature, printing on both sides of
the paper. The K30 and K30D, 30-ppm printers, were introduced in July 1992.
K31 Printer/K31D Printer. The K31/K31D offers the same standard features as
the K30/K30D and incorporates the RIGS controller described below. Standard
features of the K31 and K31D included a 25 MHz IDT 3081 RISC (MIPS R3000
compatible) microprocessor with an internal floating point co-processor and 12
megabytes to 64 megabytes of RAM, full graphics printing at 300 dpi, one floppy
disk drive, a 540 megabyte or larger internal hard disk and dual cassette input
trays containing a total of 800 sheets and an output tray. Available as an
option is a 50 MHz IDT 3081 RISC microprocessor to accelerate complex graphics.
The K31D printer also offers the duplex printing feature. The K31 and K31D,
30-ppm printers, were introduced in September 1995.
K40D Printer. The K40D also incorporates the features of straight paper
path, LED array printhead and dual component toner process. Standard features of
the K40D model also include a 25 MHz IDT 3081 RISC (MIPS R3000 compatible)
microprocessor with an internal floating point co-processor and 12 to 64
megabytes of RAM, full graphics printing at 300 dpi, 400,000 pages per month
duty cycle, one floppy disk drive a 540 megabyte or larger internal hard disk,
and dual cassette input trays containing a total of 800 sheets and an output
tray. Available as an option is a 50 MHz IDT 3081 RISC microprocessor to
accelerate complex graphics. The K40D, a 40-ppm duplex printer, was introduced
in November 1994.
K40DX Printer. An extension of the K40D, the K40DX includes the features of
straight paper path, LED array printhead, dual component toner process and the
SIGS controller described below. Standard features of the K40DX model also
include a 133 MHz Pentium processor with an internal floating point co-
processor and 16 to 128 megabytes of RAM, full graphics printing at 600 dpi,
multi-active ports, 400,000 per month duty cycle, one floppy disk drive, a 1.2
gigabyte or larger internal hard disk, and dual cassette input trays containing
a total of 800 sheets and an output tray. Available as an option is electronic
collation. The K40DX duplex printer was introduced in May of 1998.
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126
Available as options on all of Kentek's printers are 1,200 and 2,500
sheet-input feeders; 1,400 and 3,500 sheet output stackers; and printer
cabinets.
Kentek also designs and develops proprietary printer controller hardware
and software to manage the complex tasks associated with communicating with
multiple host computers over a network and coordinating complex print jobs at
high speed. Kentek's printers generally include a printer controller (image
generation system or IGS controller) and a machine controller (printer control
logic or PCL controller), each with its associated software. In 1994, Kentek
invented a proprietary RISC-based Image Generation System ("RIGS") architecture
that is used on the K31/K31D and K40D printers. The RIGS architecture uses
higher speed microprocessors, expanded RAM and enhanced ASICs designed to speed
complex text and graphics manipulation. Kentek controllers come standard with HP
PCL5e, HPGL printer control language emulations and TIFF image decompression.
Phoenix Page Postscript(TM) is available as a printer control language option.
SIGS Controller. In May 1998, Kentek introduced its SIGS controller system,
which is used on its K40DX printer. The SIGS controller uses an Intel Pentium(R)
processor and an industry standard motherboard with 32 to 128 MB of RAM,
permitting a quick and straightforward upgrade path as faster processors become
available. In addition, the board incorporates a PCI BUS permitting the addition
of industry standard connectivity add-on cards. The controller uses a Kentek
developed PCI BUS compatible multi-function card to interface with the machine
controller. Also, the SIGS controller is based on the Lynx operating system and
Xionic's intelligent peripheral systems software, Postscript Level II, TIFF and
PCL5e, all industry standards. The Company believes that the use of such
standards lowers its cost and reduces the time to market when compared to
products with a more proprietary design.
Consumables. The Company is the exclusive manufacturer of consumable
supplies for its printers, with the exception of toner, which is manufactured
exclusively for Kentek to its specifications. The Company's consumable products
are subject to re-manufacturing or recycling by others. Although the Company
believes it has not historically lost a substantial amount of revenue to
recycling or re-manufacturing competition, there is no assurance that the
Company will not be materially and adversely effected by such competition in the
future. Kentek has recently initiated work to develop its own line of
remanufactured consumables.
PRODUCT DEVELOPMENT
The Company believes that the development of new products and the
enhancement of existing products are essential to its future success. Rapidly
changing technology, evolving industry standards, and frequent new product
introductions characterize the market for the Company's products. The Company
intends to continue to devote a substantial portion of its resources to research
and development of high-speed non-impact printers, printer controllers, paper
handling devices and software and consumable supply products. The Company
attempts to maintain its technological competitiveness and position its products
attractively by working with its customers to plan products that meet end-users'
needs.
The Company's current product development efforts are focused on its KW
printer line, as well as on developing higher speed controller and software
enhancements for its existing printer line and introducing new features such as
highlight color and improved paper handling and additional consumable supply
products. The Company believes that its success depends in part on its ability
to enhance existing products and to develop new products that maintain
technological leadership, meet a wide range of changing customer needs and
achieve market acceptance.
K40DF Printer. The K40DF is anticipated to be introduced to customers in
the first half of 1999. The K40DF is a 40-ppm printer designed to have superior
print registration (image registration from top of page within 1 millimeter) and
the ability handle a wide variety of paper stocks and weights. In conjunction
with the K40DF, the Company plans to introduce a high capacity media feeder
capable of feeding a similar variety of paper stocks and weights. The Company
believes this product combination will help it penetrate the forms market.
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KW Product Line: The KW product line will offer a series of printers with
speeds ranging from 60 to 90 ppm or more with an initial introduction of a 60
ppm printer and will incorporate new features specifically addressing concerns
of the production systems, print-on-demand and network computing market
segments. This will enable the Company to bring high-range performance to the
mid-range market segment.
The KW product line is a new design that will incorporate many of the
fundamental characteristics of Kentek's existing products, including a straight
paper path, high-speed and flexible controllers and software, and high
reliability. Further, the standard KW printer will support wide format paper,
increased paper handling capacity, 600 dpi resolution, duplex printing, and a
full-speed highlight color option. The KW product line also will include the
SIGS controller system, a scaleable Pentium-based controller motherboard, a PCI
Bus that will increase data transfer rates and enable easy integration of
co-processors, and a multiple-connectivity feature that will ease all types of
network connectivity. The Company believes that the adoption of these
industry-standard processors and communication protocols will decrease the
development and engineering cycles associated with implementing future product
enhancements. In addition, the Company is designing consumable supplies for its
KW printer line that will extend the life span of each component and reduce per
page printing costs.
Development work on the KW60 has taken longer than the Company originally
anticipated. Certain aspects of the technology development have proven to be
very complex, requiring more time and resources than originally planned. The
Company anticipates that it will continue to spend substantial resources over
the next 12-15 months in its efforts to bring the development of the KW60 to
completion and introduce it into the marketplace. The KW printers will be
manufactured by Kentek in Boulder, Colorado. The Company believes that locating
manufacturing in the United States rather than in Japan will reduce
manufacturing costs and exposure to currency fluctuations.
In addition to printers and controllers, Kentek is developing pre- and
post-processing devices such as staplers, stackers and media feeders that are
targeted for specialized needs of Kentek's customers. By focusing on the needs
of specific vertical markets, the Company believes it can increase its
competitive position in the mid-range market.
The Company maintains product development centers in Boulder, Colorado for
printer engine, controller and software development, and in Nagano, Japan, for
printer engine and paper handling device design. As of June 30, 1998 the Boulder
facility employed 77 full time and contract engineering staff and Nagano
employed 32 full-time and contract engineering staff. The Company's R&D
expenditures for fiscal years ended June 30, 1998, 1997, 1996 were $9,671,000,
$8,601,000 and $6,175,000 respectively.
CUSTOMERS, MARKETING AND SUPPORT
The Company distributes its printers exclusively through sales to OEM
customers and system integrators. In fiscal 1998 net sales to each of Lexmark,
Tally and Oce Printing Systems constituted greater than 10% of the Company's
total net sales. Financial information regarding sales to principal customers is
presented in Note 8 of the notes to consolidated financial statements, which
appear elsewhere in this Form 10-K. The loss or decline of sales to Lexmark,
Tally or Oce Printing Systems would have a material adverse affect on the
Company's business, results of operations and financial condition.
Customers typically begin purchasing a printer only after they have
completed a lengthy evaluation process and integrated the printer into their
product lines. This evaluation process includes participation in the early
stages of the printer design process and qualification of production units as
they become available. In addition, before volume purchases of a commercially
available product can occur, customers must develop marketing programs,
including sales and service training. This long sales cycle makes it difficult
in the short term for the Company to recapture lost revenues through sales to
new customers or through sales of new products to existing customers.
Kentek supports its customers through an array of sales literature,
technical support and joint sales calling on value added resellers or end-users.
The Company identifies commercial niches where there is a strong need for the
high reliability, high duty cycle and continuous operation features of Kentek
printers, then
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identifies new or existing customers that can penetrate that marketplace. In
this manner, Kentek is able to leverage the resources of its sales and marketing
organization. The Company has identified six key market niches -- community
banking, direct mail, healthcare, insurance, forms producers and MICR (magnetic
ink character recognition) -- where it believes Kentek printers have a
competitive price performance advantage. Over the last fiscal quarter, the
Company has increased its sales force in an attempt to more fully exploit these
opportunities. In fiscal 1999, the Company plans to hire additional sales
representatives in a further effort to increase printer sales both in the above
niches as well as internationally.
Consumable supply products for Kentek's printers, excluding toner, are
manufactured exclusively by Kentek and distributed principally through its
customers. In addition, certain consumable supplies are distributed through
third party resellers. Customers sell these consumable supply products and spare
parts directly to their customers through resellers of their computer systems,
or to independent supplies resellers for sale to such customers. The Company
also sells its products directly to supplies distributors, where such sales do
not adversely affect the Company's OEM customers. The Company purchases toner
manufactured exclusively to Kentek's specifications by outside suppliers.
Kentek's consumable supply products used in IBM-branded products
manufactured by Kentek are sold through Lexmark pursuant to an exclusive
relationship with the Company under which Lexmark is required to purchase its
requirements of consumable supply products for IBM-branded printers only from
Kentek. Under the terms of an agreement between IBM and Lexmark, IBM may begin
selling consumable supply products for IBM-branded printers after March 2002. In
order to do so, IBM would be required to purchase such consumable supplies from
Lexmark for resale by IBM or to incur engineering, tooling and manufacturing
costs to enter the business of supply consumables for its customers.
As of June 30, 1998, the Company's sales and marketing organization
consists of nineteen persons, of whom seventeen are based in three locations in
the United States, and two are located at a single office in Europe. The Company
complements its field sales support with in-house technical sales personnel and
a product support department to provide technical training and product support
to its customers. Financial information about foreign and domestic sales,
operating income and assets is presented in Note 12 of the notes to consolidated
financial statements, which appear elsewhere in this Form 10-K.
The Company provides a two-year warranty against defects in the Company's
printer products. The Company warrants its consumable supply products against
manufacturing defects with an industry standard "out-of-box" warranty. Use of
consumable supply products not manufactured or approved by Kentek voids the
user's warranty for both the printer and the consumable supply products. The
Company believes that its commitment to quality has resulted in low warranty
expense. In the fiscal years ended June 30, 1998, 1997, and 1996, the Company
processed warranty claims totaling $247,751, $300,883 and $358,634 respectively.
MANUFACTURING AND SOURCES OF SUPPLY
The Company operates manufacturing facilities in Boulder, Colorado and in
Nagano, Japan. The Boulder, Colorado facility manufactures the photoconductor,
developer, fuser, and cleaner consumable supply products. The Company
manufactures high capacity sheet feeders and output stackers in its facility in
Nagano, Japan. The Company designs and engineers its printer engines and
supervises their assembly under contract with the Nagano Japan Radio
Corporation. The KW60 and future products in the KW printer line will be
manufactured in Boulder, Colorado. The Company purchases toner manufactured
exclusively to Kentek's specifications by outside suppliers.
The Company procures all of its component parts from outside suppliers
including proprietary components associated with the production of both the
printer products and the consumable supply products. Although the Company
generally purchases from multiple vendors, certain of the Company's parts and
components are obtained entirely or substantially from a single source. The
Company owns all of the unique tooling and mask work used for production of
these parts. The tools for producing component parts of the printer engines
reside with component suppliers in Japan, while tooling designed and produced
for manufacturing the components of the consumable supply products are located
mostly in the United States. The Company employs proprietary ASICs in its
controller products and relies on contract manufacturers to
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assemble its printed circuit boards. In Management's opinion, adequate sources
of supply exist to maintain current production levels. The Company currently
sources over 70% of its piece-part volume and approximately 50% of the cost of
the components for its consumable supplies in the United States. The Company
believes that this has reduced its manufacturing costs and also reduced its
exposure to currency fluctuation.
The Company has significant operations in Japan, where certain components
of its printers are sourced, designed and manufactured. Operating expenses and
production costs related to Kentek's Japanese operations are subject to
fluctuations in the dollar-yen exchange rate. The Company mitigates a portion of
its currency fluctuation risk through a contractual risk sharing provision
included in certain of its customer agreements that provides for adjustment of
sales price in accordance with fluctuations in exchange rates as well as through
the purchase of forwards in the foreign exchange market. See Item 7a.
In November 1996, the Company completed the sale of its 16,000 square foot
facility in Japan. The facility had most recently been used for the manufacture
of consumable supplies and was put up for sale when Kentek transferred its
manufacturing to the United States.
BACKLOG
Aggregate backlog as of June 30, 1998 was approximately $6.4 million,
compared to approximately $9.2 million as of June 30, 1997. In both fiscal 1998
and 1997, a major customer of the Company placed orders for delivery of product
for a time horizon greater than three months If these excess orders were
excluded from backlog calculations, total backlog would be approximately $5.1
million in fiscal 1998 and $6.8 million in fiscal 1997. The reduction in
normalized backlog is primarily due to the reduction in consumable supplies
orders from Lexmark resulting from the decline in the installed base of IBM
branded 12 and 24-ppm printers.
Backlog consists of customer orders, the majority of which are scheduled
for shipment within three months following the order date. The Company also
receives orders for immediate shipment, which may not be reflected in backlog at
any given time. Purchasers of standard products may generally cancel or
reschedule orders without significant penalty, and, accordingly, the Company's
backlog at any time is not necessarily indicative of future sales. While the
Company has operated historically with a 45 to 60 day backlog of orders, results
of operations for a given quarter are significantly dependent on orders booked
and shipped during that quarter, and increasingly becoming more dependent on
orders received during the quarter.
COMPETITION
The Company competes with many companies in the printer segment of its
business, including Hewlett-Packard, Hitachi/Dataproducts, QMS, Konica, Ricoh
Canon, Xerox and Fuji-Xerox, each of which sells non-impact printers and has
substantially greater name recognition, engineering, manufacturing and marketing
capabilities, and greater financial and personnel resources than the Company.
For certain applications, the Company's products compete with similar speed
impact printers manufactured by Genicom, Tally and Printronix. The Company
expects increased competition from established and emerging printer
manufacturers and resellers, including Fujitsu, Kodak and Minolta. As a result
of the complexity of the printer and consumable supplies manufacturing and
distribution businesses, many of the Company's principal customers are also
current or potential competitors, including IBM, Oce Printing Systems,
Printronix and Tally. In addition, the Company's consumable supplies products
are increasingly being remanufactured by third parties; however, the majority of
customers still purchase the Company's unique consumable supplies. The principal
elements of competition in the Company's markets include total cost of
ownership, product features, product quality and reliability, performance
characteristics and responsiveness to customers.
PROPRIETARY RIGHTS
The Company regards much of its hardware and software as proprietary and
relies on a combination of patent, copyright, trademark and trade secret laws,
employee and third-party non-disclosure agreements, and other methods to protect
its products and technology. As of June 30, 1998, the Company had 25 U.S.
patents, 12 German patents and 11 United Kingdom patents, all of which will
expire in the period between July 2003 and September 2008. There can be no
assurance, however, that the patents held by the
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Company will protect the Company's technology or provide meaningful competitive
advantage. In addition, there can be no assurance that measures taken by the
Company to protect its products and technology will be adequate or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technologies. In addition,
the Company has not applied for patents in Japan. Moreover, the laws of some
foreign countries may not protect the Company's proprietary rights to the same
extent as the laws of the United States. Other companies may assert patent,
copyright or other intellectual property rights against the Company. If such a
claim were made against the Company, there can be no assurance that the Company
would be able to obtain a license to use such technology if necessary or that
such license could be obtained on terms that would not have a material adverse
effect on the Company's business and financial statements. Should the Company's
products be found to infringe a third party's protected technology, the Company
could be required to pay damages to the infringed party or be enjoined from
manufacturing and selling such products. The Company could also incur
substantial costs to redesign its products or to defend any legal action taken
against it.
EMPLOYEES
As of June 30, 1998, the Company had a total of 257 employees including 197
full-time and 60 part-time or contract. There were 76 full-time and 25 part-time
employees in manufacturing, 19 full-time employees in sales and marketing, and
24 full-time and four part-time employees in general and administrative
functions. In addition, 78 full-time and 31 part-time employees were engaged in
research and development. Of the 257 employees, 188 are located in the U.S., 67
in Japan and two in Europe. The Company's employees are not represented by any
union, and the Company believes that its relationships with its employees are
good.
ITEM 2. PROPERTIES
Kentek leases its main facilities in Boulder, Colorado and Nagano, Japan.
In Boulder, the Company leases five buildings: an approximately 30,000 square
foot facility for sales, marketing, research and development, and general and
administrative purposes; an approximately 42,000 square foot facility for
consumables manufacturing and warehousing; an approximately 11,000 square foot
facility for consumable supplies recycling; an approximately 7,200 square foot
building for engineering design work; and an approximately 13,800 square foot
facility for future manufacturing of the KW60 printer. In Nagano, the Company
leases a total of approximately 23,500 square feet at four separate sites for
manufacturing, warehousing, and research and development purposes. The Company
also leases office space for sales offices in Allen Park, Michigan, Melbourne,
Florida and in Gorinchem, The Netherlands. Management believes that the Company
has adequate facilities for the conduct of current and future operations.
Furthermore, future lease renewals and/or new locations are expected to
approximate current rental payments.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved with certain claims and disputes incidental to its
business. The Company currently believes the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
On May 12, 1997, the Company settled the lawsuit brought by Printronix
Corporation. The settlement included the dismissal of all charges against the
Company. The completion of this lawsuit had no material impact on the Company's
financial statements for the year ended June 30, 1997. On December 31, 1996, the
Company settled the lawsuit with Rosetta Technologies Corporation. The
settlement included the dismissal of all charges against the Company and
significant payment of past due invoices by Rosetta. The completion of this
lawsuit had no material impact on the Company's financial statements for the
year ended June 30, 1997.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Registrant's fiscal year ended June 30, 1998.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER MATTERS
MARKET PRICE AND DIVIDEND INFORMATION
The Company'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. As of June 30, 1998, 7,137,235 shares
of Common Stock were outstanding and the Company had approximately 120 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 the
Company's initial public offering on April 17, 1996 as reported on the NASDAQ
National Market. A cash dividend of $.02 per share for the fourth quarter was
declared on August 26, 1998. It is anticipated that the Company will continue to
declare quarterly dividends; however, any payment of future dividends will be at
the discretion of the Board of Directors and will depend on, among other things,
the Company's earnings, financial condition and capital requirements.
FISCAL YEAR ENDED 6/30/96 HIGH LOW
- ------------------------- ------ -----
4th Quarter................................................. $15.50 $8.00
FISCAL YEAR ENDED 6/30/97
1st Quarter................................................. $10.75 $4.25
2nd Quarter................................................. 6.50 4.38
3rd Quarter................................................. 7.38 5.63
4th Quarter................................................. 8.25 6.19
FISCAL YEAR ENDED 6/30/98
1st Quarter................................................. $10.38 $6.75
2nd Quarter................................................. 9.38 6.25
3rd Quarter................................................. 8.88 6.75
4th Quarter................................................. 9.38 7.88
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SUMMARY OF OPERATIONS
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income Statement Data:
Net sales................................ $45,053 $56,460 $74,381 $70,192 $78,867
Operating income......................... 4,243 7,249 13,277 6,406 10,026
Net income............................... 4,977 4,761 13,102 5,035 9,647
Per Share Data:(a)
Net income per basic share............... $ 0.70 $ 0.70 $ 6.59 $ 6.02 $ 11.54
Net income per diluted share............. 0.70 0.69 2.45 1.02 2.01
Weighted average shares:
Basic.................................. 7,068 6,849 1,987 836 836
Diluted................................ 7,143 6,924 5,344(b) 4,934(c) 4,791(c)
Cash dividends declared.................. $ 0.08 $ 0.08 $ 0.00 $ 0.00 $ 0.00
Balance Sheet Data:
Working capital.......................... $53,128 $48,061 $42,860 $25,506 $17,870
Total assets................... 61,472 57,652 60,245 39,711 45,450
Long-term debt........................... -- -- 115 6,651 5,864
Total liabilities.............. 5,755 6,991 14,078 17,027 29,692
Total stockholders' equity..... 55,717 50,661 46,167 22,684 15,758
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- ---------------
(a) Net income per share data have been retroactively restated to give effect
for the adoption of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share".
(b) Weighted average shares have been calculated based on the average market
price per share from the date of the IPO to year-end.
(c) Weighted average shares have been calculated based on Management's estimate
of the market value per share prior to the IPO.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Registrant's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Form 10-K.
OVERVIEW
The Company sells mid-range, non-impact printers and related consumable
supplies and spare parts. Since 1985, more than 80,000 printers have been sold
and, as a result, the sale of consumable supplies and spare parts represents a
majority of the Company's net sales. From 1985 to 1991, the Company sold its
printers, consumable supplies and spare parts exclusively to IBM. Since 1991,
the Company has sought to reduce its dependence on IBM by expanding its
marketing efforts to other OEMs. In 1995, IBM formally announced its intention
to buy a competitor's line of mid-range printers. Accordingly, sales of
printers, consumable supplies and spare parts have continued to decrease as
older printers are taken out of service thus reducing the installed base of
customers who purchase consumable supplies and spare parts.
The Company continues to manufacture its current printer models in Japan
and is therefore subject to fluctuations in cost related to the dollar-yen
exchange rate. The Company is developing the KW60 printer to meet the evolving
needs of the mid-range printer market and is manufacturing this printer in the
United States.
OPERATING RESULTS
Comparison of Fiscal Year 1998 to Fiscal Year 1997
Net Sales. Net sales decreased 20.2% from $56,460,000 in fiscal 1997 to
$45,053,000 in fiscal 1998. Printer sales constituted 14.8% and 15.6%,
respectively, of net sales in fiscal 1997 and 1998. Consumable supplies and
spare parts constituted 85.2% and 84.4%, respectively, of net sales in fiscal
1997 and 1998. The Company derives the majority of its revenue from the ongoing
sales of consumable supplies and spare parts to support its installed base. As
the installed base continues to decline, due to end of life and replacement, the
corresponding decrease in sales could have a material adverse effect on the
Company's business, results of operations and financial condition.
Printer Sales. Printer sales revenue decreased by 15.9% from $8,370,000 in
fiscal 1997 to $7,041,000 in fiscal 1998. This decrease is due primarily to
increased competition in the printer market.
Consumable Supplies and Spare Parts Sales. Sales of consumable supplies and
spare parts decreased by 20.9% from $48,090,000 in fiscal 1997 to $38,012,000 in
fiscal 1998. This decrease was due to a declining IBM printer installed base,
which resulted in lower consumable supply sales as well as an increase in market
competition by third party remanufacturers of consumable supplies.
Gross Profit. Gross profit decreased by 12.6% from $26,017,000 in fiscal
1997 to $22,729,000 in fiscal 1998. The gross margin percentage increased from
46.1% to 50.4% in the same period. The shift of sales from printers to
consumable supplies and spare parts, which have a higher gross margin,
contributed to the improved gross margin percentage. The decrease in the
Company's reserves for obsolete inventories and the continued strengthening of
the dollar in relation to the Japanese yen also contributed to the improved
gross margin percentage. The Company continues to focus on inventory management
and reduction of slow moving items.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 13.3% from $10,167,000 in fiscal 1997 to
$8,815,000 in fiscal 1998. The decrease was a result of the sale of the
Company's property in Japan, a decrease in sales and marketing expense and lower
legal expenses due to settlement of all pending litigation.
Research and Development Expense. Research and development expenses
increased by 12.4% from $8,601,000 in fiscal 1997 to $9,671,000 in fiscal 1998.
Fiscal 1998 includes a significantly higher level of expenses associated with
the development of prototype KW60 printers and an increase in salary expense of
approximately $575,000. The development staff has increased by more than 50
personnel and the Company plans to spend more than 21% of fiscal 1999 sales on
research and development expenses.
Other Income (Expense). Other income (expense) increased from $1,377,000 in
fiscal 1997 to $3,314,000 in fiscal 1998. This increase reflects a one-time book
loss of $568,000 related to the sale of the Company's property in Japan recorded
in fiscal 1997. The remaining increase of approximately $1,000,000 reflects
better performance of investments and marketable securities as well as more cash
available to invest in 1998.
Income Tax Expense. Income tax expense for fiscal 1997 was $3,865,000
compared to $2,580,000 for fiscal 1998. Income tax expense for fiscal 1997
included additional tax expense related to the sale of the Company's property in
Japan. During fiscal 1998, the Company filed amended prior year tax returns,
utilizing available research and development credits, which resulted in a
substantial refund. The effective tax rate for fiscal 1997 was 44.8% compared to
34.1% in fiscal 1998. A reconciliation of the income tax rates to the federal
statutory rate is presented in Note 7 of the notes to consolidated financial
statements.
Comparison of Fiscal Year 1997 to Fiscal Year 1996
Net Sales. Net sales declined 24.1% from $74,381,000 in fiscal 1996 to
$56,460,000 in fiscal 1997. Printer sales constituted 24.8% and 14.8%,
respectively, of net sales in fiscal 1996 and fiscal 1997. Consumable supplies
and spare parts sales constituted 75.2% and 85.2%, respectively, of net sales in
fiscal 1996 and fiscal 1997.
Printers. Printer sales decreased 54.6% from $18,436,000 in fiscal 1996 to
$8,370,000 in fiscal 1997. The decrease in printer sales was due to two major
factors: 1) the introduction by Hewlett-Packard of a competing 40 page per
minute printer, and 2) the acquisition of Siemens Nixdorf (the Company's largest
printer customer) by Oce. Although Oce is currently purchasing printers from
Kentek, annual printer volumes sold to Oce declined by 63.5% from fiscal 1996 to
fiscal 1997.
Consumable Supplies and Spare Parts Sales. Consumable supplies and spare
parts sales declined 14.0% from $55,945,000 in fiscal 1996 to $48,090,000 in
fiscal 1997. This decrease was due in part to customers returning to normal
inventory levels after a large build-up in the last six months of fiscal 1996.
In addition, lower printer sales have an immediate impact of reducing related
consumable supplies and spare parts sales. Finally, older models of installed
printers are being removed from service, reducing the amount of consumable
supplies sales.
Gross Profit. Gross profit declined 13.2% from $29,973,000 in fiscal 1996
to $26,017,000 in fiscal 1997. The gross margin percentage increased from 40.3%
to 46.1% in the same period. The decrease in gross profit is directly
attributable to the reduction in net sales between the two years. The improved
gross margin percentage was primarily caused by reduced manufacturing and
material costs as the Company realizes the benefit of moving supplies
manufacturing from Japan to the United States. Furthermore, the shift of sales
from printers to consumable supplies and spare parts, which have a higher gross
margin, contributed to improved gross margin percentage. The continued
strengthening of the dollar in relation to the Japanese yen also assisted in
improving the gross margin percentage.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 3.4% from $10,521,000 in fiscal 1996 to
$10,167,000 in fiscal 1997. The decrease is a result of reduced profit sharing
bonuses and sales commissions.
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Research and Development Expenses. Research and development expenses
increased 39.3% from $6,175,000 in fiscal 1996 to $8,601,000 in fiscal 1997. The
increase is principally attributable to expenses associated with the continued
development of the KW60 product line.
Other Income (Expense). Other income (expense) increased from $188,000 of
income in fiscal 1996 to $1,377,000 of income in fiscal 1997. This increase was
realized as a result of greater cash available for investment, partially offset
by an $568,000 loss recorded in November 1996 related to the sale of the
Company's property in Japan.
Income Tax Expense. Income tax expense for fiscal 1996 was $363,000, or an
effective tax rate of 2.7% compared with income tax expense of $3,865,000, or an
effective tax rate of 44.8% in fiscal 1997. During fiscal 1996, the Company
recognized a deferred tax asset of $3,656,000 as a result of temporary timing
differences and the elimination of a valuation allowance that was recorded in
prior years. Recognition of a deferred tax asset reduced income tax expense for
fiscal 1996. During fiscal 1997, the Company incurred additional tax expense
related to the sale of the property in Japan. A reconciliation of the income tax
rates to the federal statutory rate is presented in Note 7 of the Notes to
Consolidated Financial Statements appearing elsewhere in this Form 10-K.
INTERNATIONAL SALES
Direct sales to customers not located in the United States represented
7.2%, 6.0% and 11.8% of the Company's total sales in fiscal years 1998, 1997 and
1996, respectively. Substantially all of the sales made by the Company in
international markets are priced in dollars to eliminate currency risk. The
Company's international sales are concentrated in Europe, and for the year ended
June 30, 1998, 29.5% and 41.4%, respectively, of such sales were to customers
located in Germany and The Netherlands. The Company believes that its recent
decline in international printer sales is primarily attributable to a change in
practice by certain OEM customers to purchase more products in the United States
for resale abroad.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations historically through internally
generated cash, investing, subordinated debt and equity financing, and bank
borrowings. In November 1996, the Company sold its manufacturing facility in
Japan. The proceeds from the sale were used to pay off the Company's short-term
debt and the remaining mortgage on the property.
Changes in cash and cash equivalents during fiscal 1998 resulted in a net
decrease of $1,869,000 as compared to a decrease of $7,776,000 during fiscal
1997. In fiscal 1997, principal payments of long-term debt and capital lease
obligations were $5,150,000 compared to no debt payments and $7,000,000 used for
investment in limited partnerships in fiscal 1998. The purchase of
available-for-sale securities was $2,451,000 less in fiscal 1998. The proceeds
from sales of available-for-sale securities were $6,886,000 more in fiscal 1998,
most of which were invested in the limited partnerships. See Note 2 to the notes
to consolidated financial statements for discussion on the Company's investment
strategies.
Changes in cash and cash equivalents during fiscal 1997 resulted in a net
decrease of $7,776,000 as compared to an increase of $19,603,000 during fiscal
1996. The primary reasons for this decrease were net purchases of marketable
securities of $8,000,000 and purchases of available-for-sale securities of
$13,237,000, as well as the payoff of the long-term debt associated with the
sale of the Company's property in Japan.
The Company anticipates significant expenses related to research and
development of the KW60 printer in fiscal 1999 that will result in lower cash
flows from operations.
The Company has a $5,000,000 unsecured line of credit with a bank that
expires in October 1998. The Company intends to renew this line of credit in
fiscal 1999. As of June 30, 1998, the Company had no outstanding borrowings
under this credit facility. The Company does not actively draw on this line of
credit, and does not anticipate drawing on this line over the next several
months.
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The Company's Board of Directors has authorized a stock buy-back program
with a maximum repurchase of 5% of the outstanding common shares. Management
intends to evaluate its investments and the Company's current stock price in
determining the timing and amount of the stock purchase.
As of June 30, 1998, the Company has recorded a net deferred tax asset
totaled $2,773,000, with $773,000 classified as non-current as a result of the
nature of the temporary differences. The non-current portion is attributable to
property and equipment. At June 30, 1997 the Company had recorded a $3,338,000
net deferred tax asset. The Company has determined that it is more likely than
not that it will have sufficient taxable income in future periods to realize the
corresponding tax benefit resulting from the deferred tax asset. This
determination is based on several recurring periods of profitable operations,
continuing efforts to enhance and develop existing and new customer
relationships, the Company's movement of a substantial portion of its supplies
manufacturing to the United States from Japan and the strengthening of the
dollar against the yen. Management evaluates the positive and negative evidence
related to the recoverability of its deferred tax assets on a quarterly basis
and makes appropriate adjustments.
Financial information about income taxes is presented in Note 7 of the
notes to consolidated financial statements which appear elsewhere in this Form
10-K.
The Company believes that cash flows provided by operating activities,
together with its bank line, will be sufficient to meet the Company's cash
requirements for at least twelve months from the date of this Form 10-K.
Since the first quarter of fiscal 1997, the Company has paid a quarterly
cash dividend to holders of its Common Stock equal to $.02 per share. The
Company presently intends to continue this dividend policy.
YEAR 2000 COMPLIANCE
The Company has completed and tested conversion from existing accounting
and finance software to programs that are year 2000 compliant. Maintenance or
modification costs associated with making all other internal computer systems
year 2000 compliant will be expensed as incurred. As the Company implements
solutions to the year 2000 issue, in some circumstances it may determine that
replacing existing systems, hardware, or equipment may be more efficient and
also provide additional functionality. Replacement of these systems would be
capitalized and would reduce the estimated expenses associated with the year
2000 issue. The Company is also continuing its assessment of the readiness of
external entities, such as vendors and suppliers, which interface with the
Company and plans to have this assessment complete by June 30, 1999. The Company
believes it has adequate alternative sources of supply for the majority of the
raw materials used in the printer and consumable supplies production should any
particular vendor fail to be year 2000 compliant. The Company continues to
qualify new vendors, both in the U.S. and Japan, for alternative sources of
supply. Alternative vendors will be qualified in fiscal year 1999.
The Company's contingency plans, if year 2000 modifications do not work or
are not ready by year 2000, relies significantly on manual procedures and record
keeping. All files will be adequately backed up as of December 31, 1999 and will
be available for downloading into any spreadsheet package to facilitate manual
record keeping. Adequate hard copy reports of balances and transactions as of
December 31, 1999 will also be available to provide a complete manual system of
accounting, inventory control, shipping and receiving if required. Subsequent to
year 2000, manual systems will continue to be in place to mitigate the risk of
lost information due to any unforeseen interruptions that may occur as a result
of year 2000 issues arising after January 1, 2000.
The Company's past and present printer products incorporate software. The
Company's printer products prior to the K40DX (K2, K2+, K3, K4, K30, K31 and
K40) do not contain any real-time clock functionality and are believed to be
year 2000 compliant. The K40DX printer has a real-time clock and is believed to
be year 2000 compliant. Based on management's assessment, no material product
distribution or warranty claims are expected. Management believes that the
Company will not incur any significant product expenses related to year 2000
compliance.
E-15
136
Management believes that its efforts will result in year 2000 compliance.
Kentek has incurred no incremental material costs associated with year 2000
compliance, as the majority of the costs have occurred as a result of normal
upgrade procedures. The Company does not expect the future costs associated with
these procedures to be material. However, the impact on business operations of
failure by the Company to achieve compliance or failure by external entities
which the Company cannot control, such as vendors, to achieve compliance, could
be material to the Company's financial condition and results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" ("EPS"). SFAS No. 128, which supersedes APB Opinion No. 15, establishes
new standards for computing and presenting EPS. The Company adopted this
Statement in fiscal year 1998. All prior period EPS data have been restated. The
adoption of this Statement had no material effect on the Company's reported EPS
amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. The Company is required
to adopt this Statement in fiscal year 1999. Reclassification of financial
statements for earlier periods provided for comparative purposes are required.
The Company has determined that the adoption of this Statement will not have a
material impact on its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which will be effective for the Company
beginning July 1, 1998. SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company has determined
that the adoption of this statement will not have a material impact on its
financial statement disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The accounting
provisions for qualifying hedges allow gains and losses recognized in the income
statement related to a hedged item to be offset by a related derivative's gains
and losses, and requires the Company to formally document, designate, and assess
the effectiveness of transactions that qualify for hedge accounting. The Company
is not required to adopt this Statement until July 1999. The Company has not
determined the impact that adopting this Statement will have on its financial
statements. However, when adopted this Statement could increase volatility in
reported earnings and other comprehensive income of the Company.
In January 1998, the American Institute of Certified Public Accountants
("AICAP") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on the accounting for computer software costs. In April 1998,
the AICPA issued SOP No. 98-5, "Reporting on the Costs of Start-up Activities."
This SOP provides guidance on the accounting for the cost of start-up
activities. The Company is not required to adopt these statements until July
2000 and does not expect the adoption of these standards to result in material
changes to previously reported amounts or disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's investment portfolio of cash equivalents and
marketable securities. The stated objectives of the Company's investment
guidelines are: safety of principal; liquidity; maximization of yield; and
diversification of risk. The
E-16
137
Company places it's cash equivalent and marketable securities investments with
U.S. Treasury and federal agency obligations, high credit quality commercial
paper, obligations of corporations, banks and agencies including notes and
bonds, taxable money market preferreds, certificates and/or time deposits of
high quality commercial banks and tax exempt state and municipal obligations.
The investment portfolio includes only those securities with active secondary
resale markets to ensure portfolio liquidity.
The Company has investments in equity securities in the amount of
$11,982,000 as well as investments in two limited partnerships in the amount of
$7,000,000 that are subject to market and interest rate risk.
The table below presents principal amounts and related weighted average
interest rates by date of maturity for the Company's investment portfolio of
debt securities. The debt security investment portfolio has a weighted average
maturity of 904 days or less. Management has historically and intends to
continue selling such investments within one year of the purchase date.
MATURITY
----------------------------------------------
2015 AND FAIR VALUE AT
1999 THEREAFTER TOTAL JUNE 30, 1998
------- ---------- ------- -------------
(AMOUNTS IN THOUSANDS)
Cash equivalents................................... $ 3,941 $ 3,941 $ 3,941
Average interest rate............................ 5.62% 4.81%
Commercial paper................................... 15,756 $1,050 16,806 16,806
Average interest rate............................ 5.77% 5.62% 5.76%
Tax-exempt investments............................. 1,100 1,300 2,400 2,400
Average interest rate............................ 3.74% 1.28% 2.41%
------- ------ ------- -------
Total investment portfolio............... $20,797 $2,350 $23,147 $23,147
======= ====== ======= =======
Average interest rate............................ 5.64% 3.22% 5.39%
The above table is based upon contractual maturity dates in the Company's
investment portfolio of debt securities. These investment securities are subject
to interest rate risk and will fall in value if market interest rates increase.
If market interest rates were to increase immediately and uniformly by 10% from
levels as of June 30, 1998, the fair value of the portfolio would decline by
approximately $3,500,000. See Note 2 to the notes to consolidated financial
statements for additional discussion regarding the Company's investment
securities.
FOREIGN CURRENCY RISK
The Company has operations in Japan, and as a result, operating expenses
are dependent on dollar-yen exchange rates. The Company has purchased Japanese
Yen forward contracts to minimize the effect of fluctuating foreign currencies
on its reported income, generally over the ensuing three months. The forward
contracts do not qualify as hedges for financial reporting purposes and are
reported in the financial statements net of changes in forward rates that are
reflected in income. Although the volatility of income over the period covered
by such contracts is reduced, increased volatility may be reported during
interim periods. The counterparties to the Company's forward contracts consist
of two financial institutions. The credit ratings and concentration of risk of
these financial institutions are monitored on a continuing basis and present no
significant credit risk to the Company. As of June 30, 1997, the Company did not
have any foreign currency forward contracts outstanding. At June 30, 1998,
outstanding Japanese yen contractual amounts were as follows:
NOTIONAL GAINS
AMOUNT (THOUSANDS) LOSSES
-------- ----------- ------
Japanese yen forward contracts.................. $2,748 $67 $--
Based on the Company's overall currency rate exposure at June 30, 1998, a
10% change in currency rates would not have a material effect on the financial
position, results of operations or cash flows of the Company. See Note 13 of the
notes to consolidated financial statements.
E-17
138
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Reports............................... E-19
Report of Independent Certified Public Accountants.......... E-20
Consolidated Balance Sheets as of June 30, 1998 and 1997.... E-21
Consolidated Statements of Income for the Years Ended June
30, 1998, 1997 and 1996................................... E-22
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1998, 1997 and 1996.................. E-23
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996.............................. E-24
Notes to Consolidated Financial Statements.................. E-25
Financial Statement Schedule II -- Consolidated Valuation
and Qualifying Accounts................................... E-37
E-18
139
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Kentek Information Systems, Inc.
Boulder, Colorado
We have audited the accompanying consolidated balance sheets of Kentek
Information Systems, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. The consolidated statements of operations,
stockholders' equity, and cash flows and related financial statement schedule of
the Company for the year ended June 30, 1996 were audited by other auditors
whose report, dated August 9, 1996, expressed an unqualified opinion on those
statements and financial statement schedule.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Kentek Information Systems,
Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the financial
statement schedules for each of the two years in the period ended June 30, 1998,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Denver, Colorado
August 15, 1998
E-19
140
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Kentek Information Systems, Inc.
Boulder, Colorado
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of Kentek Information Systems, Inc. and
subsidiaries for the year ended June 30, 1996. Our audit also included the
consolidated financial statement schedule for the year ended June 30, 1996
listed in the Index at Item 8. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Kentek Information Systems, Inc. and subsidiaries for the year ended
June 30, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statement schedule for the year ended June
30, 1996, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
BDO SEIDMAN, LLP
Los Angeles, California
August 9, 1996
E-20
141
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND 1997
(THOUSANDS)
ASSETS
JUNE 30
-----------------
1998 1997
------- -------
Current assets:
Cash and cash equivalents................................. $16,347 $18,216
Marketable securities (Note 2)............................ 19,308 16,374
Investment in limited partnership (Note 2)................ 7,000 --
Accounts receivable, less allowance for doubtful accounts
of $490 and $653....................................... 5,297 6,213
Inventories (Note 3)...................................... 7,725 10,074
Deferred income taxes (Note 7)............................ 2,000 2,628
Other..................................................... 701 1,045
------- -------
Total current assets...................................... 58,378 54,550
------- -------
Property and equipment:
Land and buildings........................................ 96 117
Tooling................................................... 9,749 11,189
Furniture, fixtures and equipment......................... 5,927 5,975
Leasehold improvements.................................... 541 502
------- -------
Total property and equipment.............................. 16,313 17,783
Less accumulated depreciation and amortization............ 14,519 16,062
------- -------
Property and equipment, net....................... 1,794 1,721
------- -------
Deposits and other.......................................... 1,300 1,381
------- -------
Total assets...................................... $61,472 $57,652
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,200 $ 3,324
Accrued expenses:
Income taxes........................................... 180 --
Bonus.................................................. 539 618
Other.................................................. 2,331 2,547
------- -------
Total current liabilities......................... 5,250 6,489
Other....................................................... 505 502
------- -------
Total liabilities................................. 5,755 6,991
Commitments and contingencies (Note 9)
Stockholders' equity (Note 5):
Common stock, $.01 par -- shares authorized, 12,000;
shares outstanding, 7,137 and 6,929.................... 71 69
Additional paid-in capital................................ 44,821 43,945
Foreign currency translation adjustment................... (988) (753)
Retained earnings......................................... 11,813 7,400
------- -------
Total stockholders' equity................................ 55,717 50,661
------- -------
Total liabilities and stockholders' equity........ $61,472 $57,652
======= =======
See accompanying notes to consolidated financial statements.
E-21
142
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30
-------------------------
1998 1997 1996
------ ------ -------
Net sales (Note 8):
Printers.................................................. $7,041 $8,370 $18,436
Consumable supplies and spare parts....................... 38,012 48,090 55,945
------ ------ -------
Total............................................. 45,053 56,460 74,381
Cost of sales............................................... 22,324 30,443 44,408
------ ------ -------
Gross profit................................................ 22,729 26,017 29,973
------ ------ -------
Operating expenses:
Selling, general and administrative....................... 8,815 10,167 10,521
Research and development.................................. 9,671 8,601 6,175
------ ------ -------
Total operating expenses.......................... 18,486 18,768 16,696
------ ------ -------
Operating income............................................ 4,243 7,249 13,277
Other income, net (Note 10)................................. 3,314 1,377 188
------ ------ -------
Income before income taxes.................................. 7,557 8,626 13,465
Income tax expense (Note 7)................................. 2,580 3,865 363
------ ------ -------
Net income.................................................. $4,977 $4,761 $13,102
====== ====== =======
Net income applicable to common stockholders (Note 5)....... $4,977 $4,761 $11,750
====== ====== =======
Net income per share:
Basic.................................................. $ 0.70 $ 0.70 $ 6.59
====== ====== =======
Diluted................................................ $ 0.70 $ 0.69 $ 2.45
====== ====== =======
Weighted average shares:
Basic.................................................. 7,068 6,849 1,987
====== ====== =======
Diluted................................................ 7,143 6,924 5,344
====== ====== =======
See accompanying notes to consolidated financial statements.
E-22
143
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS)
SENIOR CONVERTIBLE CONVERTIBLE FOREIGN RETAINED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL CURRENCY EARNINGS
------------------ --------------- --------------- PAID-IN TRANSLATION (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT)
-------- ------- ------ ------ ------ ------ ---------- ----------- ------------
Balance June 30, 1995.......... 11,005 $ 550 1,785 $ 18 836 $ 8 $31,484 $ 541 $(9,917)
Conversion of preferred stock
to common (Note 5).......... (11,005) (550) (1,785) (18) 3,789 38 530 -- --
Sale of common stock, net of
offering costs (Note 5)..... -- -- -- -- 2,200 22 15,601 -- --
Payment of excess liquidation
preference on preferred
stock conversion (Note 5)... -- -- -- -- -- -- (4,152) -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- -- -- (1,090) --
Net income.................... -- -- -- -- -- -- -- -- 13,102
------- ----- ------ ---- ----- --- ------- ------- -------
Balance June 30, 1996.......... -- -- -- -- 6,825 68 43,463 (549) 3,185
Exercise of stock options..... -- -- -- -- 104 1 482 --
Dividends paid................ -- -- -- -- -- -- -- -- (546)
Foreign currency translation
adjustment.................. -- -- -- -- -- -- -- (204) --
Net income.................... -- -- -- -- -- -- -- -- 4,761
------- ----- ------ ---- ----- --- ------- ------- -------
Balance June 30, 1997.......... -- -- -- -- 6,929 69 43,945 (753) 7,400
Exercise of stock options..... -- -- -- -- 208 2 876 -- --
Dividends paid................ -- -- -- -- -- -- -- -- (564)
Foreign currency translation
adjustment.................. -- -- -- -- -- -- -- (235) --
Net income.................... -- -- -- -- -- -- -- -- 4,977
------- ----- ------ ---- ----- --- ------- ------- -------
Balance June 30, 1998.......... -- $ -- -- $ -- 7,137 $71 $44,821 $ (988) $11,813
======= ===== ====== ==== ===== === ======= ======= =======
See accompanying notes to consolidated financial statements.
E-23
144
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS)
YEAR ENDED JUNE 30
-----------------------------
1998 1997 1996
-------- -------- -------
OPERATING ACTIVITIES:
Net income.............................................. $ 4,977 $ 4,761 $13,102
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization...................... 1,278 1,281 1,648
Loss on disposal of property and equipment......... 38 777 191
Deferred income tax expense (benefit).............. 565 318 (3,656)
Unrealized gains on forward exchange contracts and
trading securities............................... (500) (159) --
Realized and unrealized gains on available-for-sale
securities....................................... (1,558) (1,345) --
Changes in operating assets and liabilities:
Trading securities, net............................ (3,254) (8,000) --
Accounts receivable................................ 916 885 724
Inventories........................................ 2,008 3,794 (2,122)
Other current assets............................... 28 (429) 129
Other assets....................................... (8) 758 (181)
Accounts payable and accrued expenses.............. (351) (1,937) (118)
-------- -------- -------
Net cash provided by operating activities................... 4,139 704 9,717
-------- -------- -------
INVESTING ACTIVITIES:
Purchases of available-for-sale securities.............. (10,786) (13,237) --
Investments in limited partnerships..................... (7,000) -- --
Purchase of equipment................................... (1,226) (1,062) (832)
Proceeds from sale of available-for-sale securities..... 13,233 6,367 --
Proceeds from sale of equipment......................... 3 4,928 12
-------- -------- -------
Net cash used in investing activities....................... (5,776) (3,004) (820)
-------- -------- -------
FINANCING ACTIVITIES:
Principal payments of long-term debt and capital lease
obligations........................................... -- (5,150) (85)
Proceeds from issuance of common stock.................. 878 483 17,600
Dividends paid.......................................... (564) (546) --
Payment of offering costs............................... -- -- (1,977)
Payment of excess liquidation preference on preferred
stock................................................. -- -- (4,152)
-------- -------- -------
Net cash provided by (used in) financing activities......... 314 (5,213) 11,386
-------- -------- -------
Effect of exchange rate changes on cash..................... (546) (263) (680)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ (1,869) (7,776) 19,603
Cash and cash equivalents, beginning of year................ 18,216 25,992 6,389
-------- -------- -------
Cash and cash equivalents, end of year...................... $ 16,347 $ 18,216 $25,992
======== ======== =======
Supplemental cash flow information:
Cash paid during the year for:
Interest........................................... $ 7 $ 25 $ 233
Income taxes....................................... 2,392 5,304 3,251
Non-cash activities: Preferred stock of $568,000 was converted into common stock
during the year ended June 30, 1996.
See accompanying notes to consolidated financial statements.
E-24
145
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Kentek Information Systems, Inc. (the "Company") is a supplier of
mid-range, non-impact laser printers and related consumable supplies and spare
parts. The Company was incorporated under the laws of the State of Delaware in
1981. The Company's operations in the United States ("U.S.") consist of
manufacturing facilities in Boulder, Colorado, which are used to manufacture the
consumable supply products. The Company's principal subsidiary, Nippon Kentek
Kaisha Ltd., a Delaware corporation ("Nippon Kentek"), is engaged in research
and development and manufacturing-related activities in Japan. The Company
designs and engineers its printer engines and supervises their assembly under
contract with a Japanese company. The Company distributes its printers,
consumable supplies and spare parts exclusively through sales to OEM customers
and systems integrators.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries, Kentek
Europe BV, Kentek GmbH and Nippon Kentek. All significant intercompany balances
and transactions have been eliminated in consolidation.
Foreign Currency Translation -- The functional currency for the Company's
foreign operations is the applicable local currency. The translation of the
applicable foreign currency into U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using a weighted average exchange rate during
the period. Resulting translation adjustments are accumulated in the foreign
currency translation adjustment component of stockholders' equity. Currency
transaction gains and losses are recognized in net income currently.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In addition, significant estimates are included in the accompanying
financial statements related to reserves for inventory obsolescence,
uncollectible accounts receivable and warranty reserves which are based upon
historical and developing trends, aging of items, and other information deemed
pertinent to estimate collectibility and realizability. It is possible that
these reserves may change within a year, and the effect of the change could be
material to the consolidated financial statements.
Cash Equivalents -- The Company considers cash, money market accounts and
all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Marketable Securities -- Management has determined that the Company's
marketable securities portfolio consists of both available-for-sale and trading
securities.
Marketable securities classified as available-for-sale are available to
support current operations and to take advantage of other investment
opportunities. These securities are stated at fair value based upon market
quotations. Unrealized gains and losses on available-for-sale securities were
not significant. Realized gains and losses are included in other income, net.
Marketable securities classified as trading securities are carried at fair
value based upon market quotations. Net realized and unrealized gains and losses
on trading securities are included in other income, net.
Concentrations of Credit Risk -- The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash and cash
equivalent balances in excess of the insurance provided by federal insurance
authorities, marketable securities and accounts receivable.
E-25
146
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's cash equivalents are placed with a major financial
institution and are primarily invested in investment grade commercial paper with
an average original maturity of three months or less and money market accounts.
The Company's marketable securities consist of commercial paper and various
equity securities. The exposure to loss resulting from the concentrations of
credit risk with respect to accounts receivable is limited due to generally
short payment terms and the customers' dispersion across geographic areas. The
Company performs ongoing credit evaluation of its customer's financial condition
and generally requires no collateral from its customers.
Inventories -- Inventories are valued at the lower of cost (determined
primarily by the weighted moving average method) or market.
Property, Equipment and Depreciation -- Property and equipment are stated
at cost. Depreciation is computed by the straight-line method over the following
estimated useful lives:
YEARS
-----
Tooling.............................................. 3
Furniture, fixtures and equipment.................... 3-7
Leasehold improvements............................... Term of Lease
Impairment of Long-lived Assets -- The carrying value of long-lived assets
and certain identified intangible assets held and used by the Company are
evaluated for impairment whenever there is an event or change in circumstances
that indicates that such assets have been impaired or that the carrying value of
such assets might not be recoverable.
Income Taxes -- The Company accounts for income taxes in accordance with
the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement basis and the income
tax basis of assets and liabilities that will result in taxable or deductible
amounts in the future. Such deferred income tax computations are based on
enacted tax laws and rates applicable to the years in which the differences are
expected to affect taxable income.
Stock Option Plans -- The Company accounts for stock-based compensation to
employees and directors using the intrinsic value method in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation".
Net Income Per Share -- During 1998, the Company adopted SFAS No. 128,
"Earnings Per Share". SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and supercedes APB Opinion No. 15 and its
related interpretations. All prior periods presented have been restated in
accordance with SFAS No. 128. SFAS No. 128 replaces the presentation of primary
EPS with a presentation of basic EPS, which excludes dilution, and requires dual
presentation of basic and diluted EPS for all entities with complex capital
structures. Diluted EPS is computed similarly to fully diluted EPS pursuant to
APB Opinion No. 15. For the year ended June 30, 1996, net income has been
reduced by the Excess Liquidation Preference ("ELP") (Note 5) attributable to
the Senior Convertible Preferred Stock ("SCPS") totaling $1,352,000, in
computing net income per share. Stock options were omitted from the
E-26
147
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
denominator because they were antidilutive and were not material. A
reconciliation of the numerator and denominator used in the calculation of basic
and diluted earnings per share is presented below.
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
FOR THE YEAR ENDED JUNE 30, 1998
Net income............................................... $ 4,977
=======
Basic net income per share...............................
Income available to Common stockholders.................. $ 4,977 7,068 $0.70
======= =====
Effect of stock options.................................. 75
-----
Diluted net income per share............................. $ 4,977 7,143 $0.70
======= ===== =====
FOR THE YEAR ENDED JUNE 30, 1997
Net income............................................... $ 4,761
=======
Basic net income per share...............................
Income available to Common stockholders.................. $ 4,761 6,849 $0.70
======= =====
Effect of stock options.................................. 75
-----
Diluted net income per share............................. $ 4,761 6,924 $0.69
======= ===== =====
FOR THE YEAR ENDED JUNE 30, 1996
Net income............................................... $13,102
=======
Basic net income per share...............................
Income available to common stockholders.................. $11,750 1,987 $6.59
======= =====
Effect of convertible preferred stock.................... 3,357
-----
Diluted net income per share............................. $11,750 5,344 $2.45
======= ===== =====
Revenue Recognition and Product Warranty -- Sales of printers, consumable
supplies and spare parts are recorded upon shipment to customers. The Company
warrants its printers against defects in design, materials and workmanship for
two years. A provision for estimated future costs relating to warranty expense
is recorded when products are shipped.
Research and development -- Costs incurred in connection with research and
development activities are expensed as incurred.
New Accounting Pronouncements -- In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. The Company is required to adopt this statement in fiscal year 1999.
Reclassification of financial statements for earlier periods provided for
comparative purposes are required. The Company has determined that the adoption
of this Statement will have no material impact on its financial disclosures.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which will be effective for the Company
beginning July 1, 1998. SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company has determined
that the adoption of this statement will not have a material impact on its
financial statement disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that all derivative
E-27
148
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The accounting provisions for qualifying
hedges allow gains and losses recognized related to a hedged item in the income
statement to be offset by related derivative's gains and losses, and requires
the Company to formally document, designate, and assess the effectiveness of
transactions that qualify for hedge accounting. The Company is not required to
adopt this Statement until July 1999. The Company has not determined its method
or timing of adopting this Statement or the impact on its financial statements.
However, when adopted this Statement could increase volatility in reported
earnings and other comprehensive income of the Company.
In January 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on the accounting for computer software costs. In April 1998,
the AICPA issued SOP No. 98-5, "Reporting on the Costs of Start-up Activities."
This SOP provides guidance on the accounting for the cost of start-up
activities. The Company is not required to adopt these statements until July
2000 and does not expect the adoption of these standards to result in material
changes to previously reported amounts or disclosures.
Reclassifications -- Certain prior year amounts have been reclassified to
conform with the current year presentation.
2. INVESTMENTS
Marketable Securities -- The Company accounts for its investments in
marketable securities in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires an entity to
categorize its investments as held-to-maturity, available-for-sale, or trading
securities, according to the use of investment, and to record unrealized gains
and losses in net income or as separate component of stockholders' equity,
depending on the investment's classification. Management determines the proper
classifications of investments in obligations with fixed maturities and
marketable equity securities at the time of purchase and reevaluates such
designations as of each balance sheet date. As of June 30, 1998 and 1997,
available-for-sale and trading securities consisted of the following:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
(THOUSANDS)
JUNE 30, 1998
Available-for-sale securities
Bank and corporate debt................... $ 7,326 $ -- $ -- $ 7,326
Trading securities
Equity.................................... 11,549 433 -- 11,982
Total............................. $18,875 $433 $ -- $19,308
JUNE 30, 1997
Available-for-sale securities
Bank and corporate debt................... $ 8,215 $ -- $ -- $ 8,215
Trading securities
Equity.................................... 8,000 159 -- 8,159
Total............................. $16,215 $159 $ -- $16,374
As of June 30, 1998, securities classified as available-for-sale had
contractual maturity dates ranging from July 1998 to April 2029, the cost for
these securities approximated their fair value as of June 30, 1998 and 1997.
During 1998 and 1997, proceeds from sales of available-for-sale securities
approximated $13,233,000
E-28
149
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and $6,367,000, respectively. The Company uses the specific identification
method to determine cost for available-for-sale securities. Gross unrealized
gains and losses on sales of available-for-sale securities were not material in
1998 and 1997. Net unrealized holding gains on trading securities of $433,000
and $159,000 have been included in net income for 1998 and 1997, respectively.
Investments in Limited Partnerships -- As of June 30, 1998, the Company has
investments in two limited partnerships. The first investment of $3,000,000 was
made in June 1998 in the HCM High Yield Opportunity Fund, LP ("HCM"). The
prospectus for HCM indicates that HCM's investment objective is to provide
investors with risk-adjusted rates of return through a portfolio structured to
generally have the following characteristics: low volatility; short duration
(generally less than 2 years); and an overall high degree of liquidity in the
underlying securities. The partnership will attempt to achieve these objectives
through a two-pronged investment strategy: an emphasis on non-investment grade
fixed income financial instruments (including bonds and bank loans) that, in
HCM's judgement, are likely (i) to be repurchased by the issuer at a premium
within twelve to eighteen months as a result of the occurrence of a corporate
event such as an IPO, asset sale, merger or refinancing and (ii) active trading
of the portfolio. Withdrawals from the partnership may be made quarterly with 30
days notice. The second investment of $4,000,000 was also made in June 1998 in
Cerberus, LP ("CLP"). The prospectus for CLP indicates that CLP invests in
publicly traded and private debt, trade claims, large and middle market bank
loans, distressed real estate and public and private equity, including post
bankruptcy equity. To control risk, assets are broadly diversified among 60 or
more positions. Withdrawals from the fund may be made each June 30 and December
31 with 90 days notice. The Company accounts for the investments in limited
partnerships at cost. Based on information provided by HCM's and CLP's General
Partners, the Company's proportionate share in the fair value of each
partnership as of June 30, 1998 approximated the Company's carrying value for
each investment.
3. INVENTORIES
Inventories consist of the following net of allowance:
JUNE 30
----------------
1998 1997
------ -------
(THOUSANDS)
Finished printers, consumable supplies and spare parts...... $4,072 $ 6,064
Raw materials............................................... 3,653 4,010
------ -------
$7,725 $10,074
====== =======
4. REVOLVING CREDIT AGREEMENT
The Company has an unsecured revolving line-of-credit agreement with a
bank, which expires October 31, 1998. The available loan amount is $5,000,000.
The line-of-credit agreement provides for interest at the bank's prime rate. The
Company must meet certain financial ratio requirements under the terms of the
agreement. At June 30, 1998 and 1997, no amounts were drawn on the
line-of-credit.
5. CAPITAL STOCK
The Company's Board of Directors have authorized a stock buy-back program
with a maximum repurchase of 5% of the outstanding common shares. Management
intends to evaluate its investments and the Company's current stock price in
determining the timing and amount of stock repurchase. During 1998, 1997 and
1996, the Company declared and paid cash dividends per common share equal to
$0.08, $0.08 and nil, respectively.
E-29
150
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 17, 1996, the Company completed its IPO of 2,200,000 shares of
common stock in the offering at $8 per share. In addition, non-management
stockholders sold an additional 675,000 shares. The Company received $15,623,000
in proceeds, net of offering costs of $1,977,000.
Effective immediately prior to the IPO, the outstanding SCPS and
Convertible Preferred Stock ("CPS") were converted into common stock and the
SCPS and CPS authorized shares were canceled. The SCPS was voting and had a
primary liquidation preference of $1 per share, plus the aggregate amount of the
ELP. ELP accrued on the SCPS at an annual rate of 12%. On April 23, 1996, the
ELP of approximately $4,152,000 was paid to SCPS holders, and the SCPS shares
were converted into common stock at a conversion rate of 1.3869245 shares of
common stock per SCPS share. (Note 1).
6. STOCK OPTION PLAN
The Company currently has one stock option plan, the 1992 Stock Option Plan
("the Plan"). The Plan provides for the grant of incentive stock options to
officers, directors, and employees of the Company. The Company has reserved
1,250,000 shares of its authorized common stock for stock options for issuance
in connection with the plan. The Plan provides for the grant of stock options,
including incentive stock options and non-statutory stock options. At June 30,
1998, there were 426,148 shares available for future stock option grants. The
following table summarizes information on stock option activity for the Plan:
EXERCISE PRICE WEIGHTED AVERAGE
NUMBER OF SHARES PER SHARE EXERCISE PRICE PER SHARE
---------------- -------------- ------------------------
Outstanding at July 1, 1995........ 344,112 $3.24 - $6.49 $4.13
Granted.......................... 378,575 $6.49 $6.49
Expired.......................... (41,685) $3.24 - $6.49 $4.43
--------
Outstanding at June 30, 1996....... 681,002 $3.24 - $8.38 $5.43
Granted.......................... 117,000 $6.00 - $7.88 $6.48
Exercised........................ (104,817) $3.24 - $6.49 $4.61
Canceled and expired............. (45,772) $3.24 - $8.38 $6.61
--------
Outstanding at June 30, 1997....... 647,413 $3.24 - $7.88 $5.67
Granted.......................... 109,500 $7.94 - $9.50 $8.68
Exercised........................ (207,890) $3.24 - $6.49 $4.22
Canceled and expired............. (37,878) $3.24 - $6.63 $5.72
--------
Outstanding at June 30, 1998....... 511,145 $3.24 - $9.50 $6.90
========
Options issued to officers and employees under the Plan vest
proportionately over three years on each of the first, second, and third
anniversary dates of the option grant date and expire in five years. Options
granted subsequent to July 1, 1997 have a ten-year life. Options issued to
directors under the Plan vest 100% six months after the grant date and expire in
ten years.
The Company accounts for stock options issued to officers, directors and
employees using the intrinsic value method prescribed by APB No. 25 and has
adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no
compensation expense has been recognized for options issued under the Plan. Had
compensation expense for the Plan been determined based on the fair value at the
grant date of awards under
E-30
151
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
those plans consistent with the provisions of SFAS No. 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
6/30/98 6/30/97 6/30/96
----------------- ----------------- -----------------
Net income -- as reported..................... $4,977,000 $4,761,000 $13,102,000
Net income -- pro forma....................... 4,511,000 4,437,000 12,995,000
Net income per share -- as reported
Basic....................................... $ 0.70 $ 0.70 $ 6.59
Diluted..................................... 0.70 0.69 2.45
Net income per share -- pro forma
Basic....................................... $ 0.64 $ 0.65 $ 6.54
Diluted..................................... 0.64 0.64 2.43
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model. The following assumptions
used for grants in 1998, 1997 and 1996; risk-free interest rate of 5.20% in
1998, 6.00% in 1997 and 6.47% in 1996; annual dividend of $.08; expected life of
five years; and expected volatility of 53.21% in 1998, 57.00% in 1997 and 51.50%
in 1996. The outstanding stock options at June 30, 1998 have a weighted average
remaining contractual life of four years. The weighted average fair value of
options granted in 1998, 1997 and 1996 were $4.27, $3.16 and $3.09,
respectively.
The following table summarizes information about stock options outstanding
under the Plan as of June 30, 1998:
WEIGHTED WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE EXERCISE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE PRICE
EXERCISE PRICES AT 6/30/98 CONTRACTUAL LIFE PRICE AT 6/30/98 EXERCISABLE
- --------------- ----------- ---------------- -------- ----------- ----------------
$6.49 ........... 50,391 1 year $6.49 50,391 $6.49
6.49 ........... 53,679 2 years 6.49 53,679 6.49
6.49 ........... 150,157 3 years 6.49 150,157 6.49
3.24 to 6.63 ........... 21,837 4 years 5.05 15,170 6.49
3.24 ........... 2,772 5 years 3.24 2,772 3.24
3.24 ........... 1,848 6 years 3.24 1,848 3.24
6.49 ........... 9,553 7 years 6.49 9,553 6.49
6.49 ........... 57,408 8 years 6.49 57,408 6.49
5.64 to 9.50 ........... 104,000 9 years 8.08 36,000 6.49
7.94 to 8.81 ........... 59,500 10 years 8.00 27,000 5.64
------- ----- ------- -----
$3.24 to $9.50 ........... 511,145 $6.90 403,978 $6.45
======= ===== ======= =====
E-31
152
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. TAXES ON INCOME
Taxes on income consists of the following:
YEAR ENDED JUNE 30
-----------------------------
1998 1997 1996
------ ----------- ------
(THOUSANDS)
Current expense:
Federal............................................... $1,670 $3,072 $3,273
State................................................. 345 475 746
Foreign............................................... -- -- --
------ ------ ------
2,015 3,547 4,019
------ ------ ------
Deferred expense (benefit):
Federal............................................... 454 215 1,035
State................................................. 111 103 55
------ ------ ------
565 318 1,090
Reduction in valuation allowance...................... -- -- (4,746)
------ ------ ------
565 318 (3,656)
------ ------ ------
Income tax expense...................................... $2,580 $3,865 $ 363
====== ====== ======
The components of the net deferred tax asset are shown below:
JUNE 30
---------------
1998 1997
------ ------
(THOUSANDS)
Inventories................................................. $1,426 $1,694
Accrued expenses and other.................................. 397 730
Property and equipment...................................... 773 710
Accounts receivable allowance............................... 177 204
------ ------
Net deferred tax asset...................................... 2,773 3,338
Less current deferred tax asset........................... 2,000 2,628
------ ------
Non-current deferred tax asset.............................. $ 773 $ 710
====== ======
The net deferred tax asset of $2,773,000 at June 30, 1998 is realizable as
the Company has determined, based on several recurring periods of profitable
operations, continuing efforts to enhance and develop existing and new customer
relationships, its movement of a substantial portion of its supplies
manufacturing to the United States from Japan and the strengthening of the
dollar against the yen, that it is more likely than not that it will have
sufficient taxable income in future periods to realize the corresponding tax
benefit resulting from the deferred tax asset. Management plans to re-evaluate
the positive and negative evidence to this effect on a quarterly basis and make
appropriate adjustments to the deferred tax asset. Components of the net
deferred tax asset, other than property and equipment, primarily reverse
annually. As a result of the nature of these temporary differences, $773,000 of
the net deferred tax asset at June 30, 1998 is classified as non-current. The
non-current portion, which is included in deposits and other assets, is
attributable to property and equipment.
The net deferred tax asset at June 30, 1997 was $3,338,000. The current
portion of $2,628,000 is a result of temporary differences that primarily
reverse annually. The remaining non-current portion of $710,000 is attributable
to property and equipment.
E-32
153
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's effective tax rates to the federal
statutory rate is shown below:
YEAR ENDED JUNE 30
-------------------------
1998 1997 1996
------ ------ -------
(THOUSANDS)
Federal and state income tax computed at statutory
rates................................................... $2,887 $3,217 $ 4,578
Reduction of valuation allowance.......................... -- -- (4,746)
Research and development credits.......................... (366) -- --
Other permanent differences............................... 59 648 531
------ ------ -------
Tax expense............................................... $2,580 $3,865 $ 363
====== ====== =======
8. SALES TO PRINCIPAL CUSTOMERS
Transactions
Sales to customers and their affiliates which were 10% or more of total net
sales are shown below:
YEAR ENDED JUNE 30
------------------
1998 1997 1996
---- ---- ----
Customer A.................................................. 28% 34% 32%
Customer B.................................................. 18 14 16
Customer C.................................................. -- 2 10
Customer D.................................................. 18 15 10
9. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Operating Leases
The Company leases office and warehouse space under operating leases
expiring at various dates through the year 2001. Rent expense for the years
ended June 30, 1998, 1997 and 1996 was $983,000, $928,000, and $980,000. Future
minimum lease payments under operating leases are as follows:
YEAR ENDING
JUNE 30
- ----------- (THOUSANDS)
1999.................................................... $ 801
2000.................................................... 679
2001.................................................... 447
------
$1,927
======
Employment Agreement
On April 1, 1989, the Company entered into an Employment Agreement with its
President and Chief Executive Officer. The Employment Agreement, as amended,
provides for an annual salary of $252,000, an annual bonus equal to 1.5% of the
Company's pre-tax profits for each fiscal year and automobile allowance of $800
per month. The Employment Agreement can be terminated by the Company by written
notice at any time and in such event, the President and Chief Executive Officer
is entitled to a monthly severance payment equal to his then current monthly
salary for a period of six months after such termination. In addition, the
President and Chief Executive Officer is obligated not to solicit any employees
to leave employment of the Company for a period of three years after termination
of his employment. As of June 30, 1998, 1997 and 1996 bonuses of approximately
$113,000, $129,000 and $202,000 have been recorded.
E-33
154
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Profit-Sharing Plan
The Company has a savings and profit sharing plan, which allows
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. The Company matches 50% of employee
contributions up to 6% of the employee's salary. The Company's contributions are
vested 20% per year beginning with the second year of service. During the years
ended June 30, 1998, 1997 and 1996 the Company's contributions to the plan were
$118,000, $73,000 and $53,000.
Related Party Transactions
The Chairman of the Board of Directors provides consulting services to the
Company. Consulting expense for these services for the years ended June 30,
1998, 1997 and 1996 were approximately $79,000, $81,000 and $78,000.
10. OTHER INCOME, NET
Other income, net consists of the following:
YEAR ENDED JUNE 30
----------------------
1998 1997 1996
------ ------ ----
(THOUSANDS)
Investment income........................................... $3,189 $2,000 $520
Foreign currency exchange gain.............................. 67 -- --
Interest expense............................................ (7) (96) (253)
Loss on sale of assets held for sale........................ -- (568) --
Miscellaneous............................................... 65 41 (79)
------ ------ ----
Other income, net........................................... $3,314 $1,377 $188
====== ====== ====
11. CONTINGENCIES
The Company is involved with certain claims and disputes incidental to its
business. The Company currently believes that the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
E-34
155
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. OPERATIONS BY GEOGRAPHIC AREA
The Company's operations are conducted in one business segment, mid-range,
non-impact laser printers and related consumable supplies and spare parts. The
Company's production facilities are located in the U.S. and Japan. Export sales
from U.S. based operations, primarily to Germany, approximated $3,254,000,
$3,415,000 and $8,741,000 in 1998, 1997 and 1996, respectively. Intercompany
sales are transacted at established transfer prices and the related profits are
eliminated in consolidation. General corporate assets included in U.S. based
operations primarily consist of cash and cash equivalents, marketable securities
and other investments. These assets approximated $42,655,000, $34,590,000 and
$25,992,000 in 1998, 1997 and 1996, respectively. During the years ended June
30, 1998, 1997 and 1996 the Company had foreign and domestic sales, operating
income and identifiable assets as shown below:
U.S. JAPAN EUROPE TOTAL
------- ------- ------ -------
(THOUSANDS)
1998
Net sales..................................... $41,799 $ -- $3,254 $45,053
Operating income (expense).................... 5,438 (1,080) (115) 4,243
Identifiable assets........................... 58,303 3,132 37 61,472
1997
Net sales..................................... $53,045 $ -- $3,415 $56,460
Operating income (expense).................... 9,899 (2,683) 33 7,249
Identifiable assets........................... 54,246 3,195 211 57,652
1996
Net sales..................................... $65,640 $ -- $8,741 $74,381
Operating income (expense).................... 14,885 (1,638) 30 13,277
Identifiable assets........................... 49,521 10,460 264 60,245
13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Foreign Exchange Risk Management
The Company has operations in Japan, and as a result, operating expenses
are dependent on dollar-yen exchange rates. The Company has purchased Japanese
yen forward contracts to minimize the effect of fluctuating foreign currencies
on its reported income, generally over the ensuing three months. The forward
contracts do not qualify as hedges for financial reporting purposes and are
reported in the financial statements net of changes in forward rates that are
reflected in income. Although the volatility of income over the period covered
by such contracts is reduced, increased volatility may be reported during
interim periods. The counterparties to the Company's forward contracts consist
of two financial institutions. The credit ratings and concentration of risk of
these financial institutions are monitored on a continuing basis and present no
significant credit risk to the Company. As of June 30, 1997, the Company did not
have any foreign currency forward contracts outstanding. At June 30, 1998,
outstanding Japanese yen contractual amounts were as follows:
NOTIONAL
AMOUNT GAINS LOSSES
-------- ----------- ------
(THOUSANDS)
Japanese yen forward contracts......................... $2,748 $67 $ --
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156
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value
due to the short-term maturities of these instruments. The fair value of
marketable securities was estimated based on quoted market prices as of
year-end. The estimated fair values of the Company's financial instruments are
as follows:
1998 1997
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(THOUSANDS)
Nonderivatives:
Cash and cash equivalents...................... $16,347 $16,347 $18,216 $18,216
Marketable securities.......................... 19,308 19,308 16,374 16,374
Investments in limited partnerships............ 7,000 7,000 -- --
Derivatives:
Japanese yen forward contracts................. -- 67 -- --
E-36
157
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE II -- CONSOLIDATED VALUATION
AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
Year Ended June 30, 1998:
Allowance for doubtful accounts................ $ 653 $ 165 $ 328 $ 490
Allowance for inventory........................ 4,145 279 1,186 3,238
Deferred tax asset valuation allowance......... -- -- -- --
------ ------ ------ ------
$4,798 $ 444 $1,514 $3,728
====== ====== ====== ======
Year Ended June 30, 1997:
Allowance for doubtful accounts................ $ 627 $ 138 $ 112 $ 653
Allowance for inventory........................ 3,548 1,023 426 4,145
Deferred tax asset valuation allowance......... -- -- -- --
------ ------ ------ ------
$4,175 $1,161 $ 538 $4,798
====== ====== ====== ======
Year Ended June 30, 1996:
Allowance for doubtful accounts................ $ 686 $ -- $ 59 $ 627
Allowance for inventory........................ 2,336 1,725 513 3,548
Deferred tax asset valuation allowance......... 4,746 -- 4,746 --
------ ------ ------ ------
$7,768 $1,725 $5,318 $4,175
====== ====== ====== ======
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On May 9, 1997, the Company orally dismissed BDO Seidman LLP ("BDO") as its
principal accountant. The Company confirmed the dismissal of its principal
accountant in a letter to BDO dated May 12, 1997. The decision to dismiss BDO
was approved by the Company's Audit Committee of the Board of Directors.
The BDO reports on the Company's consolidated financial statements for each
of the years ended June 30, 1996 and 1995 did not contain an adverse opinion or
a disclaimer of opinion, nor were such reports qualified or modified as to audit
scope or accounting principles.
During fiscal year 1996 and any subsequent interim period preceding the
dismissal of BDO, the Company is not aware of any disagreements between the
Company and BDO or reportable events as defined in Item 304 of Regulation S-K.
On May 29, 1997, the Board of Directors of the Company authorized the
engagement of the firm of Deloitte & Touche LLP as the Company's independent
auditors for its fiscal year 1997 audit.
E-37
158
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers is set forth in
the Proxy Statement under the heading "Directors and Executive Officers", which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management", which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading "Certain Relationships and
Related Transactions", which information is incorporated herein by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K.
1. Financial Statements: The financial statements of the Company are
included in Part II, Item 8 of this report. See Index to Financial
Statements (F-1) on Page 13.
2. Financial Statement Schedules: Financial statement schedules required
under the related instructions are applicable for the period ended June 30,
1998, 1997 and 1996, and are therefore included in Item 8.
3. Report of Other Auditors: Report of BDO Seidman, LLP for fiscal 1996.
4. Exhibits: The exhibits which are filed with this Report or which are
incorporated herein by reference are set forth in the Exhibit Index below.
(b) Reports on Form 8-K filed during the fourth quarter of fiscal year
1998 -- None.
E-38
159
EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
3(i).1+ -- Amended and Restated Certificate of Incorporation of the
Registrant.
3(ii).1+ -- Bylaws of the Registrant.
4.1+ -- Reference is made to Exhibits 3(i).1 and 3(ii).1.
4.2+ -- Specimen Stock Certificate.
10.1+ -- Form of Indemnity Agreement entered into between the
Registrant and its directors and executive officers.
10.2+ -- Common Stock Registration Rights Agreement, dated as of
October 5, 1984, as amended.
10.3+ -- Series A Convertible Preferred Stock Purchase Agreement,
dated as of October 5, 1984, as amended.
10.4+* -- Amended and Restated 1992 Stock Option Plan of the
Registrant (the "Option Plan").
10.5+ -- Form of Option granted to persons other than non-employee
directors under the Option Plan.
10.6+ -- Form of Option granted to non-employee directors under
the Option Plan.
10.7+* -- Employment Agreement between the Registrant and Philip W.
Shires, dated April 1, 1989.
10.8+ -- Lease Agreement between the Registrant and Security
Connecticut Life Insurance Company, dated September 20,
1990, as amended.
10.9+ -- Lease Agreement between the Registrant and Pine Property
Limited Partnership, dated July 15, 1992, as amended.
10.10+ -- Lease Agreement between the Registrant and BFN Company,
dated September 28, 1994.
10.11+ -- Agreement on Bank Transactions and translation between
Nippon Kentek Kaisha, Ltd. and The Dai-Ichi Kangyo Bank,
Limited, dated as of July 2, 1984.
10.12+ -- Agreement on Purchase or Negotiation of Bills and
translation between Nippon Kentek Kaisha, Limited and The
Dai-Ichi Kangyo Bank, Limited, dated as of July 2, 1984.
10.12(a)+ -- Security Agreement between the Registrant and the
Dai-Ichi Kangyo Bank, Limited, dated as of July 2, 1992,
as amended.
10.12(b)+ -- Guaranty between the Registrant and The Dai-Ichi Kangyo
Bank, Limited, dated as of July 2, 1992.
10.13+ -- Credit and Security Agreement between the Registrant and
Colorado National Bank, dated as of November 2, 1994, as
amended.
10.15+ -- Sales/Purchase Contract between Nippon Kentek Kaisha
Limited and Kao Corporation, dated October 1, 1991.
10.16+ -- Letter Agreement between the Registrant and Lexmark
International, Inc., dated May 10, 1993, as amended.
10.17+ -- Addendum Agreement between the Registrant and Lexmark
International, Inc., dated November 17, 1994.
10.18+ -- Agreement between the Company and Hewlett-Packard
Company, dated March 22, 1994.
10.19+ -- Purchase Agreement between the Company and Siemens
Nixdorf Printing Systems, LP, dated February 3, 1992, as
amended.
E-39
160
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
10.20+ -- Purchase Agreement between the Company and Standard
Register Corporation, dated February 4, 1997.
10.21+ -- Lease Agreement between the Registrant and Avalon
Investment Company, dated March 31, 1997.
21.1+ -- List of subsidiaries of the Registrant.
27.1 -- Financial Data Schedules-Fiscal years ended 1996, 1997
and 1998
- ---------------
+ Previously filed with the Commission as an exhibit to the Registrant's
Registration Statement on Form S-1 (File No. 333-1606) and incorporated herein
by reference.
* Management contract or compensatory plan.
E-40
161
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KENTEK INFORMATION SYSTEMS, INC.
By /s/ PHILIP W. SHIRES
-----------------------------------
Philip W. Shires
President and Chief Executive
Officer
September 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PHILIP W. SHIRES President, Chief Executive Officer September 25, 1998
- ----------------------------------------------------- and Director (Principal
Philip W. Shires Executive Officer)
/s/ VICKY S. HAMMOND Chief Financial Officer (Principal September 25, 1998
- ----------------------------------------------------- Financial and Accounting
Vicky S. Hammond Officer)
/s/ HOWARD L. MORGAN Chairman of the Board September 25, 1998
- -----------------------------------------------------
Howard L. Morgan
/s/ JUSTIN J. PERREAULT Director September 25, 1998
- -----------------------------------------------------
Justin J. Perreault
/s/ JAMES H. SIMONS Director September 25, 1998
- -----------------------------------------------------
James H. Simons
/s/ SHELDON WEINIG Director September 25, 1998
- -----------------------------------------------------
Sheldon Weinig
E-41
162
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
3(i).1+ -- Amended and Restated Certificate of Incorporation of the
Registrant.
3(ii).1+ -- Bylaws of the Registrant.
4.1+ -- Reference is made to Exhibits 3(i).1 and 3(ii).1.
4.2+ -- Specimen Stock Certificate.
10.1+ -- Form of Indemnity Agreement entered into between the
Registrant and its directors and executive officers.
10.2+ -- Common Stock Registration Rights Agreement, dated as of
October 5, 1984, as amended.
10.3+ -- Series A Convertible Preferred Stock Purchase Agreement,
dated as of October 5, 1984, as amended.
10.4+* -- Amended and Restated 1992 Stock Option Plan of the
Registrant (the "Option Plan").
10.5+ -- Form of Option granted to persons other than non-employee
directors under the Option Plan.
10.6+ -- Form of Option granted to non-employee directors under
the Option Plan.
10.7+* -- Employment Agreement between the Registrant and Philip W.
Shires, dated April 1, 1989.
10.8+ -- Lease Agreement between the Registrant and Security
Connecticut Life Insurance Company, dated September 20,
1990, as amended.
10.9+ -- Lease Agreement between the Registrant and Pine Property
Limited Partnership, dated July 15, 1992, as amended.
10.10+ -- Lease Agreement between the Registrant and BFN Company,
dated September 28, 1994.
10.11+ -- Agreement on Bank Transactions and translation between
Nippon Kentek Kaisha, Ltd. and The Dai-Ichi Kangyo Bank,
Limited, dated as of July 2, 1984.
10.12+ -- Agreement on Purchase or Negotiation of Bills and
translation between Nippon Kentek Kaisha, Limited and The
Dai-Ichi Kangyo Bank, Limited, dated as of July 2, 1984.
10.12(a)+ -- Security Agreement between the Registrant and the
Dai-Ichi Kangyo Bank, Limited, dated as of July 2, 1992,
as amended.
10.12(b)+ -- Guaranty between the Registrant and The Dai-Ichi Kangyo
Bank, Limited, dated as of July 2, 1992.
10.13+ -- Credit and Security Agreement between the Registrant and
Colorado National Bank, dated as of November 2, 1994, as
amended.
10.15+ -- Sales/Purchase Contract between Nippon Kentek Kaisha
Limited and Kao Corporation, dated October 1, 1991.
10.16+ -- Letter Agreement between the Registrant and Lexmark
International, Inc., dated May 10, 1993, as amended.
10.17+ -- Addendum Agreement between the Registrant and Lexmark
International, Inc., dated November 17, 1994.
10.18+ -- Agreement between the Company and Hewlett-Packard
Company, dated March 22, 1994.
10.19+ -- Purchase Agreement between the Company and Siemens
Nixdorf Printing Systems, LP, dated February 3, 1992, as
amended.
10.20+ -- Purchase Agreement between the Company and Standard
Register Corporation, dated February 4, 1997.
10.21+ -- Lease Agreement between the Registrant and Avalon
Investment Company, dated March 31, 1997.
163
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
21.1+ -- List of subsidiaries of the Registrant.
27.1 -- Financial Data Schedules-Fiscal years ended 1996, 1997
and 1998
- ---------------
+ Previously filed with the Commission as an exhibit to the Registrant's
Registration Statement on Form S-1 (File No. 333-1606) and incorporated herein
by reference.
* Management contract or compensatory plan.
164
ANNEX F
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999
F-1
165
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-27814
KENTEK INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3577 22-2406249
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
2945 WILDERNESS PLACE, BOULDER, CO 80301
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 440-5500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [X] No [ ]
Number of shares outstanding of the issuer's common stock, as of March 31, 1999:
4,596,447 SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
166
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -- March 31, 1999 and June
30, 1998.............................................. F-3
Consolidated Statements of Income -- for the three and
nine months ended March 31, 1999 and 1998............. F-4
Consolidated Statements of Cash Flows -- for the nine
months ended March 31, 1999 and 1998.................. F-5
Notes to Consolidated Financial Statements............. F-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... F-9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ F-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. F-13
Item 2. Changes in Securities............................. F-13
Item 3. Defaults Upon Senior Securities................... F-13
Item 4. Submissions of Matters to a vote of Security
Holders................................................ F-13
Item 5. Other Information................................. F-13
Item 6. Exhibits and Reports on Form 8-K.................. F-13
SIGNATURES.................................................. F-14
F-2
167
PART I.
FINANCIAL INFORMATION.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
ASSETS
MARCH 31, JUNE 30,
1999 1998
----------- --------
(UNAUDITED)
Current Assets:
Cash and cash equivalents................................. $ 9,070 $16,347
Marketable securities..................................... 18,271 19,308
Investment in limited partnerships........................ 7,000 7,000
Accounts receivable, less allowance....................... 4,426 5,297
Inventories (Note 2)...................................... 5,670 7,725
Deferred income taxes..................................... 1,937 2,000
Other..................................................... 934 701
-------- -------
Total current assets.............................. 47,308 58,378
Property and equipment, at cost, less accumulated
depreciation and amortization............................. 1,648 1,794
Deposits and other.......................................... 1,128 1,300
-------- -------
Total assets...................................... $ 50,084 $61,472
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,352 $ 2,200
Accrued expenses (Note 4)................................. 2,869 3,050
-------- -------
Total current liabilities......................... 5,221 5,250
Other....................................................... 472 505
-------- -------
Total liabilities................................. 5,693 5,755
======== =======
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par -- shares authorized, 12,000;
shares issued, 7,186 and 7,137; shares outstanding,
4,596 and 7,137........................................ 72 71
Treasury stock (Note 3)................................... (15,179) --
Additional paid-in-capital................................ 45,113 44,821
Foreign currency translation adjustment................... (460) (988)
Retained earnings......................................... 14,845 11,813
-------- -------
Total stockholders' equity........................ 44,391 55,717
-------- -------
Total liabilities and stockholders' equity........ $ 50,084 $61,472
======== =======
See Notes to Consolidated Financial Statements
F-3
168
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
Net sales:
Printers..................................... $ 1,368 $ 1,539 $ 3,470 $ 5,356
Consumable supplies and spare parts.......... 9,070 10,319 24,549 29,326
------- ------- ------- -------
Total net sales...................... 10,438 11,858 28,019 34,682
Cost of sales.................................. 4,894 5,602 12,959 17,784
------- ------- ------- -------
Gross profit................................... 5,544 6,256 15,060 16,898
------- ------- ------- -------
Operating Expenses:
Selling, general and administrative.......... 1,972 2,133 6,434 6,462
Research and development..................... 673 2,381 6,157 6,770
Restructuring charge (Note 4)................ -- -- 1,142 --
------- ------- ------- -------
Total operating expenses............. 2,645 4,514 13,733 13,232
------- ------- ------- -------
Operating (loss) income........................ 2,899 1,742 1,327 3,666
Other income, net.............................. 647 771 2,158 2,333
------- ------- ------- -------
(Loss) income before income taxes.............. 3,546 2,513 3,485 5,999
Income tax (benefit) expense................... 96 753 96 2,060
------- ------- ------- -------
Net (loss) income.............................. $ 3,450 $ 1,760 $ 3,389 $ 3,939
======= ======= ======= =======
Net (loss) income per share: (Note 5)
Basic........................................ $ 0.72 $ 0.25 $ 0.56 $ 0.56
======= ======= ======= =======
Diluted...................................... $ 0.71 $ 0.24 $ 0.56 $ 0.55
======= ======= ======= =======
Weighted average shares outstanding:
Basic........................................ 4,817 7,085 6,053 7,048
======= ======= ======= =======
Diluted...................................... 4,827 7,196 6,064 7,160
======= ======= ======= =======
See Notes to Consolidated Financial Statements
F-4
169
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31
--------------------
1999 1998
-------- -------
Operating activities:
Net income................................................ $ 3,389 $ 3,941
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 975 925
Loss on disposal of property and equipment............. 464 35
Restructuring charge, net of cash payments............. 446 0
Changes in operating assets and liabilities:
Accounts receivable.................................... 871 747
Inventories............................................ 2,340 1,457
Other current assets................................... (87) (645)
Other assets........................................... (184) (122)
Accounts payable and accrued expenses.................. (1,017) 623
-------- -------
Net cash provided by operating activities................... 7,197 6,961
-------- -------
Investing activities:
Purchase of marketable securities, net.................... 1,037 (476)
Purchase of equipment..................................... (1,170) (814)
Proceeds from sale of equipment........................... 10 0
-------- -------
Net cash provided by (used in) investing activities......... (123) (1,290)
-------- -------
Financing activities:
Proceeds from issuance of common stock.................... 292 758
Dividends paid............................................ (357) (421)
Purchase of treasury stock................................ (15,179) 0
-------- -------
Net cash provided by financing activities................... (15,244) 337
-------- -------
Effect of exchange rate changes on cash..................... 893 (444)
-------- -------
Net decrease in cash and cash equivalents................... (7,277) 5,564
Cash and cash equivalents, beginning of period.............. 16,347 18,216
-------- -------
Cash and cash equivalents, end of period.................... $ 9,070 $23,780
======== =======
See Notes to Consolidated Financial Statements
F-5
170
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. STATEMENT OF ACCOUNTING PRESENTATION
The accompanying unaudited consolidated financial statements of Kentek
Information Systems, Inc. (the "Company" or "Kentek") have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management all adjustments (consisting only of normal
recurring adjustments) considered necessary for fair presentation have been
included. Results of operations for the three and nine months ended March 31,
1999 are not necessarily indicative of results for the full year. These
financial statements and notes should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
June 30, 1998 filed with the Securities and Exchange Commission in the Company's
Annual Report on Form 10-K.
NOTE 2. INVENTORIES
Inventories consist of the following:
MARCH 31, JUNE 30,
1999 1998
--------- --------
(THOUSANDS)
Finished printers, consumable supplies and spare parts...... $2,663 $4,072
Raw Materials............................................... 3,007 3,653
------ ------
$5,670 $7,725
====== ======
NOTE 3. TREASURY STOCK
The board of directors has authorized the repurchase of shares of the
Company's common stock. The Company's repurchases of shares of common stock are
recorded as treasury stock and result in a reduction of stockholders' equity. No
treasury shares have been reissued, however, in the event of future reissuance
the Company will use a first-in, first-out method and the excess of repurchase
cost over reissuance price will be treated as a reduction of retained earnings.
As of March 31, 1999, the Company has repurchased 2,589,750 shares of its common
stock at an aggregate cost of $15,179,084. Repurchases of stock have been
suspended pending action by the Special Committee of the Board of Directors on
the offer by Kentek Management to purchase the Company.
NOTE 4. RESTRUCTURING CHARGE
In November 1998, the Company terminated its development effort on the
KW60, a wide-format, 60 page-per-minute printer. The Company recorded a pre-tax
restructuring charge of approximately $1,142,000 million for severance and other
termination benefits and other related exit costs. This charge includes
involuntary employee termination benefits for 75 employees, primarily within the
Company's Research and Development Group. The following table summarizes the
costs associated with the restructuring charge (thousands):
SEVERANCE &
OTHER WRITE-OFF OF NONCANCELLABLE TOTAL
TERMINATION LONG-LIVED OPERATING RESTRUCTURING
BENEFITS ASSETS LEASES CHARGE
----------- ------------ -------------- -------------
Initial reserve..................... $ 542 $ 446 $ 154 $ 1,142
Utilized through March 31, 1999..... (542) (446) (123) (1,111)
----- ----- ----- -------
Balance, March 31, 1999............. $ -- $ -- $ 31 $ 31
===== ===== ===== =======
F-6
171
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. EARNINGS PER SHARE
At December 31, 1997 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." All amounts presented have
been restated in accordance with SFAS No. 128. SFAS No. 128 requires companies
to present basic earnings per share and diluted earnings per share, instead of
the previously reported primary and fully diluted earnings per share. The
following table is a reconciliation of basic to diluted earnings per share for
the three and nine months ended March 31, 1999 and 1998:
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
THREE MONTHS ENDED MARCH 31, 1999
EARNINGS PER BASIC SHARE
Income attributable to common stockholders....... $3,450 4,817 $0.72
-----
EFFECT OF DILUTIVE SECURITIES
Stock options.................................... -- 10
------ -----
EARNINGS PER DILUTED SHARE....................... $3,450 4,827 $0.71
====== ===== =====
NINE MONTHS ENDED MARCH 31, 1999
EARNINGS PER BASIC SHARE
Income attributable to common stockholders....... $3,389 6,053 $0.56
-----
EFFECT OF DILUTIVE SECURITIES
Stock options.................................... -- 11
------ -----
EARNINGS PER DILUTED SHARE....................... $3,389 6,064 $0.56
====== ===== =====
THREE MONTHS ENDED MARCH 31, 1998
EARNINGS PER BASIC SHARE
Income available to common stockholders.......... $1,760 7,085 $0.25
-----
EFFECT OF DILUTIVE SECURITIES
Stock options.................................... -- 112
------ -----
EARNINGS PER DILUTED SHARE....................... $1,760 7,197 $0.24
====== ===== =====
NINE MONTHS ENDED MARCH 31, 1998
EARNINGS PER BASIC SHARE
Income available to common stockholders.......... $3,939 7,048 $0.56
-----
EFFECT OF DILUTIVE SECURITIES
Stock options.................................... -- 112
------ -----
EARNINGS PER DILUTED SHARE....................... $3,939 7,160 $0.55
====== ===== =====
The Company declared dividends of $0.02 per share for the quarters ended
June 30, 1998, September 30, 1998 and December 31, 1998 and paid such dividends
on September 18, 1998, December 4, 1998 and March 31, 1999, respectively.
NOTE 6. OTHER COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This standard
requires reporting of changes in stockholders' equity that
F-7
172
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
do not result directly from transactions with share owners. Components of other
comprehensive income are as follows (thousands):
Three Months Ended:
CURRENT
BALANCE, JANUARY 1 PERIOD CHANGE BALANCE, MARCH 31
------------------- ----------------- -----------------
1999 1998 1999 1998 1999 1998
------ -------- ------ ------ ----- -------
Cumulative foreign currency
translation adjustment..... $(641) $(1,233) $ 181 $ 156 $(460) $(1,077)
Net income................... 3,450 1,760
------ ------
Comprehensive income......... $3,631 $1,916
====== ======
Nine Months Ended:
CURRENT
BALANCE, JULY 1 PERIOD CHANGE BALANCE, MARCH 31
--------------- --------------- -----------------
1998 1997 1999 1998 1999 1998
------ ------ ------ ------ ----- -------
Cumulative foreign currency translation
adjustment.............................. $(988) $(753) $ 528 $ (324) $(460) $(1,077)
Net income................................ 3,389 3,939
------ ------
Comprehensive income...................... $3,917 $3,615
====== ======
NOTE 7. SUBSEQUENT EVENT
On April 21, 1999, Kentek Information Systems, Inc. announced that it had
received a proposal from the Company's President and Chief Executive Officer to
acquire the remaining outstanding shares of the Company's common stock not
already owned personally. The initial offer was a cash price of $7.50 per share
at closing plus an additional consideration in the form of a contingent payment
right.
Kentek's Board of Directors formed a Special Committee of independent
directors to review the advisability of this proposal. The Committee is chaired
by Kentek's Chairman of the Board of Directors, and includes two outside
directors. The Special Committee has retained Janney Montgomery Scott, Inc. to
serve as independent financial advisor to the Special Committee and Cooley
Godward LLP to serve as independent legal counsel to the Special Committee.
On May 14, 1999, the Company announced that it had agreed to a definitive
merger agreement with a newly formed corporation organized by Philip W. Shires,
the President and Chief Executive Officer of Kentek. Under the terms of the
merger agreement, each Kentek shareholder would receive, at closing, $8.29 in
cash for each share of Kentek common stock.
The Board of Directors of Kentek, acting on the unanimous recommendation of
the Special Committee of independent directors, unanimously approved the
transaction and recommended that the stockholders of Kentek approve and adopt
the agreement and merger. The transaction is subject to the approval of Kentek's
stockholders, financing, any applicable regulatory approvals and certain other
conditions.
Kentek expects to mail a proxy statement describing the transaction to all
stockholders of Kentek upon completion of Securities and Exchange Commission
review. The transaction is expected to close during the summer.
The proposed acquisition may only be completed in accordance with
applicable state and federal laws, including the Securities Act of 1933 and the
Securities Exchange Act of 1934.
F-8
173
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
presented here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and those
discussed in the Company's Form 10-K for the year ended June 30, 1998,
particularly those contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
On May 14, 1999, the Company announced that it had agreed to a definitive
merger agreement with a newly formed corporation organized by Philip W. Shires,
the President and Chief Executive Officer of Kentek. Under the terms of the
merger agreement, each Kentek shareholder would receive, at closing, $8.29 in
cash for each share of Kentek common stock. For further discussion, See Note 7
to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1999 to Three Months Ended March 31,
1998
Total Net Sales. Total net sales decreased 12.0% from $11,858,000 in the
three months ended March 31, 1998 to $10,438,000 in the three months ended March
31, 1999. Printer sales revenue decreased 11.1% from $1,539,000 in the three
months ended March 31, 1998 to $1,368,000 in the three months ended March 31,
1999. This decline was due to increased competition from lower priced, light
duty printers offered by other manufacturers. Consumable supplies and spare
parts sales decreased by 12.1% from $10,319,000 in the three months ended March
31, 1998 to $9,070,000 in the three months ended March 31, 1999. This decrease
was due to a declining printer installed base which resulted in lower consumable
supplies and spare parts sales.
Gross Profit. Gross profit decreased by 11.4% from $6,256,000 in the three
months ended March 31, 1998 to $5,544,000 in the three months ended March 31,
1999. The gross margin increased from 52.8% to 53.1% in the same period. The
increase in gross margins was due to a decrease in manufacturing overhead and a
shift to sales of higher margin consumable supplies. These benefits were offset
by the strengthening of the yen against the dollar.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 7.5% from $2,133,000 in the three months
ended March 31, 1998 to $1,972,000 in the three months ended March 31, 1999. The
decrease was a result of lower headcount due to the termination of the Company's
KW60 project. See Note 4 to the Consolidated Financial Statements.
Research and Development Expense. Research and development expenses
decreased by 71.7% from $2,381,000 in the three months ended March 31, 1998 to
$673,000 in the three months ended March 31, 1999. This decrease was due to the
termination of the KW60 project which resulted in significant reduction in
headcount and other development expenses. The Company terminated the KW60
because in its estimation the return on future sales of the printer no longer
warranted the substantial investment in time and resources that would be
required to finish development. The Company anticipates these expenses to
continue at reduced levels in future periods.
Other Income, net. Other income, net decreased from $771,000 of income in
the three months ended March 31, 1998 to $647,000 in the three months ended
March 31, 1999. This decrease was due primarily to recognition of losses
associated with the disposition and sale of certain assets. These losses were
offset by an increase in interest and investment income of $271,000.
Income Tax Expense (Benefit). Income tax expense for the three months ended
March 31, 1998 was $753,000 compared to $96,000 for the three months ended March
31, 1999. The Company's effective income tax rate for the quarter and nine
months ended March 31, 1999 includes certain non-recurring adjustments,
primarily related to research and development credits, that were included in its
amended tax returns.
F-9
174
Comparison of Nine Months Ended March 31, 1999 to Nine Months Ended March 31,
1998
Total Net Sales. Total net sales decreased 19.2% from $34,682,000 in the
nine months ended March 31, 1998 to $28,019,000 in the nine months ended March
31, 1999. Printer sales revenue decreased by 35.2% from $5,356,000 for the nine
months ended March 31, 1998 to $3,470,000 for the nine months ended March 31,
1999. This decline was due to increased competition from lower priced, light
duty printers offered by other manufacturers. Consumable supplies and spare
parts sales decreased by 16.3% from $29,326,000 in the nine months ended March
31, 1998 to $24,549,000 in the nine months ended March 31, 1999. This decrease
was due to a declining printer installed base which resulted in lower consumable
supplies and spare parts sales.
Gross Profit. Gross profit decreased by 10.9% from $16,898,000 in the nine
months ended March 31, 1998 to $15,060,000 in the nine months ended December 31,
1998. The gross margin increased from 48.7% to 53.7% in the same period. The
increase in gross margins was due to a significant decrease in manufacturing
overhead, a shift to sales of higher margin consumable supplies and an increase
in the strength of the dollar in relation to the Japanese yen.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 0.4% from $6,462,000 in the nine months
ended March 31, 1998 to $6,434,000 in the nine months March 31, 1999. The
decrease was a result of a lower accrual for profit sharing offset by increased
sales and marketing expense.
Research and Development Expense. Research and development expenses
decreased by 9.1% from $6,770,000 in the nine months ended March 31, 1998 to
$6,157,000 in the nine months ended March 31, 1999. The nine months ended March
31, 1998 included a higher level of expenses associated with the development of
the KW60 printer prior to its termination in November of 1998. The Company
terminated the KW60 because in its estimation the return on future sales of the
printer no longer warranted the substantial investment in time and resources
that would be required to finish development.
Restructuring Charge. In November 1998, the Company terminated its
development effort on the KW60, a wide-format, 60 page-per-minute printer. The
Company recorded a pre-tax restructuring charge of approximately $1,142,000 for
severance and other termination benefits and other related exit costs. See Note
4 to the Consolidated Financial Statements.
Other Income, net. Other income, net decreased from $2,333,000 in the nine
months ended March 31, 1998 to $2,158,000 in the nine months ended March 31,
1999. This decrease was due primarily to recognition of losses on the
disposition and sale of certain assets. These losses were offset by an increase
in interest and investment income of $212,000.
Income Tax Expense. Income tax expense for the nine months ended March 31,
1998 was $2,060,000 compared to $96,000 for the nine months ended March 31,
1999. The Company's effective income tax rate for the quarter and nine months
ended March 31, 1999 includes certain non-recurring adjustments, primarily
related to research and development credits, that were included in its amended
tax returns.
LIQUIDITY AND CAPITAL RESOURCES
Changes in cash and cash equivalents during the nine months ended March 31,
1999 resulted in a net decrease of $7,277,000 as compared to a net increase of
$5,564,000 for the nine months ended March 31, 1998. The primary reason for this
decrease is the Company's repurchase of 2,589,751 shares of the Company's common
stock for approximately $15,179,000. This use of cash was offset by an increase
in the sale of marketable securities of approximately $1,513,000 and an increase
in the effect of exchange rates on cash of approximately $1,337,000. The Company
does not believe that the negative sales trends will have a material impact on
its liquidity and capital reserves due to the cost reduction initiatives already
completed and in-process.
F-10
175
YEAR 2000 COMPLIANCE
The Company has completed and tested conversion of its accounting and
finance software operating on its IBM AS400-based computers to programs that are
year 2000 compliant. These AS400-based programs are used to compile business
transactions and information and have been tested and judged 100% compliant. The
PC-based network software and business productivity applications such as
Microsoft Office 97, email and internet have been tested for year 2000
compliance and have been determined to require software upgrades from Microsoft,
scheduled to be released by late summer, in order to be fully year 2000
compliant. In addition, there are stand-alone, manufacturing tracking systems
that will have to be replaced by year 2000 compliant systems. The Company
estimates that the testing, conversion and/or replacement of these systems will
be completed by June 30, 1999. All maintenance and modification costs associated
with making all internal computer systems year 2000 compliant will be expensed
as incurred. As the Company implements solutions to the year 2000 issue, in some
circumstances it may determine that replacing existing systems, hardware or
equipment may be more efficient and also provide additional functionality. Any
replacement of these systems would be capitalized, and would further reduce the
estimated expenses associated with the year 2000 issue. The Company is also
continuing its assessment of the readiness of external entities, such as vendors
and suppliers, which interface with the Company and plans to have this
assessment complete by June 30, 1999.
The Company's contingency plans, if year 2000 modifications do not work or
are not ready by year 2000, rely significantly on manual procedures and record
keeping. All files are presently backed up daily and will be adequately backed
up as of June 30, 1999, which is the end of the Company's fiscal year, as well
as of September 30, 1999, and December 31, 1999, and will be available for
downloading into any spreadsheet package to facilitate manual record keeping.
Adequate hard copy reports of balances and transactions as of June 30, 1999,
September 30, 1999, and December 31, 1999 will also be available to provide a
complete manual system of accounting, inventory control, shipping and receiving
if required. Subsequent to year 2000, manual systems will continue to be in
place to mitigate the risk of lost information due to any unforeseen
interruptions that may occur as a result of year 2000 issues arising after
January 1, 2000.
The Company's past and present printer products incorporate software. The
Company's printer products prior to the K40DX (K2, K2+, K3, K4, K30, K31 and
K40) do not contain any real-time clock functionality and are believed to be
year 2000 compliant. The K40DX printer has a real-time clock and is believed to
be year 2000 compliant. Based on management's assessment, no material product
distribution or warranty claims are expected. Management believes that the
Company will not incur any significant product expenses related to year 2000
compliance.
Management believes that its efforts will result in year 2000 compliance.
Kentek has incurred no incremental costs associated with year 2000 compliance,
as the majority of the costs have been incurred as a result of normal business
upgrade procedures. The Company does not expect the future costs associated with
these procedures to be material. However, the impact on business operations of
failure by the Company to achieve compliance or failure by external entities
which the Company cannot control, such as vendors, to achieve compliance, could
be material to the Company's financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's investment portfolio of cash equivalents and
marketable securities. The stated objectives of the Company's investment
guidelines are: safety of principal; liquidity; maximization of yield; and
diversification of risk. The Company places its cash equivalent and marketable
securities investments with U.S. Treasury and federal agency obligations, high
credit quality commercial paper, obligations of corporations, banks and agencies
including notes and bonds, taxable money market preferreds, certificates and/or
time deposits of high quality commercial banks and tax exempt state and
municipal obligations. The investment portfolio includes only those securities
with active secondary resale markets to ensure portfolio liquidity.
F-11
176
The Company also invests in trading securities on a regular basis. The
portfolio is managed by an outside professional and may include equity
securities. Total funds devoted to trading securities are approximately
$18,271,000. As of March 31, 1999, the portfolio did not contain any equities.
The Company also has investments in two limited partnerships in the amount of
$7,000,000 that are subject to market and interest rate risk.
The table below presents principal amounts and related weighted average
interest rates by date of maturity for the Company's investment portfolio of
debt securities. The debt security investment portfolio has a weighted average
maturity of 90 days or less.
MATURITY
--------------------------------------------
FAIR VALUE AT
MARCH 31,
1999 THEREAFTER TOTAL 1999
------ ---------- ------ -------------
(AMOUNTS IN THOUSANDS)
Cash equivalents..................................... $5,749 $5,749 $5,749
Average interest rate.............................. 4.49% 4.49%
Commercial paper..................................... 1,998 $0 1,998 1,998
Average interest rate.............................. 4.88% 4.88%
------ -- ------ ------
Total investment portfolio........................... $7,747 $0 $7,747 $7,747
====== == ====== ======
Average interest rate.............................. 4.59% 4.59%
The above table is based upon contractual maturity dates in the Company's
investment portfolio of debt securities. These investment securities are subject
to interest rate risk and will fall in value if market interest rates increase.
Due to the short term maturities of the portfolio, no material change in value
is expected if interest rates change.
FOREIGN CURRENCY RISK
The Company has operations in Japan, and as a result, cost of sales and
operating expenses are dependent on dollar-yen exchange rates. On occasion the
Company has purchased Japanese yen forward exchange contracts to minimize the
effect of fluctuating foreign currencies on its reported income, generally over
the ensuing four to five months. The forward exchange contracts do not qualify
as hedges for financial reporting purposes and are reported in the financial
statements net of changes in forward rates that are reflected in income.
Although the volatility of income over the period covered by such contracts is
reduced, increased volatility may be reported during interim periods. At March
31, 1999, the Company did not have any forward exchange contracts outstanding
Based on the Company's overall currency rate exposure at March 31, 1999, a
10% change in currency rates would not have a significant material effect on the
financial position, results of operations or cash flows of the Company.
F-12
177
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently not involved in any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 -- Financial Data Schedule
(b) Form 8-K
Filed on November 16, 1998.
F-13
178
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENTEK INFORMATION SYSTEMS, INC.
/s/ HOWARD L. MORGAN
------------------------------------
Howard L. Morgan
Chairman of the Board
/s/ PHILIP W. SHIRES
------------------------------------
Philip W. Shires
President and Chief Executive
Officer and
Interim Chief Accounting Officer
(Principal Executive Officer)
Date: May 14, 1999
F-14
179
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
180
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.