<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE SECURITIES EXCHANGE ACT OF 1934)
KENTEK INFORMATION SYSTEMS, INC.
(NAME OF THE ISSUER)
KE ACQUISITION CORP.
PHILIP W. SHIRES
(NAME OF THE PERSONS FILING STATEMENT)
COMMON STOCK $.01 PAR VALUE PER SHARE
(TITLE OF CLASS OF SECURITIES)
490807104
(CUSIP NUMBER OF CLASS OF SECURITIES)
----------------------
PHILIP W. SHIRES
KE ACQUISITION CORP.
2945 WILDERNESS PLACE
BOULDER, COLORADO 80301
TELEPHONE: (303) 440-5500
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE
NOTICES AND COMMUNICATIONS ON BEHALF OF PERSONS FILING STATEMENT)
----------------------
COPY TO:
JAMES H. CARROLL, ESQ. THOMAS R. STEPHENS, ESQ.
COOLEY GODWARD LLP BARTLIT BECK HERMAN PALENCHAR & SCOTT
2595 CANYON BOULEVARD, SUITE 250 511 SIXTEENTH STREET
BOULDER, COLORADO 80302 DENVER, COLORADO 80202
TELEPHONE: (303) 546-4000 TELEPHONE: (303) 592-3100
This statement is filed in connection with (check the appropriate box):
[X] (a) The filing of solicitation materials or an information statement subject
to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the Securities
Exchange Act of 1934.
[ ] (b) The filing of a registration statement under the Securities Act of 1933.
[ ] (c) A tender offer.
[ ] (d) None of the above. Check the following box if the soliciting materials
or information statement referred to in checking box (a) are preliminary copies.
[X]
CALCULATION OF FILING FEE:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TRANSACTION VALUATION* AMOUNT OF FILING FEE**
- --------------------------------------------------------------------------------
<S> <C>
$38,168,420 $7,633.68
- --------------------------------------------------------------------------------
</TABLE>
* For purposes of calculating the fee only. The amount assumes the
purchase of 4,604,152 shares of Common Stock, par value $.01 per share,
of Kentek Information Systems, Inc. at $8.29 net in cash per share for
shares not owned by the persons filing this statement.
** The amount of the filing fee calculated in accordance with Regulation
240.0-11 of the Securities Exchange Act of 1934 equals 1/50th of 1% of
the value of the shares to be purchased.
[ ] Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: Filing Parties:
Form or Registration No.: Date Filed:
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<PAGE> 2
INTRODUCTION
This Rule 13E-3 Transaction Statement (the "Schedule 13E-3") relates to a
Merger Agreement, dated as of May 14, 1999 (as amended from time to time, the
"Merger Agreement"), among Kentek Information Systems, Inc., a Delaware
corporation ("Kentek" or the "Company"), and KE Acquisition Corp., a Delaware
corporation ("Buyer"), pursuant to which Buyer will merge with and into Kentek
(the "Merger"). A copy of the Merger Agreement is filed as Annex A to the Proxy
Statement on Schedule 14A (the "Proxy Statement") filed by the Company with the
Securities and Exchange Commission (the "Commission") on the date hereof. This
Schedule 13E-3 is being filed by Buyer and Philip W. Shires, the sole
stockholder of Buyer.
The following responses and cross-references are being supplied pursuant to
General Instruction F to Schedule 13E-3 and show the locations in the Proxy
Statement (including all annexes and appendices thereto) of the information
required to be included in response to the items of this Schedule 13E-3. The
information set forth in the Proxy Statement, including all exhibits thereto, is
hereby expressly incorporated herein by reference and the responses to each item
of this Schedule 13E-3 are qualified in their entirety by reference to the
information contained in the Proxy Statement and the exhibits thereto.
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) Kentek is the issuer of the securities subject to this Schedule 13E-3.
The information set forth in the section entitled "Summary--The Company" is
incorporated herein by reference.
(b) The information set forth in the cover page to the Proxy Statement and
in the sections entitled "Price of the Common Stock" and "The Special
Meeting--Record Date; Stock Entitled to Vote; Quorum" is incorporated herein by
reference.
(c)-(d) The information set forth in the section entitled "Price of the
Common Stock" is incorporated herein by reference.
(e) Not applicable.
(f) The information set forth in the section entitled "Background of the
Merger--Industry Background" is incorporated herein by reference.
ITEM 2. IDENTITY AND BACKGROUND.
(a)-(d) and (g) This Statement is being filed by Buyer and Philip W.
Shires, the sole stockholder of Buyer. See "Buyer". The information set forth in
the cover page to the Proxy Statement and in the sections entitled "Summary--The
Buyer," "--The Company," "Buyer," and Annex D to the Proxy Statement is
incorporated herein by reference.
(e)-(f) Neither the Company nor Buyer, or to the best knowledge of the
officers and directors of Buyer and the Company, any of the persons listed in
Annex D to the Proxy Statement has, during the last five years, been convicted
in a criminal proceeding (excluding traffic violations and similar misdemeanors)
or been a party to a civil proceeding that resulted in a judgment, decree or
final order finding any violation of U.S. or state securities laws or enjoining
further violations of, or prohibiting activities to, any such law.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a)(1) The information set forth in the sections entitled "Background of
the Merger--Background of the Proposed Merger Transaction," "--Certain
Transactions," and "Special Factors--Certain Effects of the Transaction" is
incorporated herein by reference.
(2) The information set forth in the sections entitled "Special Factors"
and "Background of the Merger" is incorporated herein by reference.
1.
<PAGE> 3
(b) The information set forth in the sections entitled "Special Factors,"
"Background of the Merger--Background of the Proposed Merger Transaction,"
"--Plans For the Company After the Merger; Conduct of the Business of the
Company if the Merger is not Consummated" and "--Certain Effects of the
Transaction" is incorporated herein by reference.
ITEM 4. TERMS OF THE TRANSACTION.
(a)-(b) The information set forth in the sections entitled "Certain
Provisions of the Merger Agreement," "The Merger," "Special Factors--Certain
Effects of the Transaction," "Background of the Merger--Background of the
Proposed Merger Transaction" and "--Plans for the Company After the Merger;
Conduct of the Business of the Company if the Merger is not Consummated" is
incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a)-(g) The information set forth in the sections entitled "Special
Factors--Certain Effects of the Transaction," "Background of the Merger--Plans
for the Company After the Merger; Conduct of the Business of the Company if the
Merger is not Consummated," "The Merger," "Certain Provisions of the Merger
Agreement" and "Price of the Company Common Stock" is incorporated herein by
reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(d) The information set forth in the sections entitled "The
Merger--Merger Financing" and "Certain Provisions of the Merger
Agreement--Payment of Fees and Expenses" is incorporated herein by reference.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a)-(c) The information set forth in the sections entitled "Special
Factors--Purpose and Structure of the Merger" and "Background of the
Merger--Plans For the Company After the Merger; Conduct of the Business of the
Company if the Merger is not Consummated" is incorporated herein by reference.
(d) The information set forth in the sections entitled "The Merger--Certain
Federal Income Tax Consequences," "--Accounting Treatment," "Certain Provisions
of the Merger Agreement--Structure; Timing," "--Merger Consideration,"
"--Employee and Director Stock Options," "--Conversion of Shares,"
"--Consequences of the Merger" and "Special Factors--Certain Effects of the
Transaction" is incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) The information set forth in the sections entitled "Special
Factors--Purpose and Structure of the Merger" and "Background of the
Merger--Reasons of the Company for the Merger; Fairness of the Merger" is
incorporated herein by reference.
(b) The information set forth in the sections entitled "Special
Factors--Purpose and Structure of the Merger," "Background of the
Merger--Reasons of the Company for the Merger; Fairness of the Merger,"
"--Background of the Proposed Merger Transaction" and "--Opinion of Financial
Advisor to the Special Committee" is incorporated herein by reference.
(c) The information set forth in the section entitled "The Special
Meeting--Required Votes" is incorporated herein by reference.
(d) The information set forth in the sections entitled "Background of the
Merger--Opinion of Financial Advisor to the Board and the Special Committee,"
"--Background of the Proposed Merger Transaction" and "--Reasons of the Company
for the Merger; Fairness of the Merger" is incorporated herein by reference.
2.
<PAGE> 4
(e) The information set forth in the cover page to the Proxy Statement and
in the sections entitled "Background of the Merger--Recommendation of the
Special Committee and the Board of Directors" is incorporated herein by
reference.
(f) Not applicable.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) The information set forth in the sections entitled "Background of the
Merger--Background of the Proposed Merger Transaction" and "--Opinion of
Financial Advisor to the Board and the Special Committee" is incorporated herein
by reference.
(b)(1)-(5) The information set forth in the sections "Background of the
Merger--Background of the Proposed Merger Transaction" and "--Opinion of
Financial Advisor to the Board and the Special Committee" is incorporated herein
by reference.
(b)(6) The information set forth in the section entitled "Background of the
Merger--Opinion of Financial Advisor to the Board and the Special Committee" is
incorporated herein by reference.
(c) The information set forth in the sections entitled "Available
Information" and "Special Factors--Opinion of Financial Advisor to the Special
Committee" is incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) The information set forth in the sections entitled "Security Ownership
of Certain Beneficial Owners and Management," "The Merger--Interests of Certain
Persons in the Merger" and Annex D to the Proxy Statement is incorporated herein
by reference.
(b) The information set forth in the sections entitled "Security Ownership
of Certain Beneficial Owners and Management" is incorporated herein by
reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES.
The information set forth in the sections entitled "Background of the
Merger--Background of the Proposed Merger Transaction," "The Merger--Merger
Financing" and "Certain Provisions of The Merger Agreement" is incorporated
herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION.
(a) The information set forth in the sections entitled "Summary--The
Special Meeting," "--Security Ownership of Management," "The Merger--Interests
of Certain Persons in The Merger" and "The Special Meeting--Required Votes" is
incorporated herein by reference.
(b) The information set forth in the sections entitled "Special
Factors--Purpose and Structure of the Merger," "Background of the
Merger--Recommendation of the Special Committee and the Board of Directors,"
"--Background of the Proposed Merger Transaction" and "--Reasons of the Company
for the Merger; Fairness of the Merger" is incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in the sections entitled "Appraisal Rights,"
"The Special Meeting--Appraisal Rights" and "Annex C--Section 262 of the
Delaware General Corporation Law" is incorporated herein by reference.
3.
<PAGE> 5
(b) Not applicable.
(c) Not applicable.
ITEM 14. CONSOLIDATED FINANCIAL STATEMENTS.
(a)(1) The information set forth in the section entitled "Annex E--Annual
Report on Form 10-K for the Fiscal Year Ended June 30, 1998" is incorporated
herein by reference.
(2) The information set forth in the section entitled "Annex F--Quarterly
Report on Form 10-Q for the Period Ended March 31, 1999" is incorporated herein
by reference.
(3)-(4) The information set forth in the section entitled "Selected
Consolidated Financial Data of the Company" is incorporated herein by reference.
(b)(1)-(3) Not applicable.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) The information set forth in the sections entitled "Background of the
Merger--Background of the Proposed Merger Transaction" and "The Special
Meeting--Solicitation of Proxies" is incorporated herein by reference.
(b) The information set forth in the sections entitled "The Special
Meeting--Solicitation of Proxies" and "Certain Provisions of the Merger
Agreement--Payment of Fees and Expenses," is incorporated herein by reference.
ITEM 16. ADDITIONAL INFORMATION.
Additional Information is set forth in the Proxy Statement which is
incorporated herein by reference in its entirety.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
The Exhibit Index attached to this Transaction Statement is incorporated
herein by reference.
4.
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SIGNATURE
AFTER DUE INQUIRY AND TO THE BEST OF ITS KNOWLEDGE AND BELIEF, EACH OF THE
UNDERSIGNED CERTIFIES THAT THE INFORMATION SET FORTH IN THIS STATEMENT IS TRUE,
COMPLETE AND CORRECT.
Dated: June 3, 1999 KE ACQUISITION CORP.
By: /s/ Philip W. Shires
-----------------------------
Name: Philip W. Shires
Title: President
/s/ Philip W. Shires
--------------------------------
PHILIP W. SHIRES
<PAGE> 7
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
17(a) Not Applicable
17(b)(1) Fairness Opinion of Janney Montgomery Scott (incorporated herein by reference to Annex
B to the Proxy Statement filed as Exhibit 17(d)(1) hereto).
17(b)(2) Presentation to the Board of Directors of Kentek Information Systems, Inc., by Janney
Montgomery Scott, dated May 14, 1999.
17(c)(1) Merger Agreement, dated as of May 14, 1999, among Kentek and Buyer (incorporated herein by
reference to Annex A to the Proxy Statement filed as Exhibit 17(d)(1) hereto).
17(d)(1) Proxy Statement (filed herewith).
17(e) Section 262 of the Delaware General Corporation Law (incorporated herein by reference to Annex
C to the Proxy Statement filed as Exhibit 17(d)(1) hereto).
17(f) Not applicable.
</TABLE>
<PAGE> 1
EXHIBIT (17)(b)(2)
FAIRNESS OPINION PRESENTATION TO THE
BOARD OF DIRECTORS
OF
KENTEK INFORMATION SYSTEMS, INC.
MAY 14, 1999
<PAGE> 2
TABLE OF CONTENTS
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SECTION
(1) BACKGROUND
(2) KEY ELEMENTS OF THE TRANSACTION
(3) HISTORICAL FINANCIAL RESULTS
(4) PROJECTED FINANCIAL RESULTS
(5) COMPARABLE COMPANY ANALYSIS
(6) COMPARABLE TRANSACTION ANALYSIS
(7) DISCOUNTED CASH FLOW ANALYSIS
(8) LIQUIDATION ANALYSIS
(9) VALUATION SUMMARY
EXHIBITS
Comparable Company Detail
Form of Fairness Opinion
2 [JANNEY MONTGOMERY SCOTT LOGO]
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BACKGROUND
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[JANNEY MONTGOMERY SCOTT LOGO]
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BACKGROUND
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o On April 17, 1996, Kentek Information Systems, Inc. ("Kentek" or the
"Company") completed its initial public offering ("IPO") of 2,200,000
shares of its common stock at $8 per share, raising $15.6 million in net
proceeds.
o Prior to the Company's IPO, and for a good period thereafter, Kentek was a
leading supplier of heavy-duty, high reliability, mid-range, non-impact
laser printers and related consumable supplies and spare parts.
o Over the past couple of years, the mid-range printer market has been
characterized by:
*printers that could print 30 to 60 pages per minute ("ppm") and 30,000
to 400,000 pages per month; and
*printers that were designed primarily for high-volume printing
requirements, including (i) production printing applications, (ii)
print-on-demand applications, and (iii) computer network applications.
o Kentek printers enjoyed a dominant position in the mid-range market:
*Lowest jam rate in the industry due to "straight paper path" design.
*Lowest cost-per-page in the industry.
[JANNEY MONTGOMERY SCOTT LOGO]
4
<PAGE> 5
BACKGROUND (CONTINUED)
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o In 1998, however, trends unfavorable to Kentek and similar mid-range
printer companies surfaced. The three major trends that had the most
negative impact on Kentek were (i) the dramatic speed, duty-cycle, and
cost-of-operation improvements in light-duty printers, (ii) the tremendous
growth of distributed network printing using the new, lower cost, and
faster light-duty printers, and (iii) Xerox's marketing war with Hewlett
Packard ("HP") for dominance in the office and departmental market.
IMPROVEMENT IN LIGHT-DUTY PRINTERS:
o Lower-end printers used to be 10-20 ppm behind those printers that defined
the mid-range market.
o Printer companies that specialized in the mid-range market often were
successful in quickly introducing new printers that were faster than their
previous respective models, thus maintaining their advantage over lower-end
printers.
o Several product delays (most notably the delay of HP's 30 ppm printer)
allowed other competitors such as Lexmark and Xerox to enter the mid-range
market.
o As these new market entrants began to develop faster lower-end printers,
competition for market share increased as these printers began migrating
into the mid-range market.
[JANNEY MONTGOMERY SCOTT LOGO]
5
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BACKGROUND (CONTINUED)
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RAPID GROWTH OF DISTRIBUTED NETWORKS:
o As networked offices became more prevalent in the workplace, preference
shifted from offices with 1-2 centralized, bulky printers for everyone to
offices with multiple printers, each serving a small group of individuals.
o Because the lower-end printers that were entering the marketplace were (i)
smaller, (ii) easier to install, and (iii) had a considerably lower
acquisition cost than true mid-range printers, they quickly became the
printers-of-choice in the new office printer paradox.
o Though true mid-range printers such as those offered by Kentek are more
cost-effective in the long-run (as measured by cost per page where volume
and print coverage are high), office managers worried about meeting budget
requirements and maximizing short-term profitability (on which bonuses are
usually based) have opted instead for lower-end printers with cheaper
acquisition costs.
XEROX VERSUS HEWLETT PACKARD:
o In the mid-1990s, Xerox, the pre-eminent supplier of office copiers
worldwide, took notice of trends showing office copier machines were slowly
being replaced by both mid-range printers and printer/copiers with similar
speeds.
[JANNEY MONTGOMERY SCOTT LOGO]
6
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BACKGROUND (CONTINUED)
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XEROX VERSUS HEWLETT PACKARD (CONTINUED):
o Recognizing the need to re-invent itself, Xerox began work on
printer/copiers that could compete in the office sector. HP's delay in
introducing its 30 ppm printer afforded Xerox the opportunity to easily
enter the mid-range printer market.
o With practically unlimited resources at their disposal to develop their new
printer/copiers, Xerox was successful in winning market share away from not
only HP but other industry participants. Xerox's efforts have recently
cumulated with the introduction of a 40 ppm printer/copier (with a
development cost of close to $500 million) that surprised most players in
the printer industry.
o Xerox has taken steps to ensure continued dominance in the departmental,
office sector by:
o expanding the market to OEMs,
o expanding the market through resellers,
o controlling sales channel by directly selling their products,
o offering customers a low up-front purchase price or alternatively, low
monthly lease terms, and
o fully utilizing their majority ownership of Fuji (and Fuji's
technology) to quickly achieve product evolution.
o Xerox is in essence leading the forced attrition of mid-range printers from
the departmental, office sector.
[JANNEY MONTGOMERY SCOTT LOGO]
7
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BACKGROUND (CONTINUED)
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o Running parallel to the problems presented by negative industry trends was
Kentek's inability to develop their 60 ppm printer, the KW60.
o Prior to the KW60, Kentek successfully stayed a step ahead of the
competition by continually introducing faster printers before their
competitors could catch up. The KW60 was suppose to be the next genesis of
this trend.
o Having spent approximately $15 million over a two year period, the Company
believed they were close to finishing development of the KW60. On November
2, 1998, the Company was informed that development was not close to
completion. Certain aspects of the technology had proven to be very
complex, requiring more time and resources than originally planned.
o After estimating that at least another 2 years and $20 million would be
required to bring KW60 to fruition, the Company decided to halt further
development.
[JANNEY MONTGOMERY SCOTT LOGO]
8
<PAGE> 9
BACKGROUND (CONTINUED)
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o On February 24, 1999, Howard Morgan, the Company's Chairman, approached
Kentek's management ("Management") to discuss whether they had an interest
in purchasing the firm.
o On March 8, 1999, Management, led by President and Chief Executive Officer
Phil Shires, indicated its willingness to acquire the Company's outstanding
common stock 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 right to receive
some form of additional consideration.
o In response to the management buyout offer (the "MBO"), Kentek's Board of
Directors formed a Special Committee to review the advisability of the
proposal. The Special Committee had discussions with Printronix, Lexmark,
Genicom and Miami Computer Services to solicit their interest in acquiring
Kentek but all of the aforementioned parties respectfully declined.
o On May 10, 1999, negotiations between the Special Committee and Phil Shires
led to Management revising upwards their offer price to $8.29 per share in
cash (the "Amended MBO").
o Janney Montgomery Scott has been engaged by the Special Committee to
express an opinion as to the fairness, from a financial point of view, of
the Amended MBO to the holders of the Company's common stock.
[JANNEY MONTGOMERY SCOTT LOGO]
9
<PAGE> 10
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KEY ELEMENTS OF THE TRANSACTION
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 11
ECONOMICS AND TIMING
- --------------------------------------------------------------------------------
o The Transaction offers to purchase all of the outstanding shares of
Kentek's common stock for $8.29 per share in cash.
o The Transaction offers to include in Kentek's shares outstanding those
options that have vested prior to the close of the Transaction. Holders of
options not vested will not receive consideration unless their options are
exercisable in a sale or merger of the Company. Holders of these vested
options will only be entitled to the "in-the-money" value of each option
(calculated by subtracting the option's strike price from $8.29).
o The Transaction is expected to close sometime in late July or early August.
[JANNEY MONTGOMERY SCOTT LOGO]
11
<PAGE> 12
COMMON STOCK AND EQUIVALENTS OUTSTANDING
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Common Shares Outstanding @ 04/28/99 4,591,447
Plus: Morgan's Exercise + 7,705
Kann's Exercise + 5,000
Board Options + 166,912
Vested Employee Options + 29,327
Morgan's Sale-of-Company + 30,000
Less: Shire's Shares - 61,500
------------
Total Shares to be Purchased 4,768,891
</TABLE>
[JANNEY MONTGOMERY SCOTT LOGO]
12
<PAGE> 13
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HISTORICAL FINANCIAL RESULTS
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 14
HISTORICAL INCOME STATEMENT
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<PAGE> 15
HISTORICAL INCOME STATEMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended June 30,
----------------------------------------------------------- (1)
1995 1996 1997 1998 1999(P)
------- ------- ------- ------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net Revenues $70,192 $74,381 $56,460 $45,053 $36,035
Growth (Decline) in Revenues (11.0)% 6.0% (24.1)% (20.2)% (20.0)%
Cost of Sales 48,449 44,408 30,443 22,324 17,141
------- ------- ------- ------- --------
Gross Profit 21,743 29,973 26,017 22,729 18,894
Gross Margin 31.0% 40.3% 46.1% 50.4% 52.4%
Operating Expenses 13,519 15,048 17,487 17,208 16,048
------- ------- ------- ------- --------
Operating Cash Flow (EBITDA) 8,224 14,925 8,530 5,521 2,846
------- ------- ------- ------- --------
Operating Income (EBIT) 6,406 13,277 7,249 4,243 2,271
------- ------- ------- ------- --------
Profit (Loss) Before Taxes 5,961 13,465 8,626 7,557 5,180
------- ------- ------- ------- --------
Net Income $ 5,035 $13,102 $ 4,761 $ 4,977 $ 4,071
======= ======= ======= ======= ========
Earnings Per Share $ 0.99 $ 2.42 $ 0.69 $ 0.70 $ 0.71
</TABLE>
NET SALES
[GRAPH]
OPERATING CASH FLOW
[GRAPH]
(1) Based on actual results for Q1-Q3 and management's estimate of Q4 results.
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 16
HISTORICAL BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------(1)
1995 1996 1997 1998 1999(P)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets: (in thousands, except per share data)
- ------
Cash and Investments $ 6,389 $ 25,992 $ 34,590 $ 42,655 $ 33,709
Accounts Receivable, net 7,822 7,098 6,213 5,297 3,321
Inventory, net 12,613 13,868 10,074 7,725 5,596
Other Current Assets 8,358 9,320 3,673 2,701 2,567
-------- -------- -------- -------- --------
Current Assets 35,182 56,278 54,550 58,378 45,193
Net Fixed Assets 2,715 1,631 1,721 1,794 1,519
Other Assets 1,814 2,336 1,381 1,300 1,068
-------- -------- -------- -------- --------
Total Assets $ 39,711 $ 60,245 $ 57,652 $ 61,472 $ 47,780
======== ======== ======== ======== ========
Liabilities:
- -----------
Accounts Payable $ 6,399 $ 4,145 $ 3,324 $ 2,200 $ 1,350
Current Maturities of LT Debt 101 5,035 -- -- --
Accrued Expenses and Other 3,176 4,238 3,165 3,050 2,368
-------- -------- -------- -------- --------
Current Liabilities 9,676 13,418 6,489 5,250 3,718
LT Debt 6,651 115 -- -- --
Other Liabilities 700 545 502 505 350
-------- -------- -------- -------- --------
Total Liabilities 17,027 14,078 6,991 5,755 4,068
-------- -------- -------- -------- --------
Stockholders' Equity:
- --------------------
Preferred Equity 568 -- -- -- --
Common Stock 8 68 69 71 72
Treasury Stock -- -- -- -- (15,179)
Additional Paid in Capital 31,484 43,463 43,945 44,821 43,842
Translation Gain (Loss) 541 (549) (753) (988) (460)
Retained Earnings (9,917) 3,185 7,400 11,813 15,884
Dividend -- -- -- -- (447)
-------- -------- -------- -------- --------
Total Equity 22,684 46,167 50,661 55,717 43,712
-------- -------- -------- -------- --------
Total Liabilities & Equity $ 39,711 $ 60,245 $ 57,652 $ 61,472 $ 47,780
======== ======== ======== ======== ========
</TABLE>
(1) Based on actual results for Q1-Q3 and management's estimate of Q4 results.
[JANNEY MONTGOMERY SCOTT LOGO]
15
<PAGE> 17
HISTORICAL CASH FLOW STATEMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------(1)
1995 1996 1997 1998 1999(P)
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net Income (Loss) $ 5,035 $ 13,102 $ 4,761 $ 4,977 $ 4,701
Depreciation 1,818 1,648 1,281 1,278 575
Other Non-Cash Items 130 (3,465) (409) (1,455) (10)
Changes in Assets and Liabilities 4,033 (1,568) (4,929) (661) 2,948
-------- -------- -------- -------- --------
Cash Provided by Operating Activities 11,016 9,717 704 4,139 8,214
-------- -------- -------- -------- --------
Cash Provided by Investing Activities (1,758) (820) (3,004) (5,776) (300)
-------- -------- -------- -------- --------
Financing Activities:
Net Borrowings (Payment) of Debt (8,490) (85) (5,150) -- (155)
Dividends Paid -- -- (546) (564) (447)
Treasury Stock (Purchases)/Sales -- -- -- -- (15,179)
Proceeds from Sale of Stock -- 17,600 483 878 (907)
Effect of Other Financing Activities -- (6,129) -- -- --
-------- -------- -------- -------- --------
Cash Provided by Financing Activities (8,490) 11,386 (5,213) 314 (16,688)
-------- -------- -------- -------- --------
Effect of exchange rate changes 1,590 (680) (263) (546) 528
-------- -------- -------- -------- --------
Net increase (decrease) in cash 2,358 19,603 (7,776) (1,869) (8,246)
Cash - bop 4,031 6,389 25,992 18,216 16,347
-------- -------- -------- -------- --------
Cash - eop $ 6,389 $ 25,992 $ 18,216 $ 16,347 $ 8,101
======== ======== ======== ======== ========
</TABLE>
(1) Based on actual results for Q1-Q3 and management's estimate of Q4 results.
[JANNEY MONTGOMERY SCOTT LOGO]
16
<PAGE> 18
STOCK PERFORMANCE - KENTEK INFORMATION SYSTEMS, INC.
- --------------------------------------------------------------------------------
[GRAPH]
[JANNEY MONTGOMERY SCOTT LOGO]
17
<PAGE> 19
STOCK PERFORMANCE - PEER GROUP
- --------------------------------------------------------------------------------
[GRAPH]
Note: The comp group includes the following companies: Kentek Information
Systems, Axiohm Transaction Solutions, Bull Run Corp, Genicom Corp,
Lexmark International Group, Printronix, QMS Inc., Transact Technologies,
Tridex Corp and Zebra Technologies.
[JANNEY MONTGOMERY SCOTT LOGO]
18
<PAGE> 20
STOCK PERFORMANCE - PEER GROUP
- --------------------------------------------------------------------------------
[GRAPH]
19 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 21
SHAREHOLDER PROFILE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Directors and Exec Officers(1) 1,271,247
Institutional Investors 2,372,600
Retail Float 1,125,044
---------
Total Shares Outstanding(2) 4,768,891
</TABLE>
[GRAPH]
(1) Excludes shares owned by Phil Shires.
(2) Source: Technimetrics, Proxy and Management estimates.
[JANNEY MONTGOMERY SCOTT LOGO]
20
<PAGE> 22
PROJECTED FINANCIAL RESULTS
- --------------------------------------------------------------------------------
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 23
PROJECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following projected financial data for Kentek Information Systems, Inc. has
been reviewed by the Company's management. Janney has relied upon the assessment
of the management of the Company regarding the Company's business and prospects,
and assumed that the projections were reasonably prepared on basis reflecting
the best currently available estimates.
22 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 24
PROJECTED REVENUE BREAKDOWN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended June 30,
-------------------------------------------------------------------
2000 2001 2002 2003 2005
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Printers - IBM (a) $ -- $ -- $ -- $ -- $ --
Printers - OEM (b) 3,400 1,600 -- -- --
-------- -------- -------- -------- --------
Total Printer Revenue 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
-------- -------- -------- -------- --------
Total Supplies Revenue 18,000 14,515 12,018 8,518 5,518
Parts - IBM (f) 750 350 250 100 100
Parts - OEM (g) 1,501 1,000 1,000 500 500
Other 48 30 15 10 5
-------- -------- -------- -------- --------
Total Parts and Other Revenue 2,299 1,380 1,265 610 605
Total Revenue $ 23,699 $ 17,495 $ 13,283 $ 9,128 $ 6,123
======== ======== ======== ======== ========
UNIT SALES DATA (ACTUAL)
Printers IBM -- -- -- -- --
Printers - OEM 400 200 -- -- --
UNIT PRICE DATA (WEIGHTED AVERAGE)
Printers - IBM $ -- $ -- $ -- $ -- $ --
Printers - OEM $ 8,500 $ 8,000 $ 7,500 $ 7,000 $ 6,500
Supplies - OEM (15% cloning adjust.) $ 5,029 $ 5,029 $ 5,029 $ 5,029 $ 5,029
</TABLE>
[JANNEY MONTGOMERY SCOTT LOGO]
23
<PAGE> 25
PROJECTED REVENUE BREAKDOWN - FOOTNOTES
- --------------------------------------------------------------------------------
(a) PRINTERS - IBM. The Company has had no IBM printer sales since FY 1996.
(b) PRINTERS - OEM. Company may stop building printers by September 1999. At
that time, the Company will only have not more than 600 printers on hand,
which it believes it can sell over the next two fiscal years to mostly
financial services players. Likely buyers include (but are not limited to):
Unisys, Oce, Tally, Banctec, NCR, Printer Systems International, Print
Assist and Trisquare.
(c) SUPPLIES - LEXMARK. Projected using historical statistical trends. The
Company does not have accurate data available as to how many printers
remain in the Lexmark installed base; therefore, they are unable to project
these revenues utilizing unit data.
(d) SUPPLIES - OEM. Projected using historical statistical trends. The Company
does not have accurate data available as to how many printers remain in
their installed base; therefore, they are unable to project these revenues
utilizing unit data.
(e) SUPPLIES - OEM NEW. Assumes each new printer sold after FY1999 will produce
$5,029 in annual supplies revenue, after adjusting for potential cloning of
15%. We have assumed these revenues will continue over the 7 year life of
the printers, with the Company only realizing 50% of these revenues in
years 1 and 7 and 100% of these revenues in years 2 through 6.
(f) PARTS - IBM. Though not officially announced, the Company believes that IBM
is close to announcing end-of-life on Kentek printers, as evidenced by the
huge drop in part sales to IBM in recent years. The Company assumes that
minimal, declining sales will occur over the next five years as independent
supplies resellers form some sort of sales channel for these parts.
(g) PARTS - OEM. Company's estimate as to the amount of parts that will be sold
in conjunction with the sale of the remaining 600 printers. Projections
based on historical statistical data.
[JANNEY MONTGOMERY SCOTT LOGO]
24
<PAGE> 26
PROJECTED INCOME STATEMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended June 30,
-----------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except share data)
Net Revenues $ 23,699 $ 17,495 $ 13,283 $ 9,128 $ 6,123
Cost of Sales 12,323 9,097 6,907 4,746 3,184
-------- -------- -------- -------- --------
Gross Profit 11,375 8,397 6,376 4,381 2,939
Operating Expenses:
Sales & Marketing 1,145 1,000 800 500 200
General & Administrative 2,299 2,000 1,700 1,250 1,000
Engineering/R&D 1,075 750 500 300 --
Operations 2,064 1,200 1,000 750 600
Other 308 120 100 80 50
-------- -------- -------- -------- --------
Total Operating Expenses 6,891 5,070 4,100 2,880 1,850
-------- -------- -------- -------- --------
Operating Cash Flow (EBITDA) 4,484 3,327 2,276 1,501 1,089
Depreciation & Amortization 564 300 300 300 200
-------- -------- -------- -------- --------
Operating Income (EBIT) 3,920 3,027 1,976 1,201 889
Interest (Income)/Expense 200 200 200 186 144
-------- -------- -------- -------- --------
Profit (Loss) Before Taxes 3,720 2,927 1,776 1,015 745
Provision for Income Taxes 1,637 1,244 781 447 328
-------- -------- -------- -------- --------
Net Income $ 2,083 $ 1,583 $ 994 $ 569 $ 417
======== ======== ======== ======== ========
</TABLE>
[JANNEY MONTGOMERY SCOTT LOGO]
25
<PAGE> 27
PROJECTED BALANCE SHEET - ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except share data)
Assets:
Cash and Investments $ 4,880 $ 5,720 $ 7,811 $ 9,197 $ 9,737
Accounts Receivable, net 2,922 2,157 1,638 1,125 755
Inventory, net 4,220 3,115 2,365 1,625 1,090
Piro-paid Expenses 375 325 275 200 150
Deferred Tax Asset 819 819 819 819 819
-------- -------- -------- -------- --------
Current Assets 13,216 12,136 12,908 12,967 12,551
Property & Office Equipment 7,117 7,377 7,577 7,777 7,977
Tooling 11,853 11,853 11,853 11,853 11,853
Accumulated Depreciation (17,202) (17,502) (17,802) (18,102) (18,302)
-------- -------- -------- -------- --------
Net Fixed Assets 1,768 1,728 1,628 1,528 1,528
Guaranty Deposits 136 136 100 50 --
Deferred Tax Asset 528 528 528 528 528
Other Assets 48 8 -- -- --
-------- -------- -------- -------- --------
Total Assets $ 15,696 $ 14,536 $ 15,164 $ 15,073 $ 14,607
======== ======== ======== ======== ========
</TABLE>
[JANNEY MONTGOMERY SCOTT LOGO]
26
<PAGE> 28
PROJECTED BALANCE SHEET - LIABILITIES AND EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Liabilities: (in thousands, except share data)
Bank Credit Lines 2,000 2,000 $ 2,000 $ 1,713 $ 1,149
Accounts Payable 1,215 897 681 468 314
Royalties Payable 468 468 468 468 468
Accrued Expenses 1,400 1,300 1,250 1,200 1,100
Other Current Liabilities 50 25 25 15 --
Current Maturities of LT Debt -- -- -- -- --
-------- -------- -------- -------- --------
Current Liabilities 5,133 4,690 4,424 3,864 3,031
Debentures -- -- -- -- --
LT Debt 2,100 -- -- -- --
NKJ Retirement Liability 450 250 150 50 --
-------- -------- -------- -------- --------
Total Liabilities 7,683 4,940 4,574 3,914 3,031
-------- -------- -------- -------- --------
Stockholders' Equity:
Common Stock -- -- -- -- --
Treasury Stock -- -- -- -- --
Additional Paid in Capital -- -- -- -- --
Translation Gain (Loss) (641) (641) (641) (641) (641)
Retained Earnings 8,653 10,237 11,231 11,800 12,217
Dividend -- -- -- -- --
-------- -------- -------- -------- --------
Total Equity 8,012 9,596 10,590 11,159 11,576
-------- -------- -------- -------- --------
Total Liabilities & Equity $ 15,696 $ 14,536 $ 15,164 $ 15,073 $ 14,607
======== ======== ======== ======== ========
</TABLE>
[JANNEY MONTGOMERY SCOTT LOGO]
27
<PAGE> 29
PROJECTED CASH FLOW STATEMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
Operating Activities: (in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Net Income (Loss) $ 2,083 $ 1,583 $ 994 $ 569 $ 417
Depreciation 564 300 300 300 200
Adjustments:
Accounts Receivable 399 765 519 512 370
Inventory 1,376 1,105 750 740 535
Other Current Assets 1,373 50 50 75 50
Other Assets 356 40 44 50 50
Accounts Payable and Accruals (585) (443) (266) (273) (269)
Other Liabilities (non-debt) 100 (200) (100) (100) (50)
-------- -------- -------- -------- --------
Cash Provided by Operating Activities 5,667 3,200 2,292 1,873 1,304
-------- -------- -------- -------- --------
Cash Used in Investing Activities:
Purchase of Equipment (813) (260) (200) (200) (200)
-------- -------- -------- -------- --------
Financing Activities:
Net Borrowings (Payment) of Debt (1,900) (2,100) -- (287) (564)
Dividends Paid 447 -- -- -- --
Treasury Stock (Purchases)/Sales -- -- -- -- --
Proceeds from sale of stock -- -- -- -- --
-------- -------- -------- -------- --------
Cash Provided by Financing Activities (1,453) (2,100) -- (287) (564)
-------- -------- -------- -------- --------
Effect of exchange rate changes (181) -- -- -- --
-------- -------- -------- -------- --------
Net increase (decrease) in cash 3,220 840 2,092 1,386 540
Cash - bop 1,660 4,880 5,720 7,811 9,197
-------- -------- -------- -------- --------
Cash - eop $ 4,880 $ 5,720 $ 7,811 $ 9,197 $ 9,737
======== ======== ======== ======== ========
</TABLE>
[JANNEY MONTGOMERY SCOTT LOGO]
28
<PAGE> 30
- -------------------------------------------------------------------------------
COMPARABLE COMPANY ANALYSIS
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 31
VALUATION TECHNIQUES
COMPARABLE COMPANY ANALYSIS
- -------------------------------------------------------------------------------
Comparable company analysis looks at the financial and stock market performance
of comparable publicly traded companies. Through reference to various earnings,
cash flow and balance sheet multiples, it is possible to "imply" a composite
reference trading value. Comparable company analysis is therefore extremely
important when evaluating the value to be realized through a sale.
The selection of appropriate comparable companies is often a difficult task,
and this is true in the case of Kentek. However, we believe the following
companies represent an appropriate comparable company group for Kentek and the
Transaction:
o Axiohm Transaction Solutions o QMS Inc.
o Bull Run Corp. o Transact Technologies Inc.
o Genicom Corp. o Tridex Corp.
o Lexmark International Group Inc. o Zebra Technologies
o Printronix Inc.
[JANNEY MONTGOMERY SCOTT LOGO]
30
<PAGE> 32
COMPARABLE COMPANY ANALYSIS
SUMMARY VALUES AND MULTIPLES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET LTM LTM LTM LTM 1999(P) 2000(P)
CAP REVENUE EBITDA EBIT NET INCOME EPS EPS
----------- ----------- --------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
KENTEK $ 39,132 $ 39,810 $ 3,156 $ 1,889 $ 3,422 $ 0.38 $ 0.57
Axiohm Transaction Solutions $ 26,892 $ 231,011 $ 68,764 $ 26,501 $ 5,472 N/A N/A
Bull Run Corp 84,898 29,848 1,892 770 2,360 N/A N/A
Genicom Corp 21,041 452,540 25,102 3,022 (13,059) 0.13 N/A
Lexmark Intl Grp Inc 7,951,642 3,020,599 458,400 382,800 243,000 4.32 5.14
Printronix Inc 91,615 176,679 22,246 14,347 12,794 N/A N/A
QMS Inc 36,777 144,251 12,315 2,087 1,536 N/A N/A
Transact Technologies Inc 21,887 52,239 4,478 2,448 1,386 N/A 0.51
Tridex Corp 14,329 43,504 300 (2,964) (3,586) 0.25 N/A
Zebra Technologies 1,056,975 335,983 79,964 69,716 44,917 2.07 2.53
<CAPTION>
ENTERPRISE VALUE/ EQUITY VALUE/
STOCK ----------------------------------- --------------------------------------
PRICE LTM LTM LTM LTM 1999(P) 2000(P)
(05/03/99) REVENUE EBITDA EBIT NET INCOME NET INCOME NET INCOME
----------- ------- ------ ---- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
KENTEK $ 7.88 0.1 x 1.5 x 2.5 x 16.0 x 20.7 x 13.9 x
Axiohm Transaction Solutions $ 4.13 0.9 x 3.0 x 7.7 x 4.9 x N/A N/A
Bull Run Corp 3.81 4.7 x 74.4 x 182.7 x 38.1 x N/A N/A
Genicom Corp 1.81 0.3 x 5.1 x 42.7 x NM 13.9 x N/A
Lexmark Intl Grp Inc 123.44 2.6 x 17.4 x 20.8 x 36.3 x 28.6 x 24.0 x
Printronix Inc 13.75 0.5 x 3.7 x 5.7 x 8.1 x N/A N/A
QMS Inc 3.44 0.3 x 3.5 x 20.6 x 24.6 x N/A N/A
Transact Technologies Inc 3.94 0.5 x 6.1 x 11.1 x 19.7 x N/A 7.7 x
Tridex Corp 2.25 0.9 x 133.5 x NM NM 9.0 x N/A
Zebra Technologies 34.13 2.7 x 11.2 x 12.8 x 23.7 x 16.5 x 13.5 x
</TABLE>
31 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 33
COMPARABLE COMPANY ANALYSIS
SUMMARY OF KEY MULTIPLES AND PRICE RANGE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ENTERPRISE VALUE/ EQUITY VALUE/
------------------------------- -----------------------------------
LTM LTM LTM LTM 1999(P) 2000(P)
REVENUE EBITDA EBIT NET INCOME NET INCOME NET INCOME
------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <S> <C> <C> <C>
High 4.7 x 133.5 x 182.7 x 38.1 x 28.6 x 24.0 x
Low 0.3 3.0 5.7 4.9 9.0 7.7
Median 0.9 6.1 16.7 23.7 15.2 13.5
Adjusted Average(1) 1.2 17.3 19.3 22.5 15.2 13.5
</TABLE>
<TABLE>
<CAPTION>
KENTEK - PER SHARE EQUITY VALUE
---------------------------------------------------------------------------
LTM (2) LTM (2) LTM (2) LTM (2) 1999(P) 2000(P)
REVENUE(3) EBITDA (3) EBIT (3) NET INCOME NET INCOME NET INCOME
------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <S> <C> <C> <C>
KENTEK $39,810 $ 3,156 $ 1,889 $ 3,422 $ 1,812 $ 2,694
Shares Outstanding (000) 4,769 4,769 4,769 4,769 4,769 4,769
High $ 39.35 $ 88.37 $ 72.37 $ 27.36 $ 10.86 $ 13.57
Low 2.38 1.97 2.26 3.53 3.42 4.36
Median 7.38 4.01 6.61 17.00 5.78 7.62
Adjusted Mean(1) 10.00 11.47 7.64 16.13 5.78 7.62
</TABLE>
(1) Adjusted to exclude the highest and lowest value before averaging.
(2) LTM results for period ending December 1998.
(3) Per share equity value calculated by subtracting Kentek's total debt of
$0.000 million from indicated enterprise value before dividing by shares
outstanding.
[JANNEY MONTGOMERY SCOTT LOGO]
32
<PAGE> 34
- --------------------------------------------------------------------------------
COMPARABLE TRANSACTION ANALYSIS
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 35
VALUATION TECHNIQUES
COMPARABLE TRANSACTION ANALYSIS
- ------------------------------------------------------------------------------
Comparable transaction analysis is conducted in much the same way as the
comparable company analysis, but makes reference to comparable mergers and
acquisitions. Data from completed transactions must be evaluated in the context
of the market conditions prevailing at that time of acquisition and then
adjusted to reflect current market conditions. Comparable acquisition analysis
attempts to identify what "multiples" acquirors have been willing to pay in
comparable transactions. Comparable acquisitions are particularly meaningful
when evaluating 100% disposition, or acquisition, of controlling or strategic
stakes.
Every company has a unique business and financial condition. However, within
these constraints, we believe the transactions on the following pages represent
an appropriate group for evaluating the Transaction:
34 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 36
COMPARABLE TRANSACTION ANALYSIS
SUMMARY OF CORPORATE INFORMATION
- ------------------------------------------------------------------------------
Mergers and Acquisitions in the Computer Peripheral Industry (1)
==============================================================================
<TABLE>
<CAPTION>
Date Date
Effective Announced Target Target Description
- --------- --------- ------ ------------------
<S> <C> <C> <C>
10/2/1996 7/23/1996 Texas Instr-Worldwide Printer Mnfr computer printers
8/11/1997 7/9/1997 Digital Equipment Printing Sys Pvd printing services
10/2/1997 7/15/1997 DH Technology Inc Mnfr whl computer printers
10/28/1997 7/15/1997 Intl Imaging Materials Mnfr thermal transfer ribbons
11/17/1997 11/7/1997 Novadyne Computer Systems Pvd information technology svc
1/12/1998 11/4/1997 Computer Vision Corp Mnfr computers, peripherals
2/25/1998 1/16/1998 Checkmate Electronics Inc Mnfr, whl payment systems
3/2/1998 1/15/1998 Globalcenter (Global Village) Mnfr computer peripherals
4/16/1998 3/30/1998 PureSpeech Inc Dvlp speech recognition prods
4/20/1998 2/25/1998 Progressive Software Inc Develop software
4/30/1998 3/6/1998 Proxima Corp Mnfr PC liq crys display prods
6/29/1998 4/22/1998 AccelGraphics Inc Mnfr graphics accelerators
7/8/1998 7/1/1998 Central Data Corp Mnfr, whl serial port devices
10/28/1998 7/9/1998 Eltron International Inc Mnfr computer printers
11/6/1998 11/6/1998 Adaptec Inc-Disk Drive Bus Manufacture disk drives
3/1/1999 3/1/1999 Amarex Technology Mnfr software-based peripheral
3/4/1999 12/2/1998 Pipelinks Inc Manufacture LAN system
3/12/1999 12/17/1998 Truevision Inc Mnfr color imaging products
3/19/1999 10/6/1998 Raster Graphics Inc Manufacture computer plotters
<CAPTION>
Date Date
Effective Announced Acquiror Acquiror Description Status
- --------- --------- -------- -------------------- ------
<S> <C> <C> <C> <C>
10/2/1996 7/23/1996 Genicom Corp Pvd printer maintenance svcs Completed
8/11/1997 7/9/1997 Genicom Corp Pvd printer maintenance svcs Completed
10/2/1997 7/15/1997 Axiohm SA Mnfr, whl computer printers Completed
10/28/1997 7/15/1997 Paxar Corp Mnfr label systems Completed
11/17/1997 11/7/1997 Genicom Corp Pvd printer maintenance svcs Completed
1/12/1998 11/4/1997 Parametric Technology Corp Develop, wholesale software Completed
2/25/1998 1/16/1998 International Verifact Inc Mnfr, whl electn payment sys Completed
3/2/1998 1/15/1998 Frontier Corp Pvd telecommunications svcs Completed
4/16/1998 3/30/1998 Voice Control Systems Dvlp computer integrated sys Completed
4/20/1998 2/25/1998 Tridex Corp Mnfr terminal devices Completed
4/30/1998 3/6/1998 ASK AS Mnfr liquid crystal displays Completed
6/29/1998 4/22/1998 Evans & Sutherland Computer Mnfr computer graphics system Completed
7/8/1998 7/1/1998 Digi International Inc Mnfr data common hardware Completed
10/28/1998 7/9/1998 Zebra Technologies Corp Mnfr bar code printing sys Completed
11/6/1998 11/6/1998 Texas Instruments Inc Mnfr semiconductors, computers Completed
3/1/1999 3/1/1999 Comverse Technology Inc Mnfr telecommunications equip Completed
3/4/1999 12/2/1998 Cisco Systems Inc Mnfr inter-networking systems Completed
3/12/1999 12/17/1998 Pinnacle Systems Inc Mnfr special effects computers Completed
3/19/1999 10/6/1998 Gretag Imaging Group Inc Mnfr photofinishing equipment Completed
</TABLE>
(1) Using SIC code 3577 for Computer Peripherals, not otherwise classified.
35 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 37
COMPARABLE TRANSACTION ANALYSIS
SUMMARY OF TRANSACTION VALUES AND KEY MULTIPLES
- --------------------------------------------------------------------------------
Mergers and Acquisitions in the Computer Peripheral Industry (1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Target Deal Value to Target:
% Owned Deal Enterprise ------------------------------ -----------------------------
Target Post-Deal Value Value Net Sales EBITDA EBIT Net Sales EBITDA EBIT
- ---- --------- ----- ---------- --------- ------ ---- --------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Texas Instr-Worldwide Printer 100.0 27.0 np 132.9 -- 8.2 0.20 n/a 3.31
Digital Equipment-Printing Sys 100.0 3.1 np -- -- -- n/a n/a n/a
DH Technology Inc 85.0 169.5 167.6 103.0 17.6 13.8 1.65 9.62 12.25
Intl Imaging Materials 100.0 244.4 267.9 106.9 26.2 17.9 2.29 9.34 13.62
Novadyne Computer Systems 100.0 12.2 12.2 35.3 (0.6) (2.8) 0.35 nm nm
ComputerVision Corp 100.0 250.3 460.1 309.1 (29.8) (50.1) 0.81 nm nm
Checkmate Electronics Inc 100.0 47.2 46.9 33.7 0.0 (0.8) 1.40 nm nm
Globalcenter(Global Village) 100.0 190.3 np 17.4 (23.7) (25.7) 10.91 nm nm
PureSpeech Inc 100.0 13.1 9.8 1.1 (3.2) (3.8) 12.07 nm nm
Progressive Software Inc 100.0 48.5 48.4 33.8 2.3 2.0 1.43 21.09 24.02
Proxima Corp 100.0 82.9 70.0 133.3 (11.2) (15.8) 0.62 nm nm
AccelGraphics Inc 100.0 55.9 41.9 32.2 (1.6) (2.1) 1.74 nm nm
Central Data Corp 100.0 18.0 np 15.0 -- -- 1.20 n/a n/a
Eltron International Inc 100.0 287.7 282.2 116.6 22.1 19.3 2.47 13.01 14.91
Adaptec Inc-Disk Drive Bus 100.0 17.0 np -- -- -- n/a n/a n/a
Amarex Technology 100.0 16.6 np -- -- -- n/a n/a n/a
Pipelinks Inc 100.0 180.0 np -- -- -- n/a n/a n/a
Truevision Inc 100.0 11.5 8.0 30.5 (0.5) (1.7) 0.38 nm nm
Raster Graphics Inc 100.0 12.8 11.5 46.5 (12.3) (14.1) 0.28 nm nm
<CAPTION>
Enterprise Value to Target:
---------------------------
Target Net Sales EBITDA EBIT
- ---- --------- ------ -----
<S> <C> <C> <C>
Texas Instr-Worldwide Printer n/a n/a n/a
Digital Equipment-Printing Sys n/a n/a n/a
DH Technology Inc 1.63 9.51 12.11
Intl Imaging Materials 2.51 10.24 14.93
Novadyne Computer Systems 0.35 nm nm
ComputerVision Corp 1.49 nm nm
Checkmate Electronics Inc 1.39 nm nm
Globalcenter(Global Village) n/a nm nm
PureSpeech Inc 9.00 nm nm
Progressive Software Inc 1.43 21.05 23.97
Proxima Corp 0.53 nm nm
AccelGraphics Inc 1.30 nm nm
Central Data Corp n/a n/a n/a
Eltron International Inc 2.42 12.76 14.63
Adaptec Inc-Disk Drive Bus n/a n/a n/a
Amarex Technology n/a n/a n/a
Pipelinks Inc n/a n/a n/a
Truevision Inc 0.26 nm nm
Raster Graphics Inc 0.25 nm nm
</TABLE>
All Deals
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE 2.52x 13.27x 13.62x 1.88x 13.39x 16.41x
MEDIAN 1.40x 11.31x 13.62x 1.41x 11.50x 14.78x
HIGH 12.07x 21.09x 24.02x 9.00x 21.05x 23.97x
LOW 0.20x 9.34x 3.31x 0.25x 9.51x 12.11x
======================================================================
</TABLE>
Selected Deals
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE 1.28x 10.66x 11.02x 1.66x 10.84x 13.89x
MEDIAN 1.23x 9.62x 12.94x 1.63x 10.24x 14.63x
HIGH 2.47x 13.01x 14.91x 2.51x 12.76x 14.93x
LOW 0.20x 9.34x 3.31x 0.25x 9.51x 12.11x
======================================================================
</TABLE>
(1) Using SIC code 3577 for Computer Peripherals, not otherwise classified.
36 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 38
- --------------------------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 39
VALUATION TECHNIQUES
DISCOUNTED CASH FLOW ANALYSIS
- ------------------------------------------------------------------------------
Discounted cash flow ("DCF") analysis values a company's ability to generate
future free cash flow. A DCF analysis involves the development of a model to
project the income statement, balance sheets and resulting free cash flows of
the company. Projections are usually made for a period of four to six years and
the resulting cash flows are discounted, at an appropriate rate to present
value. The terminal value is also discounted to present value and serves as a
proxy for the annuity represented by the continuing free cash flow of the
business. The result is the net present value of cash flows to all providers of
capital. In general, a range of discount rates and a range of exit multiples are
used to calculate a range of values. The value from a DCF analysis should be
close to the intrinsic value of the company since it does not include the
benefit of synergies that may be available to a strategic buyer.
38 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 40
DISCOUNTED CASH FLOW ANALYSIS
KENTEK INFORMATION SYSTEMS, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Projected
--------------------------------------------------------------- Terminal
06/30/00 06/30/01 06/30/02 06/30/03 06/30/04 Value
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 23,699 $ 17,495 $ 13,283 $ 9,128 $ 6,123
Change in A/R 399 765 519 512 370
-------- -------- -------- ------- -------
Cash Sales 24,098 18,260 13,802 9,640 6,493
Cost of Goods Sold 12,323 9,097 6,907 4,746 3,184
Change in Inventory (1,376) (1,105) (750) (740) (535)
Change in A/P 135 318 216 213 154
-------- -------- -------- ------- -------
Cash Cost of Goods Sold 11,082 8,311 6,373 4,220 2,803
Cash Gross Profit 13,016 9,949 7,429 5,420 3,690
Operating Expenses 7,455 5,370 4,400 3,180 2,050
Depreciation & Amortization (564) (300) (300) (300) (200)
-------- -------- -------- ------- -------
Cash Operating Expenses 6,891 5,070 4,100 2,880 1,850
Cash Operating Income 6,125 4,879 3,329 2,540 1,840
Less: 44.0% Pro Forma Tax on Taxable Net Income 1,725 1,332 869 529 391
Less: Capital Expenditures 361 260 200 200 200
-------- -------- -------- ------- -------
Unlevered FCF to Capital Providers $ 4,039 $ 3,287 $ 2,260 $ 1,812 $ 1,249 $ 2,178(2)
Interest Expense Tax Shield 88 88 88 82 63
<CAPTION>
- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NPV of Unlevered FCF(1) $ 9,692
Add: NPV of Tax Shields 409 EBITDA MULTIPLE RANGE
Less: Present Value to Debt Holders 6,000 ---------------------------------------------------
------- 0.0x 1.0x 2.0x 3.0x 4.0x
'Going Concern' Value of Equity $ 4,101 ----- ----- ----- ----- -----
12.5% $7.91 $8.04 $8.16 $8.29 $8.42
'Going Concern' Per Share Value $ 0.86 Discount 15.0% $7.81 $7.93 $8.04 $8.15 $8.27
Add: Cash Per Share Value 7.07 Factor 17.5% $7.72 $7.83 $7.93 $8.03 $8.13
------- Range 20.0% $7.64 $7.74 $7.83 $7.92 $8.01
Suggested Per Share Value $ 7.93 22.5% $7.57 $7.65 $7.73 $7.82 $7.90
- ------------------------------------------------
</TABLE>
(1) Unlevered Free Cash Flows discounted at 17.5%.
(2) Assumes a terminal value equal to last year EBITDA of $1.1 million
multiplied by an EBITDA multiple of 2.0x.
39 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 41
- -------------------------------------------------------------------------------
LIQUIDATION ANALYSIS
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 42
VALUATION TECHNIQUES
LIQUIDATION ANALYSIS
- ------------------------------------------------------------------------------
Unlike the going-concern valuation methods (Comparable Companies, Comparable
Transactions, and Discounted Cash Flow) which tend to be based largely on
income and cash flow analyses, liquidation valuations often involves an analysis
of individual asset values usually found on the balance sheet. Virtually all
businesses or interests in businesses may be appraised under each of the
following two alternative premises of value:
VALUE AS AN ORDERLY DISPOSITION. Value in exchange, on a piecemeal basis (not
part of a mass assemblage of assets), as part of an orderly disposition; this
premise contemplates that all of the assets of the business enterprise will be
sold individually, and that they will enjoy normal exposure to their
appropriate secondary market.
VALUE AS A FORCED LIQUIDATION. Value in exchange, on a piecemeal basis (not
part of a mass assemblage of assets), as part of a forced liquidation; this
premise contemplates that the assets of the business enterprise will be sold
individually, and that they will experience less than normal exposure to their
appropriate secondary market.
41 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 43
LIQUIDATION ANALYSIS
ORDERLY DISPOSITION AND FORCED LIQUIDATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
"ORDERLY" "FORCED"
BOOK VALUE RETENTION ORDERLY RETENTION FORCED
ON 03/31/99 PERCENTAGE DISPOSITION PERCENTAGE LIQUIDATION
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 34,341 x 100% = $ 34,341 x 100% = $ 34,341
Account receivable, net of allowance 4,426 x 75% = 3,320 x 70% = 3,098
Inventory, net 5,670 x 50% = 2,835 x 35% = 1,985
Prepaid expenses 934 x 43% = 402 x 43% = 402
Current portion of deferred tax asset 1,937 x 11% = 213 x 11% = 213
---------- --------- ---------
Totals $ 47,308 $ 41,110 $ 40,038
---------- --------- ---------
OTHER ASSETS:
Property and Office Equipment $ 6,746 x 15% = $ 1,012 x 10% = $ 675
Tooling 11,365 x 10% = 1,137 x 5% = 568
Other assets 1,128 x 0% = 0 x 0% = 0
---------- --------- ---------
Totals 19,239 $ 2,148 $ 1,243
---------- --------- ---------
TOTAL LIQUIDATING VALUE OF ASSETS $ 43,259 $ 41,281
--------- ---------
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $ 2,352 x 100% = $ 2,352 x 100% = $ 2,352
Royalties payable 543 x 100% = 543 x 100% = 543
Current maturities of long-term debt 0 x 100% = 0 x 100% = 0
Accrued expenses 2,099 x 70% = 1,469 x 70% = 1,469
Other current liabilities 227 x 100% = 227 x 100% = 227
---------- --------- ---------
Totals $ 5,221 $ 4,591 $ 4,591
---------- --------- ---------
OTHER LIABILITIES:
Accrued retirement benefits-Japan $ 472 x 100% = $ 472 x 100% = $ 472
Building leases-US 1,471 x 100% = 1,471 x 100% = 1,471
Building leases-Japan 1,600 x 100% = 1,600 x 100% = 1,600
Lexmark 1,761 x 100% = 1,761 x 100% = 1,761
Open purchase orders (excluding Lexmark) 4,135 x 40% = 1,664 x 40% = 1,664
---------- --------- ---------
Totals 9,439 $ 6,968 $ 6,968
---------- --------- ---------
TOTAL LIQUIDATING VALUE OF LIABILITIES $ 11,559 $ 11,559
--------- ---------
NET ASSET VALUE $ 31,700 $ 29,722
--------- ---------
</TABLE>
42 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 44
- -------------------------------------------------------------------------------
VALUATION SUMMARY
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 45
PER SHARE EQUITY VALUATION - SUMMARY
- ------------------------------------------------------------------------------
Dollar values represent adjusted median values.
[PER SHARE EQUITY VALUATION - SUMMARY GRAPH]
44 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 46
-----------------------------------------------------------------------------
COMPARABLE COMPANY DETAIL
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 47
COMPARABLE COMPANY ANALYSIS
AXIOHM TRANSACTION SOLUTIONS
------------------------------------------
APPROX. MARKET CAPITALIZATION: $36 MILLION
------------------------------------------
- --------------------------------------------------------------------------------
BUSINESS DESCRIPTION
Axiohm Transaction Solutions, Inc. designs, manufactures and distributes
transaction printers and mechanisms, impact printheads, bar code printers, and
related services and supplies, such as labels and ribbons. Axiohm Transaction
Solutions, Inc. is a non-captive designer, manufacturer and marketer of
transaction printers. Until October 2, 1997, the company operated under the name
DH Technology, Inc. On that date, the last in a series of transactions occurred
as a result of which the company was acquired by Axiohm S.A., a French
corporation, and DH, the surviving corporation, changed its name to Axiohm
Transaction Solutions, Inc.
- --------------------------------------------------------------------------------
------------------------------------------
STOCK PRICE AND VOLUME ANALYSIS
[GRAPH]
------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
INCOME STATEMENT DATA: 1996 1997 1998 LTM
---- ---- ---- -----
(in thousands, except growth data)
<S> <C> <C> <C> <C>
Sales $115,784 $153,748 $231,011 $231,011
Revenue Growth NA 32.8% 50.3% 50.3%
Operating Cash Flow (EDITDA) 24,456 30,616 68,764 68,764
Net Operating Income (EBIT) 20,626 11,087 26,501 26,501
Net Income 13,027 (39,458) 5,472 5,472
BALANCE SHEET DATA:
Current Assets 83,086
Total Assets 97,105 204,044 171,726 171,726
Current Liabilities 42,973
Total Debt 2,212 171,512 178,310 178,310
Shareholders' Equity 82,252 (18,081) (47,998) (47,998)
Total Debt to Capitalization NA 111.8% 136.8% 136.8%
</TABLE>
- --------------------------------------------------------------------------------
------------------------------------------
OWNERSHIP ANALYSIS
<TABLE>
<S> <C>
Management 57%
Retail Float 32%
Institutional 11%
</TABLE>
------------------------------------------
46 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 48
COMPARABLE COMPANY ANALYSIS
BULL RUN CORP.
------------------------------------------
APPROX. MARKET CAPITALIZATION: $91 MILLION
------------------------------------------
- -------------------------------------------------------------------------------
BUSINESS DESCRIPTION
Bull Run Corp. designs, makes, and markets heavy-duty dot matrix and thermal
printers for industrial applications; and owns interest in television stations,
daily newspapers, and other communications businesses. Bull Run Corp. operates
through wholly owned Datasouth Computer Corp. and affiliates. Datasouth makes
heavy-duty dot matrix and thermal printers, generally selling under the
Datasouth name. It has historically targeted the heavy-duty, multipart forms
segment of the serial matrix impact printer market such as
transportation/travel, healthcare and manufacturing/distribution. These printers
are used mainly for forms such as invoices, purchase orders, bills of lading,
customs documents,
- -------------------------------------------------------------------------------
------------------------------------------
STOCK PRICE AND VOLUME ANALYSIS
[GRAPH]
------------------------------------------
- -------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
1996 1997 1998 LTM
-----------------------------------------
INCOME STATEMENT DATA: (in thousands, except growth data)
<S> <C> <C> <C> <C>
Sales $24,654 $22,320 $29,848 $28,848
Revenue Growth NA -9.5% 33.7% 33.7%
Operating Cash Flow (EDITDA) 4,784 1,005 1,892 1,892
Net Operating Income (EBIT) 3,834 4 770 770
Net Income 5,877 (1,773) 2,360 2,360
BALANCE SHEET DATA:
Current Assets 11,523
Total Assets 67,851 76,832 95,172 95,172
Current Liabilities 7,978
Total Debt 31,864 44,498 55,848 55,848
Shareholders' Equity 28,318 25,056 29,791 29,791
Total Debt to Capitalization NA 64.0% 65.2% 65.2%
</TABLE>
- -------------------------------------------------------------------------------
------------------------------------------
OWNERSHIP ANALYSIS
Management 62%
Retail Float 14%
Institutional 24%
------------------------------------------
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 49
COMPARABLE COMPANY ANALYSIS
GENICOM CORP.
------------------------------------------
APPROX. MARKET CAPITALIZATION: $21 MILLION
------------------------------------------
- --------------------------------------------------------------------------------
BUSINESS DESCRIPTION
GENICOM Corp. provides maintenance and repair services for computer systems
produced by various vendors; offers network planning integration and
optimization services; and develops and distributes printers and related
products. GENICOM Corp., through its worldwide operations, provides maintenance
and repair services for computer systems produced by multiple vendors, network
planning integration and optimization services. The company develops,
manufactures, and distributes printers and related products. GENICOM's service
business include information management, procurement, on-site installation and
repair, and off-site repair, refurbishment, and re-manufacturing.
- --------------------------------------------------------------------------------
---------------------------------------
STOCK PRICE AND VOLUME ANALYSIS
[GRAPH]
---------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
1996 1997 1998 LTM
---------- ---------- ---------- ----------
(in thousands, except growth data)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $ 303,258 $ 421,128 $ 452,540 $ 452,540
Revenue Growth NA 38.9% 7.5% 4.5%
Operating Cash Flow(EBITDA) 25,379 37,718 25,102 25,102
Net Operating Income(EBIT) 7,507 18,751 3,022 3,022
Net Income 2,081 7,858 (13,059) (13,059)
BALANCE SHEET DATA:
Current Assets 178,175
Total Assets 186,079 250,049 229,977 229,977
Current Liabilities 93,514
Total Debt 54,553 93,463 112,936 112,936
Shareholders' Equity 37,591 45,396 24,617 24,617
Total Debt to Capitalization NA 67.3% 82.1% 82.1%
</TABLE>
- --------------------------------------------------------------------------------
---------------------------------------
OWNERSHIP ANALYSIS
<TABLE>
<S> <C>
Retail Float 67%
Management 10%
Institutional 23%
</TABLE>
---------------------------------------
48 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 50
COMPARABLE COMPANY ANALYSIS
LEXMARK INTERNATIONAL GROUP INC.
--------------------------------------------
APPROX. MARKET CAPITALIZATION: $7793 MILLION
--------------------------------------------
- --------------------------------------------------------------------------------
BUSINESS DESCRIPTION
Lexmark International Group, Inc. develops, makes and supplies laser and inkjet
printers and associated consumable supplies for the office and home markets. The
company also sells dot matrix printers for printing single and multi-part forms
by business users; and a line of office imaging products. Lexmark International
Group, Inc. is a global developer, manufacturer and supplier of laser and inkjet
printers and associated consumable supplies for the office and home markets. The
company also sells dot matrix printers for printing single and multi-part forms
by business users.
- --------------------------------------------------------------------------------
---------------------------------------
STOCK PRICE AND VOLUME ANALYSIS
[GRAPH]
---------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
1996 1997 1998 LTM
---------- ---------- ---------- ----------
(in thousands, except growth data)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $2,377,600 $2,493,500 $3,020,600 $3,020,600
Revenue Growth NA 4.9% 21.1% 0.0%
Operating Cash Flow(EDITDA) 270,800 332,200 458,400 458,400
Net Operating Income(EBIT) 201,600 254,700 382,800 382,800
Net Income 127,800 163,000 243,000 243,000
BALANCE SHEET DATA:
Current Assets 1,020,000
Total Assets 1,221,500 1,208,200 1,483,400 1,483,400
Current Liabilities 605,700
Total Debt 165,300 75,000 160,400 160,400
Shareholders' Equity 540,300 500,700 578,100 578,100
Total Debt to Capitalization NA 13.0% 21.7% 21.7%
</TABLE>
- --------------------------------------------------------------------------------
---------------------------------------
OWNERSHIP ANALYSIS
<TABLE>
<S> <C>
Management 3%
Retail Float 14%
Institutional 83%
</TABLE>
---------------------------------------
49 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 51
COMPARABLE COMPANY ANALYSIS
PRINTRONIX INC.
-------------------------------------------
APPROX. MARKET CAPITALIZATION: $93 MILLION
-------------------------------------------
- --------------------------------------------------------------------------------
BUSINESS DESCRIPTION
Printronix, Inc. designs, makes and markets medium and high speed printers which
support a wide range of computer systems and software platforms. Products are
designed primarily for business and industrial applications where performance
and reliability are paramount. Printronix, Inc. is a leading independent
supplier of line matrix printers, and a leading supplier of printers for bar
code label printing. In addition to line matrix technology, the company offers
laser printers which are designed for reliability, versatility and ease of
service and thermal printers for dedicated bar code and labeling applications.
Printronix's goal is to provide its customers with a total printing solution.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
1996 1997 1998 LTM
---------- ---------- ---------- ----------
(in thousands, except growth data)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C>
Sales $ 173,290 $ 170,391 $ 179,702 $ 179,702
Revenue Growth NA (1.7)% 5.5% 0.0%
Operating Cash Flow (EDITDA) 19,470 24,357 23,172 23,172
Net Operating Income (EBIT) 12,379 16,827 15,273 15,273
Net Income 11,671 15,064 12,364 12,364
BALANCE SHEET DATA:
Current Assets 51,043
Total Assets 80,653 88,864 84,671 84,671
Current Liabilities 20,687
Total Debt 0 0 0 0
Shareholders' Equity 63,508 69,237 63,069 63,069
Total Debt to Capitalization NA 0.0% 0.0% 0.0%
</TABLE>
- --------------------------------------------------------------------------------
-------------------------------------
STOCK PRICE AND VOLUME ANALYSIS
[GRAPH]
-------------------------------------
-------------------------------------
OWNERSHIP ANALYSIS
<TABLE>
<S> <C>
Management 31%
Retail Float 25%
Institutional 44%
</TABLE>
-------------------------------------
50 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 52
COMPARABLE COMPANY ANALYSIS
QMS INC.
------------------------------------------
APPROX. MARKET CAPITALIZATION: $35 MILLION
------------------------------------------
- --------------------------------------------------------------------------------
BUSINESS DESCRIPTION
QMS, Inc. designs and makes intelligent controllers which enhance the graphics
capabilities and performance of computer printing and imaging systems. QMS, Inc.
makes controllers which consist of software implemented on printed circuit
boards and are incorporated into computer printing and imaging systems which the
company markets, sells, and supports. QMS also markets its controllers
separately for incorporation into products marketed by others and offers service
support for non-QMS manufactured products.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
1996 1997 1998 LTM
---------- ---------- ---------- ----------
(in thousands, except growth data)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $ 147,174 $ 124,589 $ 133,491 $ 144,251
Revenue Growth NA (15.3)% 7.1% 8.1%
Operating Cash Flow (EDITDA) 10,693 (5,980) 4,590 4,461
Net Operating Income (EBIT) 5,325 (10,372) 2,345 2,169
Net Income 4,253 (26,122) 1,825 1,536
BALANCE SHEET DATA:
Current Assets 53,233
Total Assets 91,718 58,589 69,355 70,294
Current Liabilities 38,841
Total Debt 14,963 2,333 6,694 7,850
Shareholders' Equity 47,432 24,324 26,038 26,439
Total Debt to Capitalization NA 8.8% 20.5% 22.9%
</TABLE>
- --------------------------------------------------------------------------------
---------------------------------------
STOCK PRICE AND VOLUME ANALYSIS
[GRAPH]
---------------------------------------
---------------------------------------
OWNERSHIP ANALYSIS
<TABLE>
<S> <C>
Retail Float 73%
Management 12%
Institutional 15%
</TABLE>
---------------------------------------
51 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 53
COMPARABLE COMPANY ANALYSIS
TRANSACT TECHNOLOGIES INC.
------------------------------------------
APPROX. MARKET CAPITALIZATION: $19 MILLION
------------------------------------------
- --------------------------------------------------------------------------------
BUSINESS DESCRIPTION
TransAct Technologies, Inc. designs, develops, makes and markets transaction
based printers and related products under the ITHACA and MAGNETEC brand names.
The company's printers are used to provide transaction records such as receipts,
tickets, coupons, register journals and other documents. TransAct Technologies,
Inc. manufactures and sells customized and custom dot matrix and thermal
printers for applications requiring up to 60 character columns in each of its
four vertical markets; and sells an 80 column laser printer for kiosk
applications. TransAct focuses on four vertical markets: point-of-sale, gaming
and lottery, financial services and kiosks.
- --------------------------------------------------------------------------------
------------------------------------------
STOCK PRICE AND VOLUME ANALYSIS
[GRAPH]
------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
1996 1997 1998 LTM
---- ---- ---- -----
INCOME STATEMENT DATA: (in thousands, except growth data)
<S> <C> <C> <C> <C>
Sales $42,134 $58,400 $52,239 $52,239
Revenue Growth NA 38.6% (10.5)% 0.0%
Operating Cash Flow (EDITDA) 6,395 9,419 4,478 4,478
Net Operating Income (EBIT) 5,260 7,828 2,448 2,448
Net Income 3,340 4,893 1,386 1,386
BALANCE SHEET DATA:
Current Assets 16,094
Total Assets 20,784 24,699 23,788 23,788
Current Liabilities 5,987
Total Debt 1,000 300 5,800 5,800
Shareholders' Equity 14,407 17,903 12,177 12,177
Total Debt to Capitalization NA 1.6% 32.3% 32.3%
</TABLE>
- --------------------------------------------------------------------------------
------------------------------------------
OWNERSHIP ANALYSIS
<TABLE>
<S> <C>
Retail Float 66%
Institutional 24%
Management 10%
</TABLE>
------------------------------------------
52 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 54
COMPARABLE COMPANY ANALYSIS
TRIDEX CORP.
------------------------------------------
APPROX. MARKET CAPITALIZATION: $15 MILLION
------------------------------------------
- --------------------------------------------------------------------------------
BUSINESS DESCRIPTION
Tridex Corp. designs, develops, makes, integrates and sells custom-designed
terminal devices, customer displays, keyboards and other peripheral devices used
in a variety of transactions at the retail point-of-sale, and ribbon cartridges
for specialty dot matrix printers. Tridex Corp. provides high quality,
point-of-sale (POS) solutions and peripheral devices used in many niche retail
applications including convenience store, fuel, home centers, automotive parts,
hardware, theatre, grocery and other transaction based markets. Products
include customer displays, keyboards and terminal devices for POS applications.
The company manufactures and markets POS customer displays, keyboards and
terminal devices for use in
- --------------------------------------------------------------------------------
------------------------------------------
STOCK PRICE AND VOLUME ANALYSIS
[GRAPH]
------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
1996 1997 1998 LTM
---- ---- ---- -----
INCOME STATEMENT DATA: (in thousands, except growth data)
<S> <C> <C> <C> <C>
Sales $37,053 $25,833 $43,504 $43,504
Revenue Growth NA (30.3)% 68.4% 68.4%
Operating Cash Flow (EDITDA) 2,878 543 300 300
Net Operating Income (EBIT) 1,157 (321) (2,964) (2,964)
Net Income 5,991 (568) (3,586) (3,586)
BALANCE SHEET DATA:
Current Assets 17,944
Total Assets 38,653 28,003 52,953 52,953
Current Liabilities 13,444
Total Debt 5,546 0 25,747 25,747
Shareholders' Equity 26,015 24,219 18,377 18,377
Total Debt to Capitalization NA 0.0% 58.4% 58.4%
</TABLE>
- --------------------------------------------------------------------------------
------------------------------------------
OWNERSHIP ANALYSIS
<TABLE>
<S> <C>
Retail Float 64%
Management 20%
Institutional 16%
</TABLE>
------------------------------------------
53 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 55
COMPARABLE COMPANY ANALYSIS
ZEBRA TECHNOLOGIES
-------------------------------------------
APPROX. MARKET CAPITALIZATION: $996 MILLION
-------------------------------------------
- --------------------------------------------------------------------------------
BUSINESS DESCRIPTION
Zebra Technologies Corp. makes and supports a line of computerized on-demand bar
code label printers, specialty bar code labeling materials, thermal transfer
ribbons and PC-based bar code software which provides bar code labeling
solutions targeted primarily at industrial and service organizations worldwide.
Zebra Technologies Corp. provides bar code labeling solutions, principally to
manufacturing and service entities, for use in automatic identification and data
collection systems. The company makes, sells and supports a broad line of
computerized label printing systems, related specialty supplies and PC-based
label design software on a worldwide basis.
- --------------------------------------------------------------------------------
---------------------------------------
STOCK PRICE AND VOLUME ANALYSIS
[GRAPH]
---------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
<TABLE>
<CAPTION>
1996 1997 1998 LTM
---------- ---------- ---------- ----------
(in thousands, except growth data)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $ 169,715 $ 192,071 $ 335,983 $ 335,983
Revenue Growth NA 13.2% 74.9% 74.9%
Operating Cash Flow (EDITDA) 49,994 65,586 79,964 79,964
Net Operating Income (EBIT) 46,155 61,311 69,716 69,716
Net Income 28,915 42,810 44,917 44,917
BALANCE SHEET DATA:
Current Assets 280,030
Total Assets 163,283 203,584 310,002 310,002
Current Liabilities 38,025
Total Debt 178 253 234 234
Shareholders' Equity 140,456 179,551 270,884 270,884
Total Debt to Capitalization NA 0.1% 0.1% 0.1%
</TABLE>
- --------------------------------------------------------------------------------
---------------------------------------
OWNERSHIP ANALYSIS
<TABLE>
<S> <C>
Management 17%
Retail Float 32%
Institutional 51%
</TABLE>
---------------------------------------
54 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 56
COMPARABLE COMPANY ANALYSIS
SELECTED MARKET DATA
- --------------------------------------------------------------------------------
Note: Financials have been adjusted, where applicable, to exclude the effects of
extraordinary items.
<TABLE>
<CAPTION>
Kentek Axiohm
Information Transaction Bull Run Genicom Lexmark Intl
Systems Solutions Corp Corp Grp Inc
----------- ----------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Market Price as of: 5/3/1999 $ 7.88 $ 4.13 $ 3.81 $ 1.81 $ 123.44
52 Week High $ 9.38 $ 14.50 $ 5.50 $ 12.75 $ 128.50
52 Week Low $ 4.63 $ 3.00 $ 2.88 $ 1.09 $ 50.75
Symbol/Exchange KNTK/OTC AXHMOTC BULL/OTC GECI/OTC LXK/NYSE
Most Recent Fiscal Year/End 6/98 12/98 12/98 12/98 12/98
Most Recent Quarter End 12/98 12/98 12/98 12/98 12/98
Common Shares Outstanding 4,969 8,519 22,268 11,609 64,418
Market Value of Common Equity $ 39,312 $ 26,892 $ 84,898 $21,041 $ 7,951,642
Total Debt & Preferred Stock(2) 0 178,310 55,848 112,936 160,400
Cash & Marketable Securities (34,341) (902) (58) (4,894) (149,000)
----------- ----------- --------- -------- -------------
Total Enterprise Value (TEV) $ 4,791 $ 204,300 $ 140,688 $129,083 $ 7,963,042
=========== =========== ========= ======== =============
Earnings Per Share
LFY EPS $ 0.70 $ 0.84 $ 0.10 $ (1.13) $ 3.40
LTM EPS $ 0.49 $ 0.84 $ 0.10 $ (1.13) $ 3.40
1999 EPS Estimate (3)% Change $ 0.09 -37.1% N/A N/A N/A N/A $ 0.13 N/A $ 4.32 27.1%
1999 EPS Calendarized Estimate (4)% Change $ 0.38 -15.7% N/A N/A N/A N/A $ 0.13 N/A $ 4.32 27.1%
2000 EPS Estimate (3)% Change $ 0.54 500.0% N/A N/A N/A N/A N/A N/A $ 5.14 19.0%
2000 EPS Calendarized Estimate (4)% Change $ 0.57 48.7% N/A N/A N/A N/A N/A N/A $ 5.14 19.0%
Next 5 Year Growth (%)(3) 5.0% N/A N/A 20.0% 20.0%
Price/LFY EPS 11.3 x 4.9 x 38.1 x NM 36.3 x
Price/LTM EPS 16.0 x 4.9 x 38.1 x NM 36.3 x
Price/1999E Calendarized EPS 20.7 x N/A N/A 13.9 x 28.6 x
Price/2000E Calendarized EPS 13.9 x N/A N/A N/A 24.0 x
Indicated Annual Dividend $ 0.08 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Dividend Yield 1.0% N/A N/A N/A N/A
Latest Return: EBITDA/Total Assets 23.4% 40.0% 2.0% 10.9% 30.9%
Latest Return on Equity 7.7% (11.4)% 7.9% N/M 42.0%
</TABLE>
[JANNEY MONTGOMERY SCOTT LOGO]
55
<PAGE> 57
COMPARABLE COMPANY ANALYSIS
SELECTED BALANCE SHEET & CAPITALIZATION DATA
- --------------------------------------------------------------------------------
Note: Financials have been adjusted, where applicable, to exclude the effects of
extraordinary items.
<TABLE>
<CAPTION>
Kentek Axiohm
Information Transaction Lexmark Intl.
Systems Solutions Bull Run Corp Genicom Corp Grp Inc.
---------- ----------- ------------- ------------ ----------
Capitalization as of: 3/99 12/98 12/98 12/98 12/98
<S> <C> <C> <C> <C> <C>
Short-Term Debt $ 0 $ 9,698 $ 4,000 $ 7,936 $ 11,700
Long-Term Debt 0 166,412 51,848 105,000 148,700
Preferred Stock 0 0 0 0 0
Common Equity 44,391 (47,998) 29,791 24,617 578,100
---------- ---------- ---------- ---------- ----------
Total Shareholders' Equity 44,391 (47,998) 29,791 24,617 578,100
---------- ---------- ---------- ---------- ----------
Total Capitalization $ 44,391 $ 130,312 $ 85,639 $ 137,553 $ 738,500
========== ========== ========== ========== ==========
Short-Term Debt 0.00% 7.60% 4.67% 5.77% 1.58%
Long-Term Debt 0.00% 129.24% 60.54% 76.33% 20.14%
Preferred Stock 0.00% 0.00% 0.00% 0.00% 0.00%
Common Equity 100.00% (36.63)% 34.79% 17.90% 76.28%
---------- ---------- ---------- ---------- ----------
Total Shareholders' Equity 100.00% (36.63)% 34.79% 17.90% 78.28%
---------- ---------- ---------- ---------- ----------
Total Capitalization 100.00% 100.00% 100.00% 100.00% 100.00%
========== ========== ========== ========== ==========
Debt/Equity Ratio 0.00% (371.49)% 187.47% 458.77% 27.75%
Total Assets $ 50,084 $ 171,726 $ 95,172 $ 229,977 $1,483,400
Total Operating Assets (3) $ 14,615 $ 88,603 $ 14,001 $ 204,347 $1,301,500
Net Fixed Assets $ 1,648 $ 20,556 $ 2,623 $ 45,459 $ 430,500
Net Sales/Net Fixed Assets (x) 24.2x 11.2x 11.4x 10.0x 7.0x
Average Accts. Rec. Balance (2) $ 4,756 $ 32,838 $ 5,172 $ 88,448 $ 404,450
Acct. Rec. Turnover (Days) 43.6 51.9 63.2 71.3 48.9
Average Accts. Pay. Balance (2) $ 2,177 $ 18,694 $ 2,705 $ 74,756 $ 251,675
Accts. Pay. Turnover (Days) 43.6 45.2 44.7 77.2 47.5
Average Inventory Balance (2) $ 6,949 $ 31,934 $ 4,616 $ 64,603 $ 382,700
Inventory Turnover (Days) 139.3 77.2 76.2 66.7 72.2
</TABLE>
56 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 58
COMPARABLE COMPANY ANALYSIS
HISTORICAL FINANCIAL DATA
- --------------------------------------------------------------------------------
Note: Financials have been adjusted, where applicable, to exclude the effects of
extraordinary items.
<TABLE>
<CAPTION>
Kentek Axiohm
Information Transaction Lexmark Intl
Systems Solutions Bull Run Corp Genicom Corp Grp Inc
----------- ----------- ------------- ------------ ------------
12/98 12/98 12/98 12/98 12/98
<S> <C> <C> <C> <C> <C>
Net Operating Revenues
LTM $ 39,810 $ 231,011 $ 29,848 $ 452,540 $3,020,599
1998 45,053 231,011 29,848 452,540 3,020,600
1997 56,460 153,748 21,639 421,128 2,493,500
1996 74,381 95,302 23,810 303,258 2,377,600
Gross Profit
LTM $ 21,603 $ 50,062 $ 7,745 $ 98,945 $1,086,200
1998 22,729 80,082 7,745 98,945 1,086,200
1997 26,017 51,148 5,672 97,181 870,000
1996 29,973 28,912 6,640 70,969 747,400
Operating Cash Flow
LTM $ 3,156 $ 68,764 $ 1,592 $ 25,102 $ 458,400
1998 5,521 68,764 1,592 25,102 458,400
1997 8,530 41,946 502 37,718 352,100
1996 14,925 14,172 2,179 25,257 299,600
Operating Profit
LTM $ 1,889 $ 26,501 $ 770 $ 3,022 $ 382,800
1998 4,243 26,501 770 3,022 382,800
1997 7,249 21,975 (499) 18,751 274,600
1996 13,277 11,251 1,229 7,385 230,400
Profit Before Tax
LTM $ 5,152 $ 9,583 $ 4,214 $ (8,093) $ 365,400
1998 7,557 9,583 4,214 (8,093) 365,400
1997 8,626 12,035 (2,712) 11,659 254,700
1996 13,465 11,410 9,889 2,604 201,600
Net Income
LTM $ 3,422 $ 5,472 $ 2,360 $ (13,059) $ 243,000
1998 4,977 5,472 2,360 (13,059) 243,000
1997 4,761 (7,443) (1,773) 9,354 163,000
1996 13,102 7,004 5,877 4,590 127,800
</TABLE>
57 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 59
COMPARABLE COMPANY ANALYSIS
HISTORICAL MARGIN DATA
- --------------------------------------------------------------------------------
Note: Financials have been adjusted, where applicable, to exclude the effects of
extraordinary items.
<TABLE>
<CAPTION>
Kentek Axiohm
Information Transaction Lexmark Intl
Systems Solutions Bull Run Corp Genicom Corp Grp Inc
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Index Growth Rates
- ------------------
LTM (11.5)% 0.0% 0.0% 0.0% 0.0%
1998 (20.2) 50.3 37.9 7.5 21.1
1997 (24.1) 61.3 (9.1) 38.9 4.9
1996 N/A N/A N/A N/A N/A
Gross Profit as % of Revenue
- ----------------------------
LTM 54.3% 34.7% 25.9% 21.9% 36.0%
1998 50.4 34.7 25.9 21.9 36.0
1997 46.1 33.3 26.2 23.1 34.9
1996 40.3 30.3 27.9 23.4 31.4
Operating Cash Flow as % of Revenue
- -----------------------------------
LTM 7.9% 29.8% 6.3% 5.5% 15.2%
1998 12.3 29.5 6.3 5.5 15.2
1997 15.1 27.3 2.3 9.0 14.1
1996 20.1 14.9 9.2 8.3 12.6
Operating Profit as % of Revenue
- --------------------------------
LTM 4.7% 11.5% 2.6% 0.7% 12.7%
1998 9.4 11.5 2.6 0.7 12.7
1997 12.8 14.3 NM 4.5 11.0
1996 17.8 11.8 5.2 2.4 9.7
Profit Before Tax as % of Revenue
- ---------------------------------
LTM 12.9% 4.1% 14.1% NM 12.1%
1998 16.8 4.1 14.1 NM 12.1
1997 15.3 7.8 NM 2.8 10.2
1996 18.1 12.0 41.5 0.9 8.5
Net Income as % of Revenue
- --------------------------
LTM 8.6% 2.4% 7.9% NM 5.0%
1998 11.0 2.4 7.9 NM 5.0
1997 8.4 NM NM 2.2 6.5
1996 17.6 7.3 24.7 1.5 5.4
</TABLE>
[JANNEY MONTGOMERY SCOTT LOGO]
58
<PAGE> 60
COMPARABLE COMPANY ANALYSIS
SELECTED VALUATION RATIOS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Note: Financials have been adjusted, where applicable, to exclude the effects of extraordinary items.
Kentek Axiohm
Information Transaction Lexmark Intl
Systems Solutions Bull Run Corp Genicom Corp Grp Inc
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Market Capitalization Basis
- ---------------------------
Market/Net Income 16.0 x 4.9 x 38.1 x NM 36.3 x
Market/Net Income (1999P Calendarized) 20.7 x N/A N/A 13.9 x 28.6 x
Market/Net Income (2000P Calendarized) 13.9 x N/A N/A N/A 24.0 x
Market/Book 0.9 x NM 2.8 x 0.9 x 13.8 x
TEV Basis
- ---------
TEV/Revenue 0.1 x 0.9 x 4.7 x 0.3 x 2.6 x
TEV/Operating Cash Flow 1.5 x 3.0 x 74.4 x 5.1 x 17.4 x
TEV/Operating Profit 2.5 x 7.7 x 182.7 x 42.7 x 20.8 x
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
59 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 61
COMPARABLE COMPANY ANALYSIS
SELECTED MARKET DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Note: Financials have been adjusted, where applicable, to exclude the effects of extraordinary items.
Transact Zebra
Printronix Inc QMS Inc Technologies Inc Tridex Corp Technologies
-------------- -------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Market Price as of: 5/3/1999 $ 13.75 $ 3.44 $ 3.94 $ 2.25 $ 34.13
52 Week High $ 16.50 $ 5.00 $ 10.63 $ 7.88 $ 44.63
52 Week Low $ 11.00 $ 2.63 $ 1.75 $ 1.88 $ 22.88
Symbol/Exchange PTNX/OTC AQM/NYSE TACT/OTC TRDX/OTC ZBRA/OTC
Most Recent Fiscal Year End 3/98 9/98 12/98 12/98 12/98
Most Recent Quarter End 12/98 12/98 12/98 12/98 12/98
Common Shares Outstanding 6,663 10,699 5,559 6,368 30,974
Market Value of Common Equity $ 91,615 $ 36,777 $ 21,887 $ 14,329 $ 1,056,975
Total Debt & Preferred Stock(2) 0 7,850 5,800 25,747 234
Cash & Marketable Securities (9,820) (1,707) (546) (18) (162,668)
-------- -------- -------- -------- -----------
Total Enterprise Value (TEV) $ 81,795 $ 42,920 $ 27,141 $ 40,058 $ 894,541
======== ======== ======== ======== ===========
Earnings Per Share
- ------------------
LFY EPS $ 1.90 $ 0.17 $ 0.20 $ (0.59) $ 1.44
LTM EPS $ 1.69 $ 0.14 $ 0.20 $ (0.59) $ 1.44
1999 EPS Estimate (3)/% Change N/A N/A N/A N/A N/A N/A $ 0.25 N/A $ 2.07 43.7%
1999 EPS Calendarized Estimate (4)/% Change N/A N/A N/A N/A N/A N/A $ 0.25 N/A $ 2.07 43.7%
2000 EPS Estimate (3)/% Change N/A N/A N/A N/A $ 0.51 N/A N/A N/A $ 2.53 22.2%
2000 EPS Calendarized Estimate (4)/% Change N/A N/A N/A N/A $ 0.51 N/A N/A N/A $ 2.53 22.2%
Next 5 Year Growth (%)(3) N/A N/A 20.0% N/A 18.0%
Price/LFY EPS 7.2 x 20.2 x 19.7 x NM 23.7 x
Price/LTM EPS 8.1 x 24.6 x 19.7 x NM 23.7 x
Price/1999E Calenderized EPS N/A N/A N/A 9.0 x 16.5 x
Price/2000E Calenderized EPS N/A N/A 7.7 x N/A 13.5 x
Indicated Annual Dividend $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Dividend Yield N/A N/A N/A N/A N/A
Latest Return: EBITDA/Total Assets 26.3% 17.5% 18.8% 0.6% 25.8%
Latest Return on Equity 20.3% 5.8% 11.4% NM 16.6%
</TABLE>
60 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 62
COMPARABLE COMPANY ANALYSIS
SELECTED BALANCE SHEET & CAPITALIZATION DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Note: Financials have been adjusted, where applicable, to exclude the effects of extraordinary items.
Transact Zebra
Printronix Inc QMS Inc Technologies Inc Tridex Corp Technologies
-------------- -------- ---------------- ----------- ------------
Capitalization as of: 12/98 12/98 12/98 12/98 12/98
<S> <C> <C> <C> <C> <C>
Short-Term Debt $ 0 $ 7,524 $ 725 $ 6,406 $ 234
Long-Term Debt 0 326 5,075 19,341 0
Preferred Stock 0 0 0 0 0
Common Equity 63,069 26,439 12,177 18,377 270,884
-------- -------- -------- -------- --------
Total Shareholders' Equity 63,069 26,439 12,177 18,377 270,884
-------- -------- -------- -------- --------
Total Capitalization $ 63,069 $ 34,289 $ 17,977 $ 44,124 $271,118
======== ======== ======== ======== ========
Short-Term Debt 0.00% 21.94% 4.03% 14.52% 0.09%
Long-Term Debt 0.00% 0.95% 28.23% 43.83% 0.00%
Preferred Stock 0.00% 0.00% 0.00% 0.00% 0.00%
Common Equity 100.00% 77.11% 67.74% 41.55% 99.91%
-------- -------- -------- -------- --------
Total Shareholders' Equity 100.00% 77.11% 67.74% 41.55% 99.91%
-------- -------- -------- -------- --------
Total Capitalization 100.00% 100.00% 100.00% 100.00% 100.00%
======== ======== ======== ======== ========
Debt/Equity Ratio 0.00% 29.69% 47.63% 140.10% 0.09%
Total Assets $ 84,671 $ 70,294 $ 23,788 $ 52,953 $310,002
Total Operating Assets(3) $ 72,911 $ 58,261 $ 21,212 $ 19,562 $142,653
Net Fixed Assets $ 31,688 $ 4,735 $ 5,664 $ 2,445 $ 38,850
Net Sales/Net Fixed Assets(x) 5.6 x 30.5 x 9.2 x 17.8 x 8.6 x
Average Accts. Rec. Balance(2) $ 24,617 $ 23,579 $ 6,870 $ 5,632 $ 42,367
Accts. Rec. Turnover (Days) 50.9 59.7 48.0 47.3 46.0
Average Accts. Pay. Balance(2) $ 9,634 $ 12,955 $ 3,044 $ 3,741 $ 14,273
Accts. Pay. Turnover (Days) 29.4 45.5 28.9 43.1 28.9
Average Inventory Balance(2) $ 16,374 $ 21,837 $ 8,909 $ 5,430 $ 25,298
Inventory Turnover (Days) 50.0 76.7 84.7 62.6 51.2
</TABLE>
[JANNEY MONTGOMERY SCOTT LOGO]
61
<PAGE> 63
COMPARABLE COMPANY ANALYSIS
HISTORICAL FINANCIAL DATA
- --------------------------------------------------------------------------------
Note: Financials have been adjusted, where applicable, to exclude the effects
of extraordinary items.
<TABLE>
<CAPTION>
Transact Zebra
Printronix Inc. QMS Inc. Technologies Inc. Tridex Corp Technologies
---------------- --------- ----------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
12/98 12/98 12/98 12/98 12/98
Net Operating Expenses
- ---------
LTM $ 176,679 $ 144,251 $ 52,239 $ 43,504 $ 335,983
1998 N/A 133,491 52,239 43,504 335,983
1997 170,391 124,589 58,400 25,833 297,100
1996 173,250 147,174 42,134 22,325 252,487
Gross Profit
- ---------
LTM $ 57,151 $ 40,359 $ 13,826 $ 11,834 $ 155,810
1998 N/A 39,420 13,826 11,834 155,810
1997 53,930 26,032 18,173 6.204 143,708
1996 45,943 48,023 13,933 5,954 117,013
Operating Cash Flow
- ---------
LTM $ 22,246 $ 12,315 $ 4,478 $ 300 $ 79,964
1998 N/A 12,142 4,478 300 79,964
1997 22,619 (3,387) 9,422 (150) 78,264
1996 18,790 15,461 6,368 1,362 64,609
Operating Profit
- ---------
LTM $ 14,347 $ 2,087 $ 2,448 $ (2,964) $ 69,716
1998 N/A 2,081 2,448 (2,964) 69,716
1997 15,086 (17,188) 7,831 (1,014) 71,262
1996 11,699 5,664 5,233 306 59,094
Profit Before Tax
- ---------
LTM $ 15,273 $ 1,571 $ 2,127 (54,721) $ 73,101
1998 N/A 1,860 2,127 (4,721) 73,101
1997 16,744 (18,093) 7,828 (612) 65,225
1996 12,140 3,520 5,528 (666) 65,664
Net Income
- ---------
LTM $ 12,794 $ 1,536 $ 1,386 $ (3,586) $ 44,917
1998 N/A 1,825 1,386 (3,586) 44,917
1997 15,629 (21,305) 4,893 (568) 54,447
1996 11,671 4,253 3,340 3,166 40,929
</TABLE>
62 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 64
COMPARABLE COMPANY ANALYSIS
HISTORICAL MARGIN DATA
- --------------------------------------------------------------------------------
Note: Financials have been adjusted, where applicable, to exclude the effects of
extraordinary items.
<TABLE>
<CAPTION>
Transact Zebra
Printronix Inc QMS Inc Technologies Inc Tridex Corp Technologies
-------------- ------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Index Growth Rates
LTM N/A 8.1% 0.0% 0.0% 0.0%
1998 N/A 7.1 (10.5) 68.4 13.1
1997 (1.7) (15.3) 38.5 15.7 17.7
1996 N/A N/A N/A N/A N/A
Gross Profit as % of Revenue
LTM 32.3% 28.0% 26.5% 27.2% 46.4%
1998 N/A 29.5 26.5 27.2 46.4
1997 31.7 20.9 31.1 24.0 46.4
1996 26.5 32.6 33.1 26.7 46.3
Operating Cash Flow as % of Revenue
LTM 12.6% 8.5% 8.6% 0.7% 23.8%
1998 N/A 9.1 8.6 0.7 23.8
1997 13.3 NM 16.1 NM 26.3
1996 10.8 10.5 15.1 6.1 25.6
Operating Profit as % of Revenue
LTM 8.1% 1.4% 4.7% NM 20.7%
1998 N/A 1.6 4.7 NM 20.7
1997 8.9 NM 13.4 NM 24.0
1996 6.8 3.8 12.4 1.4 23.4
Profit Before Tax as % of Revenue
LTM 8.6% 1.1% 4.1% NM 21.8%
1998 N/A 1.4 4.1 NM 21.8
1997 9.8 NM 13.4 NM 28.7
1996 7.0 2.4 13.1 NM 26.0
Net Income as % of Revenue
LTM 7.2% 1.1% 2.7% NM 13.4%
1998 N/A 1.4 2.7 NM 13.4
1997 9.2 NM 8.4 NM 18.3
1996 6.7 2.9 7.9 14.2 16.2
</TABLE>
63 [JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 65
COMPARABLE COMPANY ANALYSIS
SELECTED VALUATION RATIOS
- --------------------------------------------------------------------------------
Note: Financials have been adjusted, where applicable, to exclude the effects of
extraordinary items.
<TABLE>
<CAPTION>
Transact Zebra
Printronix Inc. QMS Inc Technologies Inc Tridex Corp Technologies
--------------- ------- ---------------- ----------- ------------
Market Capitalization Basis
<S> <C> <C> <C> <C> <C>
Market/Net Income 6.1 x 24.6 x 19.7 x NM 23.7 x
Market/Net Income (1999P Calendarized) N/A N/A N/A 9.0 x 16.5 x
Market/Net Income (2000P Calendarized) N/A N/A 7.7 x N/A 13.5 x
Market/Book 1.5 x 1.4 x 1.8 x 0.8 x 3.9 x
TEV Basis
TEV/Revenue 0.5 x 0.3 x 0.5 x 0.9 x 2.7 x
TEV/Operating Cash Flow 3.7 x 3.5 x 6.1 x 133.5 x 11.2 x
TEV/Operating Profit 5.7 x 20.6 x 11.1 x NM 12.8 x
</TABLE>
[JANNEY MONTGOMERY SCOTT LOGO]
64
<PAGE> 66
- --------------------------------------------------------------------------------
FORM OF FAIRNESS OPINION
[JANNEY MONTGOMERY SCOTT LOGO]
<PAGE> 1
[KENTEK LOGO]
[DATE], 1999
Dear Stockholder,
You are cordially invited to attend a Special Meeting of stockholders of
Kentek Information Systems, Inc. ("Kentek") to be held on [DATE], 1999 at
[11:00] 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.
<PAGE> 2
KENTEK INFORMATION SYSTEMS, INC.
----------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
[DATE], 1999
----------------------
To the Stockholders of
Kentek Information Systems, Inc.:
Notice is hereby given that a special meeting of Stockholders (the
"Special Meeting") of Kentek Information Systems, Inc. ("Kentek") will be held
on [DATE], 1999 at [11:00] 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. ("Buyer"), pursuant to which Buyer
will be merged with and into Kentek (the "Merger"). Pursuant to the
Merger, each share (a "Share") of Kentek's common stock, $0.01 par
value, issued and outstanding immediately prior to the effective time
of the Merger (other than Shares held by Kentek as treasury stock,
Shares owned by Buyer or any affiliate of Buyer, and Shares as to
which appraisal rights have been validly exercised) will be converted
into the right to receive $8.29 in cash, without interest. A copy of
the Merger Agreement is included in the attached Proxy Statement and
is incorporated herein by reference.
2. To transact such 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 such 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 [DATE], 1999
will be entitled to notice of the Special Meeting and to vote at the Special
Meeting and any adjournment thereof. Any stockholder will be able to examine a
list of holders of record, for any purpose related to the Special Meeting,
during the 10-day period before the meeting. The list will be available at
Kentek's corporate headquarters located at 2945 Wilderness Place, Boulder,
Colorado 80301. Approval and adoption of the Merger Agreement requires the
affirmative vote by at least a majority of the outstanding Shares entitled to
vote at the Special Meeting.
By Order of the Board of Directors,
James C.T. Linfield
Corporate Secretary
Boulder, Colorado
[DATE], 1999
EACH STOCKHOLDER IS URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. IF A STOCKHOLDER DECIDES TO ATTEND THE SPECIAL MEETING, HE OR
SHE MAY, IF SO DESIRED, REVOKE THE PROXY AND VOTE THE SHARES IN PERSON.
<PAGE> 3
KENTEK INFORMATION SYSTEMS, INC.
----------------------
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
[DATE], 1999
----------------------
This Proxy Statement is being furnished to holders of common stock, par
value $0.01 per share ("Common Stock"), of Kentek Information Systems, Inc., a
Delaware corporation ("Kentek" or the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company (the "Board")
for use at the special meeting of stockholders, and at any adjournment or
postponement thereof (the "Special Meeting"), to be held at the offices of
Cooley Godward LLP, 2595 Canyon Boulevard, Suite 250, Boulder, Colorado 80302 on
[DATE], 1999 at [11:00] 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. ("Buyer"), pursuant to which Buyer 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 (a "Share") of Common Stock issued and
outstanding immediately prior to the effective time of the Merger (other than
Shares held by Kentek as treasury stock, Shares owned by Buyer and its
affiliates and Shares as to which appraisal rights have been validly exercised)
will be converted into the right to receive $8.29 in cash, without interest.
Subsequent to the consummation of the Merger, the stockholders of Kentek other
than Buyer (the "Public Stockholders") will no longer have an interest in
Kentek. As of the date hereof, Buyer owns 61,500 Shares, representing
approximately 1.3% of the outstanding Common Stock. A Special Committee of the
Board (the "Special Committee"), which is composed solely of directors
unaffiliated with Buyer, 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, had a direct conflict of interest regarding
the Merger arising from his relationships with Kentek and Buyer. In particular,
Mr. Shires presently serves as the sole stockholder, director and officer of
Buyer 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, Buyer or their affiliates and who do
not have material commercial relationships with Kentek, Buyer or their
affiliates.
On May 14, 1999, the Special Committee unanimously determined that the
Merger, the Merger Agreement and the transactions contemplated thereby are fair
to and in the best interests of the Public Stockholders, and unanimously
recommended that the Board and the stockholders of the Company approve the
Merger, the Merger Agreement and the transactions contemplated thereby.
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 thereby are fair to and in the best interests of the
Public Stockholders and recommended that the stockholders of the Company
approve and adopt the Merger, the Merger Agreement and the transactions
contemplated thereby.
The Company believes that the Merger, the Merger Agreement and the
transactions contemplated thereby are fair to and in the best interests of the
Public Stockholders, and recommends that the stockholders of the Company
approve the Merger, the Merger Agreement and the transactions contemplated
thereby. In addition, as described further herein, Buyer and Philip W. Shires
also believe that the Merger is fair to the Public Stockholders.
All Shares represented by properly executed proxies received prior to or
at the Special Meeting and not revoked will be voted in accordance with the
instructions indicated in such proxies. If no instructions are indicated, such
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 such 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 the Company a
<PAGE> 4
signed notice of revocation or a later-dated and signed proxy or by attending
the Special Meeting and voting in person.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION
OF A PROXY IN ANY JURISDICTION FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH PROXY SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROXY
STATEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
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
thereby on such 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 the Company's stockholders on or about [DATE], 1999.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Proxy Statement is [DATE], 1999.
<PAGE> 5
----------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..........................................................................1
SUMMARY.........................................................................................................3
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY.............................................................7
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.......................................................8
THE SPECIAL MEETING.............................................................................................9
SPECIAL FACTORS................................................................................................11
BACKGROUND OF THE MERGER.......................................................................................13
PRICE OF THE COMMON STOCK......................................................................................26
THE MERGER.....................................................................................................27
CERTAIN PROVISIONS OF THE MERGER AGREEMENT.....................................................................29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................35
REGULATORY CONSIDERATIONS......................................................................................37
BUYER..........................................................................................................37
APPRAISAL RIGHTS...............................................................................................37
INDEPENDENT AUDITORS...........................................................................................38
STOCKHOLDER PROPOSALS..........................................................................................38
WHERE YOU CAN FIND MORE INFORMATION............................................................................38
AVAILABLE INFORMATION..........................................................................................39
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 BUYER........................................................................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
</TABLE>
<PAGE> 6
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT IS THE PROPOSED TRANSACTION?
A: Buyer will acquire Kentek by merging into Kentek, with Kentek as the
surviving corporation.
Q: WHO IS THE BUYER?
A: KE Acquisition Corp. ("Buyer") was formed by Philip W. Shires in connection
with the proposed merger. Mr. Shires is the President and Chief Executive
Officer and a director and a stockholder of Kentek. Currently, the only
director, officer and stockholder of Buyer and the surviving corporation is Mr.
Shires, but certain other officers and employees of Kentek are expected to
enter into agreements with Buyer to become stockholders of the surviving
corporation.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Stockholders of Kentek (other than Buyer and its affiliates and stockholders
who dissent and properly seek appraisal of the fair value of their shares) will
be entitled to receive $8.29 in cash, without interest, for each share of
Common Stock. If you own stock options of Kentek, you will be entitled to
receive, upon proper exercise of each stock option, the difference between
$8.29 and the exercise price of such 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 proposed 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 19.5% premium over
the closing price for the shares on The NASDAQ National Market on April 21,
1999, the date before Kentek announced it had received Buyer's 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 [__] to [__].
Q: SINCE A MEMBER OF THE BOARD OF DIRECTORS IS THE STOCKHOLDER OF BUYER, 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 Buyer. 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 [__] to [__].
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 Buyer. The
special committee independently selected and retained legal and financial
advisors to assist it in the negotiation, and received an opinion 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, 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 BUYER?
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.
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. Buyer and its affiliates currently
own approximately 1.3% of Kentek's common stock, which they have agreed to vote
in favor of the Merger Agreement.
1
<PAGE> 7
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 [__] to [__] 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 [RECORD DATE] will
be entitled to notice of, and to vote at, the special meeting to approve the
Merger Agreement and the transactions contemplated thereby.
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 938 Quail Street, Lakewood,
Colorado 80215.
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 [__] to [__].
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.
2
<PAGE> 8
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 in its entirety by the more detailed information
contained elsewhere in this Proxy Statement, the Annexes hereto and the
documents otherwise referred to herein. Stockholders are urged to review this
entire Proxy Statement carefully, including the Annexes hereto and such other
documents.
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
Buyer. Pursuant to the Merger Agreement, Buyer will be merged directly into
Kentek (the "Merger") and stockholders of Kentek (other than Buyer and its
affiliates) who do not dissent from the Merger as described herein will receive
$8.29 per share for each share of Common Stock that they own at the effective
time of the Merger. Buyer and its affiliates currently own approximately 1.3%
of the outstanding Common Stock.
During the time the Merger Agreement was negotiated and at the time the
Merger Agreement was executed, one of the executive officers and directors of
Kentek was the sole executive officer, director and stockholder of Buyer. Three
of Kentek's directors who were not affiliated with Buyer formed the Special
Committee of the Board of Directors of Kentek that negotiated the terms of the
Merger Agreement. In connection with the execution of the Merger Agreement,
both the Board of Directors of Kentek (the "Board") and the Special Committee
determined that the Merger, the Merger Agreement and the transactions
contemplated thereby were fair to the Public Stockholders.
For additional information on the directors and executive officers of
Kentek and Buyer, 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. 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 is the exclusive manufacturer of consumable supplies for its
printers, with the exception of toner, which is manufactured exclusively for
Kentek to its specifications. 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 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, unique features, and the low total cost of ownership of its
printers and consumable supplies.
Kentek's principal executive offices are located at 2945 Wilderness Place,
Boulder, Colorado 80301 and its telephone number is (303) 440-5500.
3
<PAGE> 9
BUYER
Buyer was formed in April, 1999 for purposes of the Merger. Buyer 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. The address of the principal office of Buyer is 2945 Wilderness
Place, Boulder, Colorado 80301 and its telephone number is (303) 440-5500.
THE SPECIAL MEETING
TIME AND PLACE OF MEETING
The Special Meeting will be held at the offices of Cooley Godward LLP,
2595 Canyon Boulevard, Suite 250, Boulder, CO 80302 on [DATE], 1999, starting
at [11:00] a.m., local time. See page [__].
MATTER TO BE CONSIDERED
The Special Meeting has been called for the holders of the Common Stock to
consider and vote upon a proposal to approve and adopt the Merger Agreement.
See page [__].
RECORD DATE; VOTE REQUIRED
Holders of record of Common Stock at the close of business on [DATE], 1999
(the "Record Date") have the right to receive notice of and to vote at the
Special Meeting. Each share of Common Stock 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 of the
Common Stock is required to approve and adopt the Merger Agreement. Buyer and
its affiliates own approximately 1.3% of the outstanding Common Stock. Buyer
and its affiliates have agreed to vote their Shares in favor of the proposal to
approve and adopt the Merger Agreement.
SECURITY OWNERSHIP OF MANAGEMENT
As of the Record Date, directors and executive officers of the Company and
their affiliates as a group beneficially owned an aggregate of [________]
Shares (approximately [____]% of the Common Stock) of which [________] Shares
(approximately [____]% of the Common Stock) are eligible to vote at the Special
Meeting. The directors and executive officers of the Company have indicated
that they intend to vote their shares of Common Stock in favor of the adoption
of the Merger Agreement although they are not obligated to do so. See page
[__].
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE COMPANY'S BOARD OF DIRECTORS
Because of the direct conflict of a member of the Board with respect to
any transaction between Kentek and Buyer, the Board established a special
committee (the "Special Committee") to act on behalf of the stockholders of
Kentek other than Buyer and its affiliates (the "Public Stockholders") for
purposes of negotiating the price and other terms of the transaction with Buyer
and evaluating the fairness of the Merger, the Merger Agreement and the
transactions contemplated thereby. The Special Committee is composed solely of
directors unaffiliated with Buyer and its affiliates. 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
thereby 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 thereby. See
pages [__] and [__].
OPINION OF FINANCIAL ADVISOR
Janney Montgomery Scott Inc. ("Janney Montgomery Scott") has served as
financial advisor to the Special Committee in connection with the Merger.
Janney Montgomery Scott has rendered its opinion to the Special Committee and
the Board that, as of the date of such opinion, the consideration to be
received pursuant to the Merger by the Public Stockholders was fair from a
financial point of view to the holders of such Shares. Janney Montgomery
Scott's opinion was delivered in writing to the Special Committee and the Board
on May 14, 1999 and a copy of such opinion is attached to this Proxy Statement
as Annex B (the "Janney Montgomery Scott Opinion"). The Janney Montgomery Scott
Opinion should be read in its entirety with respect to assumptions made,
matters
4
<PAGE> 10
considered, and limitations on the review undertaken by Janney Montgomery Scott
in rendering its opinion. See pages [__] to [__] and Annex B.
THE MERGER
EFFECTIVE TIME OF THE MERGER
Pursuant to the Merger Agreement, Buyer will be merged directly into
Kentek, with Kentek as the surviving corporation (the "Surviving Corporation").
The Merger will 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 is specified in the certificate of merger.
MERGER CONSIDERATION
In the Merger (subject to certain provisions as described herein with
respect to Shares owned by Buyer and its affiliates, Shares held in treasury,
and Shares as to which appraisal rights have been validly exercised) each share
of Common Stock shall be converted into the right to receive $8.29 per share in
cash, without interest (the "Merger Consideration"). The price of $8.29 per
share is a 19.5% premium over the closing price for the Shares on The NASDAQ
National Market on April 21, 1999, the day before Kentek announced it had
received Buyer's initial proposal, 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. See page [__].
STOCK OPTIONS
Each option issued by Kentek to directors or employees shall be adjusted
on the date of the Merger, unless Buyer and the option holder have agreed to a
different result. As a result of the adjustment, the option holder, upon due
exercise of such option (to the extent such option is then vested and
exercisable), shall receive from Kentek an amount equal to the excess, if any,
of $8.29 over the per share exercise price of such option. See pages [__] and
[__].
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 (i) the Company's stockholders adopt the Merger Agreement and
(ii) Buyer shall have received the financing necessary to consummate the
transactions contemplated by the Merger Agreement. See pages [__] and [__].
TERMINATION OF THE MERGER AGREEMENT
Either Buyer or the Company may terminate the Merger Agreement under
certain circumstances, including if the Merger has not been completed by
November 14, 1999. See pages [__] and [__].
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. Buyer expects that it will finance the Merger from borrowings under
new senior secured credit facilities and from cash and marketable 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 [__] and
[__].
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 the Company 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 of Common Stock as appraised by the Delaware Court
of Chancery. Under certain circumstances, a holder may forfeit the right to
appraisal, in which case such 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 [__] and [__].
5
<PAGE> 11
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As a result of his relationships with Kentek and Buyer, Philip W. Shires,
the Company's Chief Executive Officer and President and a director, has
interests described herein that constitute direct conflicts of interest in
connection with the Merger. The Special Committee and the Board were and are
aware of the conflicts described herein 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," "--Reasons of the Company for
the Merger; Fairness of the Merger," and "The Merger--Interests of Certain
Persons in the Merger." See pages [__] and [__].
CERTAIN EFFECTS OF THE TRANSACTION
Following the Merger, the Public Stockholders will cease to have any
ownership interest in the Company or rights as holders of Shares. The Public
Stockholders will no longer benefit from any profits or increases in the value
of the Company and will no longer bear the risk of any decreases in value of
the Company. Rather, Buyer's stockholders will own 100% of the Company.
As a result of the Merger, the Company will be privately held and there
will be no public market for the Common Stock. In addition, Buyer currently
intends to cause the Company to terminate the registration of the Common Stock
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
soon after consummation of the Merger as the requirements for termination of
registration are met. After such registration is terminated, the Company will
no longer be required to file periodic reports with the Securities and Exchange
Commission (the "SEC"). See pages [__] and [__].
PLANS FOR THE COMPANY AFTER THE MERGER
The Company's printer sales and, consequently, consumable supplies and
spare parts sales are decreasing over time due to increased competition in the
printer industry and the introduction, by competitors, of new products. Buyer
plans to continue to manage Kentek's business as the business has been managed
over the recent past and does not plan to introduce or develop new products
other than extensions of existing product lines. Buyer anticipates that the
revenues generated by the Company following the Merger will be sufficient to
repay the Company's creditors, and will enable the Company to service its
existing customers.
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 page [__].
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.
6
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
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 Buyer 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 such information is material to
stockholders in evaluating the Merger and Merger Agreement since (1) the
proposed merger consideration is all cash and (2) if the Merger is completed,
the common stock of Kentek would cease to be publicly traded.
The financial information 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, and the financial information for
the nine months ended March 31, 1999 and 1998 has been derived from the
unaudited consolidated financial statements of Kentek filed on Form 10-Q with
the SEC. 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, which is enclosed with this Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31,
(UNAUDITED) FISCAL YEAR ENDED JUNE 30,
---------------- ---------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
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 (c) $ 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 (b) 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
</TABLE>
- ---------------------------
(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) Weighted average shares have been calculated based on the average market
price per share from the date of the IPO to year-end.
(c) 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.
(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.
7
<PAGE> 13
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 such forward-looking statements, including, among
others:
o delays in receiving required regulatory and other approvals;
o the ability of Buyer to obtain funding necessary to consummate the
Merger;
o the failure of stockholders to approve the Merger Agreement;
o general economic or market conditions;
o changes in business strategy;
o availability of financing on acceptable terms to fund future
operations;
o acceptance in new markets;
o competitive conditions in Kentek's markets;
o general economic or market conditions;
o changes in technology; and
o various other factors, both referenced and not referenced in this
Proxy Statement including those discussed in Kentek's periodic and
other filings with the SEC.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected, planned
or intended. Kentek does not intend, or assume any obligation, to update or
revise these forward-looking statements to reflect actual results, changes in
assumptions or changes in the factors affecting such forward-looking
statements.
8
<PAGE> 14
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED
The primary 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 the Company and the other conditions to the Merger are
satisfied or waived, Buyer will merge with and into Kentek and all Shares
currently held by stockholders (other than Shares held by Kentek as treasury
stock, Shares owned by Buyer or any affiliate of Buyer, and Shares as to which
appraisal rights have been validly exercised) will be converted into the right
to receive $8.29 in cash, without interest. See "Certain Provisions of the
Merger Agreement--Merger Consideration." At the Special Meeting, the
stockholders will also be asked to transact such other business as properly may
come before the meeting. The Board is not presently aware of any such other
business.
Representatives of the independent accountants of the Company 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." 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 of Shares
entitled to vote thereon is required to approve and adopt the Merger Agreement
and the transactions contemplated thereby. The transaction is not structured so
that the approval of at least a majority of unaffiliated security holders is
required.
As of the Record Date, directors and executive officers of the Company and
their affiliates were beneficial owners of an aggregate of [_________] Shares
(approximately [___]% of the Common Stock) of which [_________] Shares
(approximately [___]% of the Common Stock) are eligible to vote at the Special
Meeting. The directors and executive officers of the Company have indicated
that they intend to vote their shares of Common Stock in favor of the adoption
of the Merger Agreement although they are not obligated to do so. See "Security
Ownership of Certain Beneficial Owners and Management."
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 SUCH 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
herein. If, however, other matters are properly brought before the Special
Meeting or any adjournments or postponements thereof, the persons appointed as
proxies will have the discretion to vote or act thereon in accordance with
their best judgment, unless authority to do so is withheld in the proxy. The
persons appointed as proxies may not exercise their discretionary voting
authority to vote any such 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 such proxy are voted at
the Special Meeting by (i) attending and voting in person at the Special
Meeting, (ii) giving notice of revocation of the proxy at the Special Meeting,
or (iii) delivering to the Secretary of the Company (a) a written notice of
revocation or (b) 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.
9
<PAGE> 15
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
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 [________] Shares of
Common Stock. The presence, in person or by proxy, at the Special Meeting of
the holders of at least a majority of outstanding Shares is necessary to
constitute a quorum for the transaction of business. Abstentions will be
counted as present for the purposes of determining whether a quorum is present
but will not be counted as votes cast in favor of approval and adoption of the
Merger Agreement. Because the vote on the Merger Agreement requires the
approval of the majority of the votes entitled to be cast by the stockholders
of the outstanding Shares of Common Stock, abstentions will have the same
effect as a negative vote on these proposals. Proxies relating to "street name"
Shares that are voted by brokers will be counted as Shares present for purposes
of determining the presence of a quorum on all matters, but will not be treated
as Shares having voted at the Special Meeting as to any proposal as to which
authority to vote is withheld by the broker.
APPRAISAL RIGHTS
Each stockholder of Common Stock 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 the Company, 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 such rights and the legal consequences of
voting shares of Common Stock in favor of the approval and adoption of the
Merger Agreement.
SOLICITATION OF PROXIES
The cost of solicitation of proxies will be borne by the Company. 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 the Company
who will not be specially compensated for such services. The Company may also
request banks and brokers to solicit proxies from their customers, where
appropriate, and will reimburse such persons for reasonable expenses incurred
in that regard.
10
<PAGE> 16
SPECIAL FACTORS
PURPOSE AND STRUCTURE OF THE MERGER
Reasons for the Merger. In February 1999, Kentek determined to explore
strategic transactions for its business and its stockholders. Among the
strategic transactions considered were transactions that would result in the
sale of Kentek. In connection with such a transaction, Kentek determined that
it was important to provide an opportunity for liquidity to the Public
Stockholders. Acquiring all Shares held by the Public Stockholders would result
in the benefits described in the second paragraph of this section. The other
option considered by Kentek was simply maintaining the status quo. Kentek
determined that it should pursue such a strategic transaction and thereby
provide the Public Stockholders with the option of obtaining liquidity or
maintaining the status quo. Following the extensive review process described
below, Kentek determined that the Merger was the best available option for
Kentek and the Public Stockholders.
Kentek's principal reasons for the Merger are: (a) the Merger will provide
liquidity to the Public Stockholders; (b) after the proposed Merger, Buyer will
be able to manage the Company without having to consider the positions of
minority or unaffiliated holders of Common Stock; (c) as a privately held
company, Kentek can be managed with a greater emphasis on long-term results
than on short-term profits; (d) after the Merger, Kentek will be eligible to
elect to be taxed under Subchapter S of the Internal Revenue Code, thereby
creating tax advantages for Buyer's stockholders; (e) the assumption by Kentek
of the status of a private company will allow Kentek to eliminate the time
devoted by its management and certain other employees to matters which relate
exclusively to the Company being a public company; and (f) the Company will be
able to eliminate certain other costs which relate to being a public company,
including: the costs of certain accounting, auditing and SEC counsel
activities, the cost of preparing, printing and mailing corporate reports and
proxy statements, the expense of a transfer agent and the cost of investor
relations activities. Buyer expects that, over time, it could save up to
approximately $400,000 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.
The acquisition of the Shares not held by Buyer and its affiliates was
structured as a merger in order to effect a prompt and orderly transfer of the
ownership of the Company held by the Public Stockholders and to provide such
Public Stockholders with cash for their Shares. Kentek did consider, as an
alternative, a cash tender offer for all of the Shares held by the Public
Stockholders. Kentek ultimately rejected this alternative in the belief that
the Merger would be more efficient 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 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.
Kentek did not consider a stock-for-stock transaction with Buyer 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 have resulted in a continuing
public minority interest in Kentek after the Merger. This would not have
eliminated the detriments of being a public company with minority interests and
would have eliminated the benefits described in items (b), (c), (d), (e) and
(f) of the second paragraph of this section. 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.
Kentek also considered an alternative in which the Merger Consideration
would have been structured to provide a lower amount of cash at the closing
(lower than the $8.29 cash payment for each Share in the Merger) with the
possibility of the Public Stockholders ultimately receiving a contingent cash
payment over a time period of four to four and one-half years after the Merger.
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 after the Merger.
As a result, the Special Committee determined that the Merger offered a better
transaction for the Public Stockholders and did not seek the contingent payment
alternative.
Fairness of the Merger. Based on the factors set forth above, Kentek
believes that the consideration to be received by the Public Stockholders
pursuant to the Merger is fair to the Public Stockholders. Kentek believes the
Merger is fair because: (i) the Special Committee and the Board, prior to the
Merger, based on the factors discussed
11
<PAGE> 17
under "Background of the Merger--Reasons of the Company for the Merger;
Fairness of the Merger" concluded that the Merger is fair to, and in the best
interests of, the Public Stockholders, (ii) the Special Committee and the
Board, prior to the Merger, received an opinion from Janney Montgomery Scott
that, as of the date of such opinion and based on and subject to certain
matters stated in such opinion, the consideration to be paid in the Merger is
fair to the Public Stockholders from a financial point of view and (iii) the
negotiations between Kentek and Buyer, 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 did not find it practicable to
assign, nor did it assign, relative weights to the individual factors
considered in reaching its conclusions as to fairness.
Each of the Buyer and its affiliates also believe that the consideration
to be received by the Public Stockholders pursuant to the Merger is fair to the
Public Stockholders. The Buyer and its affiliates base their belief as to the
fairness of the Merger on the factors relied upon by Kentek.
CERTAIN EFFECTS OF THE 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, Buyer will merge with and into Kentek, with Kentek as the surviving
corporation. Upon the consummation of the Merger, 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. In addition,
upon consummation of the Merger, the certificate of incorporation of the
Company shall 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 Buyer shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.
In the Merger, the Public Stockholders will receive cash consideration of
$8.29 per Share and cease to have any ownership interest in the Company or
rights as holders of Shares. The price of $8.29 per share is a 19.5% premium
over the closing price for the Shares on The NASDAQ National Market on April
21, 1999, the date before Kentek announced it had received Buyer's initial
proposal, 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. After
the Merger, the Public Stockholders will no longer benefit from any increases
in the value of the Company or the payment of dividends on the Common Stock and
will no longer bear the risk of any decreases in value of the Company.
Following the Merger, Buyer's and its affiliates' beneficial interests in the
net book value and net earnings of the Company would increase from
approximately 1.3% to 100%. Based on the unaudited financial statements of the
Company as of March 31, 1999, the net book value of the Company was
approximately $44,391,000, and the net earnings of the Company for the nine
months ended March 31, 1999 were approximately $3,389,000. Buyer and its
affiliates will be the sole beneficiaries of any future earnings and profits of
the Company and will have the ability to benefit from any divestitures,
strategic acquisitions or other corporate opportunities that may be pursued by
the Company in the future.
As a result of the Merger, Kentek will be privately held, there will be no
public market for the Common Stock and there will not be another meeting of
Public Stockholders. In addition, Kentek currently intends to cause the Company
to terminate the registration of the Common Stock under the Exchange Act as
soon after consummation of the Merger as the requirements for termination of
registration are met. After such registration is terminated, the Company will
no longer be required to file periodic reports with the SEC.
The Company believes that the Merger will be treated for federal income
tax purposes as a purchase by Buyer of the Common Stock held by the Public
Stockholders and, therefore, will not give rise to gain, loss or other income
to the Company. For information regarding certain tax consequences to Public
Stockholders, see "The Merger--Certain Federal Income Tax Consequences."
As described above in "--Purpose and Structure of the Merger; Reasons of
Buyer for the Merger," Buyer expects that, over time, it could save up to
approximately $400,000 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.
12
<PAGE> 18
BACKGROUND OF THE MERGER
INDUSTRY BACKGROUND
Over the past several years, the mid-range printer market has been
characterized by (i) printers that could print 30 to 60 pages per minute
("ppm") and 30,000 to 400,000 pages per month; and (ii) printers that were
designed primarily for high-volume printing requirements such as production
printing applications, print-on-demand applications, and computer network
applications.
At the time of the Company's initial public offering in April 1996, Kentek
was a leading supplier of heavy-duty, high reliability, mid-range, non-impact
laser printers and related consumable supplies and spare parts. Kentek printers
enjoyed a leading position in the mid-range printer market due to (i) the
lowest jam rate in the industry due to the "straight paper path" design and
(ii) the lowest cost-per-page in the industry.
In 1998, however, trends unfavorable to Kentek and similar mid-range
printer companies accelerated. The three major trends that had the most
negative impact on Kentek were (i) the dramatic speed, duty-cycle, and
cost-of-operation improvements in light-duty printers, (ii) the tremendous
growth of distributed network printing using the new, lower cost, and faster
light-duty printers, and (iii) negative industry characteristics stemming from
increased competition between Xerox and Hewlett Packard ("HP") for dominance in
the office and departmental printer market.
Improvement in Light Duty Printers. Historically, lower-end printers were
typically 10 to 20 ppm behind those printers that defined the mid-range market.
In addition, 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. Several product delays in
the mid-range market, however (most notably the delay of HP's 30 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 1-2
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 true mid-range printers, higher speed
light duty printers quickly became the leading solution in the new networked
office environment. Although true 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 instead for lower-end
printers with lower initial acquisition costs.
Increased Market Competition. In the mid-1990s, Xerox, the leading
supplier of office copiers worldwide, took notice of trends showing office
copier machines were slowly being replaced by both mid-range printers and
printer/copiers with similar speeds. Xerox began work on printer/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 printer/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 printer/copiers, including a 40 ppm
printer/copier, which was developed at a cost approaching $500 million. As a
result of the development and marketing efforts of Xerox and other industry
participants, true mid-range printers have effectively been foreclosed from
competing in the departmental printing and networked office market segments. In
particular, Xerox has priced its 40 ppm printer/copier at approximately $3,000
per unit. In contrast, the Company's printers are several times more expensive,
and, as a result, the Company's printers can only compete on the basis of a
handful of features that the Xerox machines lack.
These negative industry trends were exacerbated by Kentek's inability to
successfully introduce its next generation 60 ppm printer, the KW60. Prior to
the KW60, Kentek remained a successful competitor in the mid-range market by
introducing new faster mid-range printers before other mid-range or lower-end
printer competitors. Despite having spent approximately $15 million during 1997
and 1998, the Company was unable to complete development of the KW60. Certain
aspects of the KW60 development proved to be more complex than anticipated,
requiring more time and resources than originally planned. In November 1998,
the Company announced it was halting further development efforts on the KW60,
estimating that at least 2 years and an additional $20 million would be
required to bring this next generation printer to market.
13
<PAGE> 19
Between November 1998 and the end of March 1999, following the Company's
decision to abandon development efforts on the KW60, the Company vacated three
of the five buildings it occupied, reduced its headcount by approximately 58%,
and reduced operating expenses by approximately $2.8 million quarterly. The
Company also incurred a restructuring charge of approximately $1.14 million in
connection with these efforts.
Because of negative competitive trends and the lack of a new faster
mid-range printer to address increasing performance from light duty printers,
the Company has experienced significant declines in new printer sales over the
past several years. The Company's sales of consumable supplies and spare parts
have also been declining due to a shrinking installed base of printers. New
printer sales have not kept pace with the rate at which existing Kentek
printers have been going out of service.
Due to these factors, the public markets have not placed a significant
value on Kentek's printer business. The Company'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
Buyer's merger proposal on April 21, 1999 the Shares did not trade above $7.00
per Share. A significant portion of the Company's market valuation reflects the
Company's cash and investment securities, currently approximately $7.11 per
share as of March 31, 1999. Over the past 12 months, a majority of Kentek's net
income has been derived from its investments in marketable securities rather
than its printing operations. At times, the Company's common stock has traded
at a discount to its per share cash value.
In response to this low valuation of the Company's Common Stock, Kentek's
board authorized a stock buy back program. The Company repurchased a total of
2,589,750 shares of its Common Stock 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 Kentek common shares which were outstanding
immediately following completion of Kentek's initial public offering.
The table below sets forth the number of shares purchased, the range of
prices paid, and the average purchase price for Shares repurchased by Kentek
during each quarterly period since July 1, 1996. No repurchases occurred within
the past 60 days.
<TABLE>
<CAPTION>
RANGE OF AVERAGE PURCHASE NUMBER OF SHARES
QUARTER ENDED PRICES PAID (1) PRICE (1) REPURCHASED (1)
------------- --------------- --------- ---------------
<S> <C> <C> <C>
September 30, 1996 -- -- --
------------- ------------- ---------
December 31, 1996 -- -- --
------------- ------------- ---------
March 31, 1997 -- -- --
------------- ------------- ---------
June 30, 1997 -- -- --
------------- ------------- ---------
September 30, 1997 -- -- --
------------- ------------- ---------
December 31, 1997 -- -- --
------------- ------------- ---------
March 31, 1998 -- -- --
------------- ------------- ---------
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
------------- ------------- ---------
</TABLE>
- --------------------
(1) Includes sales commissions, where applicable.
BACKGROUND OF THE PROPOSED MERGER TRANSACTION
On February 24, 1999, Howard Morgan, the Company's Chairman, approached
the Company's President and Chief Executive Officer, Philip W. Shires, to
discuss alternatives for achieving liquidity for the Public Stockholders. In
the course of this discussion, the topic of Mr. Shires' possible purchase of the
Company arose. On March 8, 1999, Mr. Shires indicated his potential willingness
to acquire the Company'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.
14
<PAGE> 20
During the next several weeks, Mr. Shires explored the feasibility of a
potential acquisition of the Company, engaged in discussions with potential
financing sources, and retained legal counsel to assist with the formulation of
a formal proposal to acquire the Company. During this time, Mr. Morgan
consulted with the Company's outside legal counsel, Cooley Godward LLP,
regarding the possibility of Mr. Shires making a formal proposal to acquire the
Company.
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 Buyer would acquire all outstanding shares of Kentek Common
Stock 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
Mr. Morgan 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 the Company'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 the Company.
Janney Montgomery Scott had served as the managing underwriter for the
Company's initial public offering and had also been retained by the Company 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 such firm's familiarity and expertise with the
Company. Cooley Godward LLP had served as Kentek's counsel in connection with
its 1996 initial public offering and had subsequently served as the company'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 the Company.
On April 21, 1999, Kentek issued a press release indicating that it had
received a proposal from Mr. Shires to acquire the outstanding shares of the
Company's common stock 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.
Following the April 21, 1999 announcement, the Special Committee
instructed Mr. Morgan to contact firms in the printer industry regarding their
potential interest in acquiring Kentek. Mr. 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, or
had otherwise evinced interest. Neither Xerox nor Hewlett Packard was a current
customer, and both had previously told the Company 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 Mr. Morgan declined to make an
acquisition proposal. In addition, no other parties contacted Mr. Morgan,
Kentek or Janney Montgomery Scott regarding 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 the Company. 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 Company's lack of growth prospects were considered to be a
significant deterrent for many financial buyers.
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During the next two weeks, Cooley Godward LLP negotiated the terms of the
proposed merger agreement with Mr. Shires' counsel. In addition, Janney
Montgomery Scott met with Kentek officers to prepare its financial analysis of
the proposed acquisition. Mr. Morgan updated the Special Committee, Janney
Montgomery Scott and Cooley Godward LLP regarding discussions with potential
acquirors.
On May 7, 1999, the Special Committee met telephonically. Janney
Montgomery Scott and Cooley Godward LLP participated in the May 7, 1999
meeting. Mr. Morgan updated the Special Committee and its advisors about
discussions with other 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 other
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.
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. Mr. Morgan reported that a revised proposal had been received from
Mr. Shires. Under the revised proposal, the Buyer would acquire all outstanding
shares of Kentek common stock at a cash price of $8.29 per share with no
contingent cash payment. At the May 10, 1999 meeting, Janney Montgomery Scott
presented its preliminary analysis of the fairness from a financial point of
view of Mr. Shires' proposal for the acquisition of the Company and Mr. Shires
furnished the Special Committee and its advisers with a commitment letter from
US Bank regarding the financing for the proposed transaction. In addition,
Cooley Godward LLP reported on the status of the negotiations on the form of
definitive merger agreement.
Among other things, the Board, Janney Montgomery Scott and Cooley Godward
LLP discussed the following in relation to the proposed merger agreement:
o No Voting Agreement. The proposed agreement did not require any of
the Company's stockholders to vote in favor of the proposed merger
and the related transactions.
o Modest Termination Fees. The proposed agreement did not require the
payment of termination fees in excess of the reasonable expenses
incurred by Buyer and its affiliates in connection with the
preparation and negotiation of the proposed merger agreement.
o Fiduciary Outs. The proposed agreement provided that the Board and/or
the Special Committee could authorize Kentek to engage in discussions
or negotiations concerning an unsolicited Acquisition Proposal (and
may furnish information and cooperate in this regard) subsequent to
the execution of the proposed merger agreement. This action could be
taken if the Board and/or the Special Committee determined in the
exercise of its fiduciary duties that such action was in the best
interests of Kentek stockholders. An "Acquisition Proposal" was
defined as any proposal or offer with respect to:
o a tender or exchange offer, a merger, consolidation or other
business combination involving Kentek or any of its subsidiaries
(including a merger of equals involving Kentek),
o the acquisition of an equity interest in Kentek representing in
excess of 33% of the power to vote for the election of a
majority of directors of Kentek, or
o the acquisition of assets of Kentek or its subsidiaries
(including stock of one or more subsidiaries of Kentek)
representing 33% or more of the consolidated assets of Kentek,
in each case by any person other than Buyer or its affiliates.
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 such action was necessary in order to act in a
manner that is consistent with its fiduciary obligations under
applicable law.
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o Confidentiality. Pursuant to the terms of the proposed agreement, Kentek
could not engage in negotiations with, or disclose any nonpublic
information to, any person unless it received from such person an executed
confidentiality agreement on terms and conditions deemed by the Board to
be appropriate and in Kentek's best interest.
o Notification of Acquisition Proposals. Kentek would be required to
promptly notify Buyer 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 such notice would be required to
include the identity of the person or group making such Acquisition
Proposal and the material terms and conditions of such 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 Buyer 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, Buyer 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.
o Termination Provisions. Kentek could terminate the proposed agreement at
any time if:
o 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
o 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 such party is in willful
breach of a provision of the proposed agreement.
o Price. The proposed price of $8.29 per share constituted a 19.5% premium
over the closing price for the Shares on The NASDAQ National Market on
April 21, 1999, the day before Kentek announced it had received Buyer's
initial proposal.
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 evaluation of the Company 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 the Company other than Mr. Shires or his affiliates. A
discussion with and questions to Janney Montgomery Scott by the Special
Committee followed. The Special Committee then concluded, after also
considering the Company'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 Mr. Shires and his affiliates, 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 the Company other than Mr. Shires and his affiliates, and
approved resolutions recommending that the Board approve the Merger Agreement
and cause the Company 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, the Company and
the Buyer entered into the Merger Agreement.
The Company issued a press release on the morning of May 14, 1999
announcing the execution of the Merger Agreement.
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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 thereby are fair
to and in the best interests of the Public Stockholders, and recommended that
the Board and the stockholders of the Company approve and adopt the Merger, the
Merger Agreement and the transactions contemplated thereby.
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 thereby are fair to and in the best interests of the
Public Stockholders, and recommended that the stockholders of the Company
approve and adopt the Merger, the Merger Agreement and the transactions
contemplated thereby. Prior to participating in the determinations and
recommendations of the Board, Mr. Shires, who is the sole, stockholder,
director and officer of Buyer, identified his affiliations with Buyer and noted
that as a result of such affiliations he had a direct conflict of interest.
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 thereby are fair to and in the best interests of the
Public Stockholders.
REASONS OF THE COMPANY 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 thereby to be
fair to and in the best interests of the Company's stockholders, the Special
Committee considered the following factors, each of which, in the opinion of
the Special Committee, supported its decision.
o Limitations as a Public Company. The Special Committee considered the fact
that the Company's limited trading volume, institutional sponsorship and
public float, small market capitalization and diminishing research
attention from market analysts, had adversely affected the trading markets
for, and the value of, the Company's Common Stock. In addition, the
Company's stock price performance since the Company's initial public
offering in 1996 had been erratic. In recent years, the Company's failure
to demonstrate consistent profitability, revenue growth and product
development highlighted the Company'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 concluded that
in the circumstances then existing, 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. Accordingly, the Special Committee
concluded that stockholder value was not likely to be maximized were the
Company to remain a public company.
o Liquidity. The Special Committee considered the average volume of trading
on a typical day in recent years, the fact that such volumes were not
substantial and the fact that a number of the Public Stockholders would
not be able effectively to sell their Shares into the available market.
o Financial Performance and Future Prospects. The Special Committee
considered information with respect to the financial condition, results of
operations, business and prospects of the Company, including the financial
projections supplied to Janney Montgomery Scott and the inherent
uncertainties and contingencies associated with such financial
projections, the size of the Company as compared to the remaining
companies in the printer industry, and the economic and market conditions
affecting the Company. The Special Committee also considered the impact
that these factors had and could have on the value of the Common Stock.
o Opinion of Janney Montgomery Scott. Janney Montgomery Scott delivered to
the Special Committee the financial presentation and its written opinion
to the effect 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
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<PAGE> 24
THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS
ARE URGED TO, AND SHOULD, READ THE OPINION OF JANNEY MONTGOMERY SCOTT
CAREFULLY. In addition, the presentation of any the factors considered by
Janney Montgomery Scott in its fairness opinion as discussed under
"--Opinion of Financial Advisor to the Board and the Special Committee"
supported the Special Committee's determination.
o Market Price and Premium. The Special Committee considered that the
proposed price of $8.29 per share constituted a 19.5% premium over the
closing price for the Shares on The NASDAQ National Market on April 21,
1999, the date before Kentek announced it had received Buyer's initial
proposal. The market price of the Common Stock was deemed relevant because
it indicates the arms-length trading price of the Common Stock as
determined in the open market.
o Negotiations with Buyer. The Special Committee considered the history of
negotiations with respect to the Merger Agreement and the transactions
contemplated thereby as the product of arm's-length negotiations between
Buyer and the Special Committee, which among other things, led to:
o an increase in Buyer's offer from $7.85 per Share to $8.29 per Share
to be received by the Public Stockholders, combined with the Special
Committee's belief that $8.29 per Share was the highest price that
Buyer would offer;
o provisions providing that the Company 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 in order to permit the
Company to enter into such a transaction
See "Background of the Merger--Background of the Proposed Merger
Transaction" and "Certain Provisions of the Merger Agreement."
o Financing Commitment. The Special Committee considered (1) the Commitment
Letter received by Buyer from US Bank to fund a certain portion of the
financing for the Merger and (2) Buyer's plan to fund the remainder of the
Merger Consideration with cash and marketable securities currently held by
Kentek. The Special Committee and its financial advisors reviewed the terms
and conditions of, and were satisfied with, such commitment letters and
such financing plans.
o Lack of Potential Buyers. The Special Committee believed that the length of
time between the public announcement of Buyer's indication of interest in
the Company and the date of the Merger Agreement provided a substantial
amount of time within which to gauge the current level of interest in the
Company 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 the Company and potential
unaffiliated strategic or financial third party buyers were limited due to
the Company's recent and projected future revenues and results of
operation. In addition, the Special Committee also considered the
provisions of the Merger Agreement which legally and practically permit the
Company to meaningfully respond to third party proposals for alternative
transactions. In particular, the terms of the Merger Agreement authorize
the Company under certain circumstances to (1) 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 such proposals are in the best interest of the Public
Stockholders, and (2) terminate the Merger Agreement in order to permit the
Company to enter into such an alternative transaction. See "Background of
the Merger--Background of the Proposed Merger Transaction" and "Certain
Provisions of the Merger Agreement."
o Special Committee Composition and Retention of Advisors. The Special
Committee took into account that it was composed of disinterested
directors, none of whom would have equity interests in the Company
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.
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<PAGE> 25
o Availability of Appraisal Rights. The Special Committee considered
that appraisal rights will be available to the Public Stockholders
under Delaware law.
o Loss of Equity Interest. The Special Committee considered the fact
that if the Merger Agreement is approved, the Public Stockholders
will not participate in the earnings or increased value of the
Company, if any. Because of the risks and uncertainties associated
with the Company's future prospects, the Special Committee concluded
that the Merger was preferable to enabling the holders of such stock
to have a speculative potential future return.
In view of the various factors considered by the Special Committee in
connection with its evaluation of the Merger and the Merger Consideration, the
Special Committee did not find it necessary to quantify or otherwise attempt to
assign relative importance to the specific factors considered in making its
determination, nor did it evaluate whether such 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 the Company 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 referred to above, 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 such opinion, based upon and
subject to various considerations, assumptions and limitations stated therein,
the $8.29 per share in cash to be received by the Public Stockholders in the
Merger was fair to such 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." 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
such factors were of equal importance. Rather, the Board conducted a discussion
of, among other things, the factors described above, including asking questions
of the Company's management and legal and financial advisors, and reached a
general consensus that the Merger was advisable and in the best interests of
the Company 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.
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 herein, Janney Montgomery Scott's opinion, dated May
14, 1999, together with the related presentation to the Special Committee and
the Board, was only one 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.
On May 14, 1999, Janney Montgomery Scott delivered its opinion to the
Special Committee and the Board to the effect that, as of such date, and based
upon and subject to certain matters stated therein, the Merger was fair, from a
financial point of view, to the Public Stockholders.
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
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REVIEW UNDERTAKEN, IS ATTACHED TO THIS PROXY STATEMENT AS ANNEX B AND IS
INCORPORATED HEREIN BY REFERENCE. JANNEY MONTGOMERY SCOTT'S OPINION IS DIRECTED
TO THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS OF THE COMPANY AND
ADDRESSES THE FAIRNESS OF THE TRANSACTIONS TO THE PUBLIC STOCKHOLDERS OF THE
COMPANY FROM A FINANCIAL POINT OF VIEW. JANNEY MONTGOMERY SCOTT'S OPINION DOES
NOT ADDRESS THE UNDERLYING DECISION OF THE COMPANY TO ENGAGE IN THE MERGER AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY 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 OPINION OF JANNEY MONTGOMERY
SCOTT SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with its opinion, Janney Montgomery Scott reviewed: (i)
certain publicly available business and financial information relating to the
Company that Janney Montgomery Scott deemed relevant, (ii) certain information,
including financial forecasts, relating to the business and prospects of the
Company, (iii) selected financial and stock market data for certain other
publicly traded companies that Janney Montgomery Scott deemed relevant, (iv)
the financial terms of certain other business combinations that Janney
Montgomery Scott deemed relevant, (v) the recent trading history of the Common
Stock, and (vi) other financial studies and analyses as Janney Montgomery Scott
deemed necessary. In addition, Janney Montgomery Scott held discussions with
members of management of the Company regarding the Company's business,
financial condition and prospects.
In preparing 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 the Company 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 the Company. With respect to the
financial forecast information furnished to or discussed with it by the
Company, Janney Montgomery Scott has assumed that it has been reasonably
prepared and reflects the best currently available estimates and judgment of
the Company's management as to the expected future financial performance of the
Company. Janney Montgomery Scott's opinion expresses no view with respect to
how such projections were obtained or the assumptions on which they were based.
Further, Janney Montgomery Scott has relied upon the assurances of management
of the Company that they are not aware of any facts or circumstances that would
make such information 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.
In arriving at its opinion as described herein, Janney Montgomery Scott
did not ascribe a specific range of values to the Company, 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. 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 an opinion is not readily
susceptible to partial or summary description. No company or transaction used
in such analyses as a comparison is identical to the Company or the Merger, nor
is an evaluation of the results of such 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 such 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 such analyses. In addition, analyses relating
to the value of the business or securities do not purport to be appraisals or
to reflect the prices at which businesses, companies or securities actually may
be sold. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty. In arriving at this 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 and factors, without considering all analyses and
factors, could create an incomplete view of the processes underlying such
analyses and its opinion.
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The following is a summary of the material analyses performed by Janney
Montgomery Scott and presented to the Special Committee and the Board at
meetings on May 14, 1999.
Historical Operating Results and Financial Condition. In rendering its
opinion, Janney Montgomery Scott reviewed and analyzed the historical and
current operating results and financial condition of the Company which included
(i) an assessment of the Company's recent financial statements and (ii) an
analysis of the Company's revenue, growth and operating performance trends.
Projections. Janney Montgomery Scott analyzed the Company's projections in
support of its fairness opinion. The projections were not reviewed by
independent auditors and were not prepared in accordance with generally
accepted accounting principles. Such projections were based on numerous
estimates and other assumptions and are inherently subject to significant
uncertainties and contingencies. 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 the Company or any other person considers such
estimates an accurate prediction of future events.
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 Buyer's 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.
Analysis of Selected Publicly Traded Comparable Companies. Using publicly
available information, Janney Montgomery Scott compared the financial
performance and stock market valuation for the Company 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 the Company. With
respect to each such analysis, Janney Montgomery Scott made such comparisons
among the following companies: Axiohm Transaction Solutions, Bull Run Corp.,
Genicom Corp., Lexmark International Group Inc., Printronix Inc., QMS Inc.,
Transact Technologies Inc., Tridex Corp. and Zebra Technologies (the
"Comparable Companies").
Among other multiples calculated and reviewed by Janney Montgomery Scott
were the Comparable Companies' (i) stock price multiples to historical and
estimated net income and (ii) enterprise value (total stock market value
adjusted for debt and cash) multiples to latest twelve months ("LTM") revenues,
earnings before interest and taxes ("EBIT") and earnings before interest,
taxes, depreciation and amortization ("EBITDA"). All of the trading multiples
of the Comparable Companies were based on closing stock prices on May 3, 1999.
The Comparable Companies were found to have trading ranges for enterprise value
to LTM revenues of 0.5x to 2.7x with a median value of 0.9x, enterprise value
to LTM EBITDA of 3.5x to 74.4x with a median value of 6.1x, enterprise value to
LTM EBIT of 7.7x to 42.7x with a median value of 16.7x, price to fiscal 1999
projected net income of 9.0x to 28.6x with a median value of 15.2x, and a price
to fiscal 2000 projected net income of 7.7x to 24.0x with a median value of
13.5x. Applying the median values to Kentek's historical and projected
financials resulted in an implied valuation range of $4.01 to $7.38 per share.
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 the Company's business ("Comparable Transactions"). With respect to
the Company, Janney Montgomery Scott examined multiples of the value of common
equity and indebtedness assumed in each of the transactions to, among other
measures, such 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 seven transactions
that Janney Montgomery Scott deemed most relevant included: the acquisition of
Texas Instruments' worldwide printer division by Genicom Corp.; the acquisition
of Digital
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Equipment's printing systems by Genicom Corp.; the acquisition of DH Technology
Inc. by Axiohm SA; the acquisition of International Imaging materials by Paxar
Corp.; the acquisition of Computer Vision Corp. by Parametric Technology Corp.;
the acquisition of Eltron International Inc. by Zebra Technologies; and the
acquisition of Raster Graphics Inc. by Gretag Imaging Group Inc. The Comparable
Transactions were found to have acquisition ranges for LTM revenue of 0.3x to
2.3x with a median value of 1.2x, LTM EBITDA of 9.3x to 13.0x with a median
value of 9.6x, and LTM EBIT of 3.3x to 14.9x with a median value of 12.9x.
Applying the median values to Kentek's historical financials resulted in an
implied valuation range of $5.12 to $10.25 per share.
Discounted Cash Flow Analysis. Janney Montgomery Scott prepared a
discounted cash flow analysis of the future unleveraged free cash flows that
the Company's operations could be expected to generate during various periods
using projections provided to Janney Montgomery Scott by the Company.
Unleveraged free cash flows of the Company 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 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%. After
subtracting the present value of payments due to 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.
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 the Company 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.
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, the Company
has agreed to pay Janney Montgomery Scott for its financial advisory services
in connection with the Transactions as follows: (i) $25,000 payable on the date
of the engagement, and (ii) $100,000 to be paid on the closing of the Merger.
As of the date hereof, the Company has paid Janney Montgomery Scott $25,000 of
such fees. In addition, the Company 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.
CERTAIN PROJECTIONS
The Company does not as a matter of course make public forecasts as to
future operations, but the Company did prepare certain projections in April
1999 which it provided to Janney Montgomery Scott in connection with their
analysis of Buyer's proposal and the financial evaluation of the Company at
that time. The projections set forth below are included in this Proxy Statement
solely because such information was available to Buyer, was provided by the
Company to Janney Montgomery Scott in April 1999 and was used in connection
with Janney Montgomery Scott's May 14, 1999 fairness opinion and related
presentation to the Special Committee. See "Background of the
Merger--Background of the Proposed Merger Transaction" and "Special
FactorS--Opinion of Financial Advisor to the Board and the Special Committee."
THE PROJECTIONS SET FORTH BELOW WERE NOT PREPARED BY THE COMPANY WITH A
VIEW TO PUBLIC DISCLOSURE OR COMPLIANCE WITH PUBLISHED GUIDELINES OF THE SEC OR
THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING PROSPECTIVE
FINANCIAL INFORMATION, NOR WAS THE INFORMATION PREPARED WITH THE ASSISTANCE OF
OR REVIEWED, COMPILED OR EXAMINED BY, INDEPENDENT ACCOUNTANTS. THE PROJECTIONS
REFLECT NUMEROUS ASSUMPTIONS, ALL MADE BY MANAGEMENT OF THE COMPANY, WITH
RESPECT TO INDUSTRY PERFORMANCE, GENERAL BUSINESS, ECONOMIC, MARKET AND
FINANCIAL CONDITIONS AND OTHER MATTERS, ALL OF WHICH ARE DIFFICULT TO PREDICT
AND MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. ACCORDINGLY, THERE CAN BE
NO
23
<PAGE> 29
ASSURANCE THAT THE ASSUMPTIONS MADE IN PREPARING THE PROJECTIONS SET FORTH
BELOW WILL PROVE ACCURATE, AND ACTUAL RESULTS MAY BE MATERIALLY GREATER OR LESS
THAN THOSE CONTAINED IN THE PROJECTIONS SET FORTH BELOW. THE INCLUSION OF THE
PROJECTIONS IN THIS PROXY STATEMENT SHOULD NOT BE REGARDED AS AN INDICATION
THAT THE COMPANY OR BUYER OR ANY OF THEIR RESPECTIVE FINANCIAL ADVISORS OR
OTHER REPRESENTATIVES, OR THEIR RESPECTIVE OFFICERS AND DIRECTORS, CONSIDER
SUCH INFORMATION TO BE ACCURATE, RELIABLE OR ACHIEVABLE, AND NONE OF SUCH
PERSONS OR ENTITIES ASSUMES ANY RESPONSIBILITY FOR THE VALIDITY,
REASONABLENESS, ACCURACY OR COMPLETION THEREOF.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------
(NUMBERS IN THOUSANDS)
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Revenues (a) $ 23,699 $ 17,495 $ 13,283 $ 9,128 $ 6,123
Operating Expenses 6,891 5,070 4,100 2,880 1,850
Operating Income (EBIT) 3,920 3,027 1,976 1,201 899
BALANCE SHEET DATA:
Total Assets $ 15,696 $ 14,536 $ 15,164 $ 15,073 $ 14,607
Total Liabilities 7,683 4,940 4,574 3,914 3,031
Total Stockholders' 8,012 9,596 10,590 11,159 11,576
Equity
CASH FLOW STATEMENT:
Cash - End of Period $ 4,880 $ 5,720 $ 7,811 $ 9,197 $ 9,737
</TABLE>
- ----------------------
(a) Based on historical statistical data and trends.
CERTAIN TRANSACTIONS
The Company 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 (i) an
annual salary of $252,000, (ii) an annual bonus equal to 1.5% of the Company's
pre tax profit for each fiscal year and (iii) a leased or purchased automobile
or an 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, 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 such termination. Mr. Shires is obligated not to solicit
any employees to leave employment of the Company for a period of three years
after termination of his employment.
From July 1, 1997 through the date of this Proxy Statement, the Company
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.
Cooley Godward LLP, counsel to the Special Committee in connection with
the Merger, represented the Company in various legal matters since 1994.
24
<PAGE> 30
PLANS FOR THE COMPANY AFTER THE MERGER; CONDUCT OF THE BUSINESS OF THE COMPANY
IF THE MERGER IS NOT CONSUMMATED
The Company's printer sales and, consequently, consumable supplies and
spare parts sales are decreasing over time due to increased competition in the
printer industry and the introduction, by competitors, of new products. Buyer
plans to continue to manage Kentek's business as the business has been managed
over the recent past and does not plan to introduce or develop new products
other than extensions of existing product lines. Buyer anticipates that the
revenues generated by the Company following the Merger will be sufficient to
repay the Company's creditors, and will enable the Company to service its
existing customers.
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. Buyer has no plans (other
than pursuant to the Merger Agreement) to acquire the shares of Common Stock
held by the Public Stockholders.
25
<PAGE> 31
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 June 2, 1999, 4,604,152 Shares were outstanding and the Company
had approximately [___] 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
as well as the average daily trading volume of the Common Stock since the
Company's initial public offering on April 17, 1996 as reported on The NASDAQ
National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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 (1).................................................................. 7.88 6.31
</TABLE>
- -----------------------
(1) Through May 21, 1999
On April 21, 1999, the last trading day before the public announcement
that Buyer had proposed to acquire the Shares held by the Public Stockholders
for $7.50 per Share, the closing bid price of the Common Stock was $6.9375 per
share.
On May 13, 1999, the last trading day before public announcement of the
execution of the Merger Agreement, the high and low sale prices and the closing
price of the Common Stock were $7.625 per share.
On [DATE], 1999, the closing price of the Common Stock as reported was
$[_____] per share.
On [DATE], 1999, there were approximately [_______] holders of Common
Stock.
Stockholders should obtain current market price quotations for the Common
Stock in connection with voting their Shares.
A cash dividend of $.02 per Share for the third quarter was declared May
10, 1999. A quarterly cash dividend of $.02 per Share has been paid for each
quarter during the last two years. Pursuant to the Merger Agreement, no further
dividends will be paid.
Upon consummation of the Merger, the Shares will cease to be traded on The
NASDAQ National Market.
26
<PAGE> 32
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."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences of
the Merger to holders of Common Stock. The discussion is for general
information only and does not purport to consider all aspects of federal income
taxation that might be relevant to holders of Common Stock. The discussion is
based on current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing regulations promulgated thereunder and 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 of Common Stock 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 Common Stock 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 each block of Common Stock (i.e., Shares
acquired at the same cost in a single transaction) held by the stockholder.
Net capital gain (i.e., generally 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%, unless a stockholder (i) is a corporation or
comes within certain exempt categories and, when required, demonstrates this
fact or (ii) provides a correct taxpayer identification number ("TIN") (which,
for an individual stockholder, would be the stockholder's social security
number) to the Transfer Agent (as defined below), and otherwise complies with
applicable requirements of the backup withholding rules. A stockholder who does
not provide a correct TIN may be subject to penalties imposed by the Internal
Revenue Service (the "IRS"). 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 such 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
Buyer will account for the Merger as "purchase" in accordance with
generally accepted accounting principles. Therefore, the aggregate
consideration paid by Buyer in connection with the Merger will be allocated to
the Company's assets and liabilities based upon their fair values, with any
excess being treated as goodwill.
27
<PAGE> 33
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Stockholders should be aware that, as a result of his relationships with
Kentek and Buyer, Philip W. Shires, the Company's Chief Executive Officer and
President and a director, has interests described herein that are different
from, or in addition to, the interests of holders of Shares generally. These
interests have presented Mr. Shires with direct conflicts of interest in
connection with the Merger. The Special Committee and the Board were and are
aware of the interests and conflicts described below and elsewhere in this
Proxy Statement and considered them in addition to the other matters described
under "Background of the Merger-Recommendation of the Special Committee and the
Board of Directors" and "--Reasons of the Company 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 $20,000 for serving as members of the Special Committee.
Pursuant to the Merger Agreement, the Company has agreed for two years
after the Merger to indemnify all present directors and officers of the Company
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 such policies in effect on May
14, 1999. See "Certain Provisions of the Merger Agreement--Covenants."
As of the Record Date, the executive officers and directors of the Company
beneficially owned an aggregate of [__________] Shares of which [________] 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 the Company in respect of
such Shares would be $[__________]. See "Security Ownership of Certain
Beneficial Owners and Management."
The members of the Special Committee will not serve as directors of Buyer
or any of its affiliates subsequent to the Merger. All unvested stock options
held by the directors 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, including payment of related fees and
expenses, is estimated to be approximately $39 million. Buyer expects to obtain
the Merger Financing through borrowings under a new senior secured loan
facility, and from cash and marketable securities held by Kentek. Pursuant to
the Commitment Letter, US Bank has committed, subject to the terms and
conditions therein, 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 such commitment. The Commitment Letter expires on
August 15, 1999.
The financing will be secured by Kentek's accounts, inventory and general
intangibles, will be personally guaranteed by Philip W. Shires and will bear
interest at US Bank's prime rate. The term portion of the financing (up to $4
million) will be due in 24 equal monthly payments, and the revolving portion of
the financing (up to $2 million) will be due at maturity of the financing, or
November 30, 2000. Kentek will be subject to certain covenants governing its
future operations, including financial tests. Buyer anticipates that the
financing will be repaid from amounts generated from Kentek's operations.
28
<PAGE> 34
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 in its
entirety 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 Buyer 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.
MERGER CONSIDERATION
The Merger Agreement provides that each share of Kentek's Common Stock
outstanding will be converted into the right to receive cash in an amount equal
to $8.29 per share, without interest. All shares of Common Stock that are owned
by Kentek as treasury stock will be canceled and no payment will be made for
such shares. All shares of Common Stock owned by Buyer and its affiliates shall
be canceled and no payment will be made for such 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.
EMPLOYEE AND DIRECTOR STOCK OPTIONS
Each option issued by Kentek to directors or employees shall be adjusted
on the date of the Merger, unless Buyer and the option holder have agreed to a
different result. As a result of the adjustment, the option holder, upon due
exercise of such option (to the extent such option is then vested and
exercisable), shall receive from Kentek an amount equal to the excess, if any,
of $8.29 over the per share exercise price of such option.
CONVERSION OF SHARES
Kentek will appoint an Exchange Agent who will pay the Merger
Consideration in exchange for certificates representing shares of Common Stock.
Kentek will make cash available to the Exchange Agent in order to permit the
Exchange Agent to pay the Merger Consideration. Promptly after the Merger,
Kentek or the Exchange Agent will send record holders of Common Stock a letter
of transmittal and instructions explaining how to send stock certificates to
the Exchange Agent. The Exchange Agent will receive all certificates for shares
of Common Stock 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 some 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 Buyer's consent for some actions such as significant acquisitions or
incurring indebtedness other than in the ordinary course of business, and
afford Buyer access to Kentek's properties and records.
29
<PAGE> 35
Other Covenants. The Merger Agreement contains mutual covenants of Buyer
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 Buyer 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 such action.
An "Acquisition Proposal" is any proposal or offer with respect to:
o a tender or exchange offer, a merger, consolidation or other business
combination involving Kentek or any of its subsidiaries (including a
merger of equals involving Kentek),
o the acquisition of an equity interest in Kentek representing in excess
of 33% of the power to vote for the election of a majority of
directors of Kentek, or
o the acquisition of assets of Kentek or its subsidiaries (including
stock of one or more subsidiaries of Kentek) representing 33% or more
of the consolidated assets of Kentek, in each case by any person other
than Buyer or its affiliates.
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.
However, the Merger Agreement provides that the Board and/or the Special
Committee may authorize Kentek to engage in discussions or negotiations
concerning an unsolicited Acquisition Proposal (and may furnish information and
cooperate in this regard). This action can be taken if the Board and/or the
Special Committee determines in the exercise of its fiduciary duties that such
action is in the best interests of Kentek stockholders.
In addition, the Merger Agreement provides that following receipt of an
Acquisition Proposal that is financially superior to the Merger (as determined
in good faith by the Board), the Board may withdraw, modify or not make its
recommendation in favor of the Merger. This action can be taken if the Board
concludes in good faith that such action is necessary in order to act in a
manner that is consistent with its fiduciary obligations under applicable law.
Kentek has agreed not to engage in negotiations with, or disclose any
nonpublic information to, any person unless it receives from such 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 Buyer 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 such Acquisition Proposal and the
material terms and conditions of such 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
Buyer 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, Buyer
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.
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<PAGE> 36
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, Buyer 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, Buyer 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, Buyer 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 Buyer 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 Buyer 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
warrantied to Buyer 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 Buyer's Obligations to Effect the Merger. The
obligations of Kentek and Buyer to consummate the Merger are subject to the
satisfaction of the following conditions:
o Kentek's stockholders must adopt the Merger Agreement;
o no existing law and no court action may prohibit or threaten to
prohibit the Merger;
o all consents from any governmental authority required to permit the
Merger must be obtained;
o the Merger must not be prevented by any governmental authority (and no
governmental authority can be seeking to prevent the Merger);
o Buyer must not be prohibited from exercising all material rights
pertaining to ownership of Kentek or any of its subsidiaries (and no
government authority can be seeking such a prohibition);
o Buyer 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
o no statute, rule, regulation or order can have been enacted or
proposed that would make the consummation of the Merger illegal.
Conditions to the Obligations of Buyer. The obligations of Buyer to effect
the Merger are subject to the satisfaction of the following additional
conditions:
o Kentek must have performed in all material respects its obligations
under the Merger Agreement;
o the representations and warranties of Kentek must be true in all
material respects as if made as of the date of the Merger;
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<PAGE> 37
o Kentek must obtain all consents and make all filings required for the
Merger (other than where failing to have such consents or make such
filings would not reasonably be expected to have a material adverse
effect on Kentek);
o Buyer must receive all documents it reasonably requests relating to
Kentek and Kentek's authorization of the Merger Agreement;
o Buyer 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 Buyer; and
o no more than 5% of the shares of Common Stock shall exercise appraisal
rights.
Conditions to the Obligations of Kentek. The obligation of Kentek to
effect the Merger is further subject to the satisfaction of the following
additional conditions:
o Buyer must have performed in all material respects its obligations
under the Merger Agreement;
o the representations and warranties of Buyer must be true in all
material respects as if made as of the date of the Merger;
o Buyer must obtain all consents and make all filings required for the
Merger (other than where not having such consents or making such
filings would not reasonably be expected to impede the receipt of the
Merger Consideration by Kentek's stockholders); and
o Kentek must receive all documents it reasonably requests relating to
Buyer and Buyer's authorization of the Merger Agreement.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Merger as
follows:
o by mutual written consent of Kentek and Buyer;
o by either Kentek or Buyer:
o if the Merger has not been consummated by November 14, 1999;
o if any law or regulation makes consummation of the Merger illegal or
otherwise prohibited;
o if any judgment, injunction, order or decree enjoining Kentek or Buyer
from consummating the Merger is entered and such injunction, judgment,
order or decree has become final and non-appealable; or
o if Kentek's stockholders do not approve the Merger Agreement; or
o by Buyer if:
o any person, entity or group other than Buyer and its affiliates
has increased its beneficial ownership of Common Stock by an
amount equal to 15% or more of the outstanding Common Stock
(compared with its level of ownership on the date of the Merger
Agreement);
o any representation or warranty of Kentek under the Merger
Agreement is untrue when made or any covenant of Kentek under the
Merger Agreement is breached (which, in either case, would result
in a closing condition not being satisfied), subject to a 60-day
cure period;
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<PAGE> 38
o the Board withdraws or modifies in a manner adverse to Buyer its
approval or recommendation of the Merger;
o the Board approves, recommends or endorses any Acquisition
Proposal other than the Merger; or
o by Kentek if:
o the Board determines in good faith that an Acquisition Proposal
is financially superior to the Merger and is reasonably capable
of being financed, and
o Kentek enters into a definitive agreement to effect the
financially superior Acquisition Proposal, and Kentek has
complied with the covenant set forth above under "--Covenants."
If the Merger Agreement is validly terminated, none of its provisions
survive (except for miscellaneous provisions relating to confidentiality,
expenses, governing law, jurisdiction, waiver of a jury trial, and other
matters). Termination shall be without any liability on the part of any party,
unless such party is in willful breach of a provision of the Merger Agreement.
PAYMENT OF FEES AND EXPENSES
The fees and expenses of the Merger and all related transactions will be
paid by Kentek and Buyer, and will not reduce the Merger Consideration. Kentek
agreed to pay Buyer's expenses relating to the Merger and all related
transactions if the Merger is not completed, if Buyer has not materially
breached its representations and warranties or obligations and if:
o Kentek enters into an agreement to consummate an Acquisition
Proposal and such transaction is subsequently consummated;
o The Merger Agreement is terminated by Buyer because a
representation or warranty of Kentek was untrue when made or any
covenant of Kentek under the Merger Agreement was breached
(which, in either case, resulted in a closing condition not being
satisfied);
o The Merger Agreement is terminated by Buyer because the Board
withdrew or modified in a manner adverse to Buyer its approval or
recommendation of the Merger;
o The Merger Agreement is terminated by Buyer or Kentek because the
Board approved an Acquisition Proposal other than the Merger; or
o An Acquisition Proposal is made and, within 12 months after
termination of the Merger Agreement, Kentek enters into a
definitive agreement to consummate a type of transaction
contemplated by an Acquisition Proposal, and later consummates
the transaction.
The following is an estimate of fees and expenses to be incurred in
connection with the Merger:
<TABLE>
<S> <C>
Legal Fees and Expenses of Buyer'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........................ 75,000
Printing................................................... 75,000
Filing Fees................................................ 7,500
Transfer Agent............................................. 25,000
Mailing.................................................... 7,500
Miscellaneous.............................................. 10,000
--------
TOTAL $730,000
========
</TABLE>
33
<PAGE> 39
The Company 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 such
funds, see "The Merger--Merger Financing."
AMENDMENTS; WAIVERS
The provisions of the Merger Agreement may be amended or waived if, and
only if, such 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. Shares of Common Stock
will be deregistered under the federal securities laws and will no longer be
quoted on The NASDAQ National Market or any exchange.
34
<PAGE> 40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of June 2, 1999 by: (i) each member of the
Board; (ii) each of the current executives of the Company; (iii) all current
executive officers and directors of the Company as a group; and (iv) all those
known by the Company to be beneficial owners of more than five percent of its
Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1)
------------------------
NUMBER PERCENT
NAME OF BENEFICIAL OWNER OF SHARES OF TOTAL
------------------------ --------- --------
<S> <C> <C>
James H. Simons, Ph.D. (2)............................. 1,066,630 23.17%
c/o Renaissance Technologies Corp.
800 Third Avenue
New York, New York 10022
Murdoch & Co. (3)...................................... 1,028,082 22.33%
c/o Bermuda Trust Company, Ltd.
6 Front Street
Hamilton HM11 Bermuda
Khronos Capital Limited (4)............................ 600,000 13.03%
Tropic Isle Building
Wickhams Cay
Road Town, Tortola
British Virgin Islands
Wellington Management Company, LLP (5)................. 678,000 14.73%
75 State Street
Boston, Massachusetts 02109
Wellington Trust Company, NA (6)....................... 488,000 10.60%
75 State Street
Boston, Massachusetts 02109
ROI Capital Management, Inc............................ 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 (7)................................ 19,849 *
Philip W. Shires (9)................................... 298,219 6.48%
Sheldon Weinig (7)..................................... 27,000 *
All directors and executive officers as a group
(5 persons) (10).................................. 1,586,600 34.46%
</TABLE>
- ----------------
* 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 of Common Stock subject
to options currently exercisable within 60 days of [DATE], 1999, are deemed
outstanding for computing the percentage of the person or entity holding
such 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 of
Common Stock shown as beneficially owned by them. Percentage of ownership
is based on 4,604,152 shares of Common Stock outstanding on [DATE], 1999.
35
<PAGE> 41
(2) Includes 1,028,082 shares of Common Stock 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 of Common Stock 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 of Common
Stock. Mr. Mayer was a member of the Board until his resignation in January
1998.
(5) Reflects 418,000 shares of Common Stock as to which they have shared voting
power and 678,000 shares with shared dispositive power.
(6) Reflects 228,000 shares of Common Stock as to which they have shared voting
power and 488,000 shares with shared dispositive power.
(7) Consists solely of shares of Common Stock issuable upon exercise of
options.
(8) Includes 118,659 shares of Common Stock issuable upon exercise of options.
(9) Includes 236,719 shares of Common Stock issuable upon exercise of options.
(10) Includes shares included pursuant to notes (2) and (7) through (9) above.
36
<PAGE> 42
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 such a challenge is made,
what the result will be.
BUYER
Buyer 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. All of the outstanding
capital stock of Buyer is owned by Philip W. Shires, who is also the sole
officer and director of Buyer. The principal executive offices of Buyer are
located at 2945 Wilderness Place, Boulder, Colorado 80301 and its telephone
number is (303) 440-5500.
APPRAISAL RIGHTS
If you hold Common Stock and you do not wish to accept the Merger
Consideration, then Section 262 of the DGCL provides that you may elect to have
the fair value of your shares (exclusive of any element of value arising from
the accomplishment or expectation of the Merger) determined by the Delaware
Chancery Court. This amount would then be paid in cash, together with a fair
rate of interest. Section 262 is set forth in its entirety in Annex C to this
Proxy Statement.
If you wish to exercise your appraisal right or to preserve the right to
do so, you should carefully review Annex C. If you fail to comply with the
procedures specified in Section 262 in a timely manner you may lose your
appraisal right. Because of the complexity of these procedures, you should seek
the advice of counsel if you are considering exercising your appraisal rights.
If you wish to exercise the right to demand appraisal under Section 262,
you must satisfy each of the following conditions:
o You must not vote in favor of the Merger.
o You must deliver to Kentek a written demand for appraisal of your
Common Stock before the vote on the Merger Agreement at the Special
Meeting. This written demand for appraisal must be in addition to and
separate from any proxy or vote against the Merger Agreement. Merely
voting against, or abstaining from voting, or failing to vote in favor
of adoption of the Merger Agreement will not constitute a demand for
appraisal within the meaning of Section 262.
o You must continuously hold your Common Stock from the date you make
your demand through the Merger. If you transfer your Common Stock
before the Merger, you will lose your right to appraisal.
o You must file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of your Common Stock within 120 days
after the Merger.
Demands for appraisal must be made in writing and must be mailed or
delivered to: Corporate Secretary, Kentek Information Systems, Inc., 2945
Wilderness Place, Boulder, Colorado 80301.
IF YOU ARE CONSIDERING SEEKING APPRAISAL, YOU SHOULD BE AWARE THAT THE
FAIR VALUE OF YOUR SHARES OF COMMON STOCK AS DETERMINED UNDER SECTION 262 COULD
BE GREATER THAN, THE SAME AS, OR LESS THAN THE MERGER CONSIDERATION. THE JANNEY
MONTGOMERY SCOTT OPINION IS NOT AN OPINION 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
37
<PAGE> 43
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 in its entirety by
reference to the full text of such Section, which is included as Annex C.
INDEPENDENT AUDITORS
The firm of Deloitte & Touche LLP has served as the Company's independent
auditors since May 9, 1997. The consolidated financial statements of the
Company for each of the years in the two year period ended June 30, 1998
included in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30,1998 attached hereto as Annex E, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing therein. 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 the Company's independent auditors
prior to May 9, 1997. The consolidated financial statements of the Company for
the year ended June 30, 1996 included in the Company'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 the
Company and no public participation in any future meetings of stockholders of
the Company. However, if the Merger is not consummated, the Company's public
stockholders will continue to be entitled to attend and participate in Company
stockholders' meetings. Pursuant to Rule 14a-8 under the Exchange Act
promulgated by the SEC, any stockholder of the Company who wishes to present a
proposal at the next Annual Meeting of Stockholders of the Company (in the
event the Merger is not consummated), and who wishes to have such proposal
included in the Company's proxy statement for that meeting, must have delivered
a copy of such proposal to the Company 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, such proposal must have been submitted so that
it was received no later than September 22, 1999.
WHERE YOU CAN FIND MORE INFORMATION
The SEC allows the Company to "incorporate by reference" information into
this Proxy Statement, which means that the Company can disclose important
information by referring you to another document filed separately with the SEC.
The following documents previously filed by the Company with the SEC are
incorporated by reference in this Proxy Statement and are deemed to be a part
hereof:
o The Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998;
o The Company's Quarterly Report on Form 10-Q for the period ended March
31, 1999;
o The Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1998;
o The Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998; and
o The Company's Current Report on Form 8-K dated May 14, 1999.
Specifically, the information set forth in the following sections of the
Company'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
38
<PAGE> 44
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.
The Company'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 herein 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 such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute part of this Proxy Statement.
The Company 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 such documents
(unless such exhibits are specifically incorporated by reference therein).
Requests for such 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 the Company or by Buyer or its affiliate. 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 herein or in the affairs of the
Company since the date hereof.
Because the Merger is a "going private" transaction, the Buyer and its
affiliate and the Company have filed with the SEC a Rule 13e-3 Transaction
Statement on Schedule 13E-3 under the Exchange Act with respect to the Merger.
This Proxy Statement does not contain all of the information set forth in the
Schedule 13E-3 and the exhibits thereto. Copies of the Schedule 13E-3 and the
exhibits thereto are available for inspection and copying at the principal
executive offices of the Company during regular business hours by any
interested stockholder of the Company, 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.
The Company 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 such 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."
39
<PAGE> 45
The Company'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. Such opinion is also available for inspection and
copying during regular business hours at the principal executive offices of the
Company by any interested stockholder of the Company or the representative of
such stockholder who has been so designated in writing.
40
<PAGE> 46
ANNEX A
MERGER AGREEMENT
between
KENTEK INFORMATION SYSTEMS, INC.,
and
KE ACQUISITION CORP.
dated as of
MAY 14, 1999
<PAGE> 47
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1 THE MERGER............................................................................1
SECTION 1.1. The Merger...........................................................................1
SECTION 1.2. Conversion of Shares.................................................................2
SECTION 1.3. Surrender and Payment................................................................3
SECTION 1.4. Dissenting Shares....................................................................4
SECTION 1.5. Stock Options........................................................................4
SECTION 1.6. Transfer Taxes, etc..................................................................5
ARTICLE 2 THE SURVIVING CORPORATION.............................................................5
SECTION 2.1. Certificate of Incorporation.........................................................5
SECTION 2.2. By-laws..............................................................................5
SECTION 2.3. Directors and Officers...............................................................5
SECTION 2.4. Director and Officer Liability.......................................................5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................................5
SECTION 3.1. Corporate Existence and Power........................................................5
SECTION 3.2. Corporate Authorization..............................................................6
SECTION 3.3. Governmental Authorization...........................................................6
SECTION 3.4. Non-Contravention....................................................................6
SECTION 3.5. Capitalization.......................................................................6
SECTION 3.6. Subsidiaries.........................................................................7
SECTION 3.7. SEC Filings..........................................................................7
SECTION 3.8. Financial Statements.................................................................7
SECTION 3.9. Disclosure Documents.................................................................8
SECTION 3.10. Absence of Certain Changes...........................................................8
SECTION 3.11. Litigation; Compliance..............................................................10
SECTION 3.12. Taxes...............................................................................10
SECTION 3.13. ERISA...............................................................................11
SECTION 3.14. Permits ............................................................................12
SECTION 3.15. Required Stockholder Vote...........................................................12
SECTION 3.16. Finders' Fees.......................................................................12
SECTION 3.17. Environmental Matters...............................................................12
SECTION 3.18. Restrictions on Business Activities.................................................12
SECTION 3.19. Property............................................................................12
SECTION 3.20. Interested Party Transactions.......................................................13
SECTION 3.21. Insurance...........................................................................13
SECTION 3.22. Opinion of Financial Advisor........................................................13
SECTION 3.23. Intellectual Property...............................................................13
SECTION 3.24. Material Contracts..................................................................14
SECTION 3.25. Takeover Statutes...................................................................14
</TABLE>
-i-
<PAGE> 48
<TABLE>
<S> <C> <C>
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF MERGERCO.............................................14
SECTION 4.1. Corporate Existence and Power.........................................................14
SECTION 4.2. Corporate Authorization...............................................................14
SECTION 4.3. Governmental Authorization............................................................15
SECTION 4.4. Non-Contravention.....................................................................15
SECTION 4.5. Disclosure Documents..................................................................15
SECTION 4.7. Finders' Fees.........................................................................15
SECTION 4.8. Litigation............................................................................15
ARTICLE 5 COVENANTS OF THE COMPANY...............................................................16
SECTION 5.1. Affirmative Covenants of the Company..................................................16
SECTION 5.2. Negative Covenants of the Company.....................................................16
SECTION 5.3. No Solicitation.......................................................................18
SECTION 5.4. Settlement of Certain Claims..........................................................19
SECTION 5.5. Antitakeover Statutes.................................................................19
SECTION 5.6. Access to Information.................................................................19
ARTICLE 6 COVENANTS OF EACH PARTY................................................................20
SECTION 6.1. Reasonable Efforts....................................................................20
SECTION 6.3. Public Announcements..................................................................21
SECTION 6.4. Notification of Certain Matters.......................................................21
SECTION 6.5. Proxy Statement; Stockholder Meeting..................................................21
ARTICLE 7 CONDITIONS.............................................................................22
SECTION 7.1. Conditions to the Obligations of Each Party...........................................22
SECTION 7.2. Conditions to the Obligations of MergerCo.............................................22
SECTION 7.3. Conditions to the Obligations of the Company..........................................23
ARTICLE 8 TERMINATION............................................................................24
SECTION 8.1. Termination...........................................................................24
SECTION 8.2. Effect of Termination.................................................................25
SECTION 8.3. Certain Fees..........................................................................26
ARTICLE 9 MISCELLANEOUS..........................................................................26
SECTION 9.1. Notices...............................................................................26
SECTION 9.2. Amendments; No Waivers................................................................27
SECTION 9.3. Rules of Construction.................................................................27
SECTION 9.4. Successors and Assigns................................................................27
SECTION 9.5. Governing Law; etc....................................................................27
SECTION 9.6. Counterparts; Effectiveness...........................................................28
SECTION 9.7. Parties in Interest...................................................................28
SECTION 9.8. Severability..........................................................................28
SECTION 9.9. Entire Agreement......................................................................28
SECTION 9.10. Survival of Representations and Warranties...........................................29
</TABLE>
-ii-
<PAGE> 49
EXHIBIT
<TABLE>
<CAPTION>
<S> <C>
Exhibit A Amended Certificate of Incorporation of the Company
</TABLE>
-iii-
<PAGE> 50
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.
<PAGE> 51
(c) At the Closing, upon fulfillment or waiver of the conditions
precedent to the Merger set forth in Article 7, the parties shall cause a
Certificate of Merger to be filed with the Secretary of State of the State of
Delaware, in such form as required by, and duly executed in accordance with, the
relevant provisions of the Delaware Law using the procedures permitted in
Section 251 of the Delaware Law. The Merger shall become effective at such time
as the certificate of merger is duly filed with the Secretary of State of the
State of Delaware or at such later time as the Company and MergerCo agree to
specify in the certificate of merger (the "EFFECTIVE TIME").
(d) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to all
of the restrictions, disabilities and duties of the Company and MergerCo, all as
provided under Delaware Law.
(e) The Surviving Corporation may, at any time after the Effective
Time, take any action (including the execution and delivery of any document) in
the name and on behalf of either of the Company and MergerCo in order to carry
out and effectuate the transactions contemplated by this Agreement.
(f) The Company hereby represents that (x) the Special Committee has
unanimously (i) determined that this Agreement and the Merger are fair to and in
the best interests of the Company's stockholders, and (ii) recommended that this
Agreement and the Merger be approved by the full Board of Directors and (y) its
Board of Directors, at a meeting duly called and held, and acting on such
unanimous recommendation of the Special Committee, has unanimously (i)
determined that this Agreement and the Merger are fair to and in the best
interests of the Company's stockholders, (ii) approved this Agreement and the
Merger, which approval satisfies in full the requirements of the Delaware Law
that the Agreement be approved by the Company's Board of Directors, and (iii)
resolved to recommend approval and adoption of this Agreement and the Merger by
its stockholders; provided, that such recommendation may be withdrawn, modified
or amended to the extent the Board of Directors of the Company deems it
necessary to do so in the exercise of its fiduciary obligations to the Company's
stockholders. The Company further represents that Janney Montgomery Scott Inc.
(the "FINANCIAL ADVISOR") has delivered to the Company's Board of Directors its
written opinion that, as of the date of such opinion, the Merger Consideration
to be paid in the Merger was fair to the holders of Company Common Shares from a
financial point of view.
SECTION 1.2. Conversion of Shares. At the Effective Time:
(a) each Company Common Share held by the Company as treasury stock
shall be canceled and no payment shall be made with respect thereto;
(b) each Company Common Share owned by MergerCo shall be canceled and
no payment shall be made with respect thereto;
(c) each Company Common Share outstanding immediately prior to the
Effective Time shall (except as otherwise provided in Section 1.2(a), Section
1.2(b) or as provided in Section 1.4 with respect to Company Common Shares as to
which appraisal rights have been perfected) be converted into the right to
receive the Merger Consideration in exchange for such Company Common Share. If,
subsequent to the date of this Agreement but prior to the Effective Time, the
Company changes the number of Company Common Shares outstanding as a result of
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any stock split, stock dividend, recapitalization or similar transaction, the
Merger Consideration obtainable upon conversion of a Company Common Share as
provided in this Section 1.2(c) shall be appropriately adjusted;
(d) each share of common stock, par value $.01 per share, of MergerCo
outstanding immediately prior to the Effective Time shall be automatically
converted into one validly issued, fully paid and nonassessable share of common
stock, par value $.01 per share, of the Surviving Corporation.
SECTION 1.3. Surrender and Payment. (a) Promptly after the Effective
Time, the Surviving Corporation shall transmit funds and securities to the
Exchange Agent, by wire or other acceptable means, as required for payment, in
accordance with this Agreement, of the Merger Consideration. Promptly after the
Effective Time, the Surviving Corporation will send, or cause the Exchange Agent
to send, to each holder of Company Common Shares at the Effective Time a letter
of transmittal for use in exchanging certificates evidencing such Company Common
Shares for the Merger Consideration (which letter shall specify that the
delivery shall be effected, and risk of loss shall pass, only upon proper
delivery of the certificates representing Company Common Shares to the Exchange
Agent).
(b) Each holder of Company Common Shares that have been converted into
the right to receive the Merger Consideration in exchange for each Company
Common Share, upon surrender to the Exchange Agent of a certificate or
certificates representing such Company Common Shares, together with a properly
completed letter of transmittal covering such Company Common Shares, will be
entitled immediately upon such surrender to receive the Merger Consideration
payable in respect of such Company Common Shares; provided that the Exchange
Agent will withhold from payment all amounts required to be withheld by
applicable law, including, without limitation, under the provisions of Code
section 1445, unless the holder of Company Common Shares makes applicable
affidavits or certifications reasonably satisfactory to the Exchange Agent
(based on instructions from the Surviving Corporation) that the Merger
Consideration is not subject to withholding. Until so surrendered, each
certificate representing Company Common Shares that have been converted into the
right to receive in exchange for each Company Common Share the Merger
Consideration shall, after the Effective Time, represent for all purposes, only
the right to receive the Merger Consideration.
(c) If any portion of the Merger Consideration is to be paid to a
Person other than the registered holder of the Company Common Shares, it shall
be a condition to such payment that the certificate or certificates so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the Person requesting such payment shall pay to the Exchange
Agent any transfer or other taxes required as a result of such payment to a
Person other than the registered holder of such Company Common Shares or
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
(d) After the Effective Time, there shall be no further registration
of transfers of Company Common Shares. If, after the Effective Time,
certificates representing Company Common Shares are presented to the Surviving
Corporation, they shall be exchanged for the consideration provided for, and in
accordance with the procedures set forth, in this Article 1.
(e) Any Merger Consideration that remains unclaimed by the holders of
Company Common Shares six months after the Effective Time shall be returned to
the Surviving
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Corporation, upon demand, and any such holders who have not exchanged their
Company Common Shares for the Merger Consideration in accordance with this
Section prior to that time shall thereafter look only to the Surviving Company
for payment of the Merger Consideration in respect of their Company Common
Shares, subject to applicable abandoned property, escheat and other similar
laws. Notwithstanding the foregoing, the Surviving Company shall not be liable
to any former holder of Company Common Shares for any amount paid to a public
official pursuant to applicable abandoned property, escheat or other similar
laws. Any Merger Consideration remaining unclaimed by holders of Company Common
Shares one day prior to such time as such amounts would otherwise escheat to or
become property of any governmental entity shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation free and clear
of any claims or interest of any Person previously entitled to such amounts.
(f) Any Merger Consideration made available to the Exchange Agent
pursuant to Section 1.3(a) to pay for Company Common Shares for which appraisal
rights have been perfected shall be returned to the Surviving Corporation upon
its demand.
(g) MergerCo and the Company shall use all reasonable efforts to take
all such action as may be necessary or appropriate in order to effectuate the
Merger as promptly as possible, subject, in the case of the Company, to
applicable fiduciary duties as provided in Section 5.3. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges,
immunities, powers and franchises of either of the Company or MergerCo, the
officers and directors of the Surviving Corporation are fully authorized in the
name of either of the Company or the MergerCo or otherwise to take, and shall
take, all such action.
SECTION 1.4. Dissenting Shares. Notwithstanding Section 1.2, Company
Common Shares outstanding immediately prior to the Effective Time and held by a
holder who has not voted in favor of the Merger or consented thereto in writing
and who has demanded appraisal for such Company Common Shares in accordance with
Delaware Law ("DISSENTING SHARES") shall not be converted into a right to
receive the Merger Consideration, unless such holder fails to perfect or
withdraws or otherwise loses its right to appraisal or it is determined that
such holder does not have appraisal rights in accordance with Delaware Law. If
after the Effective Time such holder fails to perfect or withdraws or loses its
right to appraisal, or if it is determined that such holder does not have an
appraisal right, such Company Common Shares shall be treated as if they had been
converted as of the Effective Time into a right to receive in exchange for each
Company Common Share the Merger Consideration.
SECTION 1.5. Stock Options. Except as otherwise agreed in writing prior
to the Effective Time between MergerCo and the holder of any stock option, each
stock option to purchase Company Common Shares outstanding at the Effective Time
shall be adjusted such that the holder of any such option shall have the right,
upon due exercise of such option (to the extent such option is then vested and
exercisable), to receive from the Surviving Corporation an amount equal to the
excess, if any, of the amount of the Merger Consideration over the applicable
per share exercise price of such option for each Company Common Share such
holder could have purchased had such holder exercised such option in full
immediately prior to the Effective Time.
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SECTION 1.6. Transfer Taxes, etc. Except as set forth in Section
1.3(c), the Surviving Corporation shall bear and be responsible for the payment
of all transfer, stamp, documentary, sales, use, registration and other similar
Taxes (but excluding any federal, state, or local taxes measured by the income
of the Person responsible for paying such Taxes) incurred in connection with the
exchange of Company Common Shares for the Merger Consideration.
ARTICLE 2
THE SURVIVING CORPORATION
SECTION 2.1. Certificate of Incorporation. At the Effective Time, the
certificate of incorporation of the Company shall be amended to read in its
entirety substantially in the form set forth in Exhibit A and as so amended
shall be the certificate of incorporation of the Surviving Corporation until
thereafter amended in accordance with applicable law.
SECTION 2.2. By-laws. The by-laws of MergerCo in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.
SECTION 2.3. Directors and Officers. From and after the Effective Time,
the directors and officers of MergerCo shall be the directors and officers of
the Surviving Corporation.
SECTION 2.4. Director and Officer Liability. The Surviving Corporation
will indemnify and hold harmless the present and former officers and directors
of the Company and its Subsidiaries (the "COVERED EMPLOYEES") in respect of acts
or omissions occurring prior to the Effective Time to the extent provided under
the Company's certificate of incorporation and bylaws in effect on the date
hereof until any applicable statute of limitations has expired; provided that
such indemnification shall be subject to any limitation imposed from time to
time under applicable Law. For not less than two years after the Effective Time,
MergerCo will provide officers' and directors' liability insurance in respect of
acts or omissions occurring prior to the Effective Time covering each such
Person currently covered by the Company's officers' and directors' liability
insurance policy on terms with respect to coverage and amount no less favorable
than those of the Company's policy in effect on the date hereof; provided that
in satisfying its obligation under this Section, MergerCo shall not be obligated
to pay premiums in excess of 150% of the amount per annum that the Company paid
for this purpose in its last full fiscal year; but provided further, that
MergerCo shall be obligated to provide such coverage as may be obtained for such
amount. The provisions of this Section 2.4 are for the benefit of and may be
enforced after the Effective Time by the Covered Employees.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to MergerCo as follows:
SECTION 3.1. Corporate Existence and Power. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted. The Company is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction where the
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character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Company Material Adverse Effect.
SECTION 3.2. Corporate Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the transactions contemplated by this Agreement are within the Company's
corporate powers and, except for any required approval by the Company's
stockholders in connection with the consummation of the Merger, have been duly
authorized by all necessary corporate action. This Agreement constitutes a valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency or other
similar laws relating to or affecting the enforcement of creditors' rights
generally and to legal principles of general applicability governing the
application and availability of equitable remedies.
SECTION 3.3. Governmental Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation of the
transactions contemplated by this Agreement by the Company require no action or
waiting period by or in respect of, or filing with, any governmental body,
agency, official or authority other than (a) the filing of a certificate of
merger in accordance with Delaware Law; (b) compliance with any applicable
requirements of the Securities Act, the Exchange Act or any Blue Sky Laws; and
(c) compliance with those Laws, Regulations and Orders noncompliance with which
would not reasonably be expected to have a Company Material Adverse Effect or to
prevent, impair or result in significant delay of the consummation of the
Merger.
SECTION 3.4. Non-Contravention. The execution, delivery and performance
by the Company of this Agreement and the consummation by the Company of the
transactions contemplated by this Agreement do not and will not (a) contravene
or conflict with the certificate of incorporation or bylaws of the Company or
(b) assuming effectuation of all filings and registrations with, the termination
or expiration of any applicable waiting periods imposed by, and receipt of all
Permits and Orders of, Governmental Authorities indicated as required in Section
3.3, (i) constitute a default under or give rise to (A) a right of termination,
cancellation, acceleration, amendment or modification with respect to the
Company or any of its Subsidiaries, (B) a loss of any benefit to which the
Company or any of its Subsidiaries is entitled or (C) an increase in the
obligations of the Company or any of its Subsidiaries, in each case, under any
provision of any Material Contract of the Company or any of its Subsidiaries
which, in any such case, individually or in the aggregate, would have a Company
Material Adverse Effect, (ii) result in the creation or imposition of any
material Lien (other than any Permitted Encumbrances) on any material asset of
the Company or any of its Subsidiaries or (iii) violate or cause a breach under
any Law, Regulation, Order or Permit applicable to the Company, its Subsidiaries
and their respective assets except for any such matters that would not
reasonably be expected, individually or in the aggregate, to have a Company
Material Adverse Effect.
SECTION 3.5. Capitalization. The authorized capital stock of the
Company consists of 12,000,000 authorized Company Common Shares. As of the date
of this Agreement, there were issued and outstanding 4,604,152 Company Common
Shares and options to purchase an aggregate of 538,017 Company Common Shares.
All outstanding shares of capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. Except as set forth in
this Section and except for changes since the date of this Agreement resulting
from the exercise of employee stock options outstanding on such date, there are
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outstanding (i) no shares of capital stock or other voting securities of the
Company, (ii) no securities of the Company convertible into or exchangeable for
shares of capital stock or voting securities of the Company, and (iii) no
options or other rights to acquire from the Company, and no obligation of the
Company to issue, any capital stock, voting securities or securities convertible
into or exchangeable for capital stock or voting securities of the Company.
There are no outstanding obligations of the Company or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any Company Common Shares.
SECTION 3.6. Subsidiaries. (a) Each of the Company's Subsidiaries is a
corporation or other legal entity duly incorporated or organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has all corporate or entity powers and all
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted, except to the extent the failure to have such
licenses, authorizations, consents and approvals would not, individually or in
the aggregate, have a Company Material Adverse Effect, and is duly qualified to
do business as a foreign corporation or entity and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except for those
jurisdictions where failure to be so qualified would not, individually or in the
aggregate, have a Company Material Adverse Effect.
(b) The Company owns all of the issued and outstanding shares of
capital stock of, or other equity interests in, each of the Subsidiaries of the
Company (other than directors' qualifying shares), and such shares and interests
have been duly authorized and are validly issued, and, with respect to capital
stock, are fully paid and nonassessable, and were not issued in violation of any
preemptive or similar rights of any past or present equity holder of such
Subsidiary.
SECTION 3.7. SEC Filings. (a) The Company has delivered to MergerCo (i)
its annual reports on Form 10-K for its fiscal years ended June 30, 1996, 1997
and 1998, (ii) its quarterly reports on Form 10-Q for its fiscal quarters ended
September 30, 1998, December 31, 1998 and March 31, 1999 ("COMPANY 10-Q"), (iii)
its proxy or information statements relating to meetings of, or actions taken
without a meeting by, the stockholders of the Company held since April 17, 1996,
and (iv) all of its other reports, statements, schedules and registration
statements filed with the Securities and Exchange Commission (the "SEC") since
January 1, 1996 ("COMPANY SEC REPORTS").
(b) As of its filing date, each such report or statement filed
pursuant to the Exchange Act, and each registration statement, as amended or
supplemented, if applicable, filed pursuant to the Securities Act, as of the
date such statement or amendment became effective, did not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
SECTION 3.8. Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company included in its annual reports on Form 10-K and the quarterly reports on
Form 10-Q referred to in Section 3.7 fairly present, in conformity with
generally accepted accounting principles applied on a consistent basis (except
as may be indicated in the notes thereto), the consolidated financial position
of the Company and its consolidated subsidiaries as of the dates thereof and
their consolidated results
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of operations and changes in financial position for the periods then ended
(subject to normal year-end adjustments in the case of any unaudited interim
financial statements). For purposes of this Agreement, "COMPANY BALANCE SHEET"
means the consolidated balance sheet of the Company as of March 31, 1999 set
forth in the Company 10-Q and "COMPANY BALANCE SHEET DATE" means March 31, 1999.
As of the date of this Agreement, there exist no liabilities or obligations of
the Company and its Subsidiaries, whether accrued, absolute, contingent or
threatened, which would be required to be reflected, reserved for or disclosed
under generally accepted accounting principles in the financial statements of
the Company as of and for the period ended March 31, 1999, other than (i)
liabilities or obligations which are adequately reflected, reserved for or
disclosed in the March 31, 1999 financial statements of the Company, (ii)
liabilities incurred in the ordinary course of business since March 31, 1999 and
(iii) such as would not have a Company Material Adverse Effect.
SECTION 3.9. Disclosure Documents. (a) Each document required to be
filed by the Company with the SEC in connection with the transactions
contemplated by this Agreement, including, without limitation, the Schedule
13E-3 filing and proxy statement (the "PROXY STATEMENT") to be filed with the
SEC in connection with the Merger and any amendments or supplements thereto
will, when filed, comply as to form in all material respects with the applicable
requirements of the Exchange Act and the Securities Act, except that no warranty
is made hereby with respect to any information supplied by MergerCo expressly
for inclusion in the Proxy Statement.
(b) At the time the Proxy Statement or any amendment or supplement
thereto is first mailed to stockholders of the Company, and at the time such
stockholders vote on adoption of this Agreement, the Proxy Statement, as
supplemented or amended, if applicable, will not contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading, except that no warranty is made hereby with respect
to any information supplied by MergerCo for inclusion in the Proxy Statement.
SECTION 3.10. Absence of Certain Changes. Except for this Agreement,
from the Company Balance Sheet Date, the Company and its Subsidiaries have
conducted their business in all material respects in the ordinary course
consistent with past practice and there has not been:
(a) any event, occurrence or development (including the
commencement of any action, suit or proceedings or, to the Knowledge of
the Company, any investigation) of a state of circumstances or facts
which, individually or together with other similar events, has had or
reasonably would be expected to have a Company Material Adverse Effect;
(b) any declaration, setting aside or payment of any dividend
or other distribution with respect to any shares of capital stock of
the Company, or any repurchase, redemption (other than the receipt of
Company Common Shares in payment of the exercise price of employee or
director stock options and Taxes in respect of such exercise and other
than the Company's regular quarterly dividend to be paid to
stockholders of record on May 31, 1999) or other acquisition by the
Company or any of its Subsidiaries of any outstanding shares of capital
stock or other securities of, or other ownership interests in, the
Company or any of its Subsidiaries;
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(c) any amendment of any material term of any outstanding
security of the Company or any of its Subsidiaries other than
amendments to the terms of the existing credit facilities of the
Company or its Subsidiaries or borrowings under such facilities;
(d) any incurrence, assumption or guarantee by the Company or
any of its Subsidiaries of any indebtedness for borrowed money other
than in the ordinary course of business and in amounts and on terms
consistent with past practices;
(e) any creation or assumption by the Company or any of its
Subsidiaries of any Lien (other than Permitted Encumbrances) on any
material asset of the Company or any of its Subsidiaries other than in
the ordinary course of business consistent with past practices;
(f) any making of any loan, advance or capital contribution to
or investment in any Person other than loans, advances or capital
contributions to or investments in wholly-owned Subsidiaries made in
the ordinary course of business consistent with past practices;
(g) any damage, destruction or other casualty loss (whether or
not covered by insurance) affecting the business or assets of the
Company or any of its Subsidiaries which, individually or in the
aggregate, has had or would reasonably be expected to have a Company
Material Adverse Effect;
(h) any transaction or commitment made, or any contract or
agreement entered into, by the Company or any of its Subsidiaries
relating to its assets or business (including the acquisition or
disposition of any assets) or any relinquishment by the Company or any
of its Subsidiaries of any contract or other right, in either case,
material to the Company and its Subsidiaries taken as a whole, other
than transactions and commitments in the ordinary course of business
consistent with past practice and those contemplated by this Agreement;
(i) any change in any method of accounting or accounting
practice by the Company or any of its Subsidiaries, whether or not any
such change is required by reason of a concurrent change in generally
accepted accounting principles;
(j) any (iv) grant of any severance or termination pay to any
director, officer or employee of the Company or any of its
Subsidiaries, (v) entering into of any employment, deferred
compensation or other similar agreement (or any amendment to any such
existing agreement) with any director, officer or employee of the
Company or any of its Subsidiaries, (vi) increase in benefits payable
under any existing severance or termination pay policies or employment
agreements or (vii) increase in compensation, bonus or other benefits
payable to directors, officers or employees of the Company or any of
its Subsidiaries except for such grants, payments, increases or changes
in the ordinary course of business consistent with past practice; or
(k) any labor dispute, other than routine individual
grievances, or any activity or proceeding by a labor union or
representative thereof to organize any employees of
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the Company or any of its Subsidiaries, which employees were not
subject to a collective bargaining agreement at the Company Balance
Sheet Date, or any lockouts, strikes, slowdowns, work stoppages or
threats thereof by or with respect to such employees, which in any such
case would reasonably be expected to have a Company Material Adverse
Effect.
During the period from March 31, 1999, neither the Company nor any of its
Subsidiaries has engaged in any conduct that is proscribed during the period
from the date of this Agreement to the Effective Time by Section 5.2 or agreed
in writing during such period prior to the date of this Agreement to engage in
any such conduct.
SECTION 3.11. Litigation; Compliance. (a) There is no action, suit or
proceeding pending against, or (to the Knowledge of the Company) threatened
against or affecting, or (to the Knowledge of the Company) any pending
investigation against, the Company or any of its Subsidiaries or any of their
respective properties before any court or arbitrator or any governmental body,
agency or official which would reasonably be expected, individually or in the
aggregate, to have a Company Material Adverse Effect or which in any manner
challenges or seeks to prevent, enjoin, alter or materially delay the Merger or
any of the other transactions contemplated by this Agreement.
(b) The Company and its Subsidiaries are in substantial compliance
with all applicable Laws and Regulations and are not in default with respect to
any Order applicable to the Company or any of its Subsidiaries, except such
events of noncompliance or defaults that, individually or in the aggregate,
would not reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.12. Taxes. (a) The Company and its Subsidiaries have timely
filed all required United States federal, state, local and foreign and other Tax
Returns and such Tax Returns are true, complete and correct, and the Company and
its Subsidiaries have timely paid and discharged all Taxes due in connection
with or with respect to the periods or transactions covered by such Tax Returns
and have paid all other Taxes as are due, except such as are being contested in
good faith by appropriate proceedings (to the extent that any such proceedings
are required) and there are no other Taxes that would be due if asserted by a
taxing authority, except Taxes with respect to which the Company is maintaining
reserves to the extent required by generally accepted accounting principles,
except where the failure of any of the foregoing to be true would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. Except as does not involve or would not result in
liability to the Company or any of its Subsidiaries that would reasonably be
expected to have a Company Material Adverse Effect, (i) there are no Tax Liens
on any assets of the Company or any of its Subsidiaries (other than Permitted
Encumbrances); and (ii) there is no written claim against the Company or any of
its Subsidiaries for any Taxes, and no assessment, deficiency or adjustment has
been asserted or proposed with respect to any Tax Return. The accruals and
reserves (including deferred taxes) reflected in the Company Balance Sheet are
in all material respects adequate to cover all Taxes accruable through the date
thereof (including interest and penalties, if any, thereon and Taxes being
contested) in accordance with generally accepted accounting principles.
(b) Neither the Company nor any of its Subsidiaries is obligated under
any agreement with respect to industrial development bonds or other obligations
with respect to which the
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excludability from gross income of the holder for federal or state income tax
purposes could be affected by the transactions contemplated by this Agreement,
and to the Knowledge of the Company, neither the Company nor any of its
Subsidiaries owns any property of a character, the indirect transfer of which,
as a consequence of the Merger, would give rise to any material documentary,
stamp or other transfer tax.
(c) The Company is not a United States real property holding
corporation (as defined in Section 897(c)(2) of the Code).
SECTION 3.13. ERISA. (a) Each Company Employee Plan has been
administered and is in compliance with the terms of such plan and all applicable
laws, rules and regulations where the failure thereof would result in liability
that would be reasonably expected to have a Company Material Adverse Effect.
Each Company Employee Plan intended to be qualified has received a favorable
determination from the IRS and, to the Company's Knowledge, nothing has occurred
since that would adversely affect such qualification. No litigation or
administrative or other proceeding involving any Company Employee Plans has
occurred or, to the Company's Knowledge, is threatened where an adverse
determination would result in liability that would be reasonably expected to
have a Company Material Adverse Effect. The Company has not contributed to any
"multiemployer plan", within the meaning of section 3(37) of ERISA. No condition
exists and no event has occurred that would be expected to constitute grounds
for termination of any Company Employee Plan and neither the Company nor any of
its affiliates has incurred any liability arising in connection with the
termination of, or complete or partial withdrawal from, any plan covered or
previously covered by Title IV of ERISA. For purpose of this Section,
"AFFILIATE" of any Person means any other Person which, together with such
Person, would be treated as a single employer under Section 414 of the Code.
(b) Each enforceable employment, severance or other similar contract,
arrangement or policy and each plan or arrangement providing for insurance
coverage (including any self-insured arrangements), workers' compensation,
disability benefits, supplemental unemployment benefits, vacation benefits,
retirement benefits or for deferred compensation, profit-sharing, bonuses, stock
options, stock appreciation or other forms of incentive compensation or
post-retirement insurance, compensation or benefits which (i) is not a Company
Employee Plan, (ii) is entered into, maintained or contributed to, as the case
may be, by the Company or any of its affiliates and (iii) covers any employee or
former employee of the Company or any of its affiliates (a "COMPANY EMPLOYEE
ARRANGEMENT") has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations that are applicable to such Company Employee Arrangement except for
failures to comply which, singly or in the aggregate, would not have a Company
Material Adverse Effect.
(c) The Company has not established, and does not maintain, any
post-retirement benefits for its employees, including but not limited to
post-retirement life insurance or post-retirement medical.
(d) Other than stock option agreements with Howard Morgan and Philip
Shires, the Company has no agreements that provide for the payment of income or
the provision of benefits (including vesting, entitlement, receipt, creation or
transfer of any rights, privileges, income or title to property or beneficial
ownership) to any employees of the Company as a result of a change of control of
the Company.
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SECTION 3.14. Permits. To the Knowledge of the Company, the Company and
its Subsidiaries have all Permits as are necessary to carry on their businesses
as currently conducted, except for any such Permits for which the Company has
made due application and except for any such Permits that the failure to possess
which, individually or in the aggregate, would not reasonably be expected to
have a Company Material Adverse Effect. The Company has not received notice from
any Governmental Authority (i) that such Permits are not in full force and
effect or have been violated, in either case in any respect that would
reasonably be expected to have a Company Material Adverse Effect or (ii)
threatening to suspend, revoke or suspend any such Permits which, in any such
case, would reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.15. Required Stockholder Vote. The affirmative vote by
stockholders of the Company Common Shares of the Company representing a majority
of the outstanding Company Common Shares is the only vote of the Company
stockholders required by Law for the adoption and approval of this Agreement,
the Merger and the transactions contemplated by this Agreement.
SECTION 3.16. Finders' Fees. There is no investment banker, broker,
finder or other intermediary which has been retained by or is authorized to act
on behalf of the Company or any of its Subsidiaries who might be entitled to any
fee or commission from MergerCo or any of its Subsidiaries in connection with
the transactions contemplated by this Agreement. The parties acknowledge that
the Special Committee has retained the Financial Advisor as financial advisor
and that the fees and expenses of the Financial Advisor will be paid by the
Company.
SECTION 3.17. Environmental Matters. Except for matters that,
individually or in the aggregate, would not reasonably be expected to have a
Company Material Adverse Effect, (a) to the Knowledge of the Company, the
properties, operations and activities of the Company and its Subsidiaries are in
compliance with all applicable Environmental Laws; (b) the Company and its
Subsidiaries and the properties and operations of the Company and its
Subsidiaries are not subject to any existing, pending or, to the Knowledge of
the Company, threatened action, suit, or proceeding by or before any Court or
Governmental Authority under any Environmental Law; and (c) all Permits, if any,
required to be obtained or filed by the Company or any of its Subsidiaries under
any Environmental Law in connection with the business of the Company and its
Subsidiaries have been obtained or filed and are valid and currently in full
force and effect.
SECTION 3.18. Restrictions on Business Activities. Except for this
Agreement, there is no agreement, judgment, injunction, order or decree binding
upon the Company or any of its Subsidiaries which has or would reasonably be
expected to have the effect of prohibiting any acquisition of property by the
Company or any of its Subsidiaries or the conduct of business by the Company or
any of its Subsidiaries as currently conducted or as proposed to be conducted by
the Company, except for any prohibition or impairment as would not reasonably be
expected to have a Company Material Adverse Effect.
SECTION 3.19. Property. The Company or its Subsidiaries, individually
or together, hold under valid lease agreements all real and personal properties
reflected in the Company 10-K or the Company 10-Q as being held under
capitalized leases, and all real and personal property that is subject to the
operating leases to which reference is made in the notes to the Company 10-K or
the Company 10-Q, and enjoy peaceful and undisturbed possession of such
properties under such
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leases, other than (i) any properties as to which such leases have terminated in
the ordinary course of business since the date of the Company 10-K or the
Company 10-Q and (ii) any matters that, individually or in the aggregate, would
not reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.20. Interested Party Transactions. Except as a result of the
transactions contemplated by this Agreement or the Company SEC Reports, since
October 23, 1998 (the date of the Company's 1998 proxy statement), no event has
occurred that would be required to be reported as a Certain Relationship or
Related Transaction pursuant to Item 404 of Regulation S-K promulgated by the
SEC.
SECTION 3.21. Insurance. All insurance policies maintained by the
Company or any of its Subsidiaries (i) are with reputable insurance carriers,
(ii) provide adequate coverage for all normal risks incident to the business of
the Company and its Subsidiaries and their respective properties and assets and
(iii) are in character and amount at least equivalent to that carried by
entities engaged in similar businesses and subject to the same or similar perils
or hazards.
SECTION 3.22. Opinion of Financial Advisor. The Special Committee has
received an opinion dated May 14, 1999 of the Financial Advisor, that, as of
such date, the Merger Consideration was fair to the Company's stockholders from
a financial point of view.
SECTION 3.23. Intellectual Property. (a) The Company and/or each of its
Subsidiaries owns, or is licensed or otherwise possesses legally enforceable
rights to use all patents, trademarks, trade names, service marks, copyrights,
and any applications therefor, technology, know-how, computer software programs
or applications, and tangible or intangible proprietary information or material
that are used in the business of the Company and its Subsidiaries as currently
conducted, except as would not reasonably be expected to have a Company Material
Adverse Effect.
(b) Except as would not reasonably be expected to have a Company
Material Adverse Effect: (i) the Company is not, nor will it be as a result of
the execution and delivery of this Agreement or the performance of its
obligations hereunder, in violation of any licenses, sublicenses and other
agreements as to which the Company is a party and pursuant to which the Company
is authorized to use any Third-Party Intellectual Property Rights; (ii) no
claims with respect to the Company Intellectual Property Rights, any trade
secret material to the Company, or Third-Party Intellectual Property Rights to
the extent arising out of any use, reproduction or distribution of such
Third-Party Intellectual Property Rights by or through the Company or any of its
Subsidiaries, are currently pending or, to the Knowledge of the Company, are
overtly threatened by any Person; and (iii) to the Company's Knowledge, there
are no valid grounds for any bona fide claims (A) to the effect that the
manufacture, sale, licensing or use of any product as now used, sold or licensed
or proposed for use, sale license by the Company or any of its Subsidiaries
infringes on any Third-Party Intellectual Property Right; (B) against the use by
the Company or any of its Subsidiaries of any trademarks, trade names, trade
secrets, copyrights, patents, technology, know-how or computer software programs
and applications used in the business of the Company or any of its Subsidiaries
as currently conducted or as proposed to be conducted; (C) challenging the
ownership, validity or effectiveness of any part of the Company Intellectual
Property Rights or other trade secret material to the Company, or (D)
challenging the license or legally enforceable right to use of the Third-Party
Intellectual Rights by the Company or any of its Subsidiaries.
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(c) (i) all patents, registered trademarks and copyrights held by the
Company and its Subsidiaries are valid and subsisting, except as would not
reasonably be expected to have a Company Material Adverse Effect, and (ii) to
the Company's Knowledge, there is no material unauthorized use, infringement or
misappropriation of any of the Company Intellectual Property by any third party,
including any employee or former employee of the Company or any of its
Subsidiaries.
SECTION 3.24. Material Contracts. All Material Contracts relating to
the Company or any of its Subsidiaries are in full force and effect, the Company
and its Subsidiaries have performed their obligations thereunder to date and, to
the Knowledge of the Company, each other party thereto has performed its
obligations thereunder to date, other than any failure of a Material Contract to
be in full force and effect or any nonperformance thereof that would not
reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.25. Takeover Statutes. The action of the Board of Directors
of the Company in approving the Merger and this Agreement for purposes of
Section 203 of the Delaware Law is sufficient to render inapplicable to the
Merger and this Agreement (and the transactions provided for herein) the
provisions of Section 203 of the Delaware Law.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MERGERCO
MergerCo hereby represents and warrants to the Company as follows:
SECTION 4.1. Corporate Existence and Power. MergerCo is a corporation
or other legal entity duly incorporated or organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization, and has all corporate or entity powers and all governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted, except to the extent the failure to have such
licenses, authorizations, consents and approvals would not, individually or in
the aggregate, be reasonably expected to prevent, impair or result in
significant delay of the consummation of the Merger. MergerCo is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except for those
jurisdictions where the failure to be so qualified would not, individually or in
the aggregate, be reasonably expected to prevent, impair or result in
significant delay of the consummation of the Merger.
SECTION 4.2. Corporate Authorization. The execution, delivery and
performance of this Agreement by MergerCo and the consummation by MergerCo of
the transactions contemplated by this Agreement are within MergerCo's corporate
powers and have been duly authorized by all necessary corporate or other action.
This Agreement constitutes the valid and binding agreement of MergerCo,
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency or other similar laws relating to or affecting the
enforcement of creditors' rights generally and to legal principles of general
applicability governing the application and availability of equitable remedies.
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SECTION 4.3. Governmental Authorization. The execution, delivery and
performance by MergerCo of this Agreement and the consummation of the
transactions contemplated by this Agreement by MergerCo require no action or
waiting period by or in respect of, or filing with, any governmental body,
agency, official or authority other than (a) the filing of a certificate of
merger in accordance with Delaware Law; (b) compliance with any applicable
requirements of the Securities Act, the Exchange Act or any Blue Sky Laws; and
(c) compliance with those Laws, Regulations and Orders noncompliance with which
would reasonably be expected to prevent, impair or result in significant delay
of the consummation of the Merger.
SECTION 4.4. Non-Contravention. The execution, delivery and performance
by MergerCo of this Agreement and the consummation by MergerCo of the
transactions contemplated by this Agreement do not and will not (a) contravene
or conflict with the certificate of incorporation or bylaws or other
organizational documents of MergerCo or (b) assuming effectuation of all filings
and registrations with, the termination or expiration of any applicable waiting
periods imposed by, and receipt of all Permits and Orders of, Governmental
Authorities indicated as required in Section 4.3, (i) constitute a default under
or give rise to (A) a right of termination, cancellation, acceleration,
amendment or modification with respect to any assets or liabilities of MergerCo,
(B) a loss of any benefit to which MergerCo is entitled or (C) an increase in
the obligations of MergerCo, in each case under any provision of any Material
Contract of MergerCo, which, in any such case, individually or in the aggregate,
would prevent, impair or result in significant delay of the consummation of the
Merger, (ii) result in the creation or imposition of any material Lien (other
than a Permitted Encumbrance) on any material assets of MergerCo or (iii)
violate or cause a breach under any Law, Regulation, Order or Permit applicable
to MergerCo, except for any such matters that would not reasonably be expected,
individually or in the aggregate, to prevent, impair or result in significant
delay of the consummation of the Merger.
SECTION 4.5. Disclosure Documents. At the time the Proxy Statement or
any amendment or supplement thereto is first mailed to stockholders of the
Company and at the time such stockholders vote on adoption of this Agreement,
the information supplied by MergerCo for inclusion in the Proxy Statement will
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.
SECTION 4.6. Finders' Fees. There is no investment banker, broker,
finder or other intermediary which has been retained by, or is authorized to act
on behalf of, MergerCo who might be entitled to any fee or commission from the
Company or any of its Subsidiaries in connection with the transactions
contemplated by this Agreement.
SECTION 4.7. Litigation. There is no action, suit or proceeding pending
against, or (to the Knowledge of MergerCo) threatened against or affecting, or
(to the Knowledge of MergerCo) any pending investigation against MergerCo or any
of its properties before any court or arbitrator or any governmental body,
agency or official which in any manner challenges or seeks to prevent, enjoin,
alter or materially delay the Merger or any of the other transactions
contemplated by this Agreement.
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ARTICLE 5
COVENANTS OF THE COMPANY
SECTION 5.1. Affirmative Covenants of the Company. Except as expressly
contemplated by this Agreement or consented to in writing by MergerCo, during
the period from the execution of this Agreement by the Company to the Effective
Time, the Company will, and will cause its Subsidiaries to:
(a) operate their businesses in all material respects in the
usual and ordinary course consistent with past practices;
(b) use all reasonable efforts to preserve substantially
intact their business organizations, maintain the rights and franchises
that are material to the Company, retain the services of their officers
and maintain the relationships with the customers and suppliers that
are material to the Company;
(c) use all reasonable efforts to sell all obsolete inventory
so as to realize the value of the Company's deferred tax assets, and
maintain supplies and other inventories in quantities deemed
appropriate by the Company;
(d) maintain and keep the properties and assets that are
material to the Company in as good repair and condition in all material
respects as on the date of this Agreement, ordinary wear and tear
excepted;
(e) use all commercially reasonable efforts to keep in full
force and effect insurance comparable in amount and scope of coverage
to that set forth in Section 3.21; and
(f) use all commercially reasonable efforts to comply in all
material respects with all applicable Laws, Regulations and Orders.
SECTION 5.2. Negative Covenants of the Company. Except as expressly
contemplated by this Agreement, or otherwise consented to in writing by
MergerCo, from the execution of this Agreement by the Company until the
Effective Time, the Company will not, and will not permit any of its
Subsidiaries to:
(a) adopt or propose any change in the certificate of
incorporation or bylaws of the Company or any of its Subsidiaries;
(b) (i) acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or in
any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets of any other Person,
(ii) incur any Indebtedness or issue any debt securities or assume,
guarantee or endorse or otherwise become responsible for the
obligations of any other Person or make any loans or advances, except
in each case in the ordinary course of business and consistent with
past practice, (iii) make or authorize any capital expenditures other
than capital expenditures in accordance with the Company's existing
capital plan, capital expenditures to repair or
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replace casualty losses or other capital expenditures in the ordinary
course of the Company's business or (iv) enter into or amend in any
material respect any contract, agreement, commitment or arrangement
with respect to any of the matters set forth in this Section 5.2(b);
(c) sell, lease, license or otherwise dispose of any material
assets or property except (i) pursuant to existing contracts or
commitments, (ii) in the ordinary course consistent with past practice,
and (iii) as contemplated or permitted by this Agreement;
(d) (i) take or agree or commit to take any action that would
make any warranty of the Company hereunder inaccurate in any respect
at, or as of any time prior to, the Effective Time such that the
conditions set forth in Section 7.2(a) would not be satisfied or (ii)
omit or agree or commit to omit to take any action necessary to prevent
any such warranty from being inaccurate in any respect at any such time
such that the conditions set forth in Section 7.2(a) would not be
satisfied;
(e) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock (other than the Company's regular
quarterly cash dividend to stockholders of record on May 31, 1999 and
other than cash dividends and distributions by a wholly owned
Subsidiary of the Company to the Company or to a Subsidiary, all of the
capital stock of which is owned directly or indirectly by the Company),
or redeem, repurchase or otherwise acquire or offer to redeem,
repurchase or otherwise acquire any of its securities or any securities
of its Subsidiaries;
(f) adopt any change in executive compensation except in the
ordinary course consistent with past practices or adjust or amend any
bonus, profit sharing, compensation, severance, termination, stock
option, pension, retirement, deferred compensation, employment or
employee benefit plan, agreement, trust, plan, fund or other
arrangement for the benefit and welfare of any director, officer or
employee (except as contemplated by this Agreement or as required to
comply with ERISA or to continue then existing tax and securities law
status);
(g) revalue in any material respect any significant portion of
its assets, including, without limitation, writing down the value of
inventory in any material manner or writing-off of notes or accounts
receivable in any material manner except as required by generally
accepted accounting principles;
(h) pay, discharge or satisfy any material claims, liabilities
or obligations (whether absolute, accrued, asserted or unasserted,
contingent or otherwise) other than the payment, discharge or
satisfaction in the ordinary course of business, consistent with past
practices, of liabilities reflected or reserved against in the
consolidated financial statements of the Company referred to in Section
3.8 or incurred in the ordinary course of business, consistent with
past practices;
(i) make any tax election with respect to or settle or
compromise any material income tax liability;
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(j) offer, sell, issue or grant, or authorize the offering,
sale, issuance or grant, of any shares of capital stock of, or other
equity interests in, any securities convertible into or exchangeable
for any shares of capital stock of, or other equity interests (or
phantom equity interests) in, or any options, warrants or rights of any
kind to acquire any shares of capital stock of, or other equity
interests (or phantom equity interests) in, the Company or any of its
Subsidiaries (other than the issuance of Company Common Shares upon the
exercise of outstanding options);
(k) grant any Lien (except Permitted Encumbrances) with
respect to any material assets including any shares of capital stock
of, or other equity interests in, any Subsidiary of the Company;
(l) (i) change any of its policies or practices with respect
to business transactions between the Company and its Subsidiaries, on
the one hand, and the Company's Affiliates (other than the Company and
its Subsidiaries), on the other hand, (ii) change any of its methods of
accounting in effect at March 31, 1999 except as may be required to
comply with generally accepted accounting principles, or (iii) change
any of its methods of reporting income or deductions for federal income
tax purposes from those employed in the preparation of the federal
income tax returns for the taxable year ending June 30, 1998, except,
in each case, as may be required by Law;
(m) except to the extent the Board of Directors of the Company
deems it necessary to do so in the exercise of its fiduciary
obligations to its stockholders, adopt any shareholder rights plan;
(n) enter into or adopt any agreements or arrangements that
provide for the payment of income or the provision of benefits
(including vesting, entitlement, receipt, creation or transfer of any
rights, privileges, income or title to property or beneficial
ownership) to employees of the Company as a result of a change of
control of the Company; or
(o) agree or commit to do any of the foregoing.
SECTION 5.3. No Solicitation. From and after the date of this
Agreement, the Company will not, and will not authorize or permit any of the
officers, directors, employees, agents and other representatives of the Company
and its Subsidiaries (collectively, the "REPRESENTATIVES") to, directly or
indirectly, solicit, encourage or initiate any Acquisition Proposal or negotiate
with any prospective buyer in connection therewith; provided, however, that (a)
nothing herein shall restrict the Company from filing a Current Report on Form
8-K describing this Agreement, the Merger and the transactions contemplated by
this Agreement and by any other agreements being entered into by the Company on
the date of this Agreement (which filing may include this Agreement as an
exhibit) promptly after the date of this Agreement or from complying with its
obligations under the Securities Act, the Exchange Act and any other applicable
Law; (b) the Company's Board of Directors and/or the Special Committee may
authorize the Company to engage in discussions or negotiations with any Person
who (without any solicitation or initiation, directly or indirectly, by the
Company or any Representative after the date of this Agreement) seeks to
initiate such discussions or negotiations and may furnish such third party
information
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concerning and access to the Company and its Subsidiaries and their respective
businesses, properties and assets, and the Company's Board of Directors and/or
the Special Committee may direct the Company's Representatives to cooperate with
and be available to consult with any such Person; provided that in the case of
this clause (b), the Company's Board of Directors and/or the Special Committee
shall have determined in the exercise of its fiduciary duties that such action
is in the best interests of the Company's stockholders, (c) following receipt of
an Acquisition Proposal that is financially superior to the Merger (as
determined in good faith by the Company's Board of Directors), the Board of
Directors of the Company may withdraw, modify or not make its recommendation in
favor of the Merger; provided that in the case of this clause (c), the Company's
Board of Directors shall have concluded in good faith that such action is
necessary in order for the Company's Board of Directors to act in a manner that
is consistent with its fiduciary obligations under applicable law, and (d) the
Company's Board of Directors may take and disclose to the Company's stockholders
any position required under the Exchange Act; provided that, in each case
referred to in the foregoing clauses (a), (b), (c) and (d), the Company shall
not engage in negotiations with, or disclose any nonpublic information to, any
Person unless it receives from such Person an executed confidentiality agreement
on terms and conditions deemed to be appropriate and in the Company's best
interests by the Board of Directors and its counsel and financial advisors. The
Company shall immediately cease and cause to be terminated any existing
solicitation of, and any discussion or negotiation conducted prior to the date
of this Agreement by the Company or any of the Company's Representatives with
respect to any Acquisition Proposal. Except to the extent the Company's Board of
Directors or the Special Committee deems it necessary not to do so in the
exercise of its fiduciary obligations to its stockholders, the Company will
promptly notify MergerCo of the receipt of any Acquisition Proposal (in any
event not less than two business days prior to entering into any agreement in
connection with the Acquisition Proposal), including the identity of the Person
or group making such Acquisition Proposal and the material terms and conditions
of such Acquisition Proposal; provided that, except to the extent the Company's
Board of Directors deems it necessary not to do so in the exercise of its
fiduciary obligations to its stockholders, in no event shall the Company enter
into a definitive agreement in connection with the Acquisition Proposal less
than five business days after the Company's initial notification to MergerCo of
an inquiry or proposal relating to an Acquisition Proposal. Within the
two-business-day or five-business-day period referred to above, if any, MergerCo
may propose an improved transaction.
SECTION 5.4. Settlement of Certain Claims. Without the prior written
agreement of MergerCo, prior to the Effective Time, the Company shall not settle
or compromise any claim brought by any present, former or purported holder or
owner of Company Common Shares or other securities of the Company, or by any
other Person, which relates to or seeks to challenge or enjoin the transactions
contemplated by this Agreement.
SECTION 5.5. Antitakeover Statutes. If any takeover statute is or may
become applicable to the transactions contemplated by this Agreement, the
Company and the members of its Board of Directors shall use all reasonable
efforts to grant such approvals and to take such actions as are necessary so
that the transactions contemplated by this Agreement may be consummated as
promptly as practicable on the terms contemplated by this Agreement and
otherwise act to eliminate or minimize the effects of any takeover statute on
any of the transactions contemplated by this Agreement.
SECTION 5.6. Access to Information. From the date of this Agreement
until the Effective Time, the Company shall (i) afford MergerCo and its
officers, directors, employees,
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accountants, consultants, legal counsel, agents and other representatives,
including environmental engineers (collectively, the "MERGERCO
REPRESENTATIVES"), reasonable access at reasonable times, upon reasonable prior
notice, to the officers, employees, agents, properties, offices and other
facilities of the Company and its Subsidiaries and to the books and records
thereof and (ii) furnish promptly to MergerCo and the MergerCo Representatives
such information concerning the business, properties, contracts, records and
personnel of the Company and its Subsidiaries (including financial, operating
and other data and information) as may be reasonably requested, from time to
time, by MergerCo.
ARTICLE 6
COVENANTS OF EACH PARTY
Each party agrees that:
SECTION 6.1. Reasonable Efforts. (a) Subject to the terms and
conditions of this Agreement, each party shall use, and shall cause each of its
respective Subsidiaries to use, all commercially reasonable efforts (i) to take,
or to cause to be taken, all appropriate action, and to do, or to cause to be
done, all things necessary, proper or advisable under applicable Law or
otherwise to consummate and make effective the transactions contemplated by this
Agreement, (ii) to obtain from any Governmental Authorities any Licenses,
Permits or Orders required to be obtained by such party or any of its
Subsidiaries in connection with the authorization, execution and delivery of
this Agreement and the performance of its obligations hereunder and (iii) to
make all necessary filings and thereafter to make promptly any other required
submissions, with respect to this Agreement required under any other applicable
Law, Regulation or Order; provided, that the Company and MergerCo shall
cooperate with each other in connection with the making of all such filings and
in supplying any information requested supplementally or by second request from
any Governmental Authority.
(b) The parties agree to cooperate and to cause their respective
Subsidiaries to cooperate with respect to, and agree to use all commercially
reasonable efforts vigorously to contest and resist and to have vacated, lifted,
reversed or overturned, any action, including legislative, administrative or
judicial action, including any Order (whether temporary, preliminary or
permanent) of any Governmental Authority, that is in effect and that restricts,
prevents or prohibits the consummation of the transactions contemplated by this
Agreement. Each of the parties also agrees to take any and all commercially
reasonable actions that may be required by any Governmental Authority as a
condition to the granting of any Permit or Order required in order to permit the
consummation of the transactions contemplated by this Agreement or as may be
required to vacate, lift, reverse or overturn any administrative or judicial
action that would otherwise cause any condition to the Effective Time not to be
satisfied; provided, however, that in no event shall either party be required to
take any action that could reasonably be expected to have a Company Material
Adverse Effect or to result in a breach of this Agreement.
(c) Each of the parties shall use, and shall cause its Subsidiaries to
use, all commercially reasonable efforts to obtain from all Persons (other than
Governmental Authorities) all consents that are (i) necessary, proper or
advisable or (ii) otherwise required under any contracts, licenses, leases,
easements or other agreements to which such party or any
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of its Subsidiaries is a party or by which it is bound, in order to permit such
party to perform its obligations hereunder.
(d) If any party shall fail to obtain any third party consent
described in Section 6.1(c), such party shall use all commercially reasonable
efforts, and shall take any such actions reasonably requested by the other
parties, to limit the adverse effect upon the Company and its Subsidiaries, and
MergerCo and its Subsidiaries, and each of their respective businesses
resulting, or which could reasonably be expected to result after the Effective
Time, from the failure to obtain such consent.
(e) Upon learning thereof, each party shall promptly notify the other
parties of (i) any complaints, investigations or hearings (or communications
indicating that the same may be contemplated) from or by any Governmental
Authorities with respect to the transactions contemplated by this Agreement or
(ii) the institution or the threat of litigation involving this Agreement or the
transactions contemplated by this Agreement.
SECTION 6.2. Public Announcements. Each party will consult with each
other before issuing any press release or making any public statement with
respect to this Agreement and the transactions contemplated by this Agreement
and, except as may be required by applicable Law or regulations of the NASDAQ
National Market, will not issue any such press release or make any such public
statement prior to such consultation; provided, however, that following the
execution hereof the Company and MergerCo may issue a press release mutually
acceptable to both parties.
SECTION 6.3. Notification of Certain Matters. Each party shall use all
commercially reasonable efforts to give prompt notice to the other parties of
(i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence
of which would be likely to cause any warranty contained in this Agreement to be
materially untrue or inaccurate, or (ii) any failure of any party materially to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section shall not limit or otherwise affect the remedies
available hereunder to the parties receiving such notice; and provided further
that failure to give such notice shall not be treated as a breach of covenant
for the purposes of Sections 7.2(a) or 7.3(a) hereof unless the failure to give
such notice results in material prejudice to the other parties.
SECTION 6.4. Proxy Statement; Stockholder Meeting. (a) As promptly as
practicable after the execution of this Agreement, the Company and MergerCo
shall prepare, and the Company shall file with the SEC, the preliminary Proxy
Statement relating to the adoption of this Agreement and approval of the
transactions contemplated by this Agreement by the stockholders of the Company,
subject to Section 5.3. As promptly as practicable after all comments are
received from the SEC on the preliminary Proxy Statement and after the
furnishing by the Company and MergerCo of all information required to be
contained therein, the Company shall file with the SEC a revised definitive
Proxy Statement, subject to Section 5.3.
(b) Subject to Section 5.3, the Company shall cause a meeting of its
stockholders to be duly called and held as soon as reasonably practicable after
the SEC completes its review process in connection with the Proxy Statement for
the purpose of voting on the approval and adoption of this Agreement and the
Merger and will (i) thereafter mail to its stockholders as promptly as
practicable the Proxy Statement, (ii) include in the Proxy Statement the Board's
recommendation
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set forth in Section 1.1(f), (iii) use all commercially reasonable efforts to
obtain the necessary approval by its stockholders of this Agreement and the
transactions contemplated by this Agreement and (iv) otherwise comply with all
legal requirements applicable to such meeting.
ARTICLE 7
CONDITIONS
SECTION 7.1. Conditions to the Obligations of Each Party. The
obligations of the Company and MergerCo to consummate the Merger are subject to
the satisfaction of the following conditions:
(a) this Agreement and the Merger shall have been adopted and
approved by the stockholders of the Company in accordance with the
Delaware Law;
(b) no provision of any existing law or regulation and no
judgment, injunction, order or decree shall prohibit or threaten to
prohibit the consummation of the Merger or the other transactions
contemplated by this Agreement;
(c) all material actions by or in respect of or filings with
any governmental body, agency, official or authority required to permit
the consummation of the Merger and the other transactions contemplated
by this Agreement shall have been obtained;
(d) there shall not be pending any action or proceeding (or
any investigation or other inquiry that might result in such an action
or proceeding) by any governmental authority or administrative agency
before any governmental authority, administrative agency or court of
competent jurisdiction, domestic or foreign, nor shall there be in
effect any judgment, decree or order of any governmental authority,
administrative agency or court of competent jurisdiction, or any other
legal restraint, (i) preventing or seeking to prevent consummation of
the Merger or the other transactions contemplated by this Agreement,
(ii) prohibiting or seeking to prohibit or limiting or seeking to limit
any party from exercising all material rights and privileges pertaining
to its ownership of the Company or any of its Subsidiaries, or (iii)
compelling or seeking to compel MergerCo, the Company or any of their
Subsidiaries to dispose of or hold separate all or any material portion
of the business or assets of the Company or any of its Subsidiaries
(including the Surviving Corporation and its Subsidiaries), in each
case as a result of the Merger or the other transactions contemplated
by this Agreement, nor shall there be any threat of any matter of a
type referred to in clauses (ii) or (iii) above which would reasonably
be expected to have a Company Material Adverse Effect; and
(e) no statute, rule, regulation or order shall be enacted,
entered, proposed, enforced or deemed applicable to the Merger which
makes the consummation of the transactions contemplated by this
Agreement illegal.
SECTION 7.2. Conditions to the Obligations of MergerCo. The obligations
of MergerCo to consummate the Merger and the other transactions contemplated by
this Agreement, are subject to the satisfaction of the following further
conditions:
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(a) (i) the Company shall have performed in all material
respects all of its obligations under this Agreement required to be
performed by it at or prior to the Effective Time, and (ii) except for
such inaccuracies or omissions the consequences of which do not singly
or in the aggregate constitute a Company Material Adverse Effect, the
representations and warranties of the Company contained in this
Agreement and in any certificate or other writing delivered by the
Company pursuant hereto shall be true in all respects at and as of the
Effective Time as if made at and as of such time (except to the extent
such representation and warranty is made as of an earlier date, in
which case the representation and warranty shall be true in all
respects as of such date) and MergerCo shall have received a
certificate signed by the Chairman or the Chief Financial Officer of
the Company to the foregoing effect;
(b) all consents, waivers, approvals, authorizations or orders
required to be obtained, and all filings required to be made, by the
Company for the consummation by it of the transactions contemplated by
this Agreement shall have been obtained and made by the Company, except
where the failure to receive such consents, etc. would not reasonably
be expected to have a Company Material Adverse Effect;
(c) MergerCo shall have received all documents it may
reasonably request relating to the Company and its authority to enter
into this Agreement, all in form and substance satisfactory to
MergerCo;
(d) MergerCo shall have received the financing necessary to
consummate the transactions contemplated by this Agreement and to fund
the working capital needs of the Surviving Corporation, on terms and
conditions reasonably acceptable to MergerCo; and
(e) no more than 5% of the Company Common Shares shall be
Dissenting Shares.
SECTION 7.3. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the Merger are subject to the
satisfaction of the following further conditions:
(a) (i) MergerCo shall have performed in all material respects
all of its obligations under this Agreement required to be performed by
it at or prior to the Effective Time, and (ii) except for such
inaccuracies or omissions the consequences of which would not singly or
in the aggregate reasonably be expected to impede the receipt of the
Merger Consideration by the Company's stockholders, the representations
and warranties of MergerCo contained in this Agreement and in any
certificate or other writing delivered by MergerCo pursuant hereto
shall be true in all respects at and as of the Effective Time as if
made at and as of such time (except to the extent such representation
and warranty is made as of an earlier date, in which case the
representation and warranty shall be true in all respects as of such
date) and the Company shall have received a certificate signed by the
President, any Vice President or the Treasurer of MergerCo to the
foregoing effect;
(b) all consents, waivers, approvals, authorizations or orders
required to be obtained, and all filings required to be made, by
MergerCo for the consummation by it of
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the transactions contemplated by this Agreement shall have been
obtained and made by MergerCo, except where the failure to receive such
consents, etc. would not reasonably be expected to impede the receipt
of the Merger Consideration by the Company's stockholders; and
(c) the Company shall have received all documents it may
reasonably request relating to the authority of MergerCo for this
Agreement, all in form and substance satisfactory to the Company.
ARTICLE 8
TERMINATION
SECTION 8.1. Termination. This Agreement may be terminated and the
Merger and the other transactions contemplated by this Agreement may be
abandoned at any time prior to the Effective Time (notwithstanding any approval
of this Agreement by the stockholders of the Company):
(a) by mutual written consent of the Company and MergerCo;
(b) by either the Company or MergerCo, if the Merger has not
been consummated within six months of the date of this Agreement;
(c) by either the Company or MergerCo, if there shall be any
law or regulation that makes consummation of the Merger illegal or
otherwise prohibited or if any judgment, injunction, order or decree
enjoining MergerCo or the Company from consummating the Merger is
entered and such judgment, injunction, order or decree shall become
final and nonappealable;
(d) by MergerCo, if any Person, entity or Group other than
MergerCo and its Affiliates shall have increased its beneficial
ownership (calculated in accordance with Rule 13d-3 under the Exchange
Act) of Company Common Shares by an amount equal to 15% or more of the
outstanding Company Common Shares compared with its level of ownership
on the date of this Agreement;
(e) (i) by MergerCo if any representation and warranty of the
Company set forth in this Agreement shall be untrue when made such that
the condition set forth in Section 7.2(a) would not be satisfied;
provided that, if such warranty is curable prior to the date 60 days
after notice to the Company by MergerCo of such breach, through the
exercise by the Company of its reasonable best efforts, so that the
condition in Section 7.2(a) would be satisfied, and for so long as the
Company continues to exercise such reasonable best efforts, MergerCo
will not have the right to terminate this Agreement under this Section,
or (ii) by the Company if any representation and warranty of MergerCo
set forth in this Agreement shall be untrue when made such that the
condition set forth in Section 7.3(a) would not be satisfied; provided
that, if such warranty is curable prior to the date 60 days after
notice to MergerCo by the Company of such breach, through the exercise
by MergerCo of its reasonable best efforts, so that the condition in
Section 7.2(a) would be satisfied, and so long as MergerCo continues to
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exercise such reasonable best efforts, the Company will not have the
right to terminate this Agreement under this Section;
(f) (i) by MergerCo upon a breach of any covenant or agreement
on the part of the Company set forth in this Agreement such that the
condition set forth in Section 7.2(a) would not be satisfied; provided
that, if such breach is curable prior to the date 60 days after notice
to the Company by MergerCo of such breach, through the exercise by the
Company of its reasonable best efforts, so that the condition in
Section 7.2(a) would be satisfied, and for so long as the Company
continues to exercise such reasonable best efforts, MergerCo will not
have the right to terminate this Agreement under this Section, or (ii)
by the Company upon a breach of any covenant or agreement on the part
of MergerCo set forth in this Agreement such that the condition set
forth in Section 7.3(a) would not be satisfied; provided that, if such
breach is curable prior to the date 60 days after notice to MergerCo by
the Company of such breach, through the exercise by MergerCo of its
reasonable best efforts, so that the condition in Section 7.3(a) would
be satisfied, and for so long as MergerCo continues to exercise such
reasonable best efforts, the Company will not have the right to
terminate this Agreement under this Section;
(g) by MergerCo (i) if the Board of Directors of the Company
shall have withdrawn or modified or amended, in a manner adverse in any
material respect to MergerCo, its approval of this Agreement and the
Merger or its recommendation set forth in Section 1.1(f), (ii) if the
Board of Directors of the Company shall have approved, recommended or
endorsed any Acquisition Proposal other than the Merger, or (iii) if
the Company shall have failed to call the Company Stockholders Meeting
within a reasonable time after completion of the SEC review process or
shall have failed as promptly as reasonably practicable thereafter to
mail the Proxy Statement to its stockholders or (iv) if the Company
shall have failed to include in such Proxy Statement the recommendation
referred to above;
(h) by the Company if (i) its Board of Directors determines
in good faith that an Acquisition Proposal is financially superior to
the transactions contemplated by this Agreement and is reasonably
capable of being financed, (ii) the Company has complied with the
requirements of Section 5.3, (iii) concurrently with such termination,
the Company makes all payments required by Section 8.3(b), and (iv)
concurrently with such termination, the Company enters into a
definitive agreement to effect the financially superior Acquisition
Proposal; and
(i) by MergerCo or the Company if, at a duly held
stockholders meeting of the Company or any adjournment thereof at which
this Agreement and the Merger is voted upon, the requisite stockholder
adoption and approval shall not have been obtained.
The party desiring to terminate this Agreement pursuant to clauses 8.1(b)
through 8.1(i) shall give written notice of such termination to the other
parties in accordance with Section 9.1.
SECTION 8.2. Effect of Termination. If this Agreement is terminated
pursuant to Section 8.1, this Agreement shall become void and of no effect with
no liability on the part of any party hereto, except for liability or damages
resulting from a willful breach of this Agreement and
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except that the agreements contained in this Section 8.2 and in Sections 6.6 and
8.3 and Article 9 shall survive the termination hereof.
SECTION 8.3. Certain Fees. (a) Except as provided in Section 8.3(b),
all costs and expenses incurred in connection with this Agreement shall be paid
by the party incurring such cost or expense.
(b) So long as MergerCo shall not have materially breached its
warranties or obligations under this Agreement, the Company agrees to pay
MergerCo a fee in immediately available funds equal to MergerCo's Expenses in
the following circumstances and at the following times only:
(i) promptly, but in no event later than two business days
after the termination by MergerCo of this Agreement pursuant to Section
8.1(e), (f) or (g);
(ii) concurrently with any termination of this Agreement by the
Company pursuant to Section 8.1(h); and
(iii) if (A) any Acquisition Proposal shall have been made prior
to the termination of this Agreement, (B) either MergerCo or the
Company subsequently terminates this Agreement pursuant to Section
8.1(a), (b) or (d), (C) MergerCo shall not have breached any
representation and warranty, covenant or agreement set forth in this
Agreement in any material respect, (D) within 12 months after the
termination of this Agreement, the Company shall have entered into an
agreement to consummate a transaction contemplated by an Acquisition
Proposal, and (E) such transaction shall subsequently be consummated,
then such payment to be made upon such acquisition of Company Common
Shares or the consummation of such Acquisition Proposal.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including telecopy or similar writing)
and shall be given:
if to MergerCo, to:
Philip W. Shires
KE Acquisition Corp.
2945 Wilderness Place
Boulder, CO 80301
Telecopy: (303) 440-9600
with a copy to:
Thomas R. Stephens
Bartlit Beck Herman Palenchar & Scott
The Kittredge Building
511 Sixteenth Street, Suite 700
Denver, CO 80202
Telecopy: (303) 592-3140
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if to the Company, to:
Chairman, Kentek Information
Systems, Inc.
2945 Wilderness Place
Boulder, CO 80301
Telecopy: (303) 440-9600
with a copy to:
James H. Carroll
Cooley Godward LLP
2595 Canyon Blvd, Suite 250
Boulder, CO 80301
Telecopy: (303) 546-4099
or such other address or telecopy number as such party may hereafter specify for
the purpose by notice to the other parties hereto. Each such notice, request or
other communication shall be effective (a) if given by telecopy, when such
telecopy is transmitted to the telecopy number specified in this Section and the
appropriate telecopy confirmation is received or (b) if given by any other
means, when delivered at the address specified in this Section.
SECTION 9.2. Amendments; No Waivers. (a) Any provision of this
Agreement may be amended or waived prior to the Effective Time if, and only if,
such amendment or waiver is in writing and signed, in the case of an amendment,
by the parties hereto, in the case of a waiver, by the party against whom the
waiver is to be effective; provided that after the adoption of this Agreement by
the stockholders of the Company, no such amendment or waiver shall, without the
further approval of such stockholders, alter or change (i) the Merger
Consideration, (ii) any term of the certificate of incorporation of the
Surviving Corporation or (iii) any of the terms or conditions of this Agreement
if such alteration or change would adversely affect the holders of any shares of
capital stock of the Company.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
SECTION 9.3. Rules of Construction. Unless the context otherwise
requires, as used in this Agreement: (i) all defined terms used herein and not
otherwise defined have the meanings assigned to such terms in Annex I hereto,
(ii) an accounting term not otherwise defined has the meaning ascribed to it in
accordance with generally accepted accounting principles; (iii) "or" is not
exclusive; (iv) "including" means "including, without limitation," (v) words in
the singular include the plural and words in the plural include the singular,
and (vi) masculine pronouns shall be deemed to include the feminine counterpart
and vice versa.
SECTION 9.4. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto.
SECTION 9.5. Governing Law; etc. (a) Governing Law. The terms of this
Agreement shall be construed in accordance with and governed by the law of the
State of Delaware (without regard to principles of conflict of laws).
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(b) Jurisdiction. Each of the parties hereto agrees that any suit,
action or proceeding seeking to enforce any provision of, or based on any matter
arising out of or in connection with, this Agreement or the transactions
contemplated by this Agreement may be brought against any of the parties in the
United States District Court for the District of Delaware or the District of
Colorado or any state court sitting in the City of Wilmington, Delaware, and
each of the parties hereby consents to the exclusive jurisdiction of such courts
(and of the appropriate appellate courts) in any such suit, action, or
proceeding and waives any objection to venue laid therein. Process in any suit,
action or proceeding may be served on any party anywhere in the world, whether
within or without the State of Delaware or the State of Colorado. Without
limiting the foregoing, each of the parties hereto agrees that service of
process upon such party at the address referred to in Section 9.1, together with
written notice of such service to such party, shall be deemed effective service
of process upon such party.
(c) Specific Performance. Each of the parties acknowledges and agrees
that the parties' respective remedies at law for a breach or threatened breach
of any of the provisions of this agreement would be inadequate and, in
recognition of that fact, each agrees that, in the event of a breach or
threatened breach by any party of the provisions of this Agreement, in addition
to any remedies at law, each party, respectively, without posting any bond,
shall be entitled to obtain equitable relief in the form of specific
performance, a temporary restraining order, a temporary or permanent injunction
or any other equitable remedy which may then be available.
(d) Waiver of Jury Trial. Each of the parties hereto hereby
irrevocably waives all right to trial by jury in any action, proceeding or
counterclaim (whether based on contract, tort or otherwise) arising out of or
relating to this Agreement or the actions of any of them in the negotiation,
administration, performance and enforcement thereof.
SECTION 9.6. Counterparts; Effectiveness. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
counterparts (or signature pages) hereof signed by all of the other parties
hereto.
SECTION 9.7. Parties in Interest. Except as expressly provided in
Article 1 and Section 2.4 in this Agreement, express or implied, is intended to
or shall confer upon any other Person, other than the parties hereto and their
respective permitted successors and assigns, any right, benefit or remedy of any
nature or kind whatsoever under or by reason of this Agreement.
SECTION 9.8. Severability. If any provisions of this Agreement or the
application thereof to either party or set of circumstances shall in any
jurisdiction and to any extent, be finally held invalid or unenforceable, such
term or provision shall only be ineffective as to such jurisdiction, and only to
the extent of such invalidity or unenforceability, without invalidating or
rendering unenforceable any other terms or provisions of this Agreement or under
any other circumstances, and the parties shall negotiate in good faith a
substitute provision which comes as close as possible to the invalidated or
unenforceable term or provision, and which puts each party in a position as
nearly comparable as possible to the position it would have been in but for the
finding of invalidity or unenforceability, while remaining valid and
enforceable.
SECTION 9.9. Entire Agreement. This Agreement constitutes the entire
agreement among the parties to this Agreement with respect to the subject matter
of this Agreement and
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supersedes all prior agreements and undertakings, both written and oral, among
the parties with respect to the subject matter of this Agreement.
SECTION 9.10. Survival of Representations and Warranties. The
representations and warranties contained herein and in any certificate or
writing delivered pursuant hereto shall not survive the Effective Time or, if
earlier, the termination of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
KENTEK INFORMATION SYSTEMS, INC.
By:
------------------------------------
Name: Howard L. Morgan
Title: Chairman of the Board
KE ACQUISITION CORP.
By:
-------------------------------------
Name: Philip W. Shires
Title: President
<PAGE> 80
DEFINED TERMS
The following terms when used in the Agreement shall have the meanings
set forth below unless the context shall otherwise require:
"ACQUISITION PROPOSAL" shall mean any proposal or offer with respect to
(i) a tender or exchange offer, a merger, consolidation or other business
combination involving the Company or any of its Subsidiaries (including a merger
of equals of the Company), or (ii) the acquisition of an equity interest in the
Company representing in excess of 33% of the power to vote for the election of a
majority of directors of the Company or (iii) the acquisition of assets of the
Company or its Subsidiaries (including stock of one or more Subsidiaries of the
Company) representing 33% or more of the consolidated assets of the Company, in
each case by any Person other than MergerCo or its Affiliates.
"AFFILIATE" shall, with respect to any Person, mean any other Person
that controls, is controlled by or is under common control with the former. The
term "CONTROL" and correlative terms shall have the meanings ascribed to them in
Rule 405 under the Securities Act.
"BLUE SKY LAWS" shall mean any applicable state securities laws.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
"COMPANY 10-K" means the Company's annual report on Form 10-K for the
fiscal year ended June 30, 1998.
"COMPANY EMPLOYEE PLAN" means each "EMPLOYEE BENEFIT PLAN", as defined
in Section 3(3) of ERISA, which (i) is subject to any provision of ERISA and
(ii) is maintained, administered or contributed to by the Company or any
affiliate (as defined in Section 3.13) and covers any director, officer or
employee or former director, officer or employee of the Company or of any
affiliate, or under which the Company or any affiliate has any liability.
"COMPANY INTELLECTUAL PROPERTY RIGHTS" means patents, registered and
material unregistered trademarks and service marks, registered copyrights, trade
names and any applications therefor and trade secrets owned by the Company or
any of its Subsidiaries.
"COMPANY MATERIAL ADVERSE EFFECT" shall mean a material adverse effect
on the condition (financial or otherwise), business, assets or results of
operations or prospects of the Company and its Subsidiaries, taken as a whole,
other than changes in general economic conditions or in the economic conditions
affecting the printer industry.
"COMPANY PROPRIETARY INFORMATION" means documents containing operating,
financial, technical or other information relating to the Company's evaluation
of the transactions contemplated by this Agreement.
"COMPANY REPRESENTATIVES" shall mean the officers, directors,
employees, accountants, consultants, legal counsel, agents and other
representatives, including environmental engineers, of the Company.
"COURT" shall mean any court, federal, state or local, or arbitration
tribunal.
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"ENVIRONMENTAL LAW OR LAWS" shall mean any and all laws, statutes,
ordinances, rules, regulations, or orders of any Governmental Authority
pertaining to the protection of the environment, as in effect at the applicable
time and that are applicable to a specified Person and such Person's
Subsidiaries, including the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as
amended, the Federal Water Pollution Control Act, as amended, the Resource
Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking
Water Act, as amended, the Toxic Substances Control Act, as amended, the
Hazardous & Solid Waste Amendments Act of 1984, as amended, the Superfund
Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, and any state laws implementing the foregoing
federal laws, and all other environmental conservation or protection laws. For
purposes of the Agreement, "ENVIRONMENTAL LAWS" shall not include laws primarily
related to the protection of human health and safety and the terms "hazardous
substance" and "releases" have the meanings specified in CERCLA (but without
regard to the exclusions set forth in the definition of hazardous substance);
provided, however, that to the extent other federal laws or the laws of the
state in which the property is located establish a meaning for "hazardous
substance" or "release" that is broader than that specified in CERCLA, such
broader meaning shall apply, and the term "hazardous substance" shall include
all dehydration and treating wastes, and (to the extent in excess of background
levels) radioactive material, even if such items are not classified as hazardous
substances or wastes pursuant to CERCLA, or RCRA or the analogous statutes of
any applicable jurisdiction.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"EXCHANGE AGENT" means a national bank or trust company or other
financial institution or transfer agent designated by MergerCo prior to the
Effective Time to act as exchange agent in exchanging Company Common Shares for
the Merger Consideration.
"EXPENSES" shall mean all of actual, documented and reasonable
out-of-pocket expenses (including all reasonable fees and expenses of counsel,
accountants, investment bankers, experts and consultants to MergerCo and its
Affiliates) incurred by MergerCo or on its behalf in connection with or related
to the authorization, preparation, negotiation, execution and performance of
this Agreement, and all other matters related to the consummation of the
transactions contemplated by this Agreement.
"GOVERNMENTAL AUTHORITY" shall mean any federal, state or local
governmental agency or authority (other than a Court).
"GROUP" shall have the meaning set forth in Section 13(d)(3) of the
Exchange Act.
"IRS" shall mean the Internal Revenue Service.
"KNOWLEDGE OF THE COMPANY" (and any other phrase to substantially
similar effect) means the actual knowledge of either Howard L. Morgan or Philip
W. Shires, in each case after reasonable inquiry with any person who is
principally responsible for the subject matter of any representation and
warranty given to the Knowledge of the Company.
"LAW" shall mean all laws, statutes, ordinances, rules and regulations
of the United States, any foreign country, or any domestic or foreign state, and
any political subdivision or agency thereof, including all decisions of Courts
having the effect of law in each such jurisdiction.
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"LIEN" shall mean, with respect to any asset, any mortgage, pledge,
security interest, encumbrance, lien or charge of any kind (including any
agreement to give any of the foregoing), any conditional sale or other title
retention agreement, any lease in the nature thereof or the filing of or
agreement to give any financing statement under the Uniform Commercial Code of
any jurisdiction, with respect to such an asset.
"MATERIAL" shall mean material to the condition (financial and other),
results of operations, prospects or business of a specified Person and its
Subsidiaries, if any, taken as a whole.
"MATERIAL CONTRACT" shall mean, as between any Person (the "DISCLOSING
PERSON") or any of its Subsidiaries, on the one hand, and any other Person other
than any other member of the group consisting of the Disclosing Person and its
Subsidiaries, on the other hand:
(1) Any collective bargaining agreement or other agreement
with any labor union;
(2) Any employment or consulting agreement, contract or
commitment between the Disclosing Person or any of its Subsidiaries and
any employee, officer or director thereof (i) having more than one year
to run from the date hereof, (ii) providing for an obligation to pay or
accrue compensation of $100,000 or more per annum or (iii) providing
for the payment or accrual of any additional compensation upon a change
in control of the Disclosing Person or any of its subsidiaries or upon
any termination of such employment or consulting relationship following
a change in control of the Disclosing Person or any of its
Subsidiaries;
(3) Any agency or representation agreement with any Person
which is not terminable by the Disclosing Person or one of its
Subsidiaries without penalty upon not more than ninety (90) days'
notice providing for the payments to such person of $100,000 or more;
(4) Any partnership, joint venture or profit sharing
agreement between the Disclosing Person or its Subsidiaries with any
Person involving aggregate payments in excess of $100,000;
(5) Any agreement, contract, commitment, indenture or other
instrument relating to the borrowing of money in a principal amount of
$100,000 or more or any direct or indirect guarantee of any obligation
of any other Person or Governmental Authority for, or agreement to
service the repayment of, borrowed money in a principal amount of
$100,000 or more, including any agreement or arrangement (i) relating
to the maintenance of compensating money balances, (ii) with respect to
lines of credit or letters of credit, (iii) relating to the purchase or
repurchase obligations of any other Person or Governmental Authority,
(iv) to advance or supply funds to or to invest in any other Person or
Governmental Authority, (v) to pay for property, products or services
of any other Person or Governmental Authority even if such property,
products or services are not conveyed, delivered or rendered and (vi)
to guarantee any lease or other similar periodic payments to be made by
any other Person or Governmental Authority;
(6) Any lease with annual rental payments aggregating
$100,000 or more that is not terminable without premium or penalty on
ninety (90) days' or less notice;
(7) Any agreement, contract or commitment for the disposition
or acquisition of any investment in any Person if such investment
requires payment of $100,000 or more;
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(8) Any other agreement, contract or commitment which
involves payment or potential payment, pursuant to the terms of such
agreement, contract or commitment, by or to the Disclosing Person or
any of its Subsidiaries of $100,000 or more within any twelve month
period commencing after the date of the Agreement.
"ORDER" shall mean any judgment, order or decree of any court,
arbitration tribunal or Governmental Authority, federal, state or local.
"PERMIT" shall mean any and all permits, licenses, authorizations,
orders, certificates, registrations or other approvals granted by any federal,
state, local or foreign Governmental Authority.
"PERMITTED ENCUMBRANCES" shall mean the following:
(1) Liens for taxes, assessments and other governmental
charges not delinquent or which are currently being contested in good
faith by appropriate proceedings; provided that, in the latter case,
adequate reserves shall have been set aside with respect thereto;
(2) all rights, if any, to consent by, required notices to,
filings with, or other actions by any Governmental Authority in
connection with the contribution or the operation of any assets;
(3) mechanics', repairmen's, employees', contractors',
materialmen's or other similar Liens not filed of record and similar
charges not delinquent or which are filed of record but are being
contested in good faith by appropriate proceedings; provided that, in
the latter case, adequate reserves shall have been set aside with
respect thereto;
(4) Liens in respect of judgments or awards currently being
prosecuted in good faith on an appeal or other proceeding for review
and with respect to which a stay of execution pending such appeal or
such proceeding for review shall have been secured; provided that
adequate reserves shall have been set aside with respect thereto;
(5) easements, leases, reservations or other rights of others
in, or minor defects and irregularities in title to, property or
assets; provided that such easements, leases, reservations, rights,
defects or irregularities do not materially impair the use of such
property or assets for the purposes for which they are held; and
(6) any lien or privilege vested in any lessor, licensor or
permittor for rent or other obligations, so long as the payment of such
rent or the performance of such obligations is not delinquent.
"PERSON" shall mean an individual, partnership, limited liability
company, corporation, joint stock company, trust, estate, joint venture,
association or unincorporated organization, or any other entity or organization,
including a government or political subdivision or any agency or instrumentality
thereof.
"REGULATION" shall mean any rule or regulation of any Governmental
Authority having the effect of law.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
-A-4-
<PAGE> 84
"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.
-A-5-
<PAGE> 85
Each of the following terms is defined in the Section set forth opposite such
term:
<TABLE>
<CAPTION>
TERM SECTION
<S> <C>
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)
</TABLE>
-A-6-
<PAGE> 86
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.
<PAGE> 87
In connection with our review, we have relied upon the accuracy and completeness
of all information provided to us by the Company and its representatives, and we
have not attempted to independently verify any such information. We have also
relied upon the assessment of the management of the Company regarding the
Company's business and prospects, and also assumed that the budgets and
financial projections of the Company were reasonably prepared by management on
bases reflecting the best currently available estimates and good faith judgments
of the future financial performance of the Company. We have not made an
independent evaluation or appraisal of the Company's assets and liabilities. Our
opinion is necessarily based on financial, market, economic and other conditions
as they exist and can be evaluated as of the date of this letter.
Janney Montgomery Scott Inc. ("Janney") is acting as the financial advisor to
the Company in connection with the Transaction and will receive customary fees
upon the completion of the Transaction. In addition, the Company has agreed to
indemnify Janney against certain liabilities arising out of the rendering of
this opinion. Janney is a nationally recognized investment banking firm and, as
part of its investment banking activities, is regularly engaged in the valuation
of businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and valuations for corporate and other purposes. Janney co-managed
the Company's initial public offering in April 1996 and, in the ordinary course
of its trading and brokerage activities, Janney makes a market in the stock of
the Company.
This opinion is for the use and benefit of the Board of Directors of the Company
in evaluating the Transaction and does not constitute a recommendation to any
shareholder of the Company as to how such shareholder should vote their shares
in the Transaction. This opinion may not be used for any other purpose, and may
not be quoted or referred to, in whole or in part, without our prior written
consent, except that this opinion may be included in its entirety in any filing
with the Securities and Exchange Commission in connection with the Transaction.
Based upon and subject to the foregoing, we are of the opinion as of the date
hereof that the Transaction is fair from a financial point of view to the
stockholders of the Company.
Very truly yours,
JANNEY MONTGOMERY SCOTT INC.
<PAGE> 88
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.
C-1
<PAGE> 89
(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 herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of stock of
such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section; provided
that, if the notice is given on or after the effective date of the merger or
consolidation, such notice shall be given by the surviving or resulting
corporation to all such holders of any class or series of stock of a
constituent corporation that are entitled to appraisal rights. Such notice may,
and, if given on or after the effective date of the merger or consolidation,
shall, also notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of such notice, demand in writing from the surviving
or resulting corporation the appraisal of such holder's shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify stockholders
of the effective date of the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the effective date of
the merger or consolidation notifying each of the holders of any class or
series of stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to all such
holders on or within 10 days after such effective date; provided, however, that
if such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice,
each constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that if
the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record date
is fixed and the notice is given prior to the effective date, the record date
shall be the close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the
C-2
<PAGE> 90
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 such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
C-3
<PAGE> 91
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written withdrawal of his
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-4
<PAGE> 92
ANNEX D
MANAGEMENT OF KENTEK AND BUYER
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
Buyer, as of the date of this Proxy Statement and (i) the present principal
occupation or employment of each such person and the name, principal business
and address of the corporation or other organization in which such occupation
or employment of each such 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 such person was held during
the last five years. Each person listed below is a citizen of the United
States.
DIRECTORS OF KENTEK
<TABLE>
<CAPTION>
NAME AGE ADDRESS OFFICE HELD PRINCIPAL OCCUPATIONS
<S> <C> <C> <C> <C>
Howard L. Morgan 53 c/o Kentek Information Chairman of the Board Howard L. Morgan has served as a
Systems, Inc. of Directors Director of Kentek since 1982.
2945 Wilderness Place Since 1989, Dr. Morgan has been
Boulder, CO 80301 President of Arca Group, Inc., a
consulting and investment
management company specializing
in the areas of computer and
communications technologies. Dr.
Morgan also has served as
General Partner of idealab!
Corporation, an incubator of
internet and e-commerce
companies, since January 1999.
Dr. Morgan was Professor of
Decision Sciences at the Wharton
School of the University of
Pennsylvania from 1972 through
1986. He serves a as a director
for a number of public
companies, including Cylink
Corp., Franklin Electronic
Publishers, Inc., Infonautics
Corporation, MetaCreations
Corporation, MyPoints.com, Inc.,
Segue Software, Inc.,
Tickets.com, Inc. and Unitronix
Corp.
</TABLE>
D-1
<PAGE> 93
<TABLE>
<S> <C> <C> <C> <C>
Philip W. Shires 57 2945 Wilderness Place President, Chief Philip W. Shires has served as
Boulder, CO 80301 Executive Officer and President since April 1989 and
Director as Chief Executive Officer since
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.
Justin J. Perreault 35 c/o Kentek Information Director Justin J. Perreault has served
Systems, Inc. as a director since February
2945 Wilderness Place 1994. Since November 1995 he has
Boulder, CO 80301 served as Executive Vice
President and Chief Operating
Officer of Object Design, Inc.,
an object oriented database
company. From 1992 to November
1995, he was a Vice President at
the Harvard Private Capital
Group, Inc., an investment
affiliate of Aeneas Venture
Corp. and the Harvard Management
Company. Prior to joining the
Harvard Private Capital Group,
Mr. Perreault was a consultant
with McKinsey & Co., Inc. from
1990 to 1992.
James H. Simons, Ph.D. 60 c/o Kentek Information Director James H. Simons, Ph.D. has
Systems, Inc. served as a director since 1982.
2945 Wilderness Place Since 1982, he has served as the
Boulder, CO 80301 President and Chairman of
Renaissance Technologies Corp.
Dr. Simons also serves as a
director of Franklin Electronic
Publishers, Inc., Cylink
Corporation, Segue Software
Corporation and Numar Corp.
Sheldon Weinig, Ph.D. 70 c/o Kentek Information Director Sheldon Weinig, Ph.D. has served
Systems, Inc. as a director since June 1997.
2945 Wilderness Place Dr. Weinig has been an Adjunct
Boulder, CO 80301 Professor at Columbia University
since 1995 and at The State
University of New York at Stony
Brook since 1994. From 1989 to
1996, Dr. Weinig was employed by
the Sony Corporation as Vice
Chairman of Sony Engineering and
Manufacturing of America. Dr.
Weinig founded Materials Research
Corporation in 1957, and served as
Chairman of that multinational
company until it was purchased by
Sony Corporation. He serves as a
director for Aseco, Insituform
Technologies Corporation and
Intermagnetics General Corporation.
</TABLE>
D-2
<PAGE> 94
EXECUTIVE OFFICERS OF KENTEK
<TABLE>
<CAPTION>
NAME AGE ADDRESS OFFICE HELD PRINCIPAL OCCUPATIONS
<S> <C> <C> <C> <C>
Philip W. Shires 57 2945 Wilderness Place President, Chief See "Directors of Kentek."
Boulder, CO 80301 Executive Officer,
Acting Chief
Financial Officer and
Director
</TABLE>
DIRECTOR OF BUYER
<TABLE>
<CAPTION>
NAME AGE ADDRESS OFFICE HELD PRINCIPAL OCCUPATIONS
<S> <C> <C> <C> <C>
Philip W. Shires 57 2945 Wilderness Place President, Secretary See "Directors of Kentek."
Boulder, CO 80301 and Director
</TABLE>
EXECUTIVE OFFICER OF BUYER
<TABLE>
<CAPTION>
NAME AGE ADDRESS OFFICE HELD PRINCIPAL OCCUPATIONS
<S> <C> <C> <C> <C>
Philip W. Shires 57 2945 Wilderness Place President, Secretary See "Directors of Kentek."
Boulder, CO 80301 and Director
</TABLE>
D-3
<PAGE> 95
ANNEX E
[ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JUNE 30, 1998]
<PAGE> 96
ANNEX F
[QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999]
