AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 2003
REGISTRATION 333-103954
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3576 94-3086355
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
ELECTRONICS FOR IMAGING, INC.
303 VELOCITY WAY
FOSTER CITY, CALIFORNIA 94404
(650) 357-3500
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
JOSEPH CUTTS
CHIEF FINANCIAL OFFICER
ELECTRONICS FOR IMAGING, INC.
303 VELOCITY WAY
FOSTER CITY, CALIFORNIA 94404
(650) 357-3500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
JAMES ETHERIDGE MARLEE S. MYERS
GENERAL COUNSEL KIMBERLY A. TAYLOR
ELECTRONICS FOR IMAGING, INC. MORGAN, LEWIS & BOCKIUS LLP
303 VELOCITY WAY ONE OXFORD CENTRE, 32ND FLOOR
FOSTER CITY, CALIFORNIA 94404 PITTSBURGH, PENNSYLVANIA 15219
(650) 357-3500 TELEPHONE (412) 560-3300 TELEPHONE
(650) 357-3776 FACSIMILE (412) 560-3399 FACSIMILE
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable following completion of the merger described in
this registration statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ----------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ----------
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share............................... 2,392,695 shares(1) N/A $0(2) $0
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
(1) Represents the maximum number of shares of EFI common stock issuable in
connection with the merger based upon (A) $2.60 (the merger consideration to
be paid per share of Printcafe common stock) times (x) 10,745,487
outstanding shares of Printcafe common stock, plus (y) an estimated
1,420,451 shares of Printcafe common stock issuable upon exercise of options
and warrants, divided by (B) $13.22, the 52-week low closing price of EFI
common stock.
(2) Pursuant to Rule 457(f), represents (a) (i) $2.55, the average of the high
and low prices of shares of Printcafe common stock as reported on the Nasdaq
National Market on March 15, 2003 times (ii) 12,165,938, the sum of the
number of outstanding shares of Printcafe common stock and the number of
shares of Printcafe common stock issuable upon exercise of outstanding
options and warrants plan minus (b) $63,358,405 the proceeds to be received
upon exercise of such outstanding Printcafe options and warrants. Inasmuch
as the difference between (a) and (b) is a negative number, $(32,335,264),
no amount is reflected above.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[PRINTCAFE LOGO]
, 2003
Dear Fellow Stockholder:
I am pleased to ask you to vote at a special meeting of our stockholders to
consider the merger agreement we signed with Electronics For Imaging, Inc., or
EFI. Upon completion of the merger, Printcafe will become a wholly-owned
subsidiary of EFI.
In the proposed merger, each share of our common stock will be converted
into $2.60 of consideration. The consideration will be paid, at your election,
in shares of EFI's common stock or cash. If you do not make a valid election,
you will receive cash consideration in connection with the merger. EFI
registered 2,392,695 shares of its common stock in connection with the merger.
EFI's common stock is traded on the Nasdaq National Market under the symbol
"EFII" and its closing price on the Nasdaq National Market was $ on
, 2003.
A special committee of our board of directors negotiated the terms and
conditions of the proposed merger and has carefully considered the proposed
merger and unanimously recommended the approval of the merger agreement to our
board of directors. A majority of the members of our board of directors
recommends that you vote to adopt the merger agreement.
We have scheduled a special meeting of our stockholders to be held on
, 2003 to consider and vote upon a proposal to adopt the merger
agreement. Your vote is very important regardless of the number of shares you
own. Whether or not you plan to attend the special meeting, please vote as soon
as possible to ensure that your shares will be represented at the special
meeting. You may vote by completing, signing, dating and returning the enclosed
proxy card in the enclosed prepaid envelope. If you do not vote, it will have
the same effect as voting against the merger.
We look forward to the successful combination of Printcafe and EFI.
Very truly yours,
Marc D. Olin
Chairman, Chief Executive Officer and
President
YOU SHOULD CAREFULLY READ THE "RISK FACTORS RELATING TO THE MERGER" SECTION
THAT BEGINS AT PAGE .
Neither the Securities and Exchange Commission nor any state securities
commission has approved of the securities to be issued in connection with the
merger or determined if this proxy statement-prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
This proxy statement-prospectus is dated , 2003 and is first
being mailed, together with forms of proxy cards, to our stockholders on or
about , 2003.
PRINTCAFE SOFTWARE, INC.
FORTY 24TH STREET
PITTSBURGH, PENNSYLVANIA 15222
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2003
On , , 2003, Printcafe Software, Inc., a Delaware
corporation, will hold a special meeting of stockholders at its principal
executive offices located at Forty 24th Street, Pittsburgh, Pennsylvania 15222.
The meeting will begin at 9:00 a.m., local time.
Only stockholders who owned stock at the close of business on ,
2003 are entitled to notice of and to vote at this meeting, including at any
adjournments or postponements of the meeting. At the meeting, stockholders will
consider and vote upon the following matter that is more fully described in this
document:
- Adoption of the Agreement and Plan of Merger, dated as of February 26,
2003, by and among Electronics For Imaging, Inc., Strategic Value
Engineering, Inc., a wholly-owned subsidiary of EFI, and Printcafe
Software, Inc.
All stockholders are cordially invited to attend the meeting in person.
Regardless of whether you plan to attend the meeting, you are urged to sign and
date the enclosed proxy which is solicited by our board of directors, and return
it promptly in the accompanying envelope, postage for which has been provided if
mailed in the United States.
The prompt return of proxies will ensure a quorum and save the expense of
further solicitation. Any stockholder returning the enclosed proxy may revoke it
prior to its exercise by voting in person at the meeting or by filing with our
corporate secretary at our corporate offices in Pittsburgh, Pennsylvania, a
written revocation or a duly executed proxy bearing a later date.
By order of the Board of Directors,
J. Devitt Kramer
Secretary
Pittsburgh, Pennsylvania
, 2003
YOUR VOTE IS IMPORTANT
IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT AS PROMPTLY AS POSSIBLE
IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
This document incorporates important business and financial information
that is not included in or delivered with this document. This information is
available without charge upon oral or written request. To be sure that the
documents arrive on time, you should make all requests for documents no later
than , 2003. To request information, you should contact either:
Printcafe Software, Inc. Electronics For Imaging, Inc.
Forty 24th Street 303 Velocity Way
Pittsburgh, Pennsylvania 15222 Foster City, California 94404
Attention: Investor Relations Attention: Investor Relations
(412) 690-3047 (650) 357-3828
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... ii
SUMMARY..................................................... 1
RISK FACTORS................................................ 15
BACKGROUND OF THE MERGER AND RELATED MATTERS................ 30
Background and Reasons for the Merger....................... 30
Recommendation of Our Board of Directors.................... 35
Opinion of UBS Warburg LLC.................................. 35
THE MERGER.................................................. 42
United States Federal Income Tax Consequences............... 42
Anticipated Accounting Treatment............................ 42
Dissenters' Appraisal Rights................................ 43
Resale of EFI Common Stock Issued in the Merger............. 44
Related Agreements.......................................... 44
Stock Purchase Program...................................... 46
Interests of Our Directors and Executive Officers in the
Merger.................................................... 47
THE MERGER AGREEMENT........................................ 48
General..................................................... 48
Effect on Capital Stock, Options, Warrants and Stock
Purchase Rights........................................... 48
Exchange of Certificates in the Merger...................... 49
Representations and Warranties.............................. 50
Restrictions on Our Solicitation of Takeover Proposals...... 51
Covenants................................................... 52
Conditions to Completion of the Merger...................... 53
Termination................................................. 54
THE SPECIAL MEETING......................................... 55
General Information; Purpose of the Special Meeting......... 55
Record Date; Shares Entitled to Vote........................ 55
Vote Required............................................... 55
Voting and Revocation of Proxies............................ 55
Other Matters to be Considered.............................. 56
Solicitation of Proxies..................................... 56
INFORMATION ABOUT PRINTCAFE................................. 57
Business.................................................... 57
Selected Consolidated Financial Data........................ 64
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 65
Principal Stockholders...................................... 78
Price Range of Our Common Stock............................. 81
COMPARATIVE RIGHTS OF EFI STOCKHOLDERS AND OUR
STOCKHOLDERS.............................................. 81
EXPERTS..................................................... 82
LEGAL MATTERS............................................... 82
FORWARD LOOKING STATEMENTS.................................. 82
SUBMISSION OF STOCKHOLDER PROPOSALS......................... 83
WHERE TO FIND MORE INFORMATION.............................. 83
SOME DOCUMENTS ARE "INCORPORATED BY REFERENCE".............. 84
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEX A -- AGREEMENT AND PLAN OF MERGER DATED AS OF FEBRUARY
26, 2003......................................... A-1
ANNEX B -- OPINION OF UBS WARBURG LLC....................... B-1
ANNEX C -- SECTION 262 OF THE GENERAL CORPORATION LAW OF THE
STATE OF DELAWARE................................ C-1
i
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Each share of our common stock you hold will be converted, at your election,
into shares of EFI common stock or cash. If you elect to receive stock, the
number of shares of EFI common stock to be issued for each share of our common
stock is calculated by dividing $2.60 by the average of the closing sales prices
of EFI common stock over 10 trading days ending on and including the fifth
trading day before the special meeting. If you do not make a valid election, you
will receive cash consideration in connection with the merger.
EFI will not issue fractional shares. Rather, you will receive cash
payments, without interest, in place of any fractional EFI shares you would have
otherwise received.
Q: WHAT STEPS DO I TAKE TO CAST MY VOTE?
A: You may vote by mailing a signed proxy card in the enclosed return envelope
as soon as possible so that your shares may be represented at the special
meeting. You may also attend the special meeting and vote in person.
Q: CAN I CHANGE MY VOTE?
A: Yes. You may change your vote by (1) delivering a written notice of
revocation to our corporate secretary before the beginning of the special
meeting, (2) delivering a later-dated, signed proxy card to our corporate
secretary before the special meeting or (3) by attending the special meeting and
voting in person.
Q: IF MY BROKER HOLDS MY SHARES IN "STREET NAME," WILL MY BROKER VOTE MY SHARES
FOR ME?
A: Your broker will vote your shares only if you provide instructions to your
broker on how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. Without instructions
to your broker, your shares will not be voted, which will have the same effect
as if you voted against the adoption of the merger agreement.
Q: WHAT HAPPENS IF I DO NOT VOTE?
A: If you do not submit your proxy or instruct your broker to vote your shares
and you do not vote in person at our special meeting of stockholders, the effect
will be the same as if you voted against the adoption of the merger agreement.
Q: IS THE MERGER TAXABLE TO ME?
A: You will generally recognize gain or loss for United States income tax
purposes to the extent the amounts you receive differ from your tax basis in
your shares of our common stock.
The material United States federal income tax consequences of the
transaction are described in more detail beginning on page .
The tax consequences to you will depend on the facts of your situation.
Please consult your tax advisor for a full understanding of the tax consequences
to you of the merger.
Q: HOW DO I ELECT TO RECEIVE CASH OR SHARES OF EFI COMMON STOCK AS MERGER
CONSIDERATION?
A: Enclosed with this document is an election form. You may elect to receive
cash or stock with respect to some or all of your shares of our common stock.
You must complete the election form and return it to American Stock Transfer &
Trust Company, EFI's exchange agent, before , 2003. Your election will
be valid only if your election form is accompanied by the certificates
representing the shares of our common stock that you own. DO NOT SEND YOUR
ELECTION FORM OR STOCK CERTIFICATE WITH YOUR PROXY.
If your shares are held in "street name" then you must instruct your broker
to make an election on your behalf.
ii
If you do not make an election or your broker does not make an election on your
behalf, then you will receive cash consideration.
Q: HOW SHOULD I SEND IN MY STOCK CERTIFICATES?
A: If your shares are held in registered form and you want to elect the form of
consideration you receive in the merger, you must (1) return a completed
election form, and (2) send in your certificates representing your shares of
Printcafe common stock with your completed election form and letter of
transmittal to the exchange agent. If you do not make an election, then you must
keep your certificates until after the closing, when you will receive a letter
of transmittal describing how you may exchange your certificates for cash
consideration. If your Printcafe common stock is held in a brokerage or other
custodial account, you will receive instructions from the entity where your
shares are held, advising you of the procedures for making your election and
delivering your shares.
Q: AM I ENTITLED TO DISSENTERS' APPRAISAL RIGHTS?
A: You will be entitled to dissenters' appraisal rights in connection with the
merger so long as you comply with Delaware law, including, among other things,
not voting in favor of the proposal to adopt the merger agreement and not
surrendering your certificates representing shares of our common stock. The
availability of dissenters' appraisal rights is discussed in more detail on page
.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We expect to complete the merger on or about , 2003. Because the
merger is subject to factors beyond the parties' control, however, we cannot
predict whether or when the merger will be completed.
Q: WHOM CAN I CALL WITH QUESTIONS?
A: If you have any questions about the merger, or if you would like copies of
any of the documents referred to in this document, you should call MacKenzie
Partners, our proxy solicitor, at (800) 322-2885 or call collect (212) 929-5500
or email proxy@mackenziepartners.com.
iii
SUMMARY
The following is a brief summary of selected information from this document
and may not include all of the information that is important to you. To better
understand the merger, and for a more complete description of the legal terms of
the transaction, you should read this entire document carefully, as well as
those additional documents to which you are referred. See "Where to Find More
Information" on page .
THE COMPANIES
Printcafe Software, Inc.
Forty 24th Street
Pittsburgh, Pennsylvania 15222
Telephone number: (412) 456-1141
Website: www.printcafe.com
We provide software solutions designed specifically for the printing
industry supply chain. Our enterprise resource planning and collaborative supply
chain software solutions enable printers and print buyers to improve
productivity and lower costs. Our procurement applications for print buyers
integrate with our software solutions designed for printers to facilitate
Web-based collaboration across the print supply chain. Our software solutions
for the printing industry supply chain have been installed by more than 4,000
customers in over 8,000 facilities worldwide, including 24 of the 25 largest
printing companies in North America and over 50 businesses in the Fortune 1000.
For additional information about us, see page . We are a corporation organized
under the laws of the State of Delaware. Our shares are currently listed for
quotation on the Nasdaq National Market under the symbol "PCAF." Please note
that information found on our website is not part of this document.
Electronics For Imaging, Inc.
303 Velocity Way
Foster City, California 94404
Telephone number: (650) 357-3500
Website: www.efi.com
EFI is the world leader in imaging solutions for network printing. EFI's
industry-leading core technology offers powerful document management tools,
seamless networking, high fidelity color and black-and-white output, and greater
productivity and cost efficiency. EFI products support a broad range of
printers, copiers, multifunction devices and mobile communications devices and
printer speeds of up to 2000 pages per minute in color. EFI has pioneered many
innovative imaging solutions, including the Fiery(R), EDOX(R), Splash(TM) and
DocStream(TM) brands of print controllers, Velocity(TM) workflow software,
eBeam(R) Web-enabled whiteboards and PrintMe(TM) which enables anytime, anywhere
printing. Best, headquartered in Germany, is a division of EFI offering an array
of inkjet proofing solutions for the Graphic Arts market. Unimobile(TM) is EFI's
mobile messaging solution for interactive data delivery. EFI maintains 20
offices worldwide. For additional information about EFI, see "Where to Find More
Information" on page . EFI is a corporation organized under the laws of the
State of Delaware. EFI's shares are currently listed on the Nasdaq National
Market under the symbol "EFII." Please note that information found on EFI's
website is not part of this document.
Recent Developments. In June 2003, EFI sold $240 million of its 1.50%
convertible senior debentures due 2023. The debentures are unsecured senior
obligations of EFI, paying interest semi-annually in arrears at an annual rate
of 1.50%. The debentures will be convertible into shares of EFI common stock at
a conversion price of approximately $26.42 per share of common stock, only upon
the occurrence of specified events. The debentures were offered only to
qualified institutional buyers in reliance on the exemption from registration
provided by Rule 144A.
EFI used approximately $58.0 million of the net proceeds from the offering
to repurchase 3,135,300 shares of its outstanding common stock from one of the
initial purchasers in the offering at a purchase price of $18.54 per share. EFI
intends to use the remaining net proceeds for general corporate purposes,
possibly including the acquisition of complimentary businesses and technologies.
EFI may also use a portion of the net proceeds to purchase additional shares of
its common stock.
1
The debentures will mature on June 1, 2023. EFI may redeem the debentures,
at its option, on or after June 1, 2008 at a redemption price equal to par plus
accrued interest, if any. Holders of the debentures will have the right to
require EFI to repurchase all or some of their debentures on June 1, 2008, June
1, 2013 and June 1, 2018 at a price equal to 100% of the principal amount of
those debentures plus accrued interest, if any. This price is payable, in the
case of any required repurchase on June 1, 2008, in cash or, in the case of any
required repurchase on June 1, 2013 or June 1, 2018, in cash, shares of EFI
common stock or a combination of cash and common stock, at EFI's option. Holders
of the debentures will have the right to require EFI to purchase all or some of
their debentures at a purchase price equal to 100% of the principal amount of
those debentures plus accrued interest, if any, upon the occurrence of
fundamental change events that occur prior to June 1, 2008, payable in cash,
shares of EFI common stock or a combination of cash and common stock, at EFI's
option.
SPECIAL MEETING OF OUR STOCKHOLDERS (SEE PAGE )
Time, Date, Place and Purpose. The special meeting will be held at our
principal executive offices, Forty 24th Street, Pittsburgh, Pennsylvania 15222,
on , 2003, beginning at 9:00 a.m., local time, to consider and to vote
upon a proposal to adopt the merger agreement.
Record Date and Votes Required. You can vote at the special meeting if you
owned our common stock at the close of business on , 2003. On that
date, there were shares of our common stock outstanding and entitled
to vote, held by approximately stockholders of record. You can cast
one vote for each share of our common stock you owned on that date. The
presence, in person or by proxy, of one-third of the outstanding shares of our
common stock is required in order for us to meet the quorum requirement under
our bylaws in order to transact business at the special meeting. Adoption of the
merger agreement requires the vote of the holders of at least a majority of the
outstanding shares of our common stock.
Please be aware that stockholders representing approximately % of our
total outstanding voting shares, as of the record date, including Marc Olin, the
chairman of our board of directors, entered into agreements with EFI in which
they agree to vote all of their shares in favor of adoption of the merger
agreement. Additionally, on February 13, 2003, we granted EFI an option to
acquire 2,126,574 shares of our common stock. On June 11, 2003, EFI exercised
this option in full. As of the record date EFI owned shares, which
represents %, of our outstanding common stock. Our stockholders that signed
the stockholders agreements are required to vote in favor of the adoption of the
merger agreement, against approval of any takeover proposal made in opposition
or in competition with the merger and against other matters that are intended to
or could reasonably be expected to impede, delay, postpone, discourage or
adversely affect any of the transactions contemplated by the merger agreement.
The stockholders agreements also restrict the ability of the stockholders that
signed the stockholders agreements to transfer the shares. Each stockholder that
signed a stockholders agreement also granted EFI an irrevocable proxy limited to
voting on the matters covered by the stockholders agreements.
Our directors, executive officers and their affiliates beneficially own
approximately % of the outstanding shares of our common stock as of
, 2003. EFI's directors, executive officers and their affiliates
beneficially own approximately % of the outstanding shares of EFI common
stock as of , 2003.
Proxies. If you vote your shares of our common stock by signing a proxy,
your shares will be voted at the special meeting as you indicate on your proxy
card. If no instructions are indicated on your signed proxy card, your shares
will be voted for adoption of the merger agreement. If your shares are held in
street name, you should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares.
If you abstain from voting, do not return a proxy card or do not give your
broker authority to vote your shares, your inaction will have the same effect as
a vote against adoption of the merger agreement.
2
OUR REASONS FOR THE MERGER (SEE PAGE )
In reaching its decision, our board of directors consulted with our senior
management, legal counsel and financial advisor, reviewed a significant amount
of information and received the recommendation of our special committee that the
board approve the merger, discussed the recommended action with the special
committee and considered a number of factors, including, among others:
- the possible alternatives to the merger, including the possibility of
continuing to operate Printcafe as a stand-alone business and the risks
associated with that alternative, in light of the fact that $14.2 million
of our debt is due in January 2004 and we do not have sufficient cash to
repay that amount and do not expect debt or equity financing to be
available;
- the $2.60 per share to be paid as consideration in the merger represents
a premium of 122.2% over the trailing average closing sales prices for
our common stock as reported on Nasdaq for the three months ended
February 25, 2003;
- the financial presentations made by UBS Warburg and the written opinion
of UBS Warburg, dated February 25, 2003;
- the ability of our stockholders to elect to receive shares of EFI common
stock in the merger, thereby giving them the opportunity to continue as
equity owners of the combined company after the merger;
- the results of UBS Warburg's market check and the letter received from
Creo on February 24, 2003 indicating that it was no longer interested in
the bidding process and was terminating its prior offers;
- our then current and historical financial condition, including the amount
of our outstanding debt, and results of operations, our prospects and
strategic objectives, the risks associated with achieving those prospects
and objectives, conditions in our industry and the current economic and
financial market environment; and
- the terms of the merger agreement, including the likelihood that the
merger would be completed and our ability to accept a superior proposal
upon payment of a fee of $828,000 to EFI.
EFI'S REASONS FOR THE MERGER
The merger is part of EFI's strategy of expanding its software offerings
for the professional printing market. With the convergence of traditional and
digital printing, the combination of EFI's imaging and workflow solutions with
Printcafe's enterprise management software is intended to accelerate the
adoption of digital printing management throughout the process from procurement
through production.
RECOMMENDATION OF OUR BOARD OF DIRECTORS (SEE PAGE )
On January 22, 2003, our board of directors formed a special committee
consisting entirely of non-management directors who had no financial or
employment interest in our largest stockholder, Creo Inc., which owns 36.6% of
our outstanding shares. The special committee engaged its own counsel and
financial advisor. The special committee negotiated the terms and conditions of
the proposed merger and recommended the approval of the merger agreement to our
board of directors. Our board of directors (with the two members who are
employees of Creo abstaining) approved the merger agreement, declared the merger
agreement advisable, fair to our stockholders and in their best interests and
recommends that you vote for the adoption of the merger agreement.
Creo offered, on January 22, 2003, to acquire all outstanding shares of our
common stock for $1.30 per share, to be paid in shares of Creo common stock.
Creo's offer limited the number of shares of its common stock based on the
trading price of Creo common stock. After we had adopted a stockholders' rights
plan and entered into agreements with EFI, Creo filed an action against us in
the Delaware Chancery Court seeking to enjoin the operation of our stockholders'
rights plan and the agreements we entered into with EFI on February 13, 2003.
The court denied Creo's motion for a temporary restraining order in that
litigation. Creo subsequently increased its offer to $3.00 and then to $4.00 per
share before withdrawing its offer and issuing a press release indicating, among
other things, that it had received
3
information in its review of our business that no longer warranted its continued
participation in the bidding process.
OPINION OF UBS WARBURG LLC (SEE PAGE )
UBS Warburg LLC, which served as financial advisor to the special
committee, has delivered a written opinion, dated February 25, 2003, to the
special committee and the board of directors that, as of the date of the opinion
and subject to the matters set forth in the opinion, the consideration to be
received by holders of our common stock, other than EFI and its affiliates, in
the merger is fair from a financial point of view to those holders. A copy of
UBS Warburg's opinion, which includes a description of the procedures followed,
assumptions made, matters considered and limitations on the review undertaken,
by UBS Warburg, is attached to this document as Annex B. You are encouraged to
read UBS Warburg LLC's opinion carefully and in its entirety. UBS Warburg LLC
has been paid a fee of $500,000 and, if the merger is completed, will be
entitled to receive an additional fee of $500,000 for acting as financial
advisor to the special committee.
THE MERGER AGREEMENT (SEE PAGE )
Terms of the Merger. If the merger is completed, a wholly-owned subsidiary
of EFI will merge with and into Printcafe. As a result, we will become a
wholly-owned subsidiary of EFI, and you will be able to elect to have your
shares of our common stock exchanged for either (a) shares of EFI common stock
or (b) cash. A copy of the merger agreement, which is the legal document
governing the merger, is attached to this document as Annex A. You are
encouraged to read the merger agreement carefully and in its entirety.
Conditions (see page ). The merger will be completed only if the
conditions set forth in the merger agreement are satisfied or waived at or
before the closing. These conditions include the following:
- The approval of the merger agreement by our stockholders;
- no legal restraint will be in effect which prevents the completion of the
merger, prohibits or limits our or EFI's ability to conduct our
respective businesses, requires us or EFI to divest any of our respective
assets or which otherwise would reasonably be expected to have a material
adverse effect on us or EFI;
- the registration statement to which this document relates must have been
declared effective by the SEC;
- the shares of EFI common stock to be issued in connection with the merger
must be approved for listing on the Nasdaq National Market;
- the accuracy of EFI's and our representations and warranties, and
compliance with EFI's and our agreements in the merger agreement;
- no occurrence of events or conditions that have, or could reasonably be
expected to have, a material adverse effect on us or EFI; and
- EFI must have received "comfort letters" from our independent auditors.
Covenants (see page ). The merger agreement also contains a number of
agreements by Printcafe and EFI, including the following:
- We agreed to conduct our business in the ordinary course until the merger
is completed;
- except for sales under our employee stock purchase program or issuances
of shares of our common stock upon exercise of options or warrants, we
agreed that we will not pay dividends, engage in a stock split or a
similar transaction, or buy or sell any of our securities, until the
merger is completed;
- we agreed that we will not, and we will not permit our subsidiaries,
officers, directors or representatives to, initiate, solicit, encourage,
negotiate or take other actions which would lead to any proposal or offer
from a third party to acquire our capital stock or a substantial part of
our
4
business or assets, subject only to an exception which allows our board of
directors to discharge its fiduciary duties; and
- EFI agreed to use commercially reasonable efforts to cause the shares of
EFI common stock to be issued to our stockholders in connection with the
merger to be listed on the Nasdaq National Market.
Termination (see page ). The parties can terminate the merger agreement
under the following circumstances:
- We and EFI can mutually agree to terminate the merger agreement;
- either party can terminate the merger agreement if the closing has not
occurred by August 31, 2003;
- EFI can terminate the merger agreement if we breach any of our
representations, warranties or agreements in the merger agreement and the
breach would permit EFI not to complete the merger;
- we can terminate the merger agreement if EFI breaches any of its
representations, warranties or agreements in the merger agreement and the
breach would permit us not to complete the merger;
- EFI can terminate the merger agreement if our board of directors fails to
recommend approval of the merger agreement to our stockholders or
withdraws or changes its recommendation; and
- we may terminate the merger agreement in order to enter into an agreement
to complete a business combination or sell our stock or assets on terms
which our board of directors determines are superior to the terms of the
merger.
If the merger agreement is terminated because our board of directors
changes its recommendation to you or elects to accept a superior proposal, we
will generally be required to pay $828,000 to EFI upon termination of the merger
agreement.
ACCOUNTING TREATMENT (SEE PAGE )
As required by Statement of Financial Accounting Standards No. 141,
Business Combinations, EFI will use the purchase method of accounting to account
for the merger.
Under this method of accounting, our assets and liabilities, including all
intangible assets, will be recorded by EFI at their respective fair market
values. All intangible assets will be amortized over their estimated useful
lives with the exception of goodwill and any other intangibles with indefinite
lives. Goodwill and other intangibles with indefinite lives are not amortized;
rather, they will be assessed for impairment on a periodic basis in the future.
Our financial position, results of operations and cash flows will be included in
EFI's financial statements prospectively as of the completion of the merger.
The pro forma combined condensed financial statements included in this
document include a preliminary allocation of EFI's costs of the acquisition. You
should note that the final allocation may be materially different from that
preliminary allocation.
REGULATORY AND LENDER REQUIREMENTS (SEE PAGE )
Other than effectiveness of the registration statement to which this
document relates, there are no material federal or state regulatory requirements
which must be complied with or approvals which must be obtained in connection
with the merger.
No consent is required from the holders of our notes with National City
Bank; Iris Graphics, an affiliate of Creo; the sellers to us of our Hagen
business; and the sellers to us of our PrintSmith business. These notes will
become due when the merger is completed. EFI intends to repay this indebtedness
with funds from its working capital.
NASDAQ LISTING
EFI will file an application for listing of additional shares with Nasdaq
after completion of the merger and the listing of those shares is a condition to
our obligation to complete the merger.
5
EFFECTS OF THE MERGER ON THE RIGHTS OF OUR STOCKHOLDERS (SEE PAGE )
If you elect to receive shares of EFI common stock, your rights as
stockholders will be governed by Delaware law and by EFI's certificate of
incorporation and bylaws. Currently, your rights as our stockholder are governed
by Delaware law and by our certificate of incorporation and bylaws. If you elect
to receive shares of EFI common stock, then following the merger your rights as
a stockholder of EFI will differ in some respects from the rights you currently
have.
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER (SEE PAGE )
Our directors and executive officers have interests in the merger that may
be different from, or in addition to, the interests of our other stockholders.
These interests include the right to retention bonuses, the right to
acceleration of vesting of stock options and the right to indemnification and
insurance coverage for acts or omissions occurring before the merger is
completed. These arrangements are detailed beginning on page . The special
committee and our board of directors were aware of these arrangements when they
considered the merger.
6
SELECTED EFI CONSOLIDATED FINANCIAL DATA
The following tables contain EFI's consolidated financial data for the
periods presented. The consolidated financial statement data as of, and for each
of the years ended December 31, 1998 through 2002 have been derived from EFI's
audited consolidated financial statements. The financial data as of March 31,
2003 and for the three months ended March 31, 2003 and 2002 have been derived
from EFI's unaudited condensed consolidated financial statements. In the opinion
of EFI's management, all normal and recurring adjustments considered necessary
for a fair presentation have been included in its unaudited condensed
consolidated financial statements. The three month results are not necessarily
indicative of the full fiscal year results. This information is only a summary.
You should read it along with EFI's historical consolidated financial statements
and related notes and the section titled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained in EFI's annual and
interim reports and other information on file with the SEC and incorporated by
reference in this document. See "Some Documents are 'Incorporated by
Reference' " on page .
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
--------- --------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
Revenue....................... $ 85,715 $ 82,893 $350,185 $517,608 $588,449 $570,752 $446,999
Cost of revenue............... 36,228 42,103 167,685 282,113 311,152 290,636 249,179
Gross profit.................. 49,487 40,790 182,500 235,495 277,297 280,116 197,820
Operating expenses
Research and development.... 22,810 22,403 89,973 98,116 94,097 74,971 60,150
Sales and marketing......... 14,730 12,289 50,624 56,767 64,526 59,373 60,615
General and
administrative............ 4,991 5,425 21,778 25,456 24,784 18,403 16,637
Amortization of goodwill and
other intangibles(1)...... 2,545 1,004 4,391 12,255 23,621 -- --
Merger-related expense...... -- -- -- -- -- 1,422 --
Total operating
expenses............... 45,076 41,121 166,766 192,594 207,028 154,169 137,402
Income (loss) from
operations.................. 4,411 (331) 15,734 42,901 70,269 125,947 60,418
Other income, net............. 2,578 3,221 7,077 17,471 21,550 16,250 9,859
Income before income taxes.... 6,989 2,890 22,811 60,372 91,819 142,197 70,277
Provision for income taxes.... (1,887) (867) (6,843) (21,432) (37,461) (46,914) (22,456)
Net income.................... $ 5,102 $ 2,023 $ 15,968 $ 38,940 $ 54,358 $ 95,283 $ 47,821
Net income per basic common
share....................... $ 0.09 $ 0.04 $ 0.29 $ 0.73 $ 0.99 $ 1.74 $ 0.89
Net income per diluted common
share....................... $ 0.09 $ 0.04 $ 0.29 $ 0.71 $ 0.97 $ 1.67 $ 0.87
Shares used in computing net
income per basic common
share....................... 54,707 54,007 54,256 53,468 54,649 54,853 53,507
Shares used in computing net
income per diluted common
share....................... 55,190 54,949 54,852 54,605 55,983 56,963 54,972
AS OF AS OF DECEMBER 31,
MARCH 31, ----------------------------------------------------
2003 2002 2001 2000 1999 1998
----------- -------- -------- -------- -------- --------
(UNAUDITED)
FINANCIAL POSITION (IN THOUSANDS)
Cash and short-term
investments................. $500,338 $498,370 $451,207 $353,603 $470,328 $328,732
Working capital............... 470,919 470,054 438,020 389,917 487,591 355,361
Long-term liabilities, less
current portion............. 278 278 331 3,140 3,467 4,142
Total assets.................. 738,932 727,106 702,987 654,390 656,075 484,191
Stockholders' equity.......... 642,855 634,067 606,567 545,316 551,187 408,680
7
---------------
(1) For the years ended December 31, 2001, 2000, 1999, and 1998, goodwill
amortization was $8,161, $2,040, $57, and $57, respectively, or $0.15,
$0.04, $0.00, and $0.00 per diluted common share, respectively. Effective
January 1, 2002, EFI adopted Statement of Financial Accounting Standard No.
142, Goodwill and Other Intangible Assets. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization and establishes
provisions for the reclassification of certain existing recognized
intangibles to goodwill. Upon the adoption of SFAS 142, EFI ceased
amortizing goodwill and reclassified net intangibles and deferred tax
liabilities relating to acquired workforce totaling $0.9 million to
goodwill.
8
SELECTED PRINTCAFE CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements, the related notes to
those statements and our "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this document. The
selected balance sheet data as of December 31, 2002 and 2001 and the selected
statement of operations data for the three years ended December 31, 2002, 2001
and 2000 are derived from our audited consolidated financial statements that are
included elsewhere in this document. The selected balance sheet data as of
December 31, 2000, 1999, and 1998 and the selected statement of operations data
for the years ended December 31, 1999, and 1998 are derived from our audited
consolidated financial statements not included in this document. The financial
data as of March 31, 2003 and for the three months ended March 31, 2003 and 2002
are derived from our unaudited consolidated financial statements included
elsewhere in this document. In the opinion of our management, all normal and
recurring adjustments necessary for a fair presentation have been included in
our unaudited consolidated financial statements. The three month results are not
necessarily indicative of our full year results.
FOR THE
THREE MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
-------- -------- -------- --------- --------- -------- ------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
Revenue.................. $ 9,403 $ 11,715 $ 46,521 $ 41,868 $ 25,334 $ 4,411 $5,242
Cost of revenue.......... 2,276 2,681 10,377 11,596 10,658 1,415 1,102
Gross profit............. 7,127 9,034 36,144 30,272 14,676 2,996 4,140
Operating expenses
Research and
development......... 3,025 3,034 12,003 12,180 11,307 1,900 1,601
Sales and marketing.... 4,068 3,947 16,989 19,114 20,542 848 397
General and
administrative...... 3,117 1,783 6,193 7,645 24,525 2,704 1,651
Depreciation........... 593 763 2,922 3,821 2,060 232 199
Amortization of
goodwill and other
intangibles(1)...... 5,090 7,388 29,511 49,052 39,481 774 --
Stock-based
compensation and
warrants............ 381 203 1,386 1,103 5,144 7,274 254
Restructuring charge... -- -- 525 2,098 1,185 -- --
Total operating
expenses.......... 16,274 17,118 69,529 95,013 104,244 13,732 4,102
(Loss) income from
operations............. (9,147) (8,084) (33,385) (64,741) (89,568) (10,736) 38
Other expense, net....... (1,115) (1,796) (7,412) (5,262) (6,150) (183) (22)
(Loss) income before
income taxes........... (10,262) (9,880) (40,797) (70,003) (95,718) (10,919) 16
Provision for income
taxes.................. -- -- -- -- -- -- --
Accretion of redeemable
preferred stock........ -- (3,341) (6,201) (5,635) (4,858) -- --
Net (loss) income........ $(10,262) $(13,221) $(46,998) $ (75,638) $(100,576) $(10,919) $ 16
Net loss per basic common
share.................. $(0.97) (81.12) $ (8.11) $ (468.67) $ (687.66) $ (96.36) $ --
Net loss per diluted
common share........... $(0.97) (81.12) $ (8.11) $ (468.67) $ (687.66) $ (96.36) $ --
Shares used in computing
net loss per basic
common share........... 10,633 163 5,797 161 146 113
Shares used in computing
net loss per diluted
common share........... 10,633 163 5,797 161 146 113
9
AS OF AS OF DECEMBER 31,
MARCH 31, ----------------------------------------------------
2003 2002 2001 2000 1999 1998
----------- -------- --------- --------- -------- ------
(UNAUDITED) (IN THOUSANDS)
FINANCIAL POSITION
Cash and short-term investments... 6,376 $ 8,775 $ 8,648 $ 15,206 $ -- $ 56
Working capital................... (11,433) 4,063 (985) (4,209) (4,109) (566)
Long-term obligations, less
current portion................. 1,575 12,743 33,365 36,114 953 68
Total assets...................... 44,667 53,673 79,503 135,958 11,840 2,025
Redeemable preferred stock........ -- -- 132,676 104,230 -- --
Stockholders' equity
(deficit)(2).................... 12,102 21,959 (105,373) (32,792) 4,858 (661)
---------------
(1) For the years ended December 31, 2001, 2000, 1999, and 1998, goodwill
amortization was $19,576, $16,653, $774, and $0, respectively, or $121.30,
$113.86, $6.83, and $0.00 per diluted common share, respectively. Effective
January 1, 2002, we adopted Statement of Financial Accounting Standard No.
142, Goodwill and Other Intangible Assets. SFAS 142 requires among other
things, the discontinuance of goodwill amortization and establishes
provisions for the reclassification of certain existing recognized
intangibles to goodwill. Upon the adoption of SFAS 142, we ceased amortizing
goodwill.
(2) In June 2002, we completed our initial public offering and issued 3,750,000
shares of common stock at a price of $10.00 per share. We received
approximately $32,950 in net proceeds and repaid approximately $17,800 of
related party debt.
10
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following information has been derived from the unaudited pro forma
condensed combined financial statements set forth elsewhere in this document and
should be read in connection with that information.
The unaudited pro forma condensed combined financial information
illustrates the estimated effects of the merger as if the merger had occurred at
January 1, 2002 for the statement of operations information and at March 31,
2003 for the balance sheet information. The unaudited pro forma financial
information has been prepared based on the purchase method of accounting and
does not include the impact of non-recurring charges directly attributable to
the merger. The basic unaudited pro forma per share information for EFI is based
on the weighted average number of outstanding shares of EFI common stock
adjusted to include the estimated number of shares of EFI common stock that
would be issued in the merger, assuming 50% of our stockholders elect to receive
shares of EFI common stock. The diluted unaudited pro forma per share
information for EFI is based on the weighted average number of outstanding
shares of EFI common stock adjusted to include (1) the dilutive effect of EFI
employee stock options and (2) the estimated number of shares of EFI common
stock that would be issued in the merger assuming 50% of our stockholders elect
to receive shares of EFI common stock.
The actual exchange ratio will be the average closing price of EFI's common
stock for the ten consecutive trading days ending on and including the fifth
trading day before the special meeting of our stockholders to vote on a proposal
to adopt the merger agreement. The actual percentage of our stockholders
receiving shares of EFI common stock in connection with the merger will be
determined based on the number of valid elections received by EFI before the
election deadline, which is the business day immediately before the date of the
special meeting of our stockholders.
The following information is not indicative of future results or of the
results that would have been achieved had the merger been completed on January
1, 2002 or March 31, 2003.
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
Revenue..................................................... $ 95,118 $396,706
Cost of revenue............................................. 38,658 178,811
Gross profit................................................ 56,460 217,895
Research and development.................................. 26,031 102,952
Sales and marketing....................................... 18,964 68,427
General and administrative................................ 8,185 28,354
Amortization of identified intangibles.................... 3,719 9,085
Stock-based compensation and warrants..................... 381 1,386
Restructuring charge...................................... -- 525
Total operating expenses............................... 57,280 210,729
(Loss) income from operations............................... (820) 7,166
Other income, net........................................... 2,319 5,576
Income before income taxes.................................. 1,499 12,742
Provision for income taxes.................................. (219) (3,453)
Net income.................................................. 1,280 9,289
Accretion of redeemable preferred stock..................... -- (6,201)
Net income attributable to common stock..................... $ 1,280 $ 3,088
Net income per basic EFI common share....................... $ 0.02 $ 0.06
Net income per diluted EFI common share..................... $ 0.02 $ 0.06
EFI shares used in computing net income per basic common
share..................................................... 55,371 54,920
EFI shares used in computing net income per diluted common
share..................................................... 55,854 55,516
11
AS OF
MARCH 31, 2003
--------------
(IN THOUSANDS)
FINANCIAL POSITION
Cash and short-term investments............................. $469,307
Working capital............................................. 440,232
Long-term debt, less current portion........................ 278
Total assets................................................ 770,842
Stockholders' equity........................................ 652,449
If the percentage of Printcafe common stock exchanged for either cash or
shares of EFI common stock differs materially from our assumptions used in the
preparation of the unaudited pro forma condensed combined financial statements,
the pro forma results could be impacted as follows:
OPERATING
% OF ELECTING CASH/ INCOME OTHER NET EPS PER EPS PER BASIC DILUTED
% OF ELECTING STOCK (LOSS) INCOME INCOME BASIC SHARE DILUTED SHARE SHARES SHARES
------------------- --------- ------ ------ ----------- ------------- ------ -------
FOR THE THREE MONTHS ENDED
MARCH 31, 2003
0% Cash/100% Stock............ $ (820) $2,405 $1,354 $0.02 $0.02 56,035 56,518
50% Cash/50% Stock*........... $ (820) $2,319 $1,280 $0.02 $0.02 55,371 55,854
100% Cash/0% Stock............ $ (820) $2,233 $1,207 $0.02 $0.02 54,707 55,190
FOR THE YEAR ENDED
DECEMBER 31, 2002
0% Cash/100% Stock............ $7,166 $5,921 $3,339 $0.06 $0.06 55,584 56,180
50% Cash/50% Stock*........... $7,166 $5,576 $3,088 $0.06 $0.06 54,920 55,516
100% Cash/0% Stock............ $7,166 $5,232 $2,837 $0.05 $0.05 54,256 54,852
---------------
* This is the ratio used for the preparation of the unaudited pro forma
condensed combined financial statements.
COMPARATIVE PER SHARE INFORMATION
The following table summarizes on a per share basis (1) historical
financial information and (2) unaudited pro forma and equivalent pro forma
financial information.
The unaudited pro forma per share information for Printcafe is based on the
unaudited pro forma amounts per share for EFI multiplied by an exchange ratio of
0.1252, representing $2.6000 divided by an assumed market value of EFI's common
stock of $20.7650. For purposes of the pro forma information we have used the
average closing price of EFI common stock for the ten consecutive trading days
ending on and including June 23, 2003, which is the actual exchange ratio based
upon the most recent information practicable at the time of the printing of this
document. The information set forth below is qualified in its entirety by
reference to, and should be read in conjunction with, EFI's and our historical
consolidated financial information included or incorporated by reference in this
document and the unaudited pro forma condensed combined financial statements
included elsewhere in this document.
THREE
MONTHS ENDED YEAR ENDED
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
HISTORICAL EFI
Net income per basic and diluted common share............. $ 0.09 $ 0.29
Book value per share(1)................................... $11.72 $11.62
HISTORICAL PRINTCAFE
Net loss per basic and diluted common share............... $(0.97) $(8.11)
Book value per share(1)................................... $ 1.14 $ 2.07
PRO FORMA COMBINED NET INCOME PER SHARE
Pro forma combined net income per EFI share............... $ 0.02 $ 0.06
Equivalent pro forma net income per Printcafe share(3).... $ 0.00 $ 0.01
12
THREE
MONTHS ENDED
MARCH 31, 2003
--------------
PRO FORMA COMBINED BOOK VALUE PER SHARE:
Pro forma book value per EFI share(2)..................... $11.76
Equivalent pro forma book value per Printcafe share(3).... $ 1.47
(1) The historical book value per share is computed by dividing total
stockholders' equity by the number of shares of common stock outstanding at
the end of the period.
(2) The pro forma combined book value per EFI share is computed by dividing
total pro forma stockholders' equity by the pro forma number of shares of
common stock outstanding at the end of the period.
(3) Equivalent pro forma share amounts are calculated by multiplying the pro
forma net income per share and the pro forma book value per share of EFI by
the exchange ratio of 0.1252.
Neither EFI nor Printcafe has declared or paid any cash dividends. This
table does not give effect to EFI's planned stock repurchase program. See "The
Merger -- Stock Purchase Program" on page .
EXCHANGE RATIO IN THE MERGER
The exact number of shares of EFI common stock to be issued in connection
with the merger with respect to shares of our common stock for which a valid
election has been made will be $2.60 divided by the average closing price of
EFI's common stock for the ten consecutive trading days ending on and including
the fifth trading day before the date of the special meeting. The following
table illustrates hypothetical exchange ratios using the closing price of EFI's
common stock over the 90 days before the printing of this document. You may call
MacKenzie Partners at (800) 322-2885 to obtain the most recent calculation of
the fraction of a share of EFI common stock issuable for each share of our
common stock for which a valid election has been made.
AVERAGE EFI EFI SHARES ISSUED PER
TRADING DAY PERIOD CLOSING PRICE PRINTCAFE SHARE
-------------------- ------------- ---------------------
Highest ten-day average................ June 9 to June 20 $20.7960 0.1250
Mean ten-day average................... May 21 to June 4 $19.2770 0.1349
Low ten-day average.................... March 12 to March 25 $16.9231 0.1536
MARKET PRICE OF EFI'S AND PRINTCAFE'S COMMON STOCK
The following table shows the closing price per share of EFI's common stock
and our common stock reported on the Nasdaq National Market on (a) February 25,
2003, which was the last trading day before the merger was publicly announced on
February 26, 2003 and (b) , 2003, the most recent practicable date
before the printing of this document. The "Printcafe Equivalent Per Share Price"
set forth below equals the closing price of EFI's common stock on the applicable
date multiplied by the exchange ratio of $2.6000 divided by the average closing
price of EFI's common stock for the ten consecutive trading days ending on and
including the fifth trading day before the applicable date. For a complete
description of the consideration payable in connection with the merger, see "The
Merger," on page .
13
AS OF FEBRUARY 25, 2003
(A) Market price per common share of EFI stock as of the market
close on
February 25, 2003........................................... $16.2495
(B) Consideration per share of Printcafe common stock........... $ 2.6000
(C) Average closing price per common share of EFI stock for the
ten consecutive trading days ending on and including
February 18, 2003........................................... $17.0018
(D) Printcafe equivalent per share price (AXB/C)................ $ 2.4850
(E) Market price per common share of Printcafe stock as of the
market close on
February 25, 2003........................................... $ 2.6000
AS OF , 2003
(A) Market price per common share of EFI stock as of the market
close on
, 2003.......................................
(B) Consideration per share of Printcafe common stock........... $ 2.6000
(C) Average closing price per common share of EFI stock for the
ten consecutive trading days ending on and including
, 2003.......................................
(D) Printcafe equivalent per share price (AXB/C)................
(E) Market price per common share of Printcafe stock as of the
market close on
, 2003.......................................
14
RISK FACTORS
By electing to receive EFI's common stock you will be subject to the risks
of ownership of that security. You are urged to consider carefully the following
important risk factors, as well as those other risk factors that are discussed
in various documents EFI has filed with the SEC and that are incorporated by
reference into this document.
RISK FACTORS RELATING TO THE MERGER
WE DO NOT HAVE SUFFICIENT CASH TO REPAY $14.2 MILLION OF OUR OUTSTANDING
DEBT WHICH BECOMES DUE IN JANUARY 2004 AND MAY NEED ADDITIONAL DEBT OR EQUITY
FINANCING WHICH WE DO NOT EXPECT TO BE AVAILABLE. IF WE ARE UNABLE TO PAY THESE
AMOUNTS WHEN DUE, THE LENDERS COULD PROCEED AGAINST THE COLLATERAL FOR THEIR
LOANS.
If we do not complete the merger with EFI or complete a similar transaction
with a third party, we do not expect to have sufficient cash to repay $14.2
million of our outstanding debt which becomes due and payable in January 2004
without securing additional debt or equity financing; we do not expect that debt
or equity financing would be available. In addition, we will incur significant
costs associated with the merger, including legal, accounting, financial
printing and financial advisory fees, which must be paid whether or not the
merger is completed.
THE PENDENCY OF THE MERGER COULD AFFECT OUR RELATIONSHIPS WITH EMPLOYEES
AND CUSTOMERS.
If the merger is not completed, we could be harmed in the following ways:
- EFI does not have a substantial base of customers in the commercial
printing industry; the announcement of the merger may result in our
customers delaying their decision to license our enterprise resource
planning software, which could have a material adverse effect on us.
- Our relationships with employees, including our ability to attract and
retain key employees, could be harmed as a result of uncertainty
regarding our future operations.
- Our relationships with customers may be disrupted because of the
diversion of management attention while negotiating the merger and as a
result of the uncertainty regarding our prospects, which could result in
the loss of market position or opportunities to our competitors. If the
merger is not completed, we may not have adequate financial resources to
regain lost market position or opportunities.
If we lose key employees or customers our business and results of
operations could be adversely affected.
IF WE DO NOT COMPLETE THE MERGER WITH EFI AND WERE TO PURSUE A SIMILAR
TRANSACTION WITH ANOTHER PARTY, THE VALUE OF THE CONSIDERATION RECEIVED IN THE
ALTERNATIVE TRANSACTION MAY BE MORE OR LESS THAN $2.60 PER SHARE.
Creo offered, before it withdrew from the bidding process, to acquire the
55.6% of our common stock that it did not own for prices ranging from $1.30 per
share to $4.00 per share. If we do not complete the merger with EFI, we would
likely seek to complete a similar transaction with a third party. We cannot
assure you that any third party would be willing to complete a transaction with
us or, if a third party were willing to complete a transaction, that the
consideration would be more or less than $2.60 per share.
Our stock price would decline to the extent that the price of our stock
before an announcement that the merger with EFI is terminated reflects an
assumption that the merger will, in fact, be completed.
15
THE NUMBER OF SHARES OF EFI COMMON STOCK ISSUED TO YOU IN CONNECTION WITH
THE MERGER, IF YOU ELECT TO RECEIVE STOCK CONSIDERATION, WILL FLUCTUATE BASED
UPON THE VALUE OF EFI'S COMMON STOCK BEFORE THE COMPLETION OF THE MERGER.
If you elect to receive shares of EFI common stock in connection with the
merger, the exact number of shares of EFI common stock into which your shares of
our common stock will be converted is determined by the average value of EFI's
common stock over a 10-day trading period ending on the fifth trading day before
our special meeting. The average value of EFI's common stock over the 10-day
trading period may be higher or lower than the price as of today's date or as of
the date of the special meeting. The price of EFI's common stock could change
for a variety of reasons, including changes in the business, operations or
prospects of EFI and its subsidiaries; the assessment of, and reaction to, the
merger by the market; general economic conditions; and other factors. There is
no guarantee that the EFI common stock that will be issued to you in exchange
for your shares of our common stock will equal or exceed the market value of
your shares of our common stock on the date on which the merger was announced,
the date of the special meeting, the date of the closing of the merger or at any
other particular time. You are urged to obtain current stock price quotations
for both the EFI common stock and our common stock.
EACH OF OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE INTERESTS IN THE MERGER
THAT MAY DIFFER FROM YOUR INTERESTS IN THE MERGER. THESE DIFFERENT INTERESTS
COULD INFLUENCE OUR OFFICERS AND DIRECTORS TO SUPPORT THE MERGER EVEN THOUGH THE
MERGER MAY NOT BE IN YOUR BEST INTERESTS.
When you consider the recommendation of our board of directors to adopt the
merger agreement, you should remember that each of our executive officers and
directors participate in arrangements that provide them with interests in the
merger that are different from, or are in addition to, your interests in the
merger. These interests include the right of Marc Olin, our chairman and chief
executive officer, and Joseph Whang, our chief financial officer and chief
operating officer, to receive retention bonuses upon completion of the merger.
In addition, each of our executive officers has the right to accelerated vesting
of stock options. None of our executive officers is a member of the special
committee that recommended the merger to our board of directors or acted to
influence the outcome of that decision to proceed with the transaction, other
than actions they have taken in fulfilling their duties as executive officers.
Additionally, under the merger agreement our directors and officers are entitled
to indemnification and insurance coverage for acts or omissions occurring before
the merger is completed. All of the members of our board of directors who are
not employees of Creo, including Marc Olin, our chairman and chief executive
officer, recommend that you vote to adopt the merger agreement. You should
consider carefully whether these interests might have influenced our directors
and executive officers to support and recommend the merger and decide for
yourself whether the merger is in your best interests.
THE MERGER WILL NOT QUALIFY AS A TAX-FREE REORGANIZATION, AND THE MERGER
CONSIDERATION WILL BE TAXABLE TO YOU.
The merger will not qualify as a tax-free reorganization under the Internal
Revenue Code, and the cash or the shares of EFI common stock you receive would
result in gain or loss to you to the extent amounts you receive differ from your
tax basis in your shares of our common stock. Any gain or loss will be income
reportable for United States federal income tax purposes. If the fair market
value of the shares of EFI common stock you receive in connection with the
merger exceeds your tax basis in your shares of our common stock, you would have
to report a gain for federal income tax purposes. In connection with the merger,
unless you elect to receive cash for some of your shares of our common stock,
you would not receive cash to satisfy any tax obligation you incur with respect
to that gain.
EFI COULD EXPERIENCE DIFFICULTY INTEGRATING OUR BUSINESS AND ACHIEVING THE
BENEFITS ANTICIPATED IN THE MERGER.
There are a number of risks and challenges involved with integrating our
business and operations with EFI's businesses, each of which could be difficult
to overcome. These risks and challenges include:
- Retaining key employees;
16
- retaining our customer base; and
- integrating EFI's and our respective products, operations, procedures and
systems.
Current and potential employees of ours and of the surviving corporation in
the merger may be unsure about their role following the merger. Other current or
potential employees could decide that they do not wish to work for a subsidiary
of EFI following completion of the merger. The combination of these two factors
could impair EFI's and our ability to attract and retain key employees. EFI has
limited experience selling products into the commercial printing market. Our
products are currently interfaced with Creo's products for commercial printers.
It is possible that Creo will compete with our enterprise resource planning
solutions or change its product interfaces so that our solutions are not as
valuable to a number of customers in target commercial printing markets. Because
of these and other challenges, it is possible that the merger may not achieve
the desired benefits and synergies anticipated by the parties and the market
price of EFI's common stock could decline.
WE MAY BECOME OBLIGATED TO PAY A FEE TO EFI.
In the merger agreement, subject to several exceptions, we agreed that we
will not pursue transactions similar to the merger, including other mergers,
sales of assets, sales of capital stock or other business combinations, with any
third party. If we rely upon one of the exceptions to this obligation and pursue
a superior proposal, we must pay EFI a termination fee of $828,000, whether or
not the alternative transaction is ultimately completed. If our stockholders do
not approve the merger and within 12 months we enter into an agreement for or
complete a similar transaction for consideration equal to or greater than that
offered by EFI, we must pay EFI a termination fee of $828,000. If the merger is
terminated, and if our board of directors seeks to engage in a similar
transaction with a different party, that party may not complete the alternative
transaction. In addition, if we enter into an agreement with another party for a
transaction similar to the merger, EFI can require us to repurchase the shares
of common stock purchased by EFI upon exercise of the option that we granted to
EFI.
THE PRICE OF EFI'S COMMON STOCK IS AFFECTED BY FACTORS DIFFERENT FROM THE
FACTORS THAT AFFECT THE PRICE OF OUR COMMON STOCK.
If you elect to receive shares of EFI common stock you will become subject
to the risks of being an EFI stockholder. EFI's business is much broader than
our business. As a result, EFI's results of operations and the price of its
common stock may be affected by factors that did not affect our operations and
the trading price of our common stock. You should carefully read the documents
incorporated by reference by EFI to understand EFI's business and many of the
risks it faces. See "Some Documents Are 'Incorporated By Reference'."
RISKS RELATED TO PRINTCAFE'S BUSINESS
OUR LIMITED OPERATING HISTORY AS A COMBINED ENTITY MAKES IT DIFFICULT TO
EVALUATE OUR BUSINESS AND OUR PROSPECTS.
We completed six acquisitions between October 1999 and April 2000. Our
limited operating history as a combined entity makes an evaluation of our
current business and prospects difficult. Due to our limited operating history
as a combined entity, we believe that period-to-period comparisons of our
revenue and results of operations are not meaningful. As a result, you should
not rely on results of operations for any prior period as an indication of
future performance.
THE SLOWDOWN IN THE ECONOMY HAS AFFECTED THE MARKET FOR INFORMATION
TECHNOLOGY SOLUTIONS, INCLUDING DEMAND FOR OUR SOFTWARE PRODUCTS, AND OUR FUTURE
FINANCIAL RESULTS MAY DEPEND, IN PART, UPON WHETHER THIS SLOWDOWN CONTINUES.
A downturn in the demand for information technology products among our
current and potential customers may result in decreased revenues or a lower
growth rate for us. Potential customers may delay or forego the purchase of our
products or may demand lower prices in order to purchase our products. A
17
reduction in the demand for our software products or in the average selling
price of our products would reduce our operating margins and adversely affect
our operating results.
IF OUR SOFTWARE PRODUCTS DO NOT ACHIEVE BROAD MARKET ACCEPTANCE, WE MAY NOT
BECOME PROFITABLE AND OUR STOCK PRICE COULD DECLINE.
Most print buyers, printers, and print industry raw material suppliers
currently coordinate the design, specification, purchasing, and manufacture of
print orders either through a combination of telephone, facsimile, e-mail, and
paperwork or through proprietary software solutions. Web-based products are
relatively new and rapidly evolving, and these products change the way in which
print buyers, printers, and print industry raw material suppliers interact with
one another. Widespread commercial acceptance of our Web-based products is
important to our future success. If the market for Web-based print management
products fails to grow or grows more slowly than we anticipate, then our
operating results could be adversely affected. To date, most of our sales have
been to printers, and our future growth is dependent upon our ability to
increase sales to print buyers. The growth of our business also depends on our
ability to enhance and develop our software products and to identify and develop
new products that serve the needs of our customers. If our existing and
potential customers do not adopt our software products, we may be unable to
continue to grow our business and increase our revenues. As a result, we may not
become profitable, or maintain profitability, and our stock price could decline.
THE SALES CYCLE FOR MANY OF OUR PRODUCTS IS LONG, WHICH COULD CAUSE OUR
REVENUE AND OPERATING RESULTS TO VARY SIGNIFICANTLY AND INCREASE THE RISK OF AN
OPERATING LOSS FOR ANY GIVEN FISCAL QUARTER.
A customer's decision to purchase and implement many of our products often
involves a significant commitment of its resources and a lengthy product
evaluation and qualification process. Approval at a number of management levels
within a customer's organization is typical for many of our products. Companies
often consider a wide range of issues before committing to purchase our
software, including anticipated benefits and cost savings, ease of installation,
ability to work with existing computer systems, functionality, and reliability.
Many of our potential customers may be addressing these issues for the first
time, and the use of our products may represent a significant change in their
current print management practices. As a result, we often devote significant
time and resources to educate potential customers about the use and benefits of
our products. The sales process for most of our products frequently takes
several months to complete, which may have an adverse impact on the timing of
our revenue, and our operating results could be adversely affected.
COMPETITION IN THE PRINTING INDUSTRY SUPPLY CHAIN FOR SOFTWARE PRODUCTS IS
INTENSE, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
Our current and potential competitors include companies that offer software
products and services to the printing industry supply chain, and companies that
offer software products for enterprise resource planning, supply chain
management, and procurement that are not customized for the printing industry.
We expect competition to increase in the future. Some of our current or
potential competitors have longer operating histories, larger customer bases,
greater brand recognition, and significantly greater financial, marketing, and
other resources. As a result, these competitors may be able to devote greater
resources to the development, promotion, sale, and support of their products. In
addition, these companies may adopt aggressive pricing policies and leverage
their customer bases to gain market share. Moreover, our current and potential
competitors may develop software products that are superior to or achieve
greater market acceptance than ours. If we are unable to offer competitive
software products and services, then our revenues will decline.
UNPLANNED SYSTEM INTERRUPTIONS, CAPACITY CONSTRAINTS, OR SECURITY BREACHES
COULD DISRUPT OUR BUSINESS AND DAMAGE OUR REPUTATION.
We must offer customers of our Web-based products reliable, secure, and
continuous service to attract and retain customers and persuade them to increase
their reliance on our software products. As the volume of data traffic on our
hosted Web sites increases, we must continually upgrade and enhance our
technical infrastructure to accommodate the increased demands placed on our
systems. Our operations also depend
18
in part on our ability to protect our systems against physical damage from fire,
earthquakes, power loss, telecommunications failures, computer viruses,
unauthorized user access, physical break-ins, and similar events. Any
interruption or increase in response time of our software products could damage
our reputation, reduce customer satisfaction, and decrease usage of our services
and the purchase of our products. The secure transmission of confidential
information over public networks is a fundamental requirement for online
communications and transactions. Third parties may attempt to breach our
security or that of our customers. Any breach in our online security could make
us liable to our customers, damage our reputation, and cause a decline in our
revenues. We may need to spend significant resources to license technologies to
protect against security breaches or to address problems caused by a security
breach.
IF OUR TECHNOLOGIES CONTAIN UNDETECTED ERRORS OR DEFECTS, WHICH INTERRUPT
OUR OPERATIONS OR THOSE OF OUR CUSTOMERS, OUR BUSINESS COULD BE HARMED.
Our technologies are highly technical and may contain undetected software
code or other errors or suffer unexpected failures. Because of their nature, our
client/server-based enterprise resource planning and other products can only be
fully tested when deployed in our customers' networks. These errors or failures
may disrupt our operations or those of our customers, damage our reputation, and
result in loss of, or delay in, market acceptance of our software products. We
may discover software errors in new releases of our software products after
their introduction. We may experience delays in release, legal action by our
customers, lost revenues, and customer frustration during the period required to
correct these errors. Any of these problems could adversely affect our operating
results.
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE
POSITION COULD BE HARMED.
We regard our patents, copyrights, service marks, trademarks, trade
secrets, and similar intellectual property as critical to our success. We rely
on patent, trademark, and copyright law, trade secret protection, and
confidentiality and/or license agreements with our employees, customers, and
strategic partners to protect our proprietary rights. These precautions may not
prevent misappropriation or infringement of our intellectual property. In
addition, the status of United States patent protection in the software and Web
industries is not well defined and will evolve as the United States Patent and
Trademark Office grants additional patents. We do not know if any of our future
patent applications will result in a patent being issued within the scope of the
claims we seek, if at all, or whether any patents we may receive will be
challenged or invalidated. In addition, the laws in foreign countries may not
protect our proprietary rights to the same extent as laws in the United States.
WE MAY FACE INTELLECTUAL PROPERTY CLAIMS THAT COULD BE COSTLY TO DEFEND AND
COULD PREVENT US FROM SELLING OUR SOFTWARE PRODUCTS
Third parties may infringe or misappropriate our intellectual property or
assert infringement claims against us. In addition, because the contents of
patent applications in the United States are not publicly disclosed until the
patent is issued, applications may have been filed by others that relate to our
software products. From time to time we receive communications from third
parties asserting that our products infringe, or may infringe, the intellectual
property rights of third parties. Intellectual property litigation is expensive
and time consuming and could divert management's attention from our business
operations. This litigation could also require us to develop non-infringing
technology or enter into royalty or license agreements with third parties. These
royalty or license agreements, if required, may not then be available on
acceptable terms, if at all. If we cannot develop or license non-infringing
technology, then our operating results could be adversely affected.
CREO COULD SUBSTANTIALLY INFLUENCE CORPORATE ACTIONS THAT CONFLICT WITH THE
INTERESTS OF OUR PUBLIC STOCKHOLDERS. WE ALSO HAVE COMMERCIAL AGREEMENTS WITH
CREO THAT ARE IMPORTANT TO OUR BUSINESS.
Creo Inc. is our largest stockholder, has two representatives on our board
of directors, and is a party to several commercial agreements with us. Creo
beneficially owns 4,717,547 shares of our common stock which represents 36.6% of
the voting power of our outstanding common stock. In addition, two members of
our board of directors, Amos Michelson and Judi Hess, are executive officers of
Creo. Creo could use
19
its stock ownership or representation on our board of directors to substantially
influence corporate actions that conflict with the interests of our public
stockholders.
In addition to the loan agreement we have with Iris Graphics, an affiliate
of Creo, we have a strategic alliance agreement and a software license agreement
with Creo. Under the strategic alliance agreement, we agreed with Creo to
undertake joint sales and marketing efforts, not to compete with each other's
business, and not to solicit the employment of each other's employees. In
addition, we granted Creo an exclusive and perpetual right to provide, and a
right of first refusal to develop, any content management and workflow products
for us. Because we have granted these rights to Creo, we may not be able to
obtain terms as favorable as those that might otherwise be available if we were
able to negotiate freely with third parties. Under the software license
agreement, Creo licenses us software which is used in our printChannel Classic
product and which will be used in our printChannel I/O product. Creo may
terminate the software license agreement in certain circumstances, including the
termination of the strategic alliance agreement and the acquisition by a third
party of more than fifty percent of our outstanding common stock. The strategic
alliance agreement does not specify a termination date. Creo may also terminate
the strategic alliance agreement or the software license agreement if we breach
any provision of the agreements and do not remedy that breach within a specified
period of time. If the agreements were to terminate, we could lose access to
Creo's sales force and the other benefits derived from our joint marketing
efforts, and Creo would be permitted to compete with us. Additionally, we would
be required to develop software to replace the functionality licensed to us by
Creo in our printChannel Classic product. The termination of the strategic
alliance agreement and software license agreements and the resulting loss of
these benefits could, among other things, reduce our revenues and significantly
harm our business.
IF OUR SOFTWARE PRODUCTS DO NOT INTEGRATE WITH OUR CUSTOMERS' EXISTING
SYSTEMS, ORDERS FOR OUR SOFTWARE PRODUCTS WILL BE DELAYED OR CANCELED, WHICH
WOULD HARM OUR BUSINESS.
Many of our customers require that our software products be designed to
integrate with their existing systems. We may be required to modify our software
product designs to achieve a sale, which may result in a longer sales cycle,
reduced operating margins, and increased research and development expense. In
some cases, we may be unable to adapt or enhance our software products to meet
these challenges in a timely and cost-effective manner, or at all. If our
software products do not integrate with our customers' existing systems,
implementations could be delayed or orders for our software products could be
canceled, which would harm our business, financial condition, and results of
operations.
IF WE FAIL TO DEVELOP AND SELL NEW PRODUCTS THAT MEET THE EVOLVING NEEDS OF
OUR CUSTOMERS, OR IF OUR NEW PRODUCTS FAIL TO ACHIEVE MARKET ACCEPTANCE, OUR
BUSINESS AND RESULTS OF OPERATIONS WOULD BE HARMED.
Our success depends on our ability to anticipate our customers' evolving
needs and to develop and market products that address those needs. The timely
development of these products, as well as any additional new or enhanced
products, is a complex and uncertain process. We may experience design,
marketing, and other difficulties that could delay or prevent our development,
introduction, or marketing of these and other new products and enhancements. We
may not have sufficient resources to anticipate technological and market trends,
or to manage long development cycles. The introduction of new or enhanced
products also requires that we manage the transition from existing products to
these new or enhanced products in order to minimize disruption in customer
ordering patterns. We are currently in the process of developing software for
print industry raw material suppliers. If we are unable to attract raw material
suppliers as customers, then our Web-based products may not be as attractive to
printers and print buyers and our business may be harmed. If we are not able to
develop new products or enhancements to existing products on a timely and
cost-effective basis, or if our new products or enhancements fail to achieve
market acceptance, our ability to continue to sell our products and grow our
business would be harmed.
20
RISKS RELATED TO EFI
RISKS RELATED TO EFI'S BUSINESS
EFI RELIES ON SALES TO A RELATIVELY SMALL NUMBER OF OEM PARTNERS, AND THE
LOSS OF ANY OF THESE PARTNERS COULD SUBSTANTIALLY DECREASE EFI'S REVENUES.
Because EFI sells its products primarily to OEM partners, EFI relies on
high sales volumes to a relatively small number of customers. Sales to Canon,
Xerox and Minolta accounted for approximately 29%, 28% and 10%, respectively, of
EFI's 2002 revenue. EFI expects that it will continue to depend on these OEM
partners for a significant portion of its revenues. If EFI loses an important
OEM or is unable to recruit additional OEMs, EFI's revenues may be materially
and adversely affected. EFI cannot assure you that its major customers will
continue to purchase its products at current levels or that they will continue
to purchase EFI's products at all. EFI's OEM partners may elect and have elected
in some cases to develop products on their own, rather than purchase EFI's
products. In addition, EFI's results of operations could be adversely affected
by a decline in demand for copiers or laser printers, other factors affecting
its major customers, in particular, or the computer industry in general. Several
of EFI's customers have in the past experienced serious financial difficulties
in their business. If any significant customers should face such difficulties in
the future, EFI's profitability could be materially and adversely affected
through, among other things, decreased sales volumes and write-offs of accounts
receivables and inventory related to that customer's products.
EFI relies upon its OEM partners to develop new products, applications and
product enhancements in a timely and cost-effective manner. EFI's continued
success depends upon the ability of these OEMs to meet changing customer needs
and respond to emerging industry standards and other technological changes.
However, EFI cannot assure you that its OEMs will effectively meet these
technological changes. These OEMs, who are not within EFI's control, have
incorporated into their products the technologies of other companies in addition
to, or instead of EFI's products and may continue to do so in the future. These
OEMs may introduce and support products that are not compatible with EFI's
products. EFI relies on these OEMs to market its products with their products,
and if these OEMs do not effectively market EFI's products, EFI's sales revenue
may be materially and adversely affected. With the exception of a small number
of minimum purchase obligations, these OEMs are not obligated to purchase
products from EFI. EFI cannot assure you that its OEMs will continue to carry
its products.
EFI's OEMs work closely with EFI to develop products that are specific to
each OEM's copiers and printers. Many of the products that EFI is developing
require that EFI coordinate development, quality testing, marketing and other
tasks with its OEMs. EFI cannot control its OEMs' development efforts and
coordinating with OEMs may cause delays that EFI cannot manage by itself. In
addition, EFI's sales revenue and results of operations may be adversely
affected if it cannot meet its OEMs' product needs for their specific copiers
and printers, as well as successfully manage the additional engineering and
support effort and other risks associated with such a wide range of products.
EFI is pursuing, and will continue to pursue, the business of additional
copier and printer OEMs. However, because there are a limited number of OEMs
producing copiers and printers in sufficient volume to be attractive customers
for EFI, EFI expects that customer concentration will continue to be a risk.
EFI establishes expenditure levels for operating expenses based on
projected sales levels and margins, and expenses are relatively fixed in the
short term. Accordingly, if sales to EFI's OEM customers are below expectations
in any given quarter, the adverse impact of the shortfall in revenues on
operating results may be increased by EFI's inability to adjust spending in the
short term to compensate for this shortfall.
EFI FACES THE RISK OF DECREASED REVENUE AS A RESULT OF ONGOING ECONOMIC
UNCERTAINTY.
The revenue growth and profitability of EFI's business depends
significantly on the overall demand for information technology products such as
EFI's that enable printing of digital data. Softening demand for these products
caused by ongoing economic uncertainty and reduced spending in the United States
and
21
other regions where EFI conducts business has resulted, and may further result,
in decreased revenues, earnings levels or growth rates or inventory write downs.
The United States and global economy, and particularly the markets for EFI's
products have weakened substantially over the past two years and market
conditions continue to be challenging. This has resulted in individuals and
companies delaying or reducing expenditures, including information technology
expenditures. Further delays or reductions in information technology spending
may have a material adverse effect on demand for EFI's products and services,
and consequently on its business, operating results, financial condition,
prospects and stock price.
EFI'S OPERATING RESULTS MAY FLUCTUATE BASED UPON MANY FACTORS, WHICH COULD
ADVERSELY AFFECT ITS STOCK PRICE.
EFI expects its stock price to vary with its operating results and,
consequently, fluctuations in its results could adversely affect its stock
price. Operating results may fluctuate due to:
- Varying demand for EFI's products;
- success and timing of new product introductions;
- changes in interest rates and availability of bank or financing credit to
consumers of digital copiers and printers;
- price reductions by EFI and its competitors;
- delay, cancellation or rescheduling of orders or projects;
- product performance;
- availability of key components, including possible delays in deliveries
from suppliers;
- the status of EFI's relationships with its OEM partners;
- the performance of third-party manufacturers;
- the status of EFI relationships with its key suppliers;
- the financial and operational condition of OEM partners and key
suppliers;
- potential excess or shortage of employees;
- competition from OEMs;
- changes in product mix;
- costs associated with complying with any applicable governmental
regulations;
- volatility in foreign exchange rates;
- acquisitions and integration of new businesses; and
- general economic conditions.
Many of EFI's products, and the related copiers and printers, are purchased
utilizing lease contracts or bank financing. If prospective purchasers of
digital copiers and printers are unable to obtain credit, or interest rate
changes make credit terms undesirable, then demand for digital copiers and
printers may be significantly reduced, which may adversely impact EFI's revenues
and operating results.
Typically EFI does not have long-term volume purchase contracts with its
customers, and a substantial portion of its backlog is scheduled for delivery
within 90 days or less. EFI's customers may cancel orders and change volume
levels or delivery times for product they have ordered from EFI without penalty.
However, a significant portion of EFI's operating expenses are fixed in advance,
and EFI plans these expenditures based on the sales forecasts from OEM customers
and product development programs. If EFI was unable to adjust its operating
expenses in response to a shortfall in sales, EFI's quarterly financial results
could be harmed.
22
EFI attempts to hire additional employees to match growth in projected
demand for its products. If actual demand is lower than EFI's projections, as
has occurred in the recent past, EFI likely will have hired too many employees
and will therefore incur expenses that need not have been incurred and EFI's
financial results may be harmed. If demand exceeds EFI's projections, EFI likely
will have hired too few employees and may not be able to meet demand for its
products and EFI's sales revenue may be adversely impacted and relationships
with customers may be harmed. Projecting demand is difficult in EFI's business
and no assurances can be provided that EFI will accurately project demand. If
EFI cannot successfully manage its growth, its results of operations may be
harmed.
EFI FACES COMPETITION FROM OTHER SUPPLIERS AS WELL AS ITS OWN OEM
CUSTOMERS, AND IF IT IS NOT ABLE TO COMPETE SUCCESSFULLY ITS BUSINESS MAY BE
HARMED.
EFI's industry is highly competitive and is characterized by rapid
technological changes. EFI competes against a number of other suppliers of
imaging products. EFI cannot assure you that products or technologies developed
by competing suppliers will not render EFI's products or technologies obsolete
or noncompetitive.
While many of EFI's OEMs sell EFI's products on an exclusive basis, EFI
does not have any formal agreements that prevent the OEMs from offering
alternative products. If an OEM offers products from alternative suppliers,
EFI's market share could decrease, which could reduce its revenue and adversely
affect its financial results.
Many of EFI's OEM partners themselves internally develop and sell products
that compete directly with EFI's current products. These OEMs may be able to
develop more quickly than EFI can products that are compatible with the OEM's
own products. These OEMs have chosen and may continue to chose to market their
own products in addition to EFI's products, even when their products are
technologically inferior, have lower performance or cost more than EFI's
products. EFI cannot assure you that it will be able to successfully compete
against similar products developed internally by the OEMs or against their
financial and other resources, particularly in the black and white and embedded
color product markets. If EFI cannot compete successfully against the OEMs'
internally developed products, its business may be harmed.
IF THE DEMAND FOR PRODUCTS THAT ENABLE COLOR PRINTING OF DIGITAL DATA
CONTINUES TO DECREASE, EFI'S SALES REVENUE WILL LIKELY DECREASE.
EFI's products are primarily targeted at enabling the printing of digital
data. Demand for networked printers and copiers containing EFI's technology
decreased in both 2001 and 2002 due to the global economic downturn. EFI cannot
assure you that demand will level off or increase in the future, nor can EFI
assure you that the demand will level off or increase for the specific OEM
printers and copiers that utilize its products. If demand for digital printing
products and services containing EFI's technology continues to decline, or if
the demand for EFI's OEMs' specific printers or copiers for which its products
are designed should continue to decline, EFI's sales revenue will be adversely
affected. EFI sells products that are large capital expenditures as well as
discretionary purchase items for its customers. In difficult economic times,
such as EFI is now experiencing, spending on information technology typically
decreases. As EFI products are of a more discretionary nature than many other
technology products, EFI may be more adversely impacted by deteriorating general
economic conditions than other technology firms. EFI is subject to economic
sensitivity that has harmed and could, in the future, harm its results of
operations. EFI believes that demand for its products may also be affected by a
variety of economic conditions and considerations, and EFI cannot assure you
that demand for its products or its customers' products will continue or improve
from current levels.
IF EFI IS NOT ABLE TO HIRE AND RETAIN SKILLED EMPLOYEES, EFI MAY NOT BE
ABLE TO DEVELOP PRODUCTS OR MEET DEMAND FOR ITS PRODUCTS IN A TIMELY FASHION.
EFI depends upon skilled employees, such as software and hardware
engineers, quality assurance engineers and other technical professionals with
specialized skills. EFI is headquartered in the Silicon Valley where competition
has historically been intense among companies to hire engineering and technical
23
professionals. In times of professional labor imbalances, it may be difficult
for EFI to locate and hire qualified engineers and technical professionals and
for EFI to retain these people. There are many technology companies located near
EFI's corporate offices in the Silicon Valley that may try to hire EFI's
employees. The movement of EFI's stock price may also impact its ability to hire
and retain employees. If EFI does not offer competitive compensation, EFI may
not be able to recruit or retain employees. EFI offers a broad-based equity
compensation plan based on granting options from stockholder-approved plans in
order to be competitive in the labor market. If stockholders do not approve
additional shares for these plans for future grants, it may be difficult for EFI
to hire and retain skilled employees. If EFI cannot successfully hire and retain
employees, EFI may not be able to develop products or to meet demand for its
products in a timely fashion and its results of operations may be adversely
impacted.
IF EFI IS UNABLE TO DEVELOP NEW PRODUCTS, OR EXECUTE PRODUCT INTRODUCTIONS
ON A TIMELY BASIS, ITS FUTURE REVENUE AND OPERATING RESULTS MAY BE HARMED.
EFI's operating results depend to a significant extent on its continual
improvement of existing technologies and its rapid innovation of new products
and technologies. EFI's success depends not only on its ability to predict
future requirements, but also to develop and introduce new products that
successfully address customer needs. Any delays in the launch or availability of
new products that EFI is planning could harm its financial results. During
transitions from existing products to new products, customers may delay or
cancel orders for existing products. EFI's results of operations may be
adversely affected if it cannot successfully manage product transitions or
provide adequate availability of products after they have been introduced.
EFI must continue to make significant investments in research and
development in order to enhance performance and functionality of its products,
including product lines different than its Fiery, Splash and EDOX servers and
embedded controllers. EFI cannot assure you that it will successfully identify
new product opportunities, develop and introduce new products to market in a
timely manner, or achieve market acceptance of its products. Also, when EFI
decides to develop new products, its research and development expenses generally
increase in the short term without a corresponding increase in revenue. Finally,
EFI cannot assure you that products and technologies developed by its customers
and others will not render EFI's products or technologies obsolete or
noncompetitive.
IF EFI ENTERS NEW MARKETS OR DISTRIBUTION CHANNELS THIS COULD RESULT IN
HIGHER OPERATING EXPENSES THAT MAY NOT BE OFFSET BY INCREASED REVENUE.
EFI continues to explore opportunities to develop product lines different
from its current servers and embedded controllers, such as EFI's Graphics Arts
software package, Velocity software products, eBeam, PrintMe Networks and
Unimobile, among others. EFI expects to continue to invest funds to develop new
distribution and marketing channels for these and additional new products and
services, which will increase its operating expenses. EFI does do not know if it
will be successful in developing these channels or whether the market will
accept any of EFI's new products or services or if EFI will generate sufficient
revenues from these activities to offset the additional operating expenses it
incurs. In addition, even if EFI is able to introduce new products or services,
the lack of marketplace acceptability of these new products or services may
adversely impact EFI's operating results.
EFI LICENSES SOFTWARE USED IN MOST OF ITS PRODUCTS FROM ADOBE SYSTEMS
INCORPORATED, AND THE LOSS OF THIS LICENSE WOULD PREVENT EFI FROM SHIPPING THESE
PRODUCTS.
Under EFI's license agreements with Adobe, EFI is required to obtain a
separate license for each type of copier or printer used with a Fiery Server or
Controller from Adobe for the right to use Adobe PostScript(TM) software in its
products. EFI has successfully obtained licenses to use Adobe's PostScript(TM)
software for its products, where required. EFI cannot assure you that Adobe will
continue to grant future licenses to Adobe PostScript(TM) software on reasonable
terms, in a timely manner, or at all. In addition, EFI cannot assure you that
Adobe will continue to give us the quality assurance approvals that EFI is
required to obtain from Adobe for the Adobe licenses. If Adobe does not grant
EFI those licenses or approvals, if the Adobe license agreements are terminated,
or if EFI's relationship with Adobe is otherwise
24
materially impaired, EFI would be unable to sell products that incorporate Adobe
PostScript(TM) software, and EFI's financial condition and results of operations
would be materially and adversely affected. In some products EFI has introduced
substitute software developed internally that does not require any license from
Adobe. The costs to continue to develop software internally could increase EFI's
research and development expenditures and EFI may not be able to recapture those
costs in increased sales. While EFI plans on expanding the number of products
using internally developed software, there can be no assurance that these
products will be accepted in the market.
EFI DEPENDS ON A LIMITED GROUP OF SUPPLIERS FOR KEY COMPONENTS IN ITS
PRODUCTS.
Components necessary for the manufacture of EFI products are obtained from
a sole supplier or a limited group of suppliers. These include processors from
Intel and other related semiconductor components. EFI does not maintain
long-term agreements with any of its suppliers of components. Because the
purchase of key components involves long lead times, in the event of
unanticipated volatility in demand for EFI's products, EFI could be unable to
manufacture certain products in a quantity sufficient to meet end user demand,
or it may hold excess quantities of inventory. EFI maintains an inventory of
components for which it is dependent upon sole or limited source suppliers and
components with prices that fluctuate significantly. As a result, EFI is subject
to a risk of inventory obsolescence, which could adversely affect its operating
results and financial condition. Additionally, the market prices and
availability of components, particularly memory, and Intel designed components,
which collectively represent a substantial portion of the total manufactured
cost of EFI's products, have fluctuated significantly in the past. Fluctuations
in the future could have a material adverse effect on EFI's operating results
and financial condition including a reduction in gross margins.
EFI IS DEPENDENT ON SUBCONTRACTORS TO MANUFACTURE AND DELIVER PRODUCTS TO
ITS CUSTOMERS.
EFI subcontracts with other companies to manufacture its products. EFI
relies on the ability of its subcontractors to produce products to be sold to
customers, and while EFI closely monitors its subcontractors performance, EFI
cannot assure you that its subcontractors will continue to manufacture EFI's
products in a timely and effective manner. The weakened economy has led to the
dissolution, bankruptcies and consolidations of some of the subcontractors who
are able to manufacture EFI's products, decreasing the available number of
subcontractors. If the available number of subcontractors continues to decrease,
it is possible that EFI will not be able to secure appropriate subcontractors to
fulfill its demand in a timely manner or at all, particularly if demand for
EFI's products increases, or if EFI loses one or more of its current
subcontractors. Fewer subcontractors may reduce EFI's negotiating leverage
regarding product costs. Difficulties experienced by EFI's subcontractors,
including financial problems, and the inability to make or ship products or fix
quality assurance problems, could harm EFI's business, operating results and
financial condition. If EFI decides to change subcontractors, EFI could
experience delays in setting up new subcontractors which would result in delay
in delivery of products. EFI has a high concentration of its products
manufactured at a single subcontractor location, Sanmina-SCI in Colorado. Should
Sanmina-SCI experience any inability to manufacture or deliver product from this
location EFI's business, financial condition and operations could be harmed.
SEASONAL PURCHASING PATTERNS OF EFI'S OEM CUSTOMERS HAVE HISTORICALLY
CAUSED LOWER FOURTH QUARTER REVENUE, WHICH MAY NEGATIVELY IMPACT EFI'S RESULTS
OF OPERATIONS.
EFI's results of operations have typically followed a seasonal pattern
reflecting the buying patterns of its large OEM customers. In the past, EFI's
fiscal fourth quarter (the quarter ending December 31) results have been
adversely affected because some or all of its OEM customers wanted to decrease,
or otherwise delay, fourth quarter orders. This impact has been increasingly
mitigated, as EFI's OEM customers have lowered channel inventories throughout
the year pushing this effect into the first quarter when its OEM partners
typically have lower sales. In addition, the first fiscal quarter traditionally
has been
25
a weaker quarter because EFI's OEM partners focus on training their sales forces
and have reduced sales to their customers. The primary reasons for this seasonal
pattern are:
- EFI's OEM partners have historically sought to minimize year-end
inventory investment (including the reduction in demand following
introductory "channel fill" purchases);
- the timing of new product releases and training by EFI's OEM partners;
and
- a number of EFI's OEM partners typically achieve their yearly sales
targets before year end and consequently delay further purchases into the
next fiscal year (EFI does not know when its partners reach these sales
targets as they generally do not disclose them to EFI).
As a result of these factors, EFI believes that period to period
comparisons of its operating results are not meaningful, and you should not rely
on such comparisons to predict EFI's future performance. EFI anticipates that
future operating results may fluctuate significantly due to the continuation or
changes in this seasonal demand pattern.
ACQUISITIONS EFI MAY MAKE INVOLVE NUMEROUS RISKS.
EFI seeks to develop new technologies and products from both internal and
external sources. As part of this effort, EFI has in the past made, and will
likely continue to make, acquisitions of other companies or other companies'
assets. Acquisitions involve numerous risks, such as:
- difficulties in integration of operations, technologies, or products;
- risks of entering markets in which EFI has little or no prior experience,
or entering markets where competitors have stronger market positions;
- possible write-downs of impaired assets;
- potential loss of key employees of the acquired company;
- possible expense overruns;
- adverse reaction by customers, suppliers or partners of the acquired
company or EFI;
- risk of changes in ratings by stock analysts;
- potential litigation surrounding transactions;
- inability to protect or secure technology rights; and
- increase in operating costs.
Mergers and acquisitions of companies are inherently risky, and EFI cannot
assure you that its previous or future acquisitions will be successful and will
not harm its business, operating results, financial condition, or stock price.
There can be no assurance that the merger will be consummated, or if
consummated, will prove to be successful.
EFI FACES RISKS FROM ITS INTERNATIONAL OPERATIONS AND FROM CURRENCY
FLUCTUATIONS.
Approximately 50% and 46% of EFI's revenue from the sale of products for
the three-month periods ended March 31, 2003 and 2002, respectively, came from
sales outside North America, primarily to Europe and Japan. EFI expects that
sales to international destinations will continue to be a significant portion of
its total revenue. EFI is subject to risks because of its international
operations. These risks include the regulatory requirements of foreign
governments which may apply to EFI's products, as well as requirements for
export licenses which may be required for the export of technologies. The
necessary export licenses may be delayed or difficult to obtain, which could
cause a delay in EFI's international sales and hurt its product revenue. Other
risks include trade protection measures, natural disasters, and political or
economic conditions in a specific country or region.
26
Given the significance of EFI's non-U.S. sales to its total product
revenue, EFI faces a continuing risk from the fluctuation of the U.S. dollar
versus the Japanese yen, the Euro and other major European currencies, and
numerous Southeast Asian currencies. EFI typically invoices its customers in
U.S. dollars and this may result in its products becoming more expensive in the
local currency of customers, thereby reducing EFI's ability to sell its
products. When EFI invoices its customers in local currencies, EFI's cash flows
and earnings are exposed to fluctuations in interest rates and foreign currency
exchange rates between the currency of the invoice and the U.S. dollar. In
January 2003, EFI acquired Best GmbH, whose sales are principally denominated in
the Euro. Sales from this subsidiary increase EFI's exposure to currency
fluctuations. In the past, EFI has attempted to limit or hedge these exposures
through operational strategies and financial market instruments. EFI generally
used forward contracts to reduce its risk from interest rate and currency
fluctuations. EFI currently does not have a hedging program in place. EFI's
efforts to reduce the risk from its international operations and from
fluctuations in foreign currencies or interest rates may not be successful,
which could harm its financial condition and operating results.
EFI MAY BE UNABLE TO ADEQUATELY PROTECT ITS PROPRIETARY INFORMATION AND MAY
INCUR EXPENSES TO DEFEND ITS PROPRIETARY INFORMATION.
EFI relies on a combination of copyright, patent, trademark and trade
secret protection, nondisclosure agreements, and licensing and cross-licensing
arrangements to establish, maintain and protect its intellectual property
rights, all of which afford only limited protection. EFI has patent applications
pending in the United States and in various foreign countries. There can be no
assurance that patents will issue from these pending applications or from any
future applications, or that, if issued, any claims allowed will be sufficiently
broad to protect EFI's technology. Any failure to adequately protect its
proprietary information could harm EFI's financial condition and operating
results. EFI cannot be certain that any patents that may issue to EFI, or which
EFI licenses from third parties, or any other of its proprietary rights will not
be challenged, invalidated or circumvented. In addition, EFI cannot be certain
that any rights granted to it under any patents, licenses or other proprietary
rights will provide adequate protection of its proprietary information.
From time to time, litigation may be necessary to defend and enforce EFI's
proprietary rights. Litigation, whether or not concluded successfully for EFI,
could involve significant expense and the diversion of its management's
attention and other resources, which could harm its financial condition and
operating results.
EFI FACES RISKS FROM THIRD PARTY CLAIMS OF INFRINGEMENT AND POTENTIAL
LITIGATION.
Third parties have claimed in the past and may claim in the future that
EFI's products infringe, or may infringe, their proprietary rights. Such claims
could result in lengthy and expensive litigation. Such claims and any related
litigation, whether or not EFI is successful in the litigation, could result in
substantial costs and diversion of EFI's resources, which could harm its
financial condition and operating results. Although EFI may seek licenses from
third parties covering intellectual property that it is allegedly infringing,
EFI cannot assure you that any such licenses could be obtained on acceptable
terms, if at all.
EFI'S PRODUCTS MAY CONTAIN DEFECTS WHICH ARE NOT DISCOVERED UNTIL AFTER
SHIPPING.
EFI's products consist of hardware and software developed by EFI and
others. EFI's products may contain undetected errors and EFI has, in the past,
discovered software and hardware errors in its products after their
introduction. There can be no assurance that errors would not be found in new
versions of EFI's products after commencement of commercial shipments, or that
any such errors would not result in a loss or delay in market acceptance and
thus harm EFI's reputation and revenues. In addition, errors in EFI's products
(including errors in licensed third party software) detected prior to new
product releases could result in delays in the introduction of new products and
in EFI's incurring additional expense, which could harm its operating results.
27
THE LOCATION AND CONCENTRATION OF EFI'S FACILITIES SUBJECTS IT TO THE RISK
OF EARTHQUAKES, FLOODS OR OTHER NATURAL DISASTERS.
EFI's corporate headquarters, including most of its research and
development facilities and manufacturing operations, are located in the San
Francisco Bay Area, an area known for seismic activity. This area has also
experienced flooding in the past. In addition, many of the components necessary
to supply EFI's products are purchased from suppliers subject to risk from
natural disasters, based in areas including the San Francisco Bay Area, Taiwan,
and Japan. A significant natural disaster, such as an earthquake or a flood,
could harm EFI's business, financial condition, and operating results.
There is a risk that EFI's employees, suppliers, or customers, either
through travel or contact with other individuals, could become exposed to
contagious diseases such as severe acute respiratory syndrome. If a significant
number of employees, suppliers, or customers were unable to fulfill their
obligations, EFI's business, financial condition, and operating results could be
harmed.
THE VALUE OF EFI'S INVESTMENT PORTFOLIO WILL DECREASE IF INTEREST RATES
INCREASE.
EFI has an investment portfolio of mainly fixed income securities
classified as available-for-sale securities. As a result, EFI's investment
portfolio is subject to interest rate risk and will fall in value if market
interest rates increase. EFI attempts to limit this exposure to interest rate
risk by investing in securities with maturities of less than three years;
however, EFI may be unable to successfully limit its risk to interest rate
fluctuations and this may cause its investment portfolio to decrease in value.
EFI'S STOCK PRICE HAS BEEN VOLATILE HISTORICALLY AND MAY CONTINUE TO BE
VOLATILE.
The market price for EFI's common stock has been and may continue to be
volatile. For example, during the 52-week period ended March 31, 2003, the
closing prices of EFI's common stock as reported on the Nasdaq National Market
ranged from a high of $19.64 to a low of $13.50. EFI expects its stock price to
be subject to fluctuations as a result of a variety of factors, including
factors beyond EFI's control. These factors include:
- actual or anticipated variations in its quarterly operating results;
- announcements of technological innovations or new products or services by
EFI or its competitors;
- announcements relating to strategic relationships, acquisitions or
investments;
- changes in financial estimates or other statements by securities
analysts;
- changes in general economic conditions;
- terrorist attacks, and the effects of war;
- changes in the rating of EFI's debentures or other securities; and
- changes in the economic performance and/or market valuations of other
software and high-technology companies.
Because of this volatility, EFI may fail to meet the expectations of its
stockholders or of securities analysts at some time in the future, and the
trading prices of its securities could decline as a result. In addition, the
stock market has experienced significant price and volume fluctuations that have
particularly affected the trading prices of equity securities of many
high-technology companies. These fluctuations have often been unrelated or
disproportionate to the operating performance of these companies. Any negative
change in the public's perception of software or Internet software companies
could depress EFI's stock price regardless of its operating results.
EFI'S DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT ITS CASH FLOW.
While EFI's convertible debentures are outstanding, EFI will have debt
service obligations of approximately $3.0 million per year in interest payments.
If EFI issues other debt securities in the future, its debt service obligations
will increase. If EFI is unable to generate sufficient cash to meet these
28
obligations and must instead use its existing cash or investments, EFI may have
to reduce, curtail or terminate other activities of its business.
EFI intends to fulfill its debt service obligations from cash generated by
its operations, if any, and from its existing cash and investments. If
necessary, among other alternatives, EFI may add lease lines of credit to
finance capital expenditures and obtain other long-term debt, lines of credit
and mortgage financing.
EFI's indebtedness could have significant negative consequences to you. For
example, it could:
- increase EFI's vulnerability to general adverse economic and industry
conditions;
- limit EFI's ability to obtain additional financing;
- require the dedication of a substantial portion of any cash flow from
operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to fund
its growth strategy, working capital, capital expenditures and other
general corporate purposes;
- limit EFI's flexibility in planning for, or reacting to, changes in its
business and its industry; and
- place EFI at a competitive disadvantage relative to its competitors with
less debt.
29
BACKGROUND OF THE MERGER AND RELATED MATTERS
BACKGROUND AND REASONS FOR THE MERGER
Background of the Merger.
In November 2001, we and EFI had discussions with respect to a potential
business combination. No agreement with respect to a transaction arose out of
those discussions. From time to time thereafter, members of EFI's management
team and members of our management team had discussions. In December 2002, EFI
engaged counsel in anticipation of resuming efforts to effect a transaction with
Printcafe.
On November 22, 2002, our board of directors met to discuss, among other
things, our outstanding indebtedness, including balloon payments which were due
in January 2004, and our available financing alternatives. Our management
recommended that we attempt to refinance or restructure our debt before it
matured, and if were unable to do so by the next board meeting, which was
scheduled for February 2003, the board of directors should consider the
strategic alternatives available to us, including a sale of the company. Because
Creo is a holder of a significant amount of our debt, we pursued discussions
with Creo to determine whether Creo would be willing to refinance or restructure
the debt we owe to its subsidiary. In addition, our management team engaged in
discussions with a number of lenders and sources of equity financing. The
discussions with Creo and other potential lenders and sources of equity
financing did not result in any proposals for debt or equity financing.
On January 22, 2003, Creo, the holder at that time of 30% of the
outstanding shares of our common stock, announced that it had entered into
definitive agreements on January 21, 2003 to acquire, for $1.30 in cash or
shares of Creo's common stock at the election of each stockholder, shares of our
common stock from two of our stockholders. If those transactions were
consummated, Creo's ownership interest in Printcafe would increase from 30% to
approximately 55%. At the same time, Creo delivered a proposal to our board of
directors to acquire all the remaining shares of our common stock for
consideration of $1.30 per share in shares of Creo's common stock, but subject
to both a minimum and maximum number of shares that would be issued regardless
of the trading price of Creo's common stock. On that day, during a conference
call with Creo, its legal counsel and our legal counsel, Creo indicated that it
viewed its proposed acquisition of us to be strategic and informed us that it
would not sell its shares to a third party, even if the third party offered a
higher price. Prior to Creo's public announcement, our board of directors was
unaware that Creo had been attempting to gain control of Printcafe because Creo
did not disclose this fact to us, even though two of Creo's executive officers
are members of our board of directors.
Shortly after announcement of the offer from Creo on January 22, 2003, we
received a proposal from EFI on January 22, 2003 to acquire all of the
outstanding shares of our common stock for $2.60 per share for either cash or
shares of EFI common stock, without a collar. A collar is a minimum and maximum
limit on the number of shares of stock that would be issued and is determined
based on the then trading value of the shares.
Our board of directors met on the evening of January 22, 2003. At that
meeting, a majority of the members of our board of directors requested that Amos
Michelson, the chairman of our board of directors who is also the chief
executive officer of Creo, resign from his position as chairman of our board of
directors. Our board of directors appointed Marc Olin, our president and chief
executive officer, as the new chairman of our board of directors. In addition,
our board of directors appointed a committee of directors who were unaffiliated
with Creo or EFI to consider the offers received from Creo and EFI, as well as
any other strategic alternatives available to us. The special committee
consisted of Charles Billerbeck, Victor Cohn and Thomas Gill. Mr. Billerbeck was
appointed chairman of the special committee. Management reported to the special
committee that management had been pursuing potential sources of debt or equity
financing since the last board meeting due to our financial condition and other
factors, including our January 2004 debt repayment obligation. Management
advised the special committee that management had not been able to obtain offers
of new debt or equity financing.
30
From January 23 through January 30, 2003, the special committee met on
several occasions to consider, among other things, retaining its own financial
and legal advisors. The special committee retained Thelen Reid & Priest LLP and
Potter Anderson & Corroon LLP as legal counsel. On January 31, 2003, the special
committee retained UBS Warburg as its financial advisor.
From February 2 through February 12, 2003, at the direction of the special
committee, UBS Warburg conducted a market test by contacting other potential
bidders for Printcafe. To that end, UBS contacted approximately 30 potential
strategic and financial buyers for Printcafe; however, no additional offers
emerged as a result of that process.
On January 30, 2003, Creo consummated the purchase of 1,532,052 shares of
our common stock pursuant to its agreement with one of our stockholders, thereby
increasing its ownership to 44.4% of our outstanding common stock. The second
agreement was scheduled to close on February 24, 2003 and the special committee
became increasingly concerned that Creo would assume control of Printcafe by
consummating that agreement. The special committee feared that if Creo assumed
voting control of Printcafe, Creo would prevent the independent directors from
pursuing the EFI proposal or any offer for Printcafe other than Creo's offer at
$1.30 per share in Creo stock. The special committee determined that EFI's offer
at $2.60 per share was superior to Creo's offer at $1.30 per share, due to the
amount of consideration in EFI's proposal and the ability of our stockholders to
elect cash or shares of EFI common stock. EFI expressed concerns with respect to
potential actions that Creo might take and advised the special committee, by
letter dated January 28, 2003, that its offer at $2.60 per share in cash was
conditioned upon (a) adoption of a customary stockholder rights agreement by the
special committee, (b) execution of an agreement granting EFI the option to
purchase 19.9% of our then outstanding common stock and (c) execution of a
definitive merger agreement. The adoption of the stockholders' rights agreement
would prevent Creo from purchasing any additional shares of our common stock
pursuant to the second stock purchase agreement or otherwise. Therefore, to
protect our stockholders against being coerced into accepting Creo's $1.30
offer, and to avoid losing control of the sale process, at a meeting on January
29, 2003, the special committee considered the adoption of a stockholders'
rights plan as well as EFI's other conditions to its proposal.
In assessing whether to adopt the stockholders' rights plan, which would
require the distribution of rights to our stockholders in the form of a
dividend, the special committee directed its advisors to determine if there were
any restrictions on our ability to make dividends and distributions under our
existing credit facility. On February 2, 2003, the special committee was advised
that the issuance of the rights under the rights plan could be viewed as a
technical default under our existing loan agreement with an affiliate of Creo.
Unwilling to put Printcafe at risk for a claim of default but still believing
that adoption of a stockholders' rights plan was essential to protect our
stockholders from Creo's advances, the special committee determined on February
3, 2003, to seek an alternative source of credit should Creo, through its
affiliate, claim a default as a result of the adoption of the stockholders'
rights plan.
On February 3, 2003, the special committee approached EFI and inquired as
to whether EFI would be willing to provide us with standby credit in the event
of a claim of default. EFI agreed to provide us with the necessary credit, in
exchange for our agreement to (a) enter into exclusive negotiations for a period
of time with EFI based on its $2.60 proposal; and (b) grant EFI an option to
acquire 2,126,574 shares of our common stock in return. Given that Creo already
held 44.4% of our outstanding common stock, consummation of EFI's offer would be
unlikely or impossible without the issuance of shares of our common stock
pursuant to the option.
After almost two weeks of negotiations regarding the terms of the proposed
agreements, since no additional competing proposal had emerged as a result of
the UBS Warburg market test, on February 13, 2003, we announced our adoption of
a stockholders' rights plan. In addition, on the same day, we and EFI executed
and delivered:
- A stock option agreement providing EFI with the right to acquire
2,126,574 shares of our common stock at a price per share of $2.60 per
share. EFI exercised this option in full on June 11, 2003.
31
- a letter agreement providing for the extension of credit by EFI to us;
and
- a letter agreement setting forth the terms upon which we could pursue
alternate proposals to EFI's proposed business combination.
On February 14, 2003, counsel to EFI delivered a first draft of a merger
agreement and ancillary documents to counsel for the special committee. From
February 14, 2003 through February 26, 2003, we, EFI and the special committee,
together with each party's respective representatives, negotiated the terms of
the merger.
On February 19, 2003, Creo commenced an action in The Court of Chancery of
the State of Delaware in and for New Castle County captioned Creo, Inc. v.
Printcafe Software, Inc., Electronics For Imaging, Inc., Marc D. Olin, Charles
J. Billerbeck, Victor A. Cohn and Thomas J. Gill. Creo requested a temporary
restraining order that would preclude us from (a) triggering, exercising or
otherwise giving effect to the stockholders' rights plan we adopted, (b) taking
any action "with the intent or effect of impeding the operation of market forces
in an open bidding contest for Printcafe," (c) taking any steps or actions to
enforce the fee provided for in the letter agreement we entered into with EFI,
(d) taking any steps or any actions to enforce the option we granted to EFI, (e)
taking any steps or actions to enforce the no solicitation provisions of the
standby credit letter that we entered into with EFI, (f) engaging in any
"conduct intended to cause or having the effect of causing Printcafe to forgo
the opportunity to explore and enter into economically more favorable
transactions" and (g) entering into, or purporting to enter into, a merger
agreement between EFI and us before the court finally rules on the action. On
February 21, 2003 the court denied Creo's request for a temporary restraining
order.
On February 21, 2003, the special committee received an offer from Creo to
acquire Printcafe in a transaction in which the consideration per share of our
common stock would be $3.00 in shares of Creo common stock "subject to an
appropriate collar." The offer from Creo, which was subject to due diligence and
approval by Creo's board of directors, did not specify the nature of the collar.
Creo issued a press release announcing its offer. The special committee and its
advisors met on the evening of February 21, 2003 to discuss this offer. At that
meeting, the special committee reviewed our rights and obligations under the
exclusivity agreement with EFI and determined, based on the advice of Potter
Anderson & Corroon LLP, its legal advisor, and its financial advisor, that the
$3.00 offer from Creo was reasonably likely to lead to a superior proposal and
to engage in further discussions with Creo. In evaluating the Creo offer, the
special committee considered the fact that the offer was solely for shares of
Creo common stock and would be subject to a collar. The special committee
notified EFI of the Creo offer on February 22, 2003. EFI did not change the
consideration payable in connection with the merger as a result of Creo's
proposal.
On February 21 and 22, 2003, UBS Warburg contacted representatives of Creo
to discuss the terms and conditions of Creo's offer, including the parameters of
the collar referred to in its offer letter, whether Creo was willing to make a
cash offer, the scope of due diligence that would be required and the timing of
Creo obtaining approval of the offer by its board of directors, and to clarify
the timing and procedures for continued negotiations with the special committee.
The special committee met twice telephonically on February 22, 2003 to remain
apprised of the discussions with Creo and to consider the status of its
negotiations with EFI.
On February 23, 2003, the special committee received a revised offer from
Creo to acquire Printcafe in a transaction in which the offered consideration
for each share of our common stock was $4.00 in shares of Creo common stock,
subject to a 20% collar. Creo did not issue a press release announcing this
offer. On that same day, the special committee and its advisors met several
times telephonically to discuss the revised offer from Creo and directed its
advisors to continue negotiations with Creo under the revised terms of its
offer. Potter Anderson, counsel for the special committee, and Morgan, Lewis &
Bockius LLP, our counsel, engaged in discussions with counsel for Creo regarding
the terms of a proposed merger agreement and Creo's request for due diligence
materials. We informed EFI of Creo's offer on February 23, 2003. EFI did not
change the consideration payable in connection with the merger as a result of
Creo's offer.
32
On February 24, 2003, EFI sent us a letter modifying the condition to EFI's
obligation to lend us funds for working capital purposes. That letter agreement
modified a condition to EFI's obligations in the original standby credit letter
agreement by extending the date by which we and EFI must have executed and
delivered a merger agreement from February 24, 2003 to March 1, 2003.
On the morning of February 24, 2003, Creo sent a draft merger agreement to
us and our counsel. That morning and afternoon we sent due diligence materials
to Creo and we and our financial advisor responded to questions from Creo
regarding the materials, including financial information, that we provided to
Creo. On the evening of February 24, 2003, Creo informed the special committee
that it was withdrawing from the bidding process and terminating its offers, in
part because of information it had learned during its due diligence
investigation. The special committee met telephonically on the evening of
February 24, 2003 to discuss the withdrawal of Creo's offers and to consider the
terms of EFI's proposed transaction at $2.60 per share.
On February 25, 2003, the special committee met to discuss the terms of the
proposed merger with EFI. Counsel reviewed the principal terms of the merger
agreement and UBS Warburg explained the methodologies it used to arrive at its
opinion as to the fairness of the transaction from a financial point of view.
After its presentation, UBS Warburg delivered its oral opinion, subsequently
confirmed in writing and based on and subject to the matters described in its
opinion, that the merger consideration was fair, from a financial point of view,
to our stockholders, other than EFI and its affiliates. Both counsel and UBS
Warburg answered questions from the special committee. After further
deliberations, the special committee then recommended that our board of
directors accept EFI's proposed transaction as set forth in the proposed merger
agreement. In addition, subject to approval of the merger agreement by our
board, the special committee recommended amendments to our stockholders' rights
plan which would prevent the distribution of the rights as a result of the
execution of the merger agreement with EFI.
Immediately following the meeting of the special committee, our board of
directors met. All of the directors, including those directors who are employees
of Creo, participated in the meeting. Counsel for Printcafe and counsel for the
special committee reviewed the terms of the proposed merger agreement and UBS
Warburg reiterated its earlier presentation given to the special committee. Both
counsel and UBS Warburg answered questions from members of our board of
directors. After discussion, our board of directors adopted and approved the
proposed merger with EFI, whereby each of our stockholders would receive $2.60
in cash or, at their election, in EFI stock for each share of our stock that
they own, declared the merger agreement advisable and determined that the merger
agreement and the merger were fair to and in the best interest of Printcafe and
our stockholders. The two members of our board of directors employed by Creo,
Amos Michelson and Judi Hess, each abstained from the vote on the merger and the
merger agreement.
Early in the morning of February 26, 2003, we, EFI and a subsidiary of EFI
executed and delivered the merger agreement. Before the Nasdaq National Market
opened on February 26, 2003, we and EFI issued a press release announcing the
proposed merger.
On March 29, 2003, we received a non-binding indication of interest from a
private equity firm with respect to a potential business combination in which
the consideration would be at least 10% higher than the $2.60 per share
consideration offered in the merger. The indication of interest was (a) subject
to due diligence, (b) not binding and (c) conditioned on Creo retaining its
equity investment in the surviving entity. The special committee met to review
this indication of interest and instructed UBS Warburg to enter into discussions
with the private equity firm in pursuit of the potential transaction. On April
4, 2003, Creo requested the right to participate in discussions and enter into
agreements with the private equity firm in connection with that proposed
transaction. Counsel to the special committee informed Creo in writing that no
action would be taken under our stockholders rights plan solely as a result of
Creo and the private equity firm discussing the terms of Creo's participation in
the transaction proposed by the private equity firm. On April 16, 2003, the
private equity firm advised our representatives that it was no longer interested
in pursuing a business combination with us based, in part, on the results of its
discussions with Creo.
33
Our Reasons for the Merger. In reaching its decision, our board of
directors consulted with our senior management, legal counsel and financial
advisor, reviewed a significant amount of information, received the
recommendation of the special committee that the board approve the merger,
discussed the recommended action with the special committee and considered a
number of factors, including, among others, the following factors:
- The possible alternatives to the merger, including the possibility
of continuing to operate Printcafe as a stand-alone entity and the
risks associated with that alternative, particularly in light of the
fact that $14.2 million of our debt is due in January 2004 and we do
not expect debt or equity financing to be available and do not have
sufficient cash to repay that amount, as well as Creo's prior
attempt to purchase, in private transactions, a controlling interest
in Printcafe at $1.30 per share in cash and its offer to exchange
all remaining outstanding shares of our common stock for shares of
Creo common stock valued at $1.30 per share, subject to a collar;
- the $2.60 per share to be paid as the consideration in the merger
represents a premium of 122.2% over the trailing average closing
sales prices for our common stock as reported on Nasdaq for the
three months ended February 25, 2003, a premium of 28.7% over the
trailing average closing sales prices for our common stock as
reported on Nasdaq for the one month ended February 25, 2003, a
premium of 14% over the trailing average closing sales prices for
our common stock as reported on Nasdaq for the one week ended
February 25, 2003, and a premium of 8.3% over the closing sale price
for our common stock as reported on Nasdaq on February 25, 2003, the
trading day before the board's approval of the merger agreement;
- the financial presentations made by UBS Warburg and the written
opinion of UBS Warburg to the special committee and our board of
directors to the effect that, as of February 25, 2003, and based on
and subject to the factors and assumptions set forth in the written
opinion, the consideration to be received by holders of our common
stock, other than EFI and its affiliates, pursuant to the merger
agreement is fair from a financial point of view to those holders;
- the ability of our stockholders to elect to receive shares of EFI
common stock in the merger, thereby giving them the opportunity to
continue as equity owners of the combined company after the merger;
- the results of UBS Warburg's market check and the letter received
from Creo on February 24, 2003 indicating that it was no longer
interested in the bidding process and was terminating its prior
offers and UBS Warburg's advice, based on those factors, as to the
relatively low likelihood of completing an alternative transaction;
- our then current and historical financial condition, including the
amount of our outstanding debt, the value of our assets, the timing
of the repayment obligations on our existing indebtedness and the
prospects for refinancing that indebtedness, our results of
operations as a stand-alone company, our prospects and strategic
objectives, the risks involved in achieving those prospects and
objectives, conditions in our industry as a whole, and the current
economic environment;
- then current financial market conditions, and historical market
prices, volatility and trading information with respect to our
common stock;
- other historical information concerning our business, prospects,
financial performance and condition, operations, technology,
management and competitive position;
- the fact that pursuant to the merger agreement, we are not
prohibited from responding (at any time prior to our stockholders'
adoption of the merger agreement) in the manner provided in the
merger agreement to takeover proposals that our board of directors
determine in good faith constitute a superior offer, and, upon
payment of a termination fee of $828,000 and compliance
34
with the terms of the merger agreement, we may terminate
the merger agreement to enter into an agreement for a
superior transaction;
- the terms of the merger agreement and related documents, including
the parties' representations, warranties and covenants, and the
conditions to their respective obligations;
- the risks and contingencies related to the announcement and pendency
of the merger, the possibility that the merger will not be
consummated and the potential negative effect of public announcement
of the merger in that event on our sales, operating results and
stock price and our ability to retain key management and personnel;
and
- the conditions to EFI's obligation to complete the merger and the
limited right of EFI to terminate the merger agreement.
This list is not exhaustive but includes the material factors considered by
the special committee or our board of directors. In view of the variety of
factors considered in connection with its evaluation of the merger, neither the
special committee nor our board of directors quantified or assigned relative
weights to the specific factors considered in reaching their recommendations.
Instead, the special committee and our board of directors made their
recommendations based on the totality of the information presented to and
considered by them.
The special committee and our board of directors also took into
consideration potential risks associated with the merger and an investment in
shares of EFI's common stock, and concluded that the potential benefits of the
merger outweighed these factors. These factors include the risk that
circumstances may arise that provide EFI the right not to consummate the merger
and that an investment in EFI stock is likely to be affected by the markets in
which it competes. There can be no assurance that the shares of EFI stock you
receive in the merger, should you elect to receive stock, will not decline in
value. See "Risk Factors Relating to the Merger," beginning on page .
RECOMMENDATION OF OUR BOARD OF DIRECTORS
After careful consideration, the special committee and our board of
directors, on February 26, 2003 (with Mr. Michelson and Ms. Hess, who are
employees of Creo, abstaining) determined that the terms of the merger agreement
and the merger were fair to, and in the best interest of, Printcafe and our
stockholders and approved the merger agreement and the merger. In reaching their
decisions, the special committee and our board of directors consulted with our
management team and advisors and independently considered the proposed merger
agreement and the transactions contemplated by the merger agreement. The
committee unanimously recommended to our board of directors that it approve the
merger agreement and our board of directors (with Mr. Michelson and Ms. Hess
abstaining) has declared the merger agreement advisable and fair to Printcafe
and our stockholders and recommends that you vote to adopt the merger agreement.
In considering the recommendation of the committee and our board of
directors with respect to the merger agreement, you should be aware that our
directors and executive officers may have interests in the merger that are
different from, or are in addition to, the interests of our other stockholders.
Please see "Interests of Our Directors and Executive Officers in the Merger," on
page .
OPINION OF UBS WARBURG LLC
Under the terms of an engagement letter, dated January 31, 2003, the
special committee retained UBS Warburg LLC to provide financial advisory
services and a financial fairness opinion to the special committee and to our
board of directors in connection with a possible business combination
transaction involving Printcafe. At the meeting of the special committee and the
subsequent meeting of our board of directors, in each case held on February 25,
2003, UBS Warburg delivered its oral opinion to the effect that, as of the date
of the opinion and based on and subject to the matters described in the opinion,
the consideration to be received by holders of our common stock, other than EFI
and its affiliates, in the
35
merger is fair from a financial point of view to such holders. The opinion was
confirmed by delivery of a written opinion dated February 25, 2003.
The following summary of the UBS Warburg opinion is qualified in its
entirety by reference to the full text of the opinion. The full text of the
opinion sets forth the assumptions made, procedures followed, matters considered
and limitations on the scope of the review undertaken, by UBS Warburg and is
attached as Annex B to this document and incorporated in this document by
reference. You are encouraged to read carefully the UBS Warburg opinion in its
entirety.
UBS Warburg's opinion:
- Is directed solely to the special committee and the board of directors;
- relates only to the fairness from a financial point of view of the
consideration to be received by holders of our common stock, other than
EFI and its affiliates, in the merger;
- addresses the aggregate value to be received by holders of our common
stock as a whole, without regard to the individual's size of holdings,
and does not in any respect constitute an opinion on the particular
situations of specific stockholders, including Creo and its affiliates
and those stockholders distinguished by size of position or other
factors;
- does not address our underlying business decision to effect the merger;
- does not constitute a recommendation to you about how to vote with
respect to the merger agreement or any other matter; and
- is necessarily based upon economic, monetary, market and other conditions
as in effect on, and the information made available to UBS Warburg as of,
the date of the opinion.
In arriving at its opinion, UBS Warburg, among other things:
- Reviewed selected publicly available business and historical financial
information relating to Printcafe and EFI;
- reviewed the reported prices and trading activity for our common stock
and EFI's common stock;
- reviewed selected internal financial information and other data relating
to our business and financial prospects, including estimates and
financial forecasts for fiscal 2003 prepared by our management, which
were provided to UBS Warburg and not publicly available;
- reviewed selected publicly available research analysts' estimates of
EFI's future financial performance;
- conducted discussions with members of our senior management;
- reviewed publicly available financial and stock market data with respect
to selected other companies in lines of business UBS Warburg believed to
be generally comparable to those of Printcafe and EFI;
- reviewed publicly available financial data with respect to selected other
transactions involving companies in lines of business UBS Warburg
believed to be generally comparable to those of Printcafe;
- reviewed drafts of the merger agreement; and
- conducted other financial studies, analyses and investigations and
considered other information as UBS Warburg deemed necessary or
appropriate.
36
In connection with its review, with the consent of the special committee
and the board of directors or at the direction of the special committee and the
board of directors, as applicable, UBS Warburg:
- Assumed that the final executed form of the merger agreement did not
differ in any material respect from the draft that UBS Warburg examined,
and that we, EFI and its subsidiary will comply with all material terms
of the merger agreement;
- assumed that the financial forecasts and estimates for fiscal 2003
referred to above had been reasonably prepared on a basis reflecting the
best currently available estimates and judgments of our management as to
our future performance;
- did not assume any responsibility for independent verification of any of
the information referred to above and relied on it as being complete and
accurate in all material respects; and
- did not make any independent evaluation or appraisal of any of the assets
or liabilities (contingent or otherwise) of Printcafe or EFI, nor was UBS
Warburg furnished with an evaluation or appraisal.
UBS Warburg was not asked to, and did not, recommend the specific
consideration payable in the merger, which was determined through negotiations
between EFI and the special committee. In addition, UBS Warburg was not asked
to, and did, not offer any opinion as to the material terms of the merger
agreement or the form of the transactions contemplated thereby, and expressed no
opinion as to what the actual value of EFI common stock will be when issued
pursuant to the merger or the prices at which EFI common stock will trade in the
future. UBS Warburg also did not express any opinion as to whether holders of
significant numbers of shares of our common stock could sell such shares for
more consideration per share than the consideration being paid in the merger in
privately negotiated transactions.
At the request of the special committee, UBS Warburg contacted third
parties to solicit indications of interest with respect to a possible business
combination with Printcafe and held discussions with a number of these parties
before the date of UBS Warburg's written opinion.
The preparation of a fairness opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to the particular
circumstances and, therefore, is not susceptible to partial analysis or summary
descriptions. In arriving at its opinion, UBS Warburg made qualitative judgments
as to the significance and relevance of each analysis and factor considered by
it, and based on the results of all the analyses undertaken by it and assessed
as a whole. UBS Warburg did not draw conclusions, in isolation, from or with
regard to any one factor or method of analysis. Accordingly, UBS Warburg
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and the factors considered by it, without considering
all analyses and factors, could create an incomplete view of the processes
underlying the analyses set forth in its opinion.
In performing its analyses, UBS Warburg made many assumptions with respect
to industry performance, general business, financial, market and economic
conditions and other matters, many of which are beyond our or EFI's control. No
company, transaction or business used in those analyses as a comparison is
identical to Printcafe or EFI or their respective businesses or the merger, nor
is an evaluation of the results entirely mathematical. Rather, the analyses
involve complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the operating results,
public trading or other values of the companies or transactions being analyzed.
The estimates contained in the analyses performed by UBS Warburg 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 suggested by these analyses. In
addition, analyses relating to the value of securities do not purport to be
appraisals or to reflect the prices at which a business might actually be sold
or the prices at which any securities may trade at the present time or at any
time in the future.
The following is a summary of the material financial analyses used by UBS
Warburg in connection with the rendering of its opinion. The financial analyses
summarized below include information presented
37
in tabular format. In order to understand the financial analyses fully, the
tables must be read together with the text of each summary. Considering the data
set forth below without considering the full narrative description of the
financial analyses, including the methodologies and assumptions underlying the
analyses, could create a misleading or incomplete view of the financial
analyses.
PRINTCAFE ANALYSES
Historical Stock Performance. UBS Warburg reviewed historical trading
prices for our common stock. This stock price performance review indicated that,
for the period beginning June 19, 2002, the first trading day following our
initial public offering, through and including February 24, 2003, the low and
high closing prices for our common stock were $0.92 and $8.00, respectively.
This review further indicated that the closing price for our common stock was
$1.10 on January 20, 2003, which was prior to Creo's $1.30 per share offer being
made public. UBS Warburg referred to the $1.10 closing stock price on January
20, 2003 as the Unaffected Price. UBS Warburg also reviewed the average closing
prices over periods prior to February 24, 2003 as set forth in the following
table:
SELECTED STATISTICS(1) CLOSING PRICE
---------------------- -------------
February 24, 2003........................................... $3.24
5 Day Average............................................... $2.56
10 Day Average.............................................. $2.39
20 Day Average.............................................. $2.29
60 Day Average.............................................. $1.56
90 Day Average.............................................. $1.47
180 Day Average............................................. $2.34
---------------
(1) All periods based on trading days.
Selected Comparable Public Company Analysis. UBS Warburg compared selected
financial information, ratios and public market multiples for Printcafe to the
corresponding data for the following six publicly-traded companies:
- i2 Technologies, Inc.
- Retek Inc.
- Manugistics Group, Inc.
- Descartes Systems Group, Inc.
- Aspen Technology, Inc.
- QRS Corporation
UBS Warburg chose the selected companies because they were publicly-traded
companies that, for purposes of the analysis, UBS Warburg considered reasonably
similar to Printcafe in that these companies are relatively smaller, independent
companies that operate in the computer software industry selling supply chain
management products. The selected public companies may significantly differ from
Printcafe based on, among other things, the size of the companies, the
geographic coverage of the companies' operations and the particular business
segments in which the companies focus.
UBS Warburg reviewed, among other information, the comparable companies'
multiples of enterprise value, which consists of the market value of the
particular company's common equity plus the market value (when available) of the
company's total debt, preferred stock and minority interests, minus cash, cash
equivalents and marketable securities to:
- Estimated calendar 2002 revenue, referred to as CY 2002E revenue, and
- estimated calendar 2003 revenue, referred to as CY 2003E revenue.
38
The Printcafe comparable companies analysis resulted in the following
ranges of implied multiples as of February 21, 2003:
PRINTCAFE IMPLIED PRINTCAFE IMPLIED PRINTCAFE IMPLIED
MULTIPLE @ MULTIPLE @ MULTIPLE @
MULTIPLE RANGE MEAN MEDIAN UNAFFECTED PRICE $2.40/SHARE (1) $2.60/SHARE
-------------- ---- ------ ----------------- ----------------- -----------------
Enterprise Value/ CY
2002E Revenue......... 0.4x to 1.0x 0.7x 0.6x 0.5x 0.8x 0.9x
Enterprise Value/ CY
2003E Revenue......... 0.6x to 1.1x 0.8x 0.7x 0.5x 0.8x 0.8x
---------------
(1) Printcafe's closing stock price on February 21, 2003.
Estimated revenue data for Printcafe and the selected companies were based
on the respective companies' relevant SEC filings as well as publicly available
research analysts' estimates.
Selected Comparable Transaction Analysis. UBS Warburg reviewed publicly
available financial information relating to the following selected transactions
in the software industry since January 2002:
ACQUIROR TARGET
-------- ------
SunGard Data Systems, Inc. Caminus Corporation
SSA Global Technologies, Inc. Infinium Software Inc.
Novell, Inc. SilverStream Software, Inc.
MSC Software Corp. Mechanical Dynamics, Inc.
TIBCO Software Inc. Talarian Corporation
UBS Warburg chose the selected transactions because they were business
combinations that, for the purposes of the analysis, UBS Warburg considered to
be reasonably similar to the merger in that these transactions involved
companies in the computer software industry. The selected transactions may
differ significantly from the merger based on, among other things, the size of
the transactions, the structure of the transactions and the dates that the
transactions were announced and consummated.
UBS Warburg reviewed, among other things, the enterprise values, which
consist of the market value of the particular company's common equity plus the
market value (when available) of the company's total debt, preferred stock and
minority interests, minus cash, cash equivalents and marketable securities,
implied in the relevant transactions as a multiple of the company's last twelve
months revenue, and the company's estimated next twelve months revenue.
The analysis indicated the following implied multiples for the selected
transactions and for the merger:
AT ANNOUNCEMENT OF THE TRANSACTION AT CLOSING OF THE TRANSACTION PRINTCAFE IMPLIED
------------------------------------ ------------------------------ MULTIPLE @
MULTIPLE RANGE MEAN MEDIAN MULTIPLE RANGE MEAN MEDIAN $2.60/SHARE
---------------- ------ -------- -------------- ---- ------ -----------------
Enterprise Value/Last Twelve
Months Revenue............... 1.2x-3.7x 2.0x 1.7x 1.0x-2.1x 1.5x 1.4x 0.9x
Enterprise Value/Next Twelve
Months Revenue............... 1.4x-3.5x 2.1x 1.8x 0.9x-2.0x 1.5x 1.6x 0.8x
All multiples for Printcafe and the selected transactions were based on
relevant SEC filings, press releases and publicly available research analysts'
estimates.
Premiums Paid Analysis. UBS Warburg reviewed selected purchase price per
share premiums paid or to be paid in acquisitions of publicly-traded, domestic
software companies, excluding "merger of equals" transactions, announced from
January 1, 2002 through the end of January 2003, with deal sizes in excess of
$25 million. This analysis indicated mean and median and high and low premiums
to the targets' closing stock prices on dates, and the targets' average closing
stock prices for periods, prior to the announcement of the applicable
transaction as set forth in the following table. The premiums for Printcafe were
calculated based on our closing stock prices on dates, and our average closing
stock prices for
39
periods, prior to January 21, 2003, the day before Creo's $1.30 per share offer
was made public, and February 24, 2003.
PREMIUM (%) TO AVERAGE STOCK
PREMIUM (%) TO STOCK PRICE PRICE FOR PERIOD
--------------------------------------------------------- -----------------------------
ONE DAY ONE WEEK ONE MONTH THREE MONTHS ONE WEEK ONE MONTH
PRIOR TO PRIOR TO PRIOR TO PRIOR TO PRIOR TO PRIOR TO
ANNOUNCEMENT ANNOUNCEMENT ANNOUNCEMENT ANNOUNCEMENT ANNOUNCEMENT ANNOUNCEMENT
------------ ------------ ------------ ------------ ------------- -------------
Mean....................... 64.7 63.1 67.3 100.8 65.2 65.2
Median..................... 48.7 45.6 51.2 70.2 42.5 51.0
High....................... 260.0 261.4 267.5 560.0 259.6 272.6
Low........................ 5.2 2.5 (12.4) (32.9) 3.7 (6.3)
Implied Premium of the
merger @ $2.60 per
share(1)................. 136.4 120.3 145.3 126.1 132.6 124.0
Implied Premium of the
merger @ $2.60 per
share(2)................. 8.3 14.0 28.7 122.2 4.6 3.6
---------------
(1) Based on our closing stock prices and averages prior to January 21, 2003.
(2) Based on our closing stock prices and averages prior to February 24, 2003.
EFI ANALYSIS
Selected Comparable Public Company Analysis. UBS Warburg compared selected
financial information, ratios and public market multiples for EFI to the
corresponding data for the following eight publicly-traded companies:
- Eastman Kodak Company
- Lexmark International, Inc.
- Pitney Bowes Inc.
- Adobe Systems Incorporated
- Xerox Corporation
- IKON Office Solutions, Inc.
- Creo Inc.
- Oak Technology, Inc.
UBS Warburg chose the selected companies because they were publicly-traded
companies that, for purposes of the analysis, UBS Warburg considered reasonably
similar to EFI in that these companies operate in the document management
industry. The selected public companies may differ significantly from EFI based
on, among other things, the size of the companies, the geographic coverage of
the companies' operations and the particular business segments in which the
companies focus.
UBS Warburg reviewed, among other information, the comparable companies'
multiples of enterprise value, which consists of the market value of the
particular company's common equity plus the market value (when available) of the
company's total debt, preferred stock and minority interest, minus cash, cash
equivalents and marketable securities, to:
- CY 2002E revenue;
- CY 2003E revenue;
- estimated calendar year 2002 earnings before interest, taxes,
depreciation and amortization, referred to as CY 2002E EBITDA; and
- estimated calendar year 2003 earnings before interest, taxes,
depreciation and amortization, referred to as CY 2003E EBITDA.
UBS Warburg also reviewed, among other information, the comparable
companies' projected price/earnings multiples, based on SEC filings and publicly
available research analysts' estimates, for calendar year 2002 and 2003.
40
The EFI comparable companies analysis resulted in the following ranges of
implied multiples as of February 24, 2003:
MULTIPLE RANGE MEAN MEDIAN EFI(1)
-------------- ----- ------ ------
Enterprise Value/CY 2002E Revenue.............. 0.3x to 5.4x 1.7x 1.0x 1.1x
Enterprise Value/CY 2003E Revenue.............. 0.3x to 5.1x 1.7x 1.1x 1.1x
Enterprise Value/CY 2002E EBITDA............... 4.8x to 15.8x 10.1x 10.3x 10.6x
Enterprise Value/CY 2003E EBITDA............... 4.9x to 15.4x 9.9x 9.9x 6.7x
CY 2002E Price/Earnings Ratio.................. 7.6x to 29.9x 16.1x 13.3x 40.3x
CY 2003E Price/Earnings Ratio.................. 7.1x to 26.8x 16.1x 13.6x 23.0x
---------------
(1) Based on EFI's closing stock price on February 24, 2003.
Estimated data for EFI and the selected companies were based on the
respective companies' relevant SEC filings as well as publicly available
research analysts' estimates.
Other Factors. In rendering its opinion, UBS Warburg considered other
factors, for informational purposes, including:
- Selected published analysts' reports on Printcafe and EFI;
- recent stock price/volume performance for Printcafe and EFI; and
- potential pro forma financial effects of the merger on EFI's estimated
2003 earning per share, based on publicly available research analysts'
estimates for EFI and internal estimates of our management for Printcafe.
Fee Arrangement. Pursuant to the engagement letter, dated January 31,
2003, among UBS Warburg, Printcafe and the special committee, UBS Warburg earned
a fee of $500,000 by Printcafe for rendering its financial fairness opinion,
which was independent of the result of the opinion, and will receive a fee equal
to an additional $500,000 upon the consummation of the merger. We also agreed to
reimburse UBS Warburg for its expenses incurred in performing its services. UBS
Warburg will not be entitled to any additional fees or compensation with respect
to the merger. In addition, we agreed to indemnify UBS Warburg and its
affiliates, their respective directors, officers, agents and employees and each
person, if any, controlling UBS Warburg or any of its affiliates against
liabilities and expenses related to or arising out of UBS Warburg's engagement
and any related transactions.
The special committee selected UBS Warburg based on its experience,
expertise and reputation. UBS Warburg is an internationally recognized
investment banking firm that regularly engages in the valuation of securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. Prior to
this engagement, UBS Warburg and its predecessors have provided us with
investment banking and other financial services, including acting as lead
manager for our initial public offering in June 2002, and received customary
compensation for rendering those services. In the ordinary course of business,
UBS Warburg, its successors and affiliates may trade or have traded securities
of Printcafe, EFI and/or Creo for their own accounts and, accordingly, may at
any time hold a long or short position in those securities.
41
THE MERGER
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
This discussion is based on currently existing provisions of the Internal
Revenue Code, existing and proposed United States Treasury Regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change, possibly with retroactive effect. Any change could alter
the tax consequences to you as described in this document.
You should be aware that this discussion does not deal with all federal
income tax considerations that may be relevant to particular stockholders in
light of their particular circumstances, like stockholders who:
- Are financial institutions, dealers in securities, tax-exempt
organizations or insurance companies;
- are foreign persons;
- do not hold their shares of our common stock as a capital asset;
- acquired their shares in connection with stock option or stock purchase
plans or in other compensatory transactions; or
- acquired their shares as part of an integrated investment, such as a
hedge, straddle or other risk-reduction transaction.
In addition, the following discussion does not address the tax consequences
of the merger under foreign, state or local tax laws, the tax consequences of
transactions effectuated prior or subsequent to, or concurrently with, the
merger, whether or not the referenced transactions are undertaken in connection
with the merger, including any transaction in which shares of our common stock
are acquired or shares of EFI common stock are disposed of, or the tax
consequences of the exercise, cancellation or termination of our stock options.
Accordingly, you are urged to consult your own tax advisors as to the specific
tax consequences to you of the merger, including the applicable federal, state,
local and foreign tax consequences.
The merger will be a fully taxable transaction to our stockholders and will
not constitute a "reorganization" for tax purposes.
- You will recognize taxable gain or loss upon the merger equal to the
difference, if any, between (a) the cash or the fair market value of the
shares of EFI common stock received as merger consideration and (b) your
adjusted tax basis in our common stock.
- This taxable gain or loss should be capital gain or loss if you hold your
shares of our common stock as a capital asset at the effective time of
the merger and will be classified as long term capital gain or loss to
the extent you have held those shares for more than one year.
In general, information reporting requirements will apply to payments made
in connection with the merger. Backup withholding at a rate of 30% will apply to
payments you receive in respect of our common stock if you fail to provide an
accurate taxpayer identification number or you are notified by the IRS that you
have failed to report all interest and dividends required to be shown on your
United States federal income tax returns. You should consult your tax advisor
concerning the application of information reporting and backup withholding
requirements to your particular circumstances.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your United States federal income tax liability if
the required information is furnished to the Internal Revenue Service.
ANTICIPATED ACCOUNTING TREATMENT
As required by Statement of Financial Accounting Standards No. 141,
Business Combinations, EFI will use the purchase method of accounting for a
business combination to account for the merger, as well
42
as the accounting and reporting regulations for goodwill and other intangibles.
Under this method of accounting:
- Our assets and liabilities, including all intangible assets, will be
recorded at their respective fair market values;
- all intangible assets will be amortized over their estimated useful lives
with the exception of goodwill and any other intangibles with indefinite
lives;
- goodwill and other intangibles with indefinite lives are not amortized;
rather, they will be assessed for impairment on a periodic basis in the
future; and
- our financial position, results of operations and cash flows will be
included in EFI's financial statements prospectively as of the completion
of the merger.
DISSENTERS' APPRAISAL RIGHTS
Under Delaware law, you are entitled to dissenters' appraisal rights in
connection with the merger. Section 262 of the Delaware General Corporation Law
will govern the exercise of those appraisal rights. The full text of Section 262
is attached as Annex C to this document for your review. The following summary
of the provisions of Section 262 is not intended to be a complete statement of
its provisions and is qualified in its entirety by reference to the full text of
Annex C, which is incorporated by reference.
If you:
- File written notice with our corporate secretary of an intention to
exercise rights to appraisal of shares prior to the special meeting;
- do not make an election or surrender your certificates;
- do not vote in favor of the merger; and
- follow the procedures set forth in Section 262
you will be entitled to be paid the fair value of the shares of our common stock
as to which appraisal rights have been perfected. The fair value of shares of
our common stock will be determined by the Delaware Court of Chancery, exclusive
of any element of value arising from the merger. The shares of our common stock
with respect to which holders have perfected their appraisal rights in
accordance with Section 262 and have not effectively withdrawn or lost their
appraisal rights are referred to in this document as the "dissenting shares."
Appraisal rights are available only to the record holder of shares. If you
wish to exercise appraisal rights but have a beneficial interest in shares which
are held of record by or in the name of another person, such as a broker or
nominee, you should act promptly to cause the record holder to follow the
procedures set forth in Section 262 to perfect your appraisal rights.
A demand for appraisal should be signed by or on behalf of the stockholder
exactly as the stockholder's name appears on the stockholder's stock
certificates. If the shares are owned of record in a fiduciary capacity such as
by a trustee, guardian or custodian, the demand should be executed in that
capacity, and if the shares are owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including one or more joint
owners, may execute a demand for appraisal on behalf of a record holder;
however, in the demand the agent must identify the record owner or owners and
expressly disclose that the agent is executing the demand as an agent or the
record owner or owners. A record holder such as a broker who holds shares as
nominee for several beneficial owners may exercise appraisal rights with respect
to the shares held for one or more beneficial owners and not exercise rights
with respect to the shares held for other beneficial owners. In that case, the
written demand should state the number of shares for which appraisal rights are
being demanded. When no number of shares is stated, the demand will be presumed
to cover all shares held of record by the broker or nominee.
43
If you demand appraisal of your shares under Section 262 and you fail to
perfect, or effectively withdraw or lose, your right to appraisal, your shares
will be converted into a right to receive the merger consideration in accordance
with the terms of the merger agreement if the merger is completed. Dissenting
shares lose their status as dissenting shares if:
- The merger is abandoned;
- the dissenting stockholder fails to make a timely written demand for
appraisal;
- the dissenting shares are voted in favor of adoption of the merger
agreement;
- neither we nor the dissenting stockholder files a complaint or intervenes
in a pending action within 120 days after the effective date of the
merger; or
- the dissenting stockholder delivers to us within 60 days of the effective
date of the merger, or thereafter with our approval, a written withdrawal
of the stockholder's demand for appraisal of the dissenting shares,
although no appraisal proceeding in the Delaware Court of Chancery may be
dismissed as to any stockholder without the approval of the court.
Within 10 days after the effective date of the merger, we must mail a
notice to all stockholders who have complied with the procedures described
above, notifying stockholders of the effective date of the merger, but that
notice will not set forth the deadline for taking action to perfect your right
to appraisal. Within 120 days after the effective date, holders of our common
stock may file a petition in the Delaware Court of Chancery for the appraisal of
their shares, although they may, within 60 days of the effective date, withdraw
their demand for appraisal. Within 120 days of the effective date, the holders
of dissenting shares may also, upon written request, receive from us a statement
setting forth the aggregate number of shares with respect to which demands for
appraisals have been received.
Failure to follow the steps required by Section 262 for perfecting
appraisal rights may result in the loss of your appraisal rights, in which event
you will be entitled to receive the cash merger consideration with respect to
the dissenting shares in accordance with the merger agreement. In view of the
complexity of the provisions of Section 262, you should consult your own legal
advisor.
RESALE OF EFI COMMON STOCK ISSUED IN THE MERGER
Shares of EFI common stock issued to our stockholders in connection with
the merger are freely transferable, except for shares issued to any person who,
at the time of the special meeting, is one of our "affiliates," as that term is
defined under the Securities Act. In general, our affiliates include:
- Our executive officers;
- our board of directors; and
- other persons or entities that control, are controlled by or are under
common control with Printcafe.
The rules adopted under the Securities Act impose restrictions upon the
resale of securities received by affiliates in connection with
reclassifications, mergers, consolidations or asset transfers. EFI common stock
received by our affiliates in the merger will be subject to these resale
limitations, and we are required to use commercially reasonable efforts to
deliver to EFI agreements signed by all of our affiliates regarding those resale
limitations.
RELATED AGREEMENTS
The Stockholders Agreements. EFI entered into stockholders agreements with
Marc Olin, the chairman of our board of directors and chief executive officer,
Joseph Whang, our chief financial officer and chief operating officer, Ronald
Hyland, our senior vice president and chief technical officer, and Mellon
Ventures II, L.P. These four stockholders owned shares of our common
stock on the record date, or approximately % of our then outstanding
shares. Mr. Olin was our chairman at the time he entered into the stockholder
agreement.
44
Each stockholder that signed a stockholder agreement is obligated to vote
the shares of our common stock that he or it beneficially owns:
- In favor of (1) the adoption of the merger agreement, (2) the approval of
the transactions contemplated by the merger agreement and (3) approval of
the merger;
- in favor of waiving any notice that may be required in connection with
any reorganization of Printcafe, any reclassification or recapitalization
of our capital stock, any sale of assets, change of control or
acquisition of Printcafe by person, or any merger, consolidation or
business combination of Printcafe with or into any person to the extent
the transaction is undertaken in connection with the merger;
- in favor of any matter that could reasonably be expected to facilitate
the merger;
- against approval of any takeover proposal made in opposition to, or in
competition with the merger;
- against any of the following actions: (1) any merger, consolidation,
business combination, sale of assets, reorganization or recapitalization
of Printcafe with any person or entity other than EFI, (2) any sale,
lease or transfer of any material part of our assets, (3) any
reorganization, recapitalization, dissolution, liquidation or winding up
of Printcafe, (4) any change in our capitalization or its corporate
structure or (5) any other action that is intended, or could reasonably
be expected, to impede, interfere with, delay, postpone, discourage or
adversely affect the merger or any of the other transactions contemplated
by the merger agreement.
The stockholders that signed stockholders agreements each granted EFI an
irrevocable proxy limited to voting on the foregoing matters.
The stockholders agreements also apply to shares of our common stock
acquired by each stockholder that is a party to those agreements between
February 26, 2003 and the termination of that stockholder's stockholders
agreement. Each stockholders agreement will terminate on the first to occur of
(a) the completion of the merger, (b) the termination of the merger agreement in
accordance with its terms, (c) a date that the stockholder and EFI mutually
agree in writing to terminate the stockholder agreement or (d) June 30, 2003.
The stockholders agreements restrict the disposition of the shares of our
common stock beneficially owned by the stockholders that signed stockholders
agreements. The stockholders agreements do not restrict the fulfillment by our
directors and officers of their duties in those capacities.
The Stock Option. On February 13, 2003, we entered into a stock option
agreement with EFI. The stock option agreement grants EFI the right, but EFI is
not obligated, to purchase up to 2,126,574 shares of our common stock at a
purchase price equal to $2.60 per share. If EFI is not in breach of its
obligations under the standby credit agreement described below, EFI may exercise
the option at any time, in whole or in part, subject to our right to suspend
EFI's ability to exercise the option for seven days if we have notified EFI that
we intend to enter into an agreement with respect to a superior proposal. The
option will terminate on December 31, 2007.
We must purchase any option shares, at the request of EFI, at a price equal
to the aggregate purchase price paid for the shares by EFI, if:
- There is an event of a default under the standby credit agreement;
- any person (other than EFI, any subsidiary of EFI or Creo) acquires
beneficial ownership of, or the right to acquire beneficial ownership of,
or any group shall have been formed that beneficially owns or has the
right to acquire beneficial ownership of, 50% or more of the then
outstanding shares of our common stock; or
- we enter into an agreement to: (1) consolidate with or merge into any
person, other than EFI or one of its subsidiaries, where we are not the
continuing or surviving corporation of the consolidation or merger, (2)
consolidate or merge with any person, other than EFI or one of its
subsidiaries,
45
where the other person is merged into Printcafe and Printcafe is the
continuing or surviving corporation, but, in connection with the merger,
the then outstanding shares of our common stock are changed into or
exchanged for stock or other securities of Printcafe or any other person
or cash or any other property or (3) sell or otherwise transfer all or
substantially all of our assets to any person, other than EFI or one of
its subsidiaries.
All of the foregoing events are collectively referred to as "repurchase
events." Additionally, we have the right to purchase the option shares and
terminate the option following a repurchase event.
In the option agreement, we granted EFI registration rights, which are
subordinate to existing registration rights that we have granted.
The Standby Credit. On February 13, 2003, we and EFI entered into a letter
agreement which would allow us to borrow money from EFI. EFI is obligated under
the standby credit agreement to disburse to us up to $11.0 million within three
business days after receiving notice from us that Iris Graphics, Inc., a wholly
owned subsidiary of Creo, declared any amounts owed under our existing credit
facility with Iris due and payable as a result of any action we took in
furtherance of the proposed business combination with EFI.
We are obligated to pay EFI interest at the simple rate of 8% per annum on
any loans made by EFI to us in connection with Iris accelerating the maturity of
our loan because of action we took in furtherance of the business combination
with EFI. All loans made under the standby credit agreement mature on January 2,
2004.
EFI also provided us with a working capital facility in an aggregate amount
of $3.0 million. Funds will be disbursed to us if the merger agreement has not
been terminated in accordance with its terms, and our cash balance as of the
close of business on the date we give EFI notice of our proposed borrowing is
less than $1.0 million. Within three business days of receiving our notice of a
valid request for a working capital disbursement, EFI must disburse $1.0 million
to us. Before our special meeting, any working capital disbursement will be
subject to our obligation to have managed our cash position in accordance with
its past practices. Any loans made under the working capital facility bear
interest at an annual rate equal to the prime rate of interest as published,
from time to time, by Citibank, plus two percent. Principal and interest are
payable on January 2, 2004 or sooner upon the termination of the standby credit
agreement in accordance with its terms.
An event of default under the standby credit agreement will occur if a
business combination with EFI is not consummated on or before June 30, 2003
unless the failure to consummate a business combination with EFI resulted from
EFI's material breach of its obligations under the merger agreement. The
occurrence of an event of default under the standby letter agreement would
accelerate the maturity of all amounts due and if those amounts were unpaid,
would give EFI the right to exercise its remedies at law, including foreclosing
on any collateral that may secure its loans.
The standby credit agreement also provides that we must use any proceeds we
receive from the exercise of the stock option we granted to EFI to pay down
outstanding amounts under the standby facility and the working capital facility.
On March 13, 2003, EFI amended the credit agreement to also give us the
right to borrow funds under the standby credit agreement if Creo's subsidiary
declares a technical default under its credit facility.
There are no amounts outstanding under the credit facility as of the date
of this document.
STOCK PURCHASE PROGRAM
Following completion of the merger, EFI intends to purchase approximately
the same number of shares of its common stock as are issued in connection with
the merger. These purchases may be effected through open market purchases,
negotiated transactions, block trades or otherwise. EFI currently has no
46
arrangements or understandings with any person with respect to those
transactions. EFI may decide not to pursue or delay the stock purchase program,
in whole or in part, without notice.
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
In considering the recommendation of our board of directors that you vote
for the adoption of the merger agreement, you should be aware that members of
our board of directors and our executive officers have agreements or
arrangements that provide them with interests in the merger that may differ
from, or be in addition to, the interests of our other stockholders. Our board
of directors was aware of these agreements and arrangements during its
deliberations of the merits of the merger and in determining to recommend that
you vote to adopt the merger agreement.
Retention Bonus Agreements. On February 20, 2003, the compensation
committee of our board of directors, which is composed of Charles Billerbeck,
Victor Cohn and Thomas Gill approved retention bonus agreements with some of our
officers and executive officers. These agreements provide for the payment of a
retention bonus upon the completion of a transaction that results in a change of
control. The compensation committee believed that it was important for
management to remain at Printcafe until the completion of a change of control
and determined the amount of the retention bonus for each officer based on the
level it believed would provide that incentive in light of the risk to our
company and the potential loss of value to our stockholders if members of
management were to leave our employment before completion of the transaction. If
the merger is completed, Marc Olin, our chairman, chief executive officer and
president, will receive a retention bonus of $200,000 and Joseph Whang, our
chief financial officer and chief operating officer, will receive a retention
bonus of $150,000.
Accelerated Vesting of Stock Options. Our executive officers have
provisions in their employment agreements that accelerate the vesting of their
stock options upon a change of control. In January 2002, we granted options to
purchase 170,340 shares of our common stock to Mr. Olin, 137,975 shares of our
common stock to Mr. Whang and 45,991 shares of our common stock to Ronald
Hyland, our senior vice president and chief technology officer, each with an
exercise price of $4.21 per share. These options generally vest ratably over a
48-month period. If the merger is completed, the vesting of these options will
accelerate by six months.
Indemnification and Insurance. The merger agreement provides that, upon
completion of the merger, EFI will indemnify and hold harmless, and provide
advancement of expenses to, all of our past and present directors, officers and
employees in all of their capacities, for acts or omissions occurring at or
before the completion of the merger to the same extent they were indemnified or
had the right to advancement of expenses as of February 26, 2003, which is the
date of the merger agreement, pursuant to our certificate of incorporation,
bylaws and indemnification agreements with any of our, or our subsidiaries',
directors, officers and employees. The merger agreement also provides that, upon
completion of the merger, EFI will provide director and officer liability
insurance policies with the current coverage of our policies of directors' and
officers' liability insurance to be effective for six years following the
completion of the merger or until the premium cost exceeds $1.2 million,
whichever occurs earlier.
47
THE MERGER AGREEMENT
The following discussion describes the merger agreement. This summary may
not contain all of the information that is important to you. You are urged to
carefully read the entire merger agreement, which is an exhibit to the
registration statement to which this document relates and is incorporated by
reference into this document.
GENERAL
The Merger. Subject to the terms and conditions of the merger agreement, a
wholly owned subsidiary of EFI will merge with and into Printcafe. After the
merger, we will continue as the surviving corporation. EFI's subsidiary will no
longer be a separate corporation and we will, as a result of the merger, become
a wholly-owned subsidiary of EFI.
Effective Time. We, EFI and its subsidiary will complete the merger by
filing a certificate of merger with the Delaware Secretary of State. The
certificate of merger will be filed upon the closing of the merger, which is
scheduled to occur on the first business day practicable after the satisfaction
or waiver of the various conditions to the merger which are set forth in the
merger agreement and described below. The effective time of the merger will be
the date and time the certificate of merger is filed with the Delaware Secretary
of State, or a later time as specified in the certificate of merger.
EFFECT ON CAPITAL STOCK, OPTIONS, WARRANTS AND PURCHASE RIGHTS
Merger Consideration. In connection with the merger, you have the right to
elect, with respect to each share of our common stock that you own, whether to
receive:
- $2.60 in cash, without interest and net of any required tax withholding;
or
- a number of shares of EFI common stock equal to $2.60 divided by the
average closing price of EFI's common stock for the ten consecutive
trading days ending on and including the fifth trading day before the
date of our special meeting of stockholders.
In order to make an election, you must comply with the procedures described
under "-- Exchange of Certificates in the Merger." If you do not make an
election, you will receive $2.60 in cash, without interest and net of any
required tax withholding, for each share of our common stock that you own.
If EFI issues any stock dividends, recapitalizes, engages in a stock split
or a similar transaction which affects the outstanding shares of EFI common
stock between the date of the merger agreement and the effective time of the
merger, the number of shares of EFI common stock to be issued in exchange for
our common stock will be adjusted appropriately.
No interest is payable on any merger consideration, whether in the form of
EFI common stock or cash.
After the merger is effective, our common stock will automatically cease to
exist and, unless you have properly perfected your appraisal rights, you will
only have the right to receive the merger consideration, consisting of EFI
common stock or cash, as described above and in the merger agreement.
Outstanding Stock Options. Each outstanding option to purchase shares of
our common stock will be converted into an option to purchase shares of EFI
common stock. The number of shares subject to, and the exercise price of, each
converted option will be adjusted on the basis of the exchange ratio applicable
to the shares of our common stock exchanged for shares of EFI common stock in
the merger.
Outstanding Warrants. Each outstanding warrant to purchase shares of our
common stock will be converted into the right to receive, upon exercise of the
warrant, $2.60 in cash for each underlying share of our common stock, unless the
warrant expressly provides that stock consideration must be issued.
Outstanding Purchase Rights. We have an employee stock purchase plan under
which some of our employees have the right to purchase shares of our common
stock. All of the purchase rights that are
48
outstanding prior to the merger will have been exercised in accordance with the
provisions of that plan immediately prior to the merger. The shares of our
common stock which are purchased by employees under our employee stock purchase
plan will be exchanged in the merger on the same terms as all other shares of
our common stock.
EXCHANGE OF CERTIFICATES IN THE MERGER
Exchange Agent and Exchange Fund. EFI has designated American Stock
Transfer & Trust Company to serve as its exchange agent in connection with the
merger. On or before the closing date of the merger, EFI will deposit with the
exchange agent (a) certificates representing all of the shares of EFI common
stock to be issued in exchange for our common stock pursuant to the merger,
together with cash representing amounts payable in lieu of issuing fractional
shares of EFI common stock for our stockholders that elect to receive the merger
consideration and stock, and (b) funds representing the aggregate merger
consideration for our stockholders that elect to receive the merger
consideration in cash or do not make an effective election before the date of
our special meeting of stockholders.
Election Procedures. We are mailing an election form to you with this
document. If you wish to receive cash consideration for all of your shares of
our common stock, you do not need to return the election form. Copies of the
election form are available from MacKenzie Partners.
If you wish to receive stock consideration for some or all of your shares
of our common stock, you must:
- Return your properly completed election form so that it is received not
later than the close of business on the day before our special meeting of
stockholders; and
- return your stock certificates representing your shares of our common
stock or a guarantee of delivery of your shares with your properly
completed election form.
A guarantee of delivery is a document signed by a broker-dealer, bank or
trust company promising to EFI that it will deliver, to EFI's exchange agent,
within three trading days, certificates representing the number of shares for
which you are making an election. If the broker-dealer, bank or trust company
does not deliver certificates representing a sufficient number of shares to
EFI's exchange agent within three trading days, then your election will be
invalid. Copies of the guarantee of delivery are available from MacKenzie
Partners.
You may change your election, at any time before the close of business on
the day before our special meeting of stockholders, by submitting a later dated
properly completed election form. You may also revoke your election by
submitting a written revocation to EFI's exchange agent before the close of
business on the day before the special meeting of our stockholders. All
determinations with respect to the validity of elections will be made by EFI and
EFI will have no liability to any of our stockholders for determinations made in
good faith.
Exchange Procedures. As soon as reasonably practicable after the
completion of the merger, EFI's exchange agent will mail to each stockholder of
record of our common stock that did not make a valid election a letter of
transmittal containing instructions for the surrender of certificates
representing our common stock in exchange for cash merger consideration.
No Fractional Shares. If you elect to receive any portion of your merger
consideration in shares of EFI common stock, no fractional shares will be
issued. Instead of issuing fractional shares of EFI common stock, the exchange
agent will pay cash, without interest, payable by check, in lieu of any
fractional share, based on the average closing sales price of EFI's common stock
on the Nasdaq National Market for the 10 trading day period ending on the fifth
trading day prior to the special meeting of our stockholders.
Dividends and Distributions. If you elect to receive your merger
consideration in shares of EFI common stock, no dividends or other distributions
that are made after the effective time of the merger with respect to shares of
EFI common stock will be paid to any holder of a certificate representing shares
of our common stock until that certificate is surrendered for cancellation.
However, if you elect to receive
49
your merger consideration in shares of EFI common stock, you will be paid,
without interest, upon surrender of your certificate, any dividends or
distributions with a record date after the effective time of the merger but a
payment date between the effective time of the merger and the time of surrender.
No Further Ownership Rights. No transfers or registrations of shares of
our common stock will be made after the effective time of the merger. If, after
the effective time of the merger, certificates representing shares of our common
stock are presented to us or our transfer agent for any reason, those
certificates will be cancelled and exchanged for the merger consideration as
provided in the merger agreement.
Termination of Exchange Fund. If, six months following the effective time
of the merger, you have not surrendered your certificates representing shares of
our common stock to the exchange agent, you may thereafter look only to EFI to
receive the merger consideration. None of EFI, Printcafe or the exchange agent
will have any liability to any holder of a certificate formerly representing
shares of our common stock, for the merger consideration, for cash in lieu of
fractional shares, or for any unpaid dividends or distributions which are
delivered to a public official pursuant to any applicable abandoned property or
similar law.
REPRESENTATIONS AND WARRANTIES
Our Representations and Warranties. We made a number of representations
and warranties in the merger agreement that relate to Printcafe, our business,
affairs, financial condition and other matters. In some instances, those
representations and warranties also apply to our subsidiaries. Our
representations and warranties are generally subject to exceptions, which are
set forth in a disclosure letter and to other qualifications, and include
representations and warranties regarding:
- Organization, good standing, capitalization and similar corporate
matters;
- corporate power and authority to execute, deliver and perform the merger
agreement, and to complete the merger and related transactions;
- the absence of default or violation or consents required under our
organizational documents or laws, and the lack of conflicts with
applicable laws, our organizational documents, the contracts to which we
are bound and applicable laws;
- title to our assets and ownership of our subsidiaries;
- the timely filing of documents, compliance with laws and regulations and
the accuracy of information contained in the documents filed with the
SEC;
- the absence of changes or events relating to our business since September
30, 2002, and the absence of undisclosed liabilities;
- the accuracy of information supplied by us in connection with this
document and the registration statement to which it relates;
- compliance with applicable laws and possession of material permits;
- intellectual property matters, including patents, trademarks and various
matters related to software;
- employment matters and matters related to employee benefit plans;
- the existence, validity and status of material contracts;
- the absence of undisclosed pending or threatened material litigation;
- the timely filing of tax returns and other tax-related matters;
- the absence of any state anti-takeover law or provision of our
stockholders rights agreement that would restrain completion of the
merger;
- the absence of questionable payments or insider interests in our
business; and
50
- matters concerning UBS Warburg LLC's fairness opinion and the terms of
our agreement with them.
EFI's Representations and Warranties. EFI made a number of representations
and warranties in the merger agreement that relate to it, its business, affairs,
financial condition and other matters. In some instances, those representations
and warranties also apply to its subsidiaries. EFI's representations and
warranties are generally subject to exceptions, which are set forth in a
disclosure letter and to other qualifications, and include representations and
warranties regarding:
- Organization, good standing, capitalization and similar corporate
matters;
- corporate power and authority to execute, deliver and perform the merger
agreement, and to complete the merger and related transactions;
- the absence of default or violation or consents required under EFI's
organizational documents or laws, and the lack of conflicts with
applicable laws, EFI's organizational documents, the contracts to which
its is bound and applicable laws;
- the timely filing of documents, compliance with laws and regulations and
the accuracy of information contained in the documents filed with the
SEC;
- the absence of changes or events relating to its business since September
30, 2002, and the absence of undisclosed liabilities;
- the accuracy of information supplied by EFI in connection with this
document and the registration statement to which it relates;
- the absence of questionable payments or insider interests in EFI's
business; and
- the operations of EFI's subsidiary that will effect the merger.
RESTRICTIONS ON OUR SOLICITATION OF TAKEOVER PROPOSALS
We agreed that we will not, among other things, solicit any takeover
proposal, participate in any discussions or negotiations regarding any takeover
proposal, or enter into any merger agreement, acquisition agreement, option or
similar agreement with a third party. Our board of directors is not precluded
from participating in discussions or negotiations with a suitor regarding a
proposal if the value offered per share of our common stock is greater than
$2.60 and if our board of directors, or the special committee, determines that
the failure to participate in discussions or negotiations with the suitor would
likely result in a breach of its fiduciary duties to our stockholders under
applicable law.
Our board of directors agreed not to:
- Withdraw, modify or supplement its recommendation of the merger agreement
in a manner adverse to EFI;
- approve or recommend a takeover proposal from a party other than EFI; or
- approve or recommend any acquisition agreement; but
on the fifth business day after we have notified EFI that our board of
directors is prepared to recommend a superior proposal, we may terminate the
merger agreement and we may enter into an acquisition agreement for a superior
proposal. A superior proposal includes any proposal made by a third party to
acquire Printcafe for consideration consisting of cash and/or securities that
our board of directors determines in good faith, after consultation with a
financial advisor of national reputation, to be superior, from a financial point
of view, to the merger and for which financing, to the extent required, is then
committed or which, in the good faith judgment of our board of directors, is
reasonably capable of being obtained by the third party.
We agreed to keep EFI informed of any takeover proposals we receive and any
developments with respect to those proposals. Our board retained the right to
make any disclosures that, in its good faith
51
judgment, after consultation with outside counsel, the failure to so disclose
would constitute a breach of its obligations under applicable law.
COVENANTS
We and EFI made a number of agreements with each other in the merger
agreement, including:
- We agreed to conduct our business in the ordinary course consistent with
past practices and to use commercially reasonable efforts to preserve
intact our business to the end that our goodwill and ongoing business
will not be impaired in any material respect as of the completion of the
merger;
- we and EFI agreed to provide notice to the other party if we or EFI have
knowledge of any breach of any representation or warranty in the merger
agreement, any failure to comply in a material respect with obligations
under the agreement or any change or event that causes, or is reasonably
likely to cause, the conditions to the closing of the merger not to be
satisfied;
- we and EFI agreed to cooperate in the preparation of this document and
the registration statement to which it relates;
- we agreed to duly call, give notice of, convene and hold our special
meeting of stockholders and except as described under "Restrictions on
Our Solicitation of Takeover Proposals," to have our board of directors
recommend that you vote to adopt the merger agreement;
- we agreed to have our independent auditors prepare "comfort letters" for
EFI;
- we agreed to provide EFI with access to our facilities, employees and
agents and to give EFI copies of reports and other information that it
may reasonably request from us;
- we and EFI each agreed to use commercially reasonable efforts to complete
the merger, but EFI will not be required to divest or hold separate any
of its assets in order to complete the merger;
- EFI agreed to give our employees credit for service with us, and our
predecessor companies, and to treat our employees the same as similarly
situated EFI employees when our employees become eligible to receive
benefits under EFI's employee benefit plans;
- EFI agreed to honor our existing director and officer indemnification
obligations for a period of six years following the completion of the
merger and to expend up to $1.2 million to provide insurance covering our
directors and officers;
- we and EFI agreed to consult with each other concerning any public
announcements with respect to the merger;
- we agreed to use commercially reasonable efforts to have our affiliates
sign agreements with EFI acknowledging their obligations under the
Securities Act and we agreed to place an appropriate legend on the shares
of our common stock that are subject to the restrictions in the
stockholders agreements;
- EFI agreed to use commercially reasonable efforts to have the shares of
its common stock issuable in connection with the merger listed on the
Nasdaq National Market;
- we agreed to provide EFI with the opportunity to participate in any
litigation related to the merger agreement or the transactions
contemplated by the merger agreement; and
- EFI agreed to vote all shares of our common stock that it owns as of the
record date for the special meeting of our stockholders in favor of
adoption of the merger agreement and to cause its subsidiary that will
effect the merger to comply with its obligations under the merger
agreement.
52
CONDITIONS TO COMPLETION OF THE MERGER
The merger will be completed only if the conditions set forth in the merger
agreement are satisfied or waived at or before the closing. These conditions
include the following:
- The approval of the merger agreement by our stockholders;
- no legal restraint will be in effect which prevents the completion of the
merger, prohibits or limits our or EFI's ability to conduct our
respective businesses, requires us or EFI to divest any of our respective
assets or which otherwise would reasonably be expected to have a material
adverse effect on us or EFI;
- the registration statement to which this document relates must have been
declared effective by the SEC;
- the shares of EFI common stock to be issued in connection with the merger
must be approved for listing on the Nasdaq National Market;
- the accuracy of EFI's and our representations and warranties, and our and
EFI's compliance with the parties' respective agreements in the merger
agreement;
- no occurrence of events or conditions that have, or could reasonably be
expected to have, a material adverse effect on us or EFI; and
- EFI must have received "comfort letters" from our independent auditors.
"Material adverse effect" means any change, effect, event, occurrence,
condition or development or state of facts that:
- Is or would reasonably be expected to be materially adverse to the
business, assets or results of operations or condition (financial or
other) of a party and its subsidiaries, taken as a whole, or
- prevents or materially delays the consummation of the merger or any other
transactions contemplated by the merger agreement,
in each case, other than any change, effect, event, occurrence, condition or
development or state of facts:
- Relating to the U.S. economy in general,
- relating to the industry in which the applicable party operates in
general (and not having a materially disproportionate effect on the
applicable party relative to most other industry participants),
- resulting from the announcement or pendency of the transactions
contemplated by the merger agreement or
- in respect of decreases in a party's stock price,
but any effect described in the first three bullets above must be direct and
that the party claiming the effect will have the burden of proving the direct
effect; but:
- In our case, none of (1) the acceleration of the maturity date of any of
our existing indebtedness, (2) the delisting of our common stock from the
Nasdaq National Market or (3) the inclusion of a "going concern" or
similar qualification in the audit opinion delivered by our auditors in
connection with their report on our financial statements for the year
ended December 31, 2002 will be a material adverse effect.
53
TERMINATION
The parties can terminate the merger agreement under the following
circumstances:
- We and EFI can mutually agree to terminate the merger agreement;
- either party can terminate the merger agreement if the closing has not
occurred by August 31, 2003, our stockholders do not adopt this agreement
at the special meeting of our stockholders or if there is a legal
restraint that prohibits completion of the merger;
- either party can generally terminate the merger agreement if there is a
breach of a representation, warranty or agreement in the merger agreement
by the other party which would result in any condition to its obligations
becoming impossible to be satisfied and, if the breach may be remedied,
30 calendar days must have elapsed since the non-breaching party gave
notice of the breach to the breaching party;
- EFI can terminate the merger agreement if we breach our agreements with
respect to not soliciting takeover proposals and that breach leads to a
superior proposal or our board of directors fails to recommend approval
of the merger agreement to our stockholders, withdraws or changes its
recommendation; if EFI so terminates the merger agreement we must pay EFI
$828,000;
- we may terminate the merger agreement in order to enter into an agreement
to enter into a business combination or sell our stock or assets on terms
which our board of directors determines are superior to the terms of the
merger; if we so terminate the merger agreement we must pay EFI $828,000;
and
- we may terminate the merger agreement within five business days after the
record date if EFI has not exercised the stock option in full before the
record date.
If our stockholders do not adopt the merger agreement and we enter into an
agreement for a takeover proposal for consideration of greater than or equal to
$2.60 within twelve months of termination, we must pay EFI $828,000.
54
THE SPECIAL MEETING
GENERAL INFORMATION; PURPOSE OF THE SPECIAL MEETING
The special meeting will be held at our principal executive offices, Forty
24th Street, Pittsburgh, Pennsylvania 15222, on , 2003, beginning at
9:00 a.m., local time, to consider and to vote upon the adoption of the merger
agreement. Our board of directors is soliciting your proxy to be voted at that
special meeting.
RECORD DATE; SHARES ENTITLED TO VOTE
Only our stockholders of record at the close of business on ,
2003, the "record date" for the special meeting, will be entitled to notice of,
and to vote at, the special meeting. On the record date, there were shares of
our common stock outstanding and entitled to vote at the special meeting. Each
holder of shares of our common stock outstanding on the record date is entitled
to one vote for each share held, exercisable in person or by properly executed
and delivered proxy, at the special meeting. The presence of the holders of at
least one-third of the shares of our common stock outstanding on the record
date, whether present in person or by properly executed and delivered proxy,
will constitute a quorum for the transaction of business at the special meeting.
VOTE REQUIRED
The affirmative vote of the holders of record of at least a majority of the
shares of our common stock entitled to vote at the special meeting is necessary
to adopt the merger agreement. Pursuant to the stockholders agreements entered
into concurrently with the execution and delivery of the merger agreement,
stockholders that collectively own approximately % of our outstanding
common stock, executed the stockholders agreements, which, among other things,
require them to vote all shares of our common stock which they are entitled to
vote, directly or indirectly, in favor of adoption of the merger agreement.
Abstentions cast in person at the special meeting will be tallied as votes
having been made and will not be treated as affirmative votes. Brokers who hold
shares for customers that have not given the broker instructions as to how to
vote at the special meeting will not vote those shares at the special meeting.
Abstentions and broker non-votes have the effect of a vote against the proposal
to adopt the merger agreement but will be counted for the purpose of determining
whether a quorum is present at the special meeting.
VOTING AND REVOCATION OF PROXIES
You are requested to complete and sign the accompanying form of proxy and
return it promptly to us in the enclosed postage-paid envelope. When the
accompanying form of proxy is returned properly executed, the shares of our
common stock represented by it will be voted at the special meeting in
accordance with the instructions contained in the proxy. If a proxy is executed
and returned without an indication as to how the shares of our common stock
represented are to be voted, the shares of our common stock it represents will
be voted for adoption of the merger agreement. Unless you check the box on your
proxy withholding discretionary authority, the proxy holders may use their
discretion to vote on other matters relating to the special meeting, like
adjourning for the purpose of soliciting additional proxies. If you vote against
the proposal to adopt the merger agreement but do not check the box withholding
discretionary authority, the proxies could vote your shares for an adjournment
or postponement which is intended to allow additional votes to be solicited for
adoption of the merger agreement.
You have the power to revoke any proxy you have given at any time before it
is voted at the special meeting. A later-dated proxy or written notice of
revocation given to our corporate secretary before the vote at the special
meeting will serve to revoke a proxy. Also, a stockholder who attends the
special meeting in person may vote by ballot at the special meeting, thereby
canceling any proxy previously given. Mere presence at the special meeting will
not revoke any proxy previously given.
55
OTHER MATTERS TO BE CONSIDERED
Our board of directors is unaware of any other matter that will be brought
before the special meeting. If, however, other matters are presented that relate
to the merger, proxies will be voted in accordance with the discretion of the
holders of the proxies. If you wish to withhold this discretionary authority
from the proxy holders, you must check the applicable box on the proxy card.
Pursuant to our bylaws and the Delaware General Corporation Law, only business
within the purposes described in the notice of special meeting in this document
may be conducted at the special meeting.
SOLICITATION OF PROXIES
We will bear the cost of soliciting proxies from holders of our common
stock. We have retained MacKenzie Partners, Inc. to assist us in the
solicitation of proxies. We have agreed to pay MacKenzie Partners up to $50,000
and to reimburse its expenses and to indemnify it from liabilities under federal
securities laws. In addition to the use of the mails, persons regularly employed
by us, EFI and MacKenzie Partners may solicit proxies by personal interview,
telephone and other telecommunication devices. Persons soliciting proxies will
receive no additional compensation for their services, but we will reimburse
them for any out-of-pocket expenses incurred by them in connection with their
services. Arrangements may also be made with custodians, nominees and
fiduciaries for the forwarding of solicitation materials to the beneficial
owners of shares of our common stock held of record by custodians, nominees or
fiduciaries, and we may reimburse custodians, nominees or fiduciaries for their
reasonable out-of-pocket expenses incurred by them in forwarding proxies.
56
INFORMATION ABOUT PRINTCAFE
BUSINESS
OVERVIEW
We provide software solutions designed specifically for the printing
industry supply chain. Our enterprise resource planning and collaborative supply
chain software solutions enable printers and print buyers to lower costs and
improve productivity. Our procurement applications, which are designed for print
buyers, facilitate collaboration between printers and print buyers over the Web.
Our software solutions have been installed by more than 4,000 customers in over
8,000 facilities worldwide, including 24 of the 25 largest printing companies in
North America and over 50 businesses in the Fortune 1000.
INDUSTRY BACKGROUND
Based on U.S. Department of Commerce data and other industry sources, we
estimate that the printing industry supply chain is at least a $240 billion
market in the United States. We use the term printing industry supply chain to
describe the supply chain consisting of printers, print buyers, who buy products
and services offered by printers, and print industry raw material suppliers, who
supply the raw materials used by printers in the printing process.
Based on industry sources, we believe that there are an estimated 50,000
printing facilities in the United States. Printers can be divided into three
principal market segments -- commercial printers, publication printers, and
retail printers -- based on the type of their equipment, the size and complexity
of their print jobs, and the nature of their customers. Commercial printing
includes the printing of brochures, direct mail materials, posters, promotional
materials, business forms, customized packaging and labels. Publication printing
involves the printing of larger quantities of more complex materials, such as
newspapers, catalogs, magazines, books, and retail inserts. Retail printers
offer customers many of the same products as a small commercial printer offers
its customers but typically also offer "walk up" service where a customer may
have a job produced on demand.
Print buyers in nearly all markets require a wide variety of printed
materials and typically place customized orders with short lead times and
frequently request last minute changes. As a result, printers face unpredictable
demand, making it difficult to sustain high equipment utilization. The
unforeseen customer requirements placed on printers by customers also make it
difficult for print industry raw material suppliers to respond to printers'
needs. These characteristics of the printing industry lead to production
inefficiencies throughout the printing industry supply chain.
The competitive environment in the printing industry requires printers and
print industry raw material suppliers to differentiate themselves by offering
superior quality, price, and customer service. Printers and print industry raw
material suppliers need solutions that increase revenues, reduce operating
costs, improve productivity, and increase customer satisfaction and loyalty.
Print buyers also seek to interact efficiently with printers in order to reduce
printing costs, improve productivity, and shorten production times.
THE TRADITIONAL PRINT PRODUCTION PROCESS
The production of printed material is complex and requires collaboration
among multiple parties throughout the process to ensure that the final product
accurately reflects the print buyer's design and meets its quality, cost, and
delivery expectations. Printing jobs are often highly customized, requiring
numerous interactions among print buyers, printers, and print industry raw
material suppliers. The production process itself can be divided into three
separate stages: design and specification; purchasing; and manufacturing and
distribution.
Design and specification. A print buyer designs printed material through a
collaborative process involving a print buyer's in-house and external design,
purchasing, sales, marketing, and creative personnel. The print buyer must then
communicate the print job specifications to the printer, using industry-specific
57
terminology, so that the printer can evaluate the specifications. Typically, the
print buyer specifies the print job manually and communicates it by telephone,
facsimile, or e-mail. The traditional design and specification process is
inherently inefficient. These inefficiencies result from the manual process of
data communication, input, and retrieval, the lack of appropriate error-checking
mechanisms, and the need for print buyers to understand the intricacies of the
print process and its industry-specific terminology in order to submit an
accurate request for a quote.
Purchasing. Purchasing a print job begins with the transmission of the
specifications to one or more printers to obtain and evaluate quotes that
estimate the cost, timing, and other elements of the project. A printer cannot
estimate the cost of a print job until the print buyer has completed the
specification phase, by defining paper, content, configuration, binding, and
distribution requirements. After evaluating the specification details, the
printer will determine its selling price, either manually or by a computer-based
process, and prepare a quote for the job. Once the printer provides a quote, the
print buyer then uses this information to modify job designs and specifications
and to select a printer. Without a consistent means of specifying a print job,
printers may misinterpret and inaccurately reply to quote requests, and print
buyers may not adhere to internal corporate policies and spending limits. In
addition, depending on a number of factors, such as the equipment available to
produce the print job, the cost of producing the same print job can vary
significantly from printer to printer. These miscommunications and
inefficiencies often lead to higher costs, delays, and customer dissatisfaction.
Manufacturing and distribution. This stage encompasses management of the
entire supply chain and production process, from purchasing and inventory of raw
materials through order management, preparation, printing, binding, finishing,
distribution, invoicing, and payment processing. The manufacturing and
distribution process has traditionally required manual preparation of job
instructions, which can result in inconsistent and inaccurate print
specifications, errors in the production process, delays in project completion,
and an inability to track the current status of inventories and jobs, leading to
high costs, production errors, delays, and customer dissatisfaction. In
addition, the difficulty associated with implementing customer change orders,
and a lack of integration between the systems that are used to plan and design
print projects, lead to further complications, inefficiencies, and errors in the
manufacturing and distribution processes.
THE IMPACT OF NEW TECHNOLOGIES ON THE PRINTING INDUSTRY SUPPLY CHAIN
The Web and other new technologies provide opportunities for businesses
across all industries to improve efficiency by extending their enterprise
software applications to include customers, partners, and suppliers. Businesses
seek software solutions that incorporate industry best practices, standard
processes, industry-specific terminology, and other functionality that has been
designed for their particular industry. Most enterprise software applications,
however, are not designed for the needs of a particular industry. We believe
that industry-specific software solutions can be easier to implement and
facilitate deeper collaboration among supply chain participants. These software
solutions are particularly in demand in industries, such as printing, with a
complex production process and rapidly changing job specifications.
The printing process involves a high degree of customization to meet the
needs of participants in the printing industry supply chain, causing them to
utilize industry-specific enterprise resource planning systems to maximize
process efficiency. Some businesses have turned to in-house solutions to address
these needs. More recently, vendors have developed a variety of software
applications designed for use in many industries, including procurement and
enterprise resource planning systems. We believe that these applications, which
are often designed for a standard assembly process, utilizing catalog-derived
parts, do not meet the complex needs of the printing industry with its
job-specific custom requirements. The complexities and inefficiencies inherent
in the traditional print process create an opportunity for an integrated
software solution specific to the printing industry supply chain that eliminates
redundant and manual processes and enhances communication and collaboration.
58
THE PRINTCAFE SOLUTION
We believe that we offer the only integrated software solutions that enable
printers and print buyers to increase efficiency in each stage of the printing
process -- from specification and purchasing to manufacturing and distribution
-- by providing enterprise resource planning systems, purchasing systems, and
collaborative supply chain planning and execution systems. Since our inception
in 1987, we have continually developed our software, targeted to the specific
needs of the printing industry supply chain, by drawing on our years of
experience in the printing industry and leveraging our relationships with our
strategic partners and customers.
Benefits to printers. Our software solutions enable printers to maximize
productivity, increase revenues, improve production management, and increase
customer satisfaction and loyalty. Printers use our software solutions to:
- Increase responsiveness by automating the quotation process, quoting
accurate prices, and receiving and fulfilling orders electronically for
almost any type of print project;
- automate the manufacturing process and control print production
equipment, including scheduling the execution of print jobs and
collecting data on print jobs in process;
- manage inventory, resource planning, purchasing, accounting, and
invoicing;
- communicate and collaborate with multiple parties throughout the printing
process; and
- leverage their technology leadership to increase revenues by increasing
business with existing customers and generating new customer
opportunities.
Benefits to print buyers. Our software solutions enable print buyers to
increase productivity and reduce costs in the printing industry supply chain. By
automating the print specification and purchasing processes, our products allow
print buyers to replace inefficient manual processes with online collaboration
capabilities. Print buyers use our software solutions to:
- Centrally manage and enforce company-wide print purchasing policies;
- specify, estimate the cost of, order, and track changes to, virtually any
type of print project by collaborating with printers of their choice;
- purchase print more effectively by allowing the print buyer to select the
most suitable printer for each print job;
- reduce print job production time by communicating and collaborating with
multiple parties throughout the printing process; and
- track the current status of a project from specification through delivery
and reconcile invoices to orders and change orders.
PRODUCTS
Our software solutions automate the print production process; facilitate
collaboration, order fulfillment, data collection and analysis, and inventory
management; and provide financial accounting functions for printers. Our
products, developed specifically for the printing industry supply chain, are
designed to reduce costs, increase customer satisfaction, and overcome
inefficiencies in the traditional print production process. Our products can be
deployed together as an integrated solution or purchased separately and used on
a stand-alone basis.
We offer four categories of products:
- Enterprise resource planning and supply chain planning products, which
facilitate efficient and accurate fulfillment of each print production
job by automating purchasing, operations, and financial functions;
59
- collaboration and procurement products, which enable print buyers to
communicate with printers at every stage of the print production process,
thereby reducing errors, production time, and costs;
- self-service applications, which enable printers to establish a Web
storefront and provide other online services to their customers,
facilitating interaction with their customers and potential customers by
improving collaboration and project management; and
- manufacturing and supply chain execution products, which enable
commercial and publication printers to plan and adjust their production
capacity by analyzing data collected from the production floor.
PRODUCT TYPE PRODUCT NAME TARGET SEGMENT DESCRIPTION
------------ --------------- ------------------------------ ----------------------------------
Enterprise Resource - Prograph - Publication printers - Software that automates the
Planning and Supply - Hagen - Large commercial printers print production process from
Chain Planning - Logic - Mid-market commercial planning and quoting to
printers inventory management and
- PSI - Small commercial printers financial reporting.
- PrintSmith - Retail printers
Collaboration and - EnterpriseSite - Fortune 1000 print buyers - Web-based purchasing software
Procurement - Impresse Site - Fortune 1000 print buyers that expedites print purchases
for print buyers through
collaboration with printers
and efficient project
management tools.
- Proteus - Publishers - Software tool for magazines,
catalogs, books, and directories
that automates internal
processes, including layout,
cost estimating, optimization,
and ordering.
Self-Service - PrinterSite - Commercial printers - Web-based software that
Applications - Printchannel - Commercial printers facilitates the print production
- PrintSmith - Retail printers process by providing an
Site integrated storefront for online
collaboration, file sharing,
project management, and
other print functions.
Manufacturing and - Auto-Count - Commercial and publication - Production floor data collection
Supply Chain Execution printers software with a direct machine
interface for tracking count,
waste, and performance
statistics from press and
bindery equipment.
- PrintFlow - Commercial and publication - Software tool that automates and
printers optimizes job scheduling of an
individual printing facility or
group of facilities.
CUSTOMERS
Our software solutions for the printing industry supply chain have been
installed by more than 4,000 printer customers in over 8,000 facilities
worldwide, including 24 of the 25 largest publication and commercial printers in
North America and more than 50 businesses in the Fortune 1000. During 2002 and
the first quarter of 2003, no single customer accounted for ten percent or more
of our revenue.
SALES AND MARKETING
We sell our products and services through:
- Our 35 person sales force, which currently generates most of our new
sales;
- sales representatives of Creo, one of our strategic partners, which
currently generates less than 2% of our total sales;
60
- co-marketing agreements with Accenture, AT Kearney and SMARTworks; and
- the sales forces of some of our printer customers, who recommend our
products to their print buyer customers.
Our marketing programs are designed to promote our brand, educate our
existing and potential customers about the features and benefits of our
software, and generate sales leads. As of May 20, 2003, our sales and marketing
team consisted of 45 professionals. Our marketing activities include
participation in industry trade shows and seminars, hosting an annual user
conference attended by over 700 participants, hosting regional user meetings,
direct mailings, trade journal advertising, and public relations activities.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
Our customer service professionals configure and implement our software
solutions and provide technical support, consulting, and training to our
customers. As of May 20, 2003, we employed 128 professionals in our customer
service organization. Our customer service professionals are available by
telephone, over the Web, or by e-mail to assist with customer support requests
24 hours a day, seven days a week.
In addition to professional services, we offer product maintenance to our
customers. Maintenance contracts are typically subject to an annual, renewable
fee and are typically priced as a percentage of product license fees. Customers
under maintenance service contracts receive technical product support and
product upgrades as they are released throughout the life of the maintenance
contracts.
TECHNOLOGY AND PRODUCT ARCHITECTURE
We design software solutions for participants in the global printing
industry supply chain. Our products are designed to be easily adaptable, secure,
and scalable for global businesses, as well as capable of handling multiple data
sources and a large number of transactions. Our products are implemented through
two technology platforms: client/server software applications and hosted Web-
based products. With our modular, object-oriented development approach, we have
developed client/server-based enterprise resource planning systems and supply
chain planning and execution software that work with a variety of databases and
operating systems. Our Web-based products are developed using readily-available
Web development tools and are deployed on an Oracle database. If we are unable
to maintain our licenses with Oracle, we could be required to obtain substitute
technology of lower quality or performance standards, or at additional cost, and
our business could be harmed. We continually refine our client/server software
applications and our Web-based products in order to improve their
interoperability and to extend the reach of our products throughout the printing
industry supply chain.
Our product architecture is designed to support today's rapidly changing
technology standards by providing the following features:
Layered architecture. Our client/server software applications are written
using an object-oriented architecture, which enables our developers to construct
and modify discrete applications efficiently and cost-effectively. Our hosted
Web-based software applications are developed using multi-tier architecture,
which provides for ease of deployment, application management, support, and
scalability.
Flexible, open systems architecture. Our open architecture benefits both
our internal software development process and the customers who use our
solutions. Our developers are able to pre-configure software to address in
separate solutions the specialized needs of the different types of participants
in the printing industry supply chain, which simplifies and accelerates the
software development process. We are able to offer products which are
appropriate for customers ranging from small, single-facility print shops to
large, enterprise-wide implementations. In addition, our architecture supports a
number of different operating systems, such as Windows, Macintosh, AS/400, and
UNIX.
Scalability. We use a distributed application framework, which leverages
separate applications working together, rather than a single, complex system, to
minimize product complexity and facilitate product updates and maintenance. We
ensure optimal scalability in our Web-based products by managing
61
application replication software on multiple servers, coupled with load
management software and hardware, which provides redundancy and additional peak
use capacity. Our multi-tier architecture allows for rapid response to demands
for increased capacity resulting in an environment that is highly scalable.
Security. Our Web-based products are protected from intrusion and
compromise through multiple industry-standard security measures. Our multi-tier
architecture isolates the major components of the system from one another -- the
publicly-accessible tiers include user interface components and business logic
modules, while the data layer resides in a separate, secure, private tier. By
segregating data from the interface and business logic, we protect the data
repository from infiltration over the public Web. We also rely upon
industry-standard security protocols, such as secure socket layer connections,
digital signatures, and encryption, to protect essential customer data from
exposure and corruption.
INTELLECTUAL PROPERTY
We rely primarily on a combination of copyright, trademark, trade secret,
and patent laws and contractual restrictions to protect the proprietary aspects
of our technology. These legal protections afford only limited protection for
our technology. We seek to protect the source code for our software,
documentation, and other written materials under trade secret and copyright
laws. We license our software pursuant to license agreements, which impose
restrictions on the licensee's ability to utilize the software. We also require
employees and consultants with access to our proprietary information to execute
confidentiality agreements. We have obtained eight patents in the United States
on aspects of our technology and business processes. Four of these patents are
scheduled to expire within the next two years and the remaining four patents
expire at different times between 2005 and 2017. We do not view the expiration
of these patents to be material. We have also filed applications for additional
patents. We expect that, if granted, the duration of these patents will be 20
years from the date of filing the application. We own various trademarks that
are used in connection with our business, some of which have been registered
with the United States Patent and Trademark Office. The duration of those
trademarks is unlimited, subject to continuous use.
We license several patents for our Web-based solutions from the owners of
the respective patents. The license agreements grant us a non-exclusive license
to use in our products the process covered by U.S. Patent No. 4,839,829, No.
6,353,483, No. 6,362,895, and No. 6,429,947. The licenses remain in effect until
the expiration of the respective patents. We also license technology owned by
Creo Inc. for use in the Web-based solutions which we offer to printers. Creo
can terminate this license agreement if a third party purchases more than fifty
percent of our outstanding stock or our strategic alliance agreement with Creo
is terminated.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. In addition, the laws of many countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States. Litigation may be necessary in the future to enforce our
intellectual property rights and to determine the validity and scope of the
proprietary rights of others. Our failure to adequately protect our intellectual
property could have a material adverse effect on our business and operating
results.
COMPETITION
Traditionally, both printers and print buyers would internally create their
own methodologies to manage their printing industry supply chain needs, often
using manual processes. In the absence of commercially-available printing
industry supply chain software, some companies developed software for their own
internal use. The market for software focused specifically on the printing
industry supply chain is relatively new and is evolving rapidly.
In this market, we encounter competition from software application vendors
that specifically target the printing industry, which are typically small,
privately-owned companies, and from larger vendors who currently offer or are
seeking to develop printer-focused enterprise resource planning products, such
as Heidelberg and SAP. We are unaware of any competing integrated suite of
software products focused
62
specifically on the print industry supply chain similar to our comprehensive
software solutions. In the future, we could potentially face competition from
other software vendors with related functionality in enterprise resource
planning, supply chain management, and procurement who decide to target the
printing industry, including Ariba, i2, Manugistics, Microsoft, Oracle, and
PeopleSoft, and other software vendors focused on specific aspects of supply
chain planning and execution, such as Manhattan Associates, Retek, and Vastera.
We believe that the principal competitive factors affecting our market include
adoption by a significant number of print buyers and printers, product quality
and performance, customer service, core technology, product features, price, and
the value of services.
EMPLOYEES
As of May 20, 2003, we had 318 full-time employees. Of these employees, 45
were in sales and marketing, 105 were in research and development, 128 were in
customer support, and 40 were in general and administrative services and
operations. Our employees are not represented by a labor union, and we consider
our employee relations to be good.
FACILITIES
Our headquarters are located in Pittsburgh, Pennsylvania, where we lease
approximately 25,000 square feet of office space. The lease expires in November
2003, unless we elect to extend the term for up to an additional two years.
These facilities are used for executive office space, including sales and
marketing, finance and administration, research and design, Web hosting, and
customer support. In addition, we have offices in Arizona, California,
Connecticut, Illinois, Minnesota, and New Hampshire in the United States, and
New Windsor in the United Kingdom.
LEGAL PROCEEDINGS
On February 19, 2003, Creo commenced an action in The Court of Chancery of
the State of Delaware in and for New Castle County captioned Creo, Inc. v.
Printcafe Software, Inc., Electronics For Imaging, Inc., Marc D. Olin, Charles
J. Billerbeck, Victor A. Cohn and Thomas J. Gill. Creo requested a temporary
restraining order with respect to (a) triggering, exercising or otherwise giving
effect to the stockholders' rights plan we adopted, (b) enforcing any action
taken or to be taken by us "with the intent or effect of impeding the operation
of market forces in an open bidding contest for Printcafe," (c) taking any steps
or actions to enforce the fee provided for in the letter agreement we entered
into with EFI, (d) taking any steps or any actions to enforce the option we
granted to EFI, (e) taking any steps or actions to enforce the no solicitation
provisions of the standby credit letter that we entered into with EFI, (f)
engaging in any "conduct intended to cause or having the effect of causing
Printcafe to forgo the opportunity to explore and enter into economically more
favorable transactions" and (g) entering into, or purporting to enter into, a
merger agreement between EFI and us before the court finally rules on the
action. On February 21, 2003 the court denied Creo's request for a temporary
restraining order. The matter is still pending in the Delaware Chancery Court
with respect to the other relief sought by Creo. We intend to vigorously defend
ourselves in this matter. If this lawsuit is resolved unfavorably to us, our
business and financial condition could be adversely affected and we may not be
able to complete the merger.
From time to time, we may be involved in various lawsuits and legal
proceedings that arise in the ordinary course of business, including claims from
third parties alleging that our products infringe their proprietary rights.
These claims, with or without merit, could be time-consuming and costly, divert
management's attention, cause product shipment delays, require us to develop
non-infringing technology, or enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on acceptable
terms, if at all. Based on our investigation to date, we do not believe that the
ultimate outcome of any of these claims would have a material adverse effect on
our business. However, if any of these disputes are resolved unfavorably to us,
our business and financial condition could be adversely affected.
63
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial and operating data set forth below
should be read in conjunction with our consolidated financial statements, the
related notes, and the other information contained in this document. The
selected consolidated balance sheet data as of December 31, 2002 and 2001 and
the selected consolidated statement of operations data for the three years ended
December 31, 2002 have been derived from our audited consolidated financial
statements included elsewhere in this document. The selected consolidated
balance sheet data as of December 31, 2000, 1999 and 1998 and the selected
consolidated statement of operations data for the two years ended December 31,
1999 have been derived from our audited consolidated financial statements not
included in this document. The financial data as of March 31, 2003 and for the
three months ended March 31, 2003 and 2002 are derived from our unaudited
consolidated financial statements included elsewhere in this document. In the
opinion of our management, all normal and recurring adjustments necessary for a
fair presentation have been included in our unaudited consolidated financial
statements. The three month results are not necessarily indicative of our full
year results.
FOR THE THREE
MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
RESULTS OF OPERATIONS
Revenue:
License and subscription....... $ 2,565 $ 5,613 $ 21,119 $ 18,103 $ 8,880 $ 1,298 $ 2,228
Maintenance.................... 5,742 5,377 21,701 20,601 15,239 1,090 907
Professional services and
other........................ 1,096 725 3,701 3,164 1,215 2,023 2,107
-------- -------- -------- -------- --------- -------- -------
Total revenue................ 9,403 11,715 46,521 41,868 25,334 4,411 5,242
Cost of revenue:
License and subscription....... 588 998 3,650 3,936 2,684 129 267
Maintenance.................... 1,254 1,309 5,091 6,088 7,337 320 160
Professional services and
other........................ 434 374 1,636 1,572 637 966 675
-------- -------- -------- -------- --------- -------- -------
Total cost of revenue........ 2,276 2,681 10,377 11,596 10,658 1,415 1,102
-------- -------- -------- -------- --------- -------- -------
Gross profit..................... 7,127 9,034 36,144 30,272 14,676 2,996 4,140
Operating expenses:
Sales and marketing............ 4,068 3,947 16,989 19,114 20,542 848 397
Research and development....... 3,025 3,034 12,003 12,180 11,307 1,900 1,601
General and administrative..... 3,117 1,783 6,193 7,645 24,525 2,704 1,651
Depreciation................... 593 763 2,922 3,821 2,060 232 199
Amortization of goodwill and
other intangibles(1)......... 5,090 7,388 29,511 49,052 39,481 774 --
Stock-based compensation and
warrants..................... 381 203 1,386 1,103 5,144 7,274 254
Restructuring charge........... -- -- 525 2,098 1,185 -- --
-------- -------- -------- -------- --------- -------- -------
Total operating expenses..... 16,274 17,118 69,529 95,013 104,244 13,732 4,102
-------- -------- -------- -------- --------- -------- -------
(Loss) income from operations.... (9,147) (8,084) (33,385) (64,741) (89,568) (10,736) 38
Other expense, net............... (1,115) (1,796) (7,412) (5,262) (6,150) (183) (22)
-------- -------- -------- -------- --------- -------- -------
Net (loss) income................ $(10,262) $ (9,880) $(40,797) $(70,003) $ (95,718) $(10,919) $ 16
Accretion of redeemable preferred
stock............................ -- (3,341) (6,201) (5,635) (4,858) -- --
-------- -------- -------- -------- --------- -------- -------
Net (loss) income attributable to
common stock..................... $(10,262) $(13,221) $(46,998) $(75,638) $(100,576) $(10,919) $ 16
======== ======== ======== ======== ========= ======== =======
Net loss per share basic and
diluted.......................... $ (0.97) $ (81.12) $ (8.11) $(468.67) $ (687.66) $ (96.36) $ --
======== ======== ======== ======== ========= ======== =======
Weighted average shares basic and
diluted.......................... 10,633 163 5,797 161 146 113 --
======== ======== ======== ======== ========= ======== =======
64
---------------
(1) For the years ended December 31, 2002, 2001, 2000, 1999, and 1998, goodwill
amortization was $0, $19,576, $16,653, $774 and $0, respectively, or $0.00,
$121.30, $113.86, $6.83, and $0.00 per diluted common share, respectively.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standard No. 142, Goodwill and other Intangible Assets. SFAS 142 requires
among other things, the discontinuance of goodwill amortization and
provisions for the reclassification of certain existing recognized
intangibles as goodwill. Upon the adoption of SFAS 142, we ceased amortizing
goodwill.
AS OF AS OF DECEMBER 31,
MARCH 31, ----------------------------------------------------
2003 2002 2001 2000 1999 1998
--------- -------- --------- --------- -------- ------
(IN THOUSANDS)
FINANCIAL POSITION:
Cash and cash equivalents........... $ 6,376 $ 8,775 $ 8,648 $ 15,206 $ -- $ 56
Working capital..................... (11,433) 4,063 (985) (4,209) (4,109) (566)
Total assets........................ 44,667 53,673 79,503 135,958 11,840 2,025
Long-term obligations, less current
portion........................... 1,575 12,743 33,365 36,114 953 68
Obligations under capital leases,
less current portion.............. -- -- 34 102 93 --
Redeemable preferred stock.......... -- -- 132,676 104,230 -- --
Total stockholders' equity
(deficit)......................... 12,102 21,959 (105,373) (32,792) 4,858 (661)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information in this discussion contains forward-looking statements that
involve risks and uncertainties. These statements involve known and unknown
risks, uncertainties, and other factors that may cause our actual results,
performance, or achievements to be materially different from any future results,
performances, or achievements expressed or implied by the forward-looking
statements. In some cases, you can identify forward-looking statements by terms
such as "may," "might," "will," "should," "could," "would," "plan," "expect,"
"intend," "believe," "goal," "estimate," "anticipate," "predict," "potential,"
or the negative of these terms, and similar expressions intended to identify
forward-looking statements. These statements reflect our current views with
respect to future events and are based on assumptions and subject to risks and
uncertainties. Given these uncertainties, you should not place undue reliance on
these forward-looking statements. Also, these forward-looking statements
represent our estimates and assumptions only as of the date of this document.
You should read this document completely and with the understanding that our
actual future results may be materially different from what we currently expect.
We qualify all of our forward-looking statements by these cautionary statements.
Factors that might cause or contribute to a discrepancy include, but are not
limited to, the Risk Factors included in our prospectus dated June 18, 2002
filed with the Securities and Exchange Commission and our other filings with the
Securities and Exchange Commission.
OVERVIEW
General. We have focused on developing software solutions designed
specifically for the printing industry supply chain since our inception in 1987.
In February 2000, Prograph Systems, our predecessor company, changed its name to
printCafe, Inc., and we launched our Web-based products to complement our
enterprise resource planning software. From February through April 2000, we
acquired five complementary businesses for an aggregate purchase price of $137.3
million. We have also committed significant resources to develop, integrate, and
market our products, expand our management team, and hire additional personnel.
On June 18, 2002, we completed our initial public offering by issuing 3,750,000
shares of our common stock at a price of $10.00 per share. We incurred a net
loss of $95.7 million, $70.0 million and $40.8 million in 2000, 2001 and 2002
respectively, and of $13.2 and $10.3 in the first quarter of 2002 & 2003
respectively, and had an accumulated deficit of $245.0 million as of March 31,
2003.
65
The acquisitions we completed in early 2000 generated goodwill of $57.7
million, of which $22.5 million remained unamortized as of March 31, 2003, and
other intangible assets of $86.4 million, of which $0.4 million remained
unamortized as of March 31, 2003. In accordance with SFAS No. 142, we have
performed the required impairment tests of goodwill and indefinite-lived
intangible assets as of December 31, 2002, and have determined that no
impairment loss is required to be recognized. The other intangible assets are
being amortized over a three-year period, Any future write-off of goodwill or
other intangible assets as a non-cash charge could be significant and would
likely harm our operating results. In addition, any future impairment loss
recognition may adversely affect our ability to comply with the financial
covenants in our installment note with National City Bank. As of March 31, 2003,
we were not in compliance with the debt service coverage covenant of the
installment note. We have received a waiver with respect to this default from
National City Bank, which expires on January 1, 2004. As of March 31, 2003, the
outstanding principal balance of this note was $0.3 million.
Sources of Revenue. Our revenue is derived principally from licenses and
subscriptions of our products, maintenance contracts, and professional and other
services, including implementation, consulting, and training. Our products are
typically purchased under either a perpetual license or a time-based or
usage-based subscription. We offer our enterprise resource planning and other
client/server software to printers and print buyers under license agreements. We
offer our Web-based products to printers and print buyers under subscription
agreements, which typically have a term of three years. Our print buyer
customers pay a subscription fee for our Web-based products based on the number
of users of the website. Our printer customers can purchase either an unlimited
subscription or a limited subscription for our Web-based products. The fee for
the limited subscription is based on the value of print orders processed through
the customer's website. Maintenance contracts are sold to customers, usually at
the time of sale of a software license, under annual agreements that provide for
automatic renewal, unless the customer cancels. We also provide professional
services, which are offered at an hourly rate.
We have derived most of our revenue from licenses of our software and the
sale of related maintenance to printers. In the first quarter of 2001, we began
to recognize revenue from the sale of our Web-based products to printers and
began to market our Web-based solutions for print buyers.
For the quarters ended March 31, 2002 and 2003, revenues from foreign
customers approximated 11% and 16%, respectively, of our total revenues. For the
years ended December 31, 2000, 2001 and 2002, revenues from foreign customers
approximated 5%, 11% and 15% respectively, of our total revenues.
CRITICAL ACCOUNTING POLICIES AND ASSUMPTIONS
Our discussion and analysis of the financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amount of assets,
liabilities, revenues, and expenses, and related disclosure of contingent assets
and liabilities. Our actual results may differ from those estimates.
The following critical accounting policies affect the significant judgments
and estimates we use in preparing our consolidated financial statements.
Accounts Receivable. We record an allowance against gross accounts
receivable to provide for doubtful accounts. The allowance is estimated based on
the age of the receivable, specific circumstances surrounding the collection of
an invoice, and historical data on allowances as a percentage of aged accounts
receivable balances. Actual collection on accounts may differ from the allowance
we have estimated.
Revenue Recognition. We recognize revenue on our software products in
accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition,
which provides for recognition of revenue when persuasive evidence of an
arrangement exists, delivery of the product has occurred, no significant
obligations remain on our part with regard to implementation, the fee is fixed
and determinable, and
66
collectibility is probable. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair value of each element. Revenue recognized
from multiple-element arrangements is allocated to undelivered elements of the
arrangement, such as maintenance and professional services, based on the
relative fair value of each element. Our determination of fair value of each
element in multi-element arrangements is based on vendor-specific objective
evidence (VSOE). We limit our assessment of VSOE for each element to either the
price charged when the same element is sold separately or the price established
by management for an element not yet sold separately. We have VSOE for
maintenance services and professional services.
If evidence of fair value of all undelivered elements exists but evidence
does not exist for one or more delivered elements, then revenue is recognized
using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the total fee is
recognized as revenue. We generally recognize license revenue under the residual
method upon delivery of our software to the customer, provided collection is
probable. Revenue allocated to maintenance is recognized ratably over the
maintenance term and revenue allocated to training and other service elements is
recognized as the services are performed. Revenue from Web-based products is
recognized ratably over the term of the subscription for unlimited subscriptions
and is recognized based on usage, subject to a fixed term, for limited
subscriptions. Many of our agreements include warranty provisions. Historically,
these provisions have not had a significant impact on our revenue recognition.
In those instances where customer acceptance may be in question, all revenue
relating to that arrangement is deferred until the warranty period has expired.
Contingencies. We are involved in disputes and litigation in the normal
course of business. We are required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable
losses. A determination of the amount of reserves required, if any, for these
contingencies are made after careful analysis of each individual issue. The
required reserves may change in the future due to new developments in each
matter or changes in insurance coverage or our approach, such as a change in
settlement strategy.
Stock Based Compensation. We have elected to follow Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations for our employee stock options because the alternative fair
value accounting provided under SFAS No. 123, Accounting for Stock Based
Compensation (SFAS 123), requires use of valuation models that were not
developed for use in valuing employee stock options.
In the first quarter of 2002, we granted options to purchase 766,520 shares
of common stock, with an exercise price of $4.21 per share, to employees and
directors. As a result, we recorded approximately $4.4 million of deferred
compensation. This amount represents the difference between the exercise price
and the fair market value of our common stock on the date we granted these stock
options. We will record stock-based compensation expense of approximately $1.1
million annually over the vesting period of these options, which is generally
four years. As described in "The Merger -- Interests of Our Directors and
Executive Officers in the Merger" if the merger is completed, the vesting of
these options will be accelerated by six months.
In April 2002, we granted options to purchase 381,603 shares of common
stock, with an exercise price of $15.54 per share, to employees. We did not
record any stock-based compensation expense related to these options as the
exercise price was above the then current fair market value. We also granted
options to purchase 92,910 shares of common stock to employees in June 2002,
with an exercise price of $2.00 per share. As a result, we will record
approximately $0.2 million of stock-based compensation expense annually over the
vesting period of these options, which is three years.
For the quarter ended March 31, 2003 we recorded $0.4 million of
stock-based compensation expense. For the year ended 2000, 2001 and 2002, we
recorded $5.1 million, $1.1 million and $1.4 million, respectively, of
stock-based compensation expense.
67
Warrants. We account for equity instruments issued to nonemployees and
pursuant to strategic alliance agreements in accordance with the provisions of
SFAS 123, Emerging Issues Task Force No. 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring or in
Conjunction with Selling Goods or Services, and Emerging Issues Task Force No.
01-9, Accounting for Consideration Given by Vendor to a Customer or a Reseller
of the Vendor's Product. Warrant expense represents charges associated with the
issuance of warrants to purchase our common stock. To the extent that we derive
revenue from agreements entered into in connection with the issuance of
warrants, we offset this revenue by the expense associated with these warrants.
Any amount of expense that exceeds revenue is recorded in sales and marketing,
general and administrative, or interest expense, based upon the nature of the
agreement. The amount of expense is equal to the fair value of vested warrants
determined using Black-Scholes pricing models. The following table sets forth
the amount of expense and reduction to revenue associated with the issuance of
these warrants for the year ended December 31, 2000, 2001 and 2002, respectively
(in thousands):
2000 2001 2002
------ ------ ----
Reduction in revenue........................................ $ -- $ 47 $--
Increase in sales and marketing............................. 3,841 1,054 26
Increase in general and administrative...................... 437 -- --
Increase in interest expense................................ 1,943 1,161 --
As of March 31, 2003, we had unvested warrants to purchase 43,899 shares of
common stock, which have exercise prices ranging from $266.40 to $592.07 and
vest upon attainment of performance criteria. Upon the vesting of warrants to
purchase 13,119 of these shares of common stock, we will record warrant expense
based upon fair value for each warrant, and upon the vesting of warrants to
purchase 30,780 of these shares of common stock, we will reduce revenue
generated from the warrant holder during the period when vesting occurs. We
cannot predict the timing or amount of this reduction in revenue and increase in
expense because the amount is calculated using the fair market value at the time
of vesting.
Income Taxes. Deferred income taxes are recognized for all temporary
differences between tax and financial bases of our assets and liabilities, using
the tax laws and statutory rates applicable to the periods in which the
differences are expected to affect taxable income. As of December 31, 2002, we
had significant net operating loss carryforwards available to offset future
taxable income. The net operating loss carryforwards will expire beginning 2015
through 2021. Federal and state tax rules impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in situations
where changes occur in the stock ownership of a company. Utilization of our
carryforwards is limited because of past ownership changes. In the event that we
have a future change in ownership, utilization of these carryforwards could be
further limited.
We have established a 100% valuation allowance against deferred tax assets
due to the uncertainty that future tax benefits can be realized from our net
operating loss carryforwards and other deferred tax assets.
Identified Intangible Assets, Purchased Technology and Goodwill. Our
identified intangible assets, purchased technology and goodwill are related
mainly to our business acquisitions. We amortize identified intangible assets
and purchased technology on a straight-line basis over the estimated useful
lives (generally three years) of the remaining assets. Goodwill represents the
excess of cost over the fair value of net intangible and identifiable intangible
assets of acquired businesses. Effective January 1, 2002, we adopted Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
Before we adopted SFAS No. 142, we amortized goodwill over its estimated useful
life of three years. Upon adoption of SFAS No. 142, we performed an initial
impairment analysis. Under SFAS No. 142, goodwill is no longer amortized to
expense, but is instead subjected to a periodic impairment test at least
annually. The impairment test is a two-step process, which analyzes whether or
not goodwill has been impaired. Step one requires that the fair value be
compared to book value. If the fair value is higher than the book value, no
impairment is indicated and there is no need to perform the second step of the
process.
68
If the fair value is lower than the book value, step two must be evaluated. Step
two requires the fair value to be allocated to assets and liabilities in a
manner similar to a purchase price allocation in order to determine the implied
fair value of the goodwill. This implied fair value is then compared with the
carrying amount, and if it were less, we would then recognize an impairment
loss. We test goodwill for impairment annually in the fourth quarter.
Impairment of Long-lived Assets. Effective January 1, 2002, we adopted
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 supersedes or amends existing accounting literature related to the
impairment and disposal of long-lived assets.
Whenever events or changes in circumstances indicate that the carrying
amount of long-lived assets may not be recoverable, we review our long-lived
assets for impairment by first comparing the carrying value of the assets to the
sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the assets. If the carrying value exceeds the sum of the assets'
undiscounted cash flows, we estimate an impairment loss by taking the difference
between the carrying value and fair value of the assets. No impairment charge
has been recorded in any of the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
Debt extinguishment costs. In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No.
13 and Technical Corrections. SFAS No. 145, which becomes effective for
financial statements issued for fiscal years beginning after May 15, 2002 and
requires gains and losses on extinguishment of debt to be classified as income
or loss from continuing operations rather than as extraordinary items as
previously required under the provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. As of December 31, 2002, we early adopted
SFAS No. 145 and reclassified an extraordinary loss of $1.1 million recognized
in the second quarter of 2002 to other expense.
Exit and disposal activities. In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146,
which became effective for exit or disposal activities that are initiated after
December 31, 2002, addresses financial accounting and reporting for costs
associated with exit or disposal activities and requires that a liability for a
cost associated with an exit or disposal activity be recognized at fair value
when the liability is incurred, rather than at the date of an entity's
commitment to an exit plan. We do not believe that SFAS No. 146 will have a
material impact on its financial position and results of operations.
Stock-based compensation. In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. SFAS No. 148 amends Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the prior disclosure guidance and requires prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. For entities that voluntarily change to the fair value
based method of accounting for stock-based employee compensation, the transition
provisions are effective for fiscal years ending after December 15, 2002. For
all other companies, the disclosure provisions are effective for interim and
annual periods beginning after December 15, 2002.
Guarantees. In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 clarifies and expands on
existing disclosure requirements for guarantees, including loan guarantees. It
also would require that, at the inception of a guarantee, we may need to
recognize a liability for the fair value, of the obligation under that
guarantee. The initial fair value recognition and measurement provisions will be
applied on a prospective basis to guarantees issued or modified after December
31, 2002. The
69
disclosure provisions are effective for financial statements of periods ending
after December 15, 2002. The adoption of FIN 45 did not impact our financial
position, results of operations or cash flows.
RESTRUCTURING
In September 2000, we initiated a restructuring plan that was designed to
reduce our cost structure and eliminate redundant job tasks that existed as a
result of the acquisitions made in early 2000. As part of this plan, we reduced
our workforce by 78 employees through the elimination of some positions and the
consolidation of other redundant job tasks. The restructuring resulted in a
charge for the year ended December 31, 2000 of $1.2 million, which consisted
primarily of severance and other benefits related to the discharged employees.
Our cash flow from operations was adversely impacted by those costs during the
fourth quarter of 2000 and the first six months of 2001.
In May 2001, we announced a restructuring that primarily related to the
consolidation of client support operations into existing facilities, resulting
in a restructuring charge of $2.1 million. The plan included terminations of 45
employees and the reduction of leased office space. Substantially all remaining
cash expenditures relating to these lease obligations were made during the first
quarter of 2003.
In August 2002, we announced a restructuring effecting an organizational
realignment of the product management and customer service and support
operations. This resulted in a restructuring charge of $0.5 million in the
quarter ended September 30, 2002. This charge consisted primarily of severance
and benefits including involuntary termination and COBRA benefits, outplacement
costs, and payroll taxes for the approximately 40 employees impacted by this
restructuring. During the quarter ended March 31, 2003, we paid all remaining
expenditures relating to this restructuring.
These restructuring plans focused on reducing our cost structure and
improving the efficiency of our operations to respond to changing market
conditions and to realize the anticipated benefits of the acquisitions made in
early 2000. We believe that these actions will not adversely impact our
operations in the future because we have undertaken initiatives to manage and
monitor our client and employee relations during the execution of these plans
and subsequent to their completion.
RESULTS OF OPERATIONS
The following table presents selected financial data for the periods
indicated as a percentage of our total revenue:
THREE MONTHS YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
--------------- ------------------
2003 2002 2002 2001 2000
----- ----- ---- ---- ----
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Revenue:
License and subscription...................... 27% 48% 45% 43% 35%
Maintenance................................... 61 46 47 49 60
Professional services and other............... 12 6 8 8 5
---- ---- ---- ---- ----
Total revenue.............................. 100 100 100 100 100
---- ---- ---- ---- ----
Cost of revenue:
License and subscription...................... 6 9 8 9 11
Maintenance................................... 13 11 11 15 29
Professional services and other............... 5 3 3 4 2
---- ---- ---- ---- ----
Total cost of revenue...................... 24 23 22 28 42
---- ---- ---- ---- ----
Gross profit.................................... 76 77 78 72 58
---- ---- ---- ---- ----
70
THREE MONTHS YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
--------------- ------------------
2003 2002 2002 2001 2000
----- ----- ---- ---- ----
Operating expenses:
Sales and marketing........................... 43% 34% 37% 46% 81%
Research and development...................... 32 26 26 29 45
General and administrative.................... 33 15 13 18 97
Depreciation.................................. 7 6 6 9 8
Amortization of Goodwill and other
intangibles................................ 54 63 63 117 156
Stock-based compensation and warrants......... 4 2 3 3 20
Restructuring charge.......................... -- -- 1 5 5
---- ---- ---- ---- ----
Total operating expenses................... 173 146 149 227 412
---- ---- ---- ---- ----
Loss from operations............................ (97)% (69)% (71) (155) (354)
Other expense, net.............................. (12) (15) (16) (12) (24)
---- ---- ---- ---- ----
Net loss........................................ (109) (84) (87) (167) (378)
Accretion of redeemable preferred stock......... -- (29) (13) (13) (19)
---- ---- ---- ---- ----
Net loss attributable to common stock........... (109)% (113)% (100)% (180)% (397)%
==== ==== ==== ==== ====
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
REVENUE
License and subscription. License and subscription revenue for the quarter
ended March 31, 2003 was $2.6 million, a 54.3% decrease from license and
subscription revenue of $5.6 million for the quarter ended March 31, 2002. The
decrease in license and subscription revenue was primarily due to a reduction in
the number of software licenses and subscriptions sold during 2003 as compared
to 2002. The decrease primarily resulted from uncertainty surrounding the
pending acquisition that was announced early in the quarter as well as overall
economic conditions.
Maintenance. Maintenance revenue for the quarter ended March 31, 2003 was
$5.7 million, a 6.8% increase from maintenance revenue of $5.4 million for the
quarter ended March 31, 2002. The increase in maintenance revenue was primarily
due to the increased number of license sales of our enterprise resource planning
products in 2002 that, in turn, resulted in an increase in the number of our
customers paying maintenance fees.
Professional services and other. Professional services and other revenue
for the quarter ended March 31, 2003 was $1.1 million, a 51.2% increase from
professional services and other revenue of $0.7 million for the quarter ended
March 31, 2002. This increase in professional services and other revenue was
primarily due to training and implementation services provided to customers who
purchased licenses for our enterprise resource planning products during the
latter part of 2002 and first quarter of 2003.
TOTAL COST OF REVENUE
Cost of revenue includes direct labor and other direct costs relating to
the delivery of our products and services. The cost of license and subscription
revenue is primarily related to third party licenses that we resell with
licenses and subscriptions of our products, as well as any hosting and
communication costs. Cost of revenue for the quarter ended March 31, 2003 was
$2.3 million, a 15.1% decrease from cost of revenue of $2.7 million for the
quarter ended March 31, 2002. This decrease is due primarily to the decrease in
license and subscription revenues.
Cost of revenue as a percentage of revenue increased from 22.9% for the
quarter ended March 31, 2002, to 24.2% for the quarter ended March 31, 2003.
This increase is mainly attributable to the shift in the product mix as a higher
percentage of revenue was provided by professional services in 2003 as
71
compared to 2002. These services have a higher cost of goods sold as compared to
licenses and subscriptions.
OPERATING EXPENSES
We classify our operating expenses into six general categories, based on
the nature of the expenditure: sales and marketing, research and development,
general and administrative, depreciation, amortization, and stock-based
compensation and warrants. We allocate our total costs for overhead and
facilities to each of the functional areas of our business that use these
services based upon estimated usage. These allocated charges include general
overhead items such as administrative salaries, professional fees, building
rent, equipment leasing costs, and telecommunication charges.
Sales and marketing. Sales and marketing expenses consist primarily of
costs related to sales and marketing, employee compensation, travel, public
relations, trade shows, and advertising. Sales and marketing expenses for the
quarter ended March 31, 2003 were $4.1 million, a 3.1% increase from sales and
marketing expenses of $3.9 million for the quarter ended March 31, 2002,
primarily due to salary increases for employees. Sales and marketing expenses as
a percentage of revenue increased from 33.7% for the quarter ended March 31,
2002 to 43.3% for the quarter ended March 31, 2003, primarily due to a decrease
in revenues.
Research and development. Research and development expenses consist
primarily of expenses related to the development and upgrade of our existing
proprietary software and expenses related to research and development for new
product offerings. These expenses primarily consist of employee compensation for
research and development. Research and development expenses for the quarter
ended March 31, 2003 were $3.0 million consistent with research and development
expenses of $3.0 million for the quarter ended March 31, 2002. Research and
development expense as a percentage of revenue increased from 25.9% for the
quarter ended March 31, 2002 to 32.2% for the quarter ended March 31, 2002 as a
result of decreased revenues.
General and administrative. General and administrative expenses consist
primarily of compensation for executive and administrative personnel, travel
expenses, professional advisory fees, and general overhead expenses, including
costs associated with being a public entity, that are not allocated to cost of
revenue, research and development, or sales and marketing. General and
administrative expenses for the quarter ended March 31, 2003 were $3.1 million,
an increase of 74.8% from general and administrative expenses of $1.8 million
for the quarter ended March 31, 2002. General and administrative expense as a
percentage of revenue increased from 15.2% for the quarter ended March 31, 2002
to 33.1% for the quarter ended March 31, 2003. The increase was in absolute
dollars was primarily due to merger related fees of approximately $1.4 million
that include investment banking, legal and accounting fees. The increase as a
percentage of revenue resulted from these additional costs combined with the
decrease in revenue.
Depreciation. Depreciation expense consists primarily of the depreciation
of equipment, furniture, fixtures, and leasehold improvements. Depreciation
expense for the quarter ended March 31, 2003 was $0.6 million, a decrease of
22.3% from depreciation expense of $0.7 million for the quarter ended March 31,
2002. This decrease is primarily attributable to certain computer equipment
becoming fully depreciated and new equipment being purchased at a slower rate
compared to prior periods.
Amortization. Amortization expense consists of the amortization of
intangible assets such as purchased technology, customer lists, and patents.
Amortization expense for the quarter ended March 31, 2003 was $5.1 million, a
decrease of 31.1% from amortization expense of $7.4 million for the quarter
ended March 31, 2002. This decrease is primarily attributable to intangible
assets relating to the acquisitions made during 2000 becoming fully amortized
during the current period.
Stock-based compensation and warrants. Stock-based compensation and
warrant expense relates to grants of employee stock options and issuance of
stock with exercise prices lower than the fair value of the underlying shares at
the time of grant or issuance, issuance of stock to employees as compensation
and the issuance of options and warrants to third parties for services rendered.
Stock-based compensation and
72
warrants expense for the quarter ended March 31, 2003 was $0.4 million, an
increase from $0.2 million for the quarter ended March 31, 2002. This increase
is primarily attributable to stock-based compensation expense recognized in 2003
related to the stock options granted in 2002.
OTHER INCOME (EXPENSE)
Other income (expense) consists primarily of interest expense related to
our borrowings and amortization of debt origination fees. Interest expense for
the quarter ended March 31, 2003 was $0.3 million, a decrease of $1.4 million
from the quarter ended March 31, 2002. This decrease is primarily due to the
repayment of $17.8 million of indebtedness upon completion of our initial public
offering. Amortization of debt origination fees for the quarter ended March 31,
2003 of $0.9 million was recorded as a result of the restructuring of debt
during the second quarter of 2002.
INCOME TAXES.
During the quarter ended March 31, 2003, we incurred net losses for federal
and state tax purposes and have not recognized any tax provision or benefits. At
March 31, 2003, we had significant accumulated net operating loss carryforwards
for federal and state tax purposes. The federal tax carryforwards expire in
various years beginning in 2011 through 2022. Utilization of certain net
operating loss carryforwards is subject to certain limitations. Events which
cause limitations on the amount of net operating losses that we may use in any
one year include, but are not limited to, a cumulative ownership change of more
than 50% over a three-year period.
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2002
Total revenue. Total revenue increased from $41.9 million in 2001 to $46.5
million in 2002, an increase of 11%. The increase in license and subscription
revenue was primarily due to increased sales of licenses of our enterprise
resource planning products, which represented 32% of our total revenue for the
twelve months ended December 31, 2002, resulting from an increase in sales and
marketing initiatives focusing on these products. These sales and marketing
initiatives also led to additional maintenance contracts associated with these
new license sales and additional training and consulting services. An increase
in subscription and transaction fees generated by our Web-based products
resulting from contract renewals and an increase in transactional volume
processed through these products also contributed to the increase in revenue.
Total cost of revenue. Cost of revenue includes direct labor and other
direct costs relating to the delivery of our products and services. The cost of
license and subscription revenue is primarily related to third party licenses
that we resell with licenses and subscriptions of our products, as well as any
hosting and communication costs. Cost of revenue decreased from $11.6 million in
2001 to $10.4 million in 2002, a decrease of 11%. This decrease was the result
of lower third party license costs and a reduction in the number of employees in
our client and professional services area resulting from the restructuring of
operations in the second quarter of 2001 and the third quarter of 2002. Cost of
revenue as a percentage of revenue decreased from 28% in 2001 to 22% in 2002,
resulting from the increase in revenue and the reduction in costs.
OPERATING EXPENSES
Sales and marketing. Sales and marketing expenses decreased from $19.1
million in 2001 to $17.0 million in 2002, a decrease of 11%. Sales and marketing
expenses as a percentage of revenue decreased from 46% in 2001 to 37% in 2002.
The decrease in absolute dollars was primarily due to a reduction in the number
of sales and marketing employees resulting from the restructuring of operations
in the second quarter of 2001 and reductions in travel, advertising, promotion,
public relations, and general marketing expenses related to initiatives that
were focused on reducing expenses.
Research and development. These expenses include employee compensation for
research and development expenses and third-party contract development costs.
Research and development expenses decreased from $12.2 million in 2001 to $12.0
million in 2002, a decrease of 2%. The decrease was
73
primarily due to a reduction in outside consulting expenses. Research and
development expenses as a percentage of revenue decreased from 29% in 2001 to
26% in 2002.
General and administrative. General and administrative expenses decreased
from $7.6 million in 2001 to $6.2 million in 2002, a decrease of 19%. General
and administrative expenses as a percentage of revenue decreased from 18% in
2001 to 13% in 2002. The decrease was primarily due to a reduction in general
and administrative employees.
Depreciation. Depreciation expense decreased from $3.8 million in 2001 to
$2.9 million in 2002, a decrease of 24%. The decrease is primarily attributable
to computer equipment becoming fully depreciated and new equipment being
purchased at a slower rate compared to prior periods.
Amortization. Amortization expense decreased from $49.1 in 2001 to $29.5
million in 2002, a decrease of 40%. The decrease was primarily the result of the
adoption of SFAS No. 142, effective January 1, 2002. We have performed the
required impairment tests of goodwill and indefinite-lived intangible assets as
of January 1, 2002 and December 31, 2002, and determined that no impairment loss
was required to be recognized.
STOCK-BASED COMPENSATION AND WARRANTS
Stock-based compensation and warrants expense increased from $1.1 million
in 2001 to $1.4 million in 2002. The increase was primarily the result of
stock-based compensation expense related to options to purchase 766,520 shares
of common stock at an exercise price of $4.21 that were issued during the first
quarter of 2002 to employees and directors.
OTHER INCOME (EXPENSE)
Interest expense decreased from $5.3 million in 2001 to $3.6 million in
2002, a decrease of 31%. The decrease is primarily due to the repayment of $17.8
million of indebtedness upon the completion of our initial public offering,
offset by a higher weighted average interest rate on outstanding indebtedness
during the first two quarters of 2002 as compared to the same periods of 2001.
During 2002, amortization of debt origination fees of $3.3 million was recorded
as a result of the restructuring of debt during the second quarter and the
write-off of $1.1 million of debt origination fees associated with a warrant
issued to a lender. Amortization expense related to debt origination fees will
be approximately $0.9 million per quarter through December 31, 2003. Other
income (expense) for the twelve months ended December 31, 2002 also includes a
fair value adjustment to reflect a decline in the value of the collateral for
notes receivable from our stockholders.
INCOME TAXES
During the twelve months ended December 31, 2001 and 2002, we incurred net
losses for federal and state tax purposes and have not recognized any tax
provision or benefits.
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 2001
The inclusion for the year 2001 of the results of the companies we acquired
in early 2000 had an incremental effect on our results of operations. The more
significant reasons for the changes year over year are described below.
Total revenue. Total revenue increased from $25.3 million in 2000 to $41.9
million in 2001, an increase of 65%. The increase in license and subscription
revenue was primarily due to increased sales of licenses of our enterprise
resource planning products, which represented 32% of our total revenue in 2001,
resulting from an increase in sales and marketing initiatives focusing on these
products. These sales and marketing initiatives also led to additional
maintenance contracts associated with these new license sales and additional
training and consulting services. To a lesser extent, revenue also increased
because we began to recognize revenue from subscriptions for our Web-based
products for printers in the first quarter of 2001.
74
Total cost of revenue. Cost of revenue increased from $10.7 million in
2000 to $11.6 million in 2001, an increase of 9%. Cost of revenue as a
percentage of revenue decreased from 42% in 2000 to 28% in 2001. The decrease as
a percentage of revenue primarily resulted from an increase in revenue and a
decrease in the number of customer and professional service employees as a
result of the restructurings of operations in the third quarter of 2000 and the
second quarter of 2001.
Sales and marketing. Sales and marketing expenses decreased from $20.5
million in 2000 to $19.1 million in 2001, a decrease of 7%. Sales and marketing
expenses as a percentage of revenue decreased from 81% in 2000 to 46% in 2001.
The decrease in absolute dollars was primarily due to a reduction in the number
of sales and marketing employees resulting from restructurings of operations in
the third quarter of 2000 and the second quarter of 2001 and reductions in
travel, advertising, promotion, public relations, and general marketing expenses
related to initiatives that were focused on reducing expenses.
Research and development. Research and development expenses increased from
$11.3 million in 2000 to $12.2 million in 2001, an increase of 8%. The increase
was primarily due to continued investment in the development of our software and
Web-based products. Research and development expenses as a percentage of revenue
decreased from 45% in 2000 to 29% in 2001.
General and administrative. General and administrative expenses decreased
from $24.5 million in 2000 to $7.6 million in 2001, a decrease of 69%. General
and administrative expenses as a percentage of revenue decreased from 97% in
2000 to 18% in 2001. The decrease was primarily due to a decrease in general and
administrative employees and the consolidation of facilities as a result of
restructurings of operations in the third quarter of 2000 and the second quarter
of 2001. Also contributing to the decrease were expense reductions in travel and
professional fees as a result of initiatives that were focused on reducing
expenses.
Depreciation. Depreciation expense increased from $2.1 million in 2000 to
$3.8 million in 2001. The increase is primarily due to the purchase of
additional computer equipment and software related to the development of our
Web-based products.
Amortization. Amortization expense increased from $39.5 million in 2000 to
$49.1 million in 2001, an increase of 24%, reflecting a full year of
amortization in 2001.
Stock-based compensation and warrants. Stock-based compensation and
warrants expense was $5.1 million in 2000 and $1.1 million in 2001. This
decrease is the result of a decrease in warrant expense and, to a lesser extent,
a reduction in the number of stock options being granted in 2001 at exercise
prices below their deemed fair value.
Other expense net. Other expense decreased from $6.2 million in 2000 to
$5.3 million in 2001, a decrease of 14%. The decrease is the result of a
reduction in outstanding indebtedness as well as a decrease in interest rates.
Income taxes. During 2001, we incurred net losses for federal and state
tax purposes and have not recognized any tax provisions or benefits.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we had $6.4 million in cash and cash equivalents, a
decrease of approximately $2.4 million from December 31, 2002. This decrease was
primarily attributable to cash used by operations during the period including
expenses related to the merger and debt repayments of $0.6 million.
Net cash used by operating activities totaled $1.7 million for the quarter
ended March 31, 2003, compared to $5.1 million of net cash used by operating
activities for the quarter ended March 31, 2002. Net cash used in operating
activities for the quarter ended March 31, 2003 is primarily attributable to the
net loss for the period (less non-cash expenses) in addition to an increase in
other assets related to annual prepaid contracts offset by a reduction in
accounts receivable resulting from the decrease in revenue. Net cash used by
operating activities totaled $10.6 million for 2002, compared to $17.9 million
of net cash used
75
by operating activities for 2001. Net cash used in operating activities for 2002
is primarily attributable to the net loss for the period (less non-cash
expenses) in addition to an increase in accounts receivable as well as decreases
in accounts payable, accrued liabilities and the restructuring reserve. The
increase in accounts receivable during 2002 is principally due to increased
sales levels of software licenses and subscriptions. Our normal and customary
payment terms provide for collection of the fee over fixed time periods,
generally between one and six months. During 2001, we received a prepayment of
approximately $0.9 million from a customer for revenue that was recognized
during 2002. Also, during 2002, we changed from a monthly billing cycle to a
quarterly billing cycle for certain maintenance contracts and therefore record a
larger amount into accounts receivable at the end of each quarter. We have also
experienced some slowdown in collections due to the general economic condition
of the printing industry. However, we are not aware of any material
collectibility or billing issues with our customers.
Net cash used by investing activities totaled $0.1 million for the quarter
ended March 31, 2003, compared to $0.4 million of net cash used by investing
activities for the quarter ended March 31, 2002. Cash used by investing
activities during the first quarter of 2003 was primarily the result of the
purchase of miscellaneous computer equipment. Net cash used by investing
activities totaled $1.0 million for 2002, compared to $2.0 million of net cash
used by investing activities for 2001. Cash used by investing activities during
2002 was primarily the result of the purchase of computer equipment and software
licenses associated with the implementation of a new customer relationship
management system and the acquisition of substantially all of the assets and
intellectual property of printChannel, Inc. Cash used by investing activities in
2001 included payment for the license of a patent acquired in 2000, purchase of
computer equipment and software, and the acquisition of technology-related
assets of another business.
Net cash used by financing activities was $0.6 million for the quarter
ended March 31, 2003, compared to $0.6 million of net cash provided by financing
activities for the quarter ended March 31, 2002. Cash used in financing
activities during the first quarter of 2003 was primarily attributable to debt
repayments of $0.6 million. Cash from financing activities in the first quarter
of 2002 was primarily attributable to the issuance of shares of our redeemable
preferred stock, offset, in part, by debt origination costs. Net cash provided
by financing activities was $11.8 million for 2002, compared to $13.3 million of
net cash provided by financing activities for 2001. Cash from financing
activities during 2002 was primarily attributable to our receipt of $33.0
million in net proceeds from our initial public offering in June 2002 offset, in
part, by debt repayments of $17.8 million and principal prepayment fees of $3.7
million. Cash from financing activities in 2001 was primarily attributable to
the issuance of shares of our preferred stock, offset, in part, by the repayment
of indebtedness.
We have a $2.0 million demand line of credit with National City Bank, all
of which was drawn as of March 31, 2003. Borrowings under the facility bear
interest, which is payable monthly, at the prime rate. We also have entered into
a $0.9 million commercial installment note with National City Bank, which is
payable monthly and matures on July 1, 2004. Borrowings under the installment
note bear interest, which is payable monthly, at the annual rate of 7.62%. As of
March 31, 2003, the outstanding principal balance of this note was $0.3 million.
The installment note contains restrictive covenants, including a limitation on
our ability to incur additional indebtedness or grant security interests in our
assets, as well as requirements that we satisfy various financial conditions,
including minimum tangible net worth and debt service coverage. As of March 31,
we were not in compliance with the debt service coverage covenant of the
installment note. We have received a waiver with respect to this default from
National City Bank, which expires January 1, 2004. If we violate any of these
financial covenants and are unable to obtain a waiver from National City Bank,
then National City Bank could declare all amounts outstanding, together with
accrued interest, to be immediately due and payable. Obligations under the
installment note and line of credit are secured by all of our tangible and
intangible personal property.
On February 13, 2003, we entered into an agreement with EFI for a standby
credit facility in the amount of $11.0 million plus a working capital facility,
which will provide up to an additional $3.0 million under certain circumstances.
Under the terms of the standby credit facility, EFI is obligated to disburse up
to $11.0 million to us if amounts under our existing credit facilities become
due and payable as a result of any action we take in order to facilitate the
proposed business combination with EFI or other criteria. All
76
loans made under this facility bear interest at the rate of 8% per annum payable
on January 2, 2004. With certain exceptions, the maturity date would be
accelerated if a business combination with EFI is not consummated on or before
June 30, 2003 or upon the termination of the agreement. Subject to certain
conditions, the credit facility also provides us with a working capital facility
up to an aggregate amount of $3.0 million to be disbursed in the event that,
among other things, our cash balance as of the close of business on the date we
give notice to EFI is less than $1.0 million. We are obligated to use the
proceeds of any exercise by EFI of the option agreement entered into on February
13, 2003 to pay down outstanding amounts under the standby credit facility. All
loans under the working capital facility bear interest at a rate per annum equal
to the prime rate as published, from time to time, by Citibank, plus two percent
payable on the maturity date of the loans.
On May 31, 2002 and June 10, 2002, we executed agreements with a number of
our debt holders to modify the terms of related-party debt, effective upon the
completion of our initial public offering. An amendment to the promissory note
issued to the former shareholders of M Data, Inc. dated as of May 31, 2002,
provided for an increase in the principal amount of the note to $4.2 million
from $4.0 million in return for a reduction in the annual interest rate to 8.0%
from 12.0%. Principal payments are due in 24 equal monthly installments
commencing January 2003. Interest is payable monthly and commenced in June 2002.
Obligations under the note are secured by all of the intellectual property of
our subsidiary, M Data, Inc.
An amendment to the credit agreement with Iris Graphics, dated as of June
10, 2002: (i) reduced the annual interest rate to a fixed rate of 4.0%; (ii)
provided for the payment of a total of $11.8 million of the outstanding
principal balance of $23.6 million at March 31, 2002 and all accrued and
deferred interest upon the completion of our initial public offering; and (iii)
eliminated the financial covenants. In return, we paid a $3.7 million
restructuring fee upon completion of the initial public offering. The $11.8
million remaining principal balance is due in one installment on January 2,
2004. Interest is payable quarterly and commenced in June 2002. The agreement
includes restrictive covenants customary for agreements of this type. If we fail
to comply with these restrictive covenants, then the lender could declare all
outstanding amounts, together with accrued interest, to be immediately due and
payable. Obligations under this agreement are secured by substantially all of
our assets.
Under an amendment to the loan agreement with the former shareholders of
Hagen Systems, dated as of June 10, 2002, we were not required to prepay $2.0
million of the $8.0 million otherwise due upon an initial public offering and
the annual interest rate was reduced to 8.0%, in return for an increase of $0.4
million to the remaining principal balance of the loan. The remaining principal
amount due under the restructured agreement is $2.4 million, which is due on
January 2, 2004. Interest at an annual rate of 8.0% is payable monthly and
commenced in June 2002. The agreement includes restrictive covenants customary
for agreements of this type. If we fail to comply with these restrictive
covenants, then the lender could declare all outstanding amounts, together with
accrued interest, to be immediately due and payable. Obligations under this
agreement are secured by substantially all of our assets.
We also have a license agreement with Creo which permits us to use some
software owned by Creo in Web-based solutions we offer to printers. If the
proposed merger with EFI is completed, Creo could terminate this license
agreement. Creo must provide us with notice of its intention to terminate the
license within 30 days after the consummation of the merger. The license would
then terminate after the expiration of a 180-day transition period. During this
180-day transition period, the license fee we pay to Creo would increase from
10% to 25% of the revenue we generate from the sale of products using Creo's
technology. During the six months ended March 31, 2003, we paid license fees to
Creo of less than $0.1 million. We believe the 180-day transition period will be
sufficient for us or EFI to develop software which provides substantially
similar functionality to the technology we license from Creo. Accordingly, we do
not believe that Creo's termination of the license agreement or the increased
license fee percentage would have a material impact on our financial position,
results of operations or liquidity in future periods.
We believe that, based on current levels of operations and anticipated
growth, our cash from operations, together with cash currently available, will
suffice to fund our operations through January 1,
77
2004. Poor financial results, unanticipated expenses or unanticipated
opportunities that require financial commitments could give rise to additional
financing requirements sooner than we expect. If we do not raise additional
funds when we need them, we might have to delay, scale back or eliminate
expenditures for expansion of our product plans and other strategic initiatives.
If we do not complete the merger with EFI or complete a similar transaction with
a third party, we do not expect to have sufficient cash to repay the $14.2
million of our outstanding debt which becomes due and payable in January 2004
without securing additional debt or equity financing; we do not expect that
additional debt or equity financing would be available to us. If we are unable
to pay these amounts when due, the lenders could proceed against the collateral.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For the three months ended March 31, 2003 and the twelve months ended
December 31, 2002, revenue from foreign customers approximated 16% and 15%
respectively, of our total revenue. We have not had any material exposure to
factors such as changes in foreign currency exchange rates in foreign markets.
However, in future periods, we expect to increase sales in foreign markets,
including Canada and Europe. As our sales are made in U.S. dollars, a
strengthening of the U.S. dollar could cause our products to be less attractive
in foreign markets. At March 31, 2003, a total of $2.0 million of outstanding
debt accrues interest based on the prime rate. Most of our cash equivalents,
short-term investments, and capital lease obligations are at fixed interest
rates. Therefore, the fair value of these investments is affected by changes in
the market interest rates. However, because our investment portfolio is
primarily composed of investments in money market funds and high-grade
commercial paper with short maturities, we do not believe an immediate 10%
change in market interest rates would have a material effect on the fair market
value of our portfolio. Therefore, we would not expect our operating results or
cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates on our investment portfolio.
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 13, 2003 by:
- Each of our directors and executive officers;
- all directors and executive officers as a group; and
- each person who is known by us to own beneficially more than 5% of our
common stock.
We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. To our knowledge, except as set
forth in the footnotes below, each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by such stockholder.
Percentage ownership calculations are based upon 12,873,613 shares of our
common stock outstanding on June 13, 2003. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person, we
have deemed shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60 days
of June 13, 2003 to be outstanding, but we have not deemed these shares to be
outstanding for computing the percentage ownership of any other person.
78
Except as otherwise noted, the address of each person listed in the table
is c/o Printcafe Software, Inc., Forty 24th Street, Pittsburgh, Pennsylvania
15222.
BENEFICIAL OWNERSHIP
----------------------
NUMBER PERCENTAGE
NAME OF SHARES OF CLASS
---- --------- ----------
5% STOCKHOLDERS
Creo Inc.(1)................................................ 4,717,547 36.6%
3700 Gilmore Way
Burnaby, British Columbia, Canada
V5G 4M1
Mellon Ventures II, L.P.(2)................................. 1,616,789 12.5
c/o Mellon Ventures, Inc.
One Mellon Center, Suite 5210
Pittsburgh, PA 15228
Electronics For Imaging, Inc.(3)............................ 4,160,940 32.3
303 Velocity Way
Foster City, CA 94404
J. & W. Seligman & Co. Incorporated(4)...................... 714,300 5.5
100 Park Avenue
New York, NY 10004
DIRECTORS AND EXECUTIVE OFFICERS
Marc D. Olin(5)............................................. 159,355 1.2
Joseph J. Whang(6).......................................... 125,157 1.0
Ronald F. Hyland, Sr.(7).................................... 33,065 *
Charles J. Billerbeck(8).................................... 1,616,789 12.5
Victor A. Cohn(9)........................................... 3,660 *
Thomas J. Gill(10).......................................... 5,161 *
Judi Hess(11)............................................... -- --
Amos Michelson(11).......................................... -- --
All directors and executive officers as a group (8
persons)(12).............................................. 1,943,187 14.9
---------------
(1) Includes 2,815,495 shares held of record by Creo SRL, a wholly-owned
subsidiary of Creo Inc., and 18,588 shares of our common stock issuable
upon the exercise of warrants issued to Creo SRL which are exercisable
within 60 days of June 13, 2003. This share information is derived from a
Schedule 13D/A filed with the SEC on February 25, 2003.
(2) Mellon Ventures II, L.P. is a majority-owned subsidiary of Mellon Financial
Corp. The general partner of Mellon Ventures II, L.P. is MVMA II L.P., and
the general partner of MVMA II L.P. is MVMA Inc. According to information
provided by the stockholder, MVMA Inc. has delegated its dispositive powers
with respect to the shares to Mellon Ventures, Inc. Includes 22,341 shares
of our common stock issuable upon the exercise of warrants exercisable
within 60 days of June 13, 2003. The share information is derived from a
Schedule 13D filed with the SEC on June 28, 2002. Mellon Ventures II, L.P.
has entered into a stockholder agreement with EFI pursuant to which Mellon
has agreed to, among other things, vote in favor of (a) the adoption of the
merger agreement, (b) the approval of the transactions contemplated by the
merger agreement and (c) approval of the merger. Additionally, Mellon
granted EFI an irrevocable proxy with respect to matters addressed by the
stockholder agreement.
(3) Includes 1,934,366 shares with respect to which EFI has voting power in the
merger pursuant to the terms of stockholder agreements with Mellon Ventures
II, L.P. and three of our executive officers. Under the terms of the
agreements, each stockholder agreed to, among other things, vote in favor
of (a) the adoption of the merger agreement, (b) the approval of the
transactions contemplated by the
79
merger agreement and (c) approval of the merger. Additionally, each
stockholder granted EFI an irrevocable proxy with respect to matters
addressed by the stockholder agreement.
(4) J. & W. Seligman & Co. Incorporated is the investment advisor of Seligman
New Technologies Fund II, Inc. The share information is derived from a
Schedule 13G/A filed by J. & W. Seligman on November 12, 2002.
(5) Includes 72,531 shares of our common stock issuable upon exercise of
options exercisable within 60 days of June 13, 2003. Mr. Olin has entered
into a stockholders agreement with EFI pursuant to which Mr. Olin has
agreed to, among other things, vote in favor of (a) the adoption of the
merger agreement, (b) the approval of the transactions contemplated by the
merger agreement and (c) approval of the merger. Additionally, Mr. Olin
granted EFI an irrevocable proxy with respect to matters addressed by the
stockholders agreement.
(6) Includes 57,406 shares of our common stock issuable upon the exercise of
options exercisable within 60 days of June 13, 2003. Mr. Whang has entered
into a stockholders agreement with EFI pursuant to which Mr. Whang has
agreed to, among other things, vote in favor of (a) the adoption of the
merger agreement, (b) the approval of the transactions contemplated by the
merger agreement and (c) approval of the merger. Additionally, Mr. Whang
granted EFI an irrevocable proxy with respect to matters addressed by the
stockholders agreement.
(7) Includes 20,920 shares of our common stock issuable upon the exercise of
options exercisable within 60 days of June 13, 2003. Mr. Hyland has entered
into a stockholders agreement with EFI pursuant to which Mr. Hyland has
agreed to, among other things, vote in favor of (a) the adoption of the
merger agreement, (b) the approval of the transactions contemplated by the
merger agreement and (c) approval of the merger. Additionally, Mr. Hyland
granted EFI an irrevocable proxy with respect to matters addressed by the
stockholders agreement.
(8) Consists of the 1,616,789 shares of our common stock beneficially owned by
Mellon Ventures II, L.P. Mr. Billerbeck disclaims beneficial ownership of
these shares, except to the extent of his pecuniary interest in Mellon
Ventures II, L.P. Mr. Billerbeck is a senior managing director of Mellon
Ventures, Inc.
(9) Consists of 3,660 shares of our common stock issuable upon the exercise of
options exercisable within 60 days of June 13, 2003.
(10) Consists of 5,161 shares of our common stock issuable upon exercise of
options exercisable within 60 days of June 13, 2003.
(11) Does not include 4,717,547 shares of our common stock beneficially owned by
Creo Inc. Mr. Michelson is chief executive officer and a director of Creo,
and Ms. Hess is an executive officer of Creo. Mr. Michelson and Ms. Hess
disclaim beneficial ownership of these shares.
(12) Includes 182,019 shares of our common stock issuable upon the exercise of
options and warrants exercisable within 60 days of June 13, 2003.
80
PRICE RANGE OF OUR COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"PCAF." The following table sets forth the high and low sales prices for each
quarter since our initial public offering on June 18, 2002.
YEAR AND QUARTER HIGH LOW
---------------- ------ -----
2002:
Second quarter (from June 18, 2002)......................... $10.00 $4.70
Third quarter............................................... 5.42 1.18
Fourth quarter.............................................. 2.00 0.91
2003:
First quarter............................................... $ 3.39 $1.01
Second quarter (through , 2003)..................... $ $
We have not paid and do not currently intend to pay any dividends on our
common stock.
COMPARATIVE RIGHTS OF EFI STOCKHOLDERS AND OUR STOCKHOLDERS
We and EFI are both organized under the laws of the State of Delaware. Any
differences in the rights of holders of our capital stock and holders of EFI
capital stock arise primarily from differences between the companies' restated
certificates of incorporation and bylaws. Upon completion of the merger, holders
of our common stock that elect to receive their merger consideration in stock
will become holders of EFI common stock and their rights will be governed by
Delaware law, EFI's certificate of incorporation and EFI's bylaws.
This section does not include a complete description of all differences
between the rights of these stockholders, nor does it include a complete
description of the specific rights of these stockholders. In addition, the
identification of some of the differences in the rights of these stockholders as
material is not intended to indicate that other differences that are equally
important do not exist. You are urged to read carefully the relevant provisions
of Delaware law, as well as our and EFI's certificates of incorporation and
bylaws. Copies of the forms of our and EFI's certificate of incorporation and
bylaws are on file with the SEC. Copies of those documents will be sent to you
upon request. See "Where You Can Find More Information." The following table
summarizes the differences between our and EFI's organizational documents.
RIGHTS EFI PRINTCAFE
------ --- ---------
Capitalization 150,000,000 shares of common 100,000,000 shares of common
stock. stock.
5,000,000 shares of preferred 1,000,000 shares of preferred
stock. stock.
Voting rights One vote per common share. No One vote per common share. No
cumulative voting. cumulative voting.
Preferred stock as determined Preferred stock as determined
by the board. by the board.
No preferred stock currently No preferred stock currently
outstanding. outstanding.
Number and election of Seven members not divided Seven members divided into
directors into classes. three equal classes.
Board of directors has the Board of directors has the
power to change the size of power to change the size of
the board. the board.
81
RIGHTS EFI PRINTCAFE
------ --- ---------
Vacancies on the board of Vacancies filled by a Vacancies filled by a
directors majority of remaining majority of remaining
directors. directors.
Removal by a majority vote. Removal only for cause.
Power to call special May be called by a majority Denied to stockholders.
meetings of the stockholders.
Action by written consent of Stockholders may act by Stockholders may not act by
stockholders written consent. written consent.
Amendment of organizational No supermajority provisions. No supermajority provisions.
documents
Stockholders' rights plan No. Yes.
State anti-takeover statute Governed by Section 203 of Governed by Section 203 of
Delaware law. Delaware law.
Advance notice of stockholder None. 120 day advance notice
proposals requirement for stockholder
proposals.
Limitation on director Directors' liability limited Directors' liability limited
liability to the fullest extent to the fullest extent
permitted by Delaware law. permitted by Delaware law.
Indemnification of directors Indemnification of directors Indemnification of directors
and officers and officers provided to the and officers provided to the
fullest extent of Delaware fullest extent of Delaware
law. law.
EXPERTS
The consolidated financial statements of Printcafe Software, Inc. at
December 31, 2002 and 2001, and for each of the three years in the period ended
December 31, 2002, included in this proxy statement-prospectus and in the
related registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of EFI incorporated in this proxy
statement-prospectus by reference to EFI's Annual Report on Form 10-K for the
year ended December 31, 2002 have been so incorporated in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of EFI common stock that may be issued pursuant
to the terms of the merger agreement will be passed upon for EFI by Richards
Layton & Finger P.A., Wilmington, Delaware.
FORWARD-LOOKING STATEMENTS
Statements included in or incorporated by reference into this document may
be "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Words like "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" or variations of those words and
similar expressions are meant to identify forward-looking statements.
Forward-looking statements, including statements concerning EFI's or our
expectations, strategic objectives, business prospects, anticipated economic
performance, financial condition and other similar matters, including without
limitation the matters discussed under the heading "Risk Factors Relating to the
Merger" and in EFI's documents which are incorporated by reference under the
heading "Factors That Could Adversely Affect Performance" are subject to risks
and uncertainties, which could cause actual results to differ materially
82
from those discussed in the forward-looking statements. Forward-looking
statements speak only as of the date of the documents in which they are made. We
and EFI each disclaim any obligation or undertaking to provide any update or
revision to any forward-looking statement made by it to reflect any change in
our or EFI's expectations or any change in events, conditions or circumstances
on which the forward-looking statement is based. You should not place undue
reliance on forward-looking statements.
SUBMISSION OF STOCKHOLDER PROPOSALS
We have scheduled our annual stockholders meeting for May 2003. In order to
have a stockholder proposal considered for inclusion in the proxy statement for
the 2003 annual meeting, we must have received the proposal no later than
November 23, 2002. In addition, the proxy solicited by our board of directors
for our 2003 annual meeting of stockholders will confer discretionary authority
to vote on any stockholder proposal presented at that meeting, unless we
received notice of the proposal no later than November 23, 2002. All stockholder
proposals must be submitted in writing and must conform to SEC regulations and
our bylaws. Stockholders submitting proposals were required to direct them to
our corporate secretary at Forty 24th Street, Pittsburgh, Pennsylvania 15222,
using certified mail-return receipt requested. We did not timely receive any
stockholder proposals for our 2003 annual meeting.
WHERE TO FIND MORE INFORMATION
EFI has filed with the SEC a registration statement on Form S-4 to register
the shares of EFI's common stock to be offered and sold in connection with the
merger. This document is a part of that registration statement. As permitted by
the SEC this document is EFI's prospectus with respect to the offer and sale of
shares of its common stock and our proxy statement with respect to the
solicitation by our board of directors to be used at a special meeting of our
stockholders to consider adoption of the merger agreement. As also permitted by
the SEC, this document does not contain all of the information that is included
in the registration statement or its exhibits.
We and EFI both file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information filed by either company, including
EFI's registration statement related to the shares of common stock to be issued
in connection with the merger, at the SEC's public reference room at 450 Fifth
Street N.W., Washington, D.C. 20549. You can obtain information about the SEC
public reference room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC at www.sec.gov. You can obtain more information about EFI and the shares
of its common stock to be issued in connection with the merger by reviewing the
registration statement, along with exhibits and schedules. Statements in this
document regarding the contents of any contract or other document are not
necessarily complete and you should refer to the copies of those contracts or
documents filed as exhibits to the registration statement. All statements in
this document are qualified in all respects by reference to the complete text of
those contracts and documents.
All information concerning EFI contained or incorporated by reference in
this document has been furnished by EFI and we have furnished all information
concerning Printcafe contained in this document.
Neither we nor EFI has authorized anyone to provide you with information
that is different from what is contained in this document. You should not assume
that the information contained in this document is accurate as of any date other
than the date of this document, and neither the mailing of this document to
stockholders nor the issuance of shares of EFI common stock in connection with
the merger will create any other implication.
83
SOME DOCUMENTS ARE "INCORPORATED BY REFERENCE"
The SEC allows EFI to "incorporate by reference" information into this
document. This means that EFI may disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be part of this document, except for
any information modified or superseded by information in or incorporated by
reference in this document. This document incorporates by reference the
documents listed below that EFI previously filed with the SEC. The documents
contain important information about EFI and its financial affairs.
EFI'S FILINGS WITH THE SEC PERIOD/DATE
-------------------------- -----------
Annual Report on Form 10-K (File No. 0-18805) Year ended December 31, 2002
Quarterly Report on Form 10-Q (File No. 0-18805) Quarter ended March 31, 2003
Registration Statement on Form 8-A (File No. 0-18805)
EFI incorporates by reference into this document additional documents that
it may file with the SEC under Section 13(a), 13(c), 14 or 15 of the Securities
Exchange Act between the date of this document and the date of the special
meeting. These documents include periodic reports, like annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as
proxy statements.
You can obtain copies of the documents incorporated by reference from EFI
or from the SEC or its web site as described above. Documents incorporated by
reference are available from EFI without charge, excluding all exhibits unless
an exhibit has been specifically incorporated by reference into this document.
You may obtain documents incorporated by reference in this document by
requesting them in writing or by telephone from EFI at the following address:
Electronics for Imaging, Inc.
303 Velocity Way
Foster City, California 94044
Attention: Investor Relations
(650) 357-3828
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM EFI, PLEASE DO SO BY
, 2003 TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
84
INDEX TO FINANCIAL STATEMENTS
PRINTCAFE SOFTWARE, INC.
Consolidated Balance Sheets, December 31, 2002 and March 31,
2003 (unaudited).......................................... F-2
Consolidated Statements of Operations, three months ended
March 31, 2002 and 2003 (unaudited)....................... F-3
Consolidated Statements of Cash Flows, three months ended
March 31, 2002 and 2003 (unaudited)....................... F-4
Notes to Consolidated Financial Statements.................. F-5
Report of Independent Auditors.............................. F-11
Consolidated Balance Sheets as of December 31, 2002 and
2001...................................................... F-12
Consolidated Statements of Operations for the years ended
December 2002, 2001 and 2000.............................. F-13
Consolidated Statements of Changes in Stockholders'
(Deficit) Equity for the years ended December 31, 2002,
2001 and 2000............................................. F-14
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.......................... F-17
Notes to Consolidated Financial Statements.................. F-18
ELECTRONICS FOR IMAGING, INC.
Introductory Note to Unaudited Pro Forma Condensed Combined
Financial Statements...................................... F-44
Unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 2003............................................ F-45
Unaudited Pro Forma Condensed Combined Statements of
Operations as of December 31, 2002 and March 31, 2003..... F-46
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements................................................ F-48
F-1
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
2002 2003
------------ -----------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,775 $ 6,376
Accounts receivable, net.................................. 12,896 11,512
Other current assets...................................... 1,361 1,669
--------- ---------
Total current assets.................................... 23,032 19,557
--------- ---------
Property and equipment, net................................. 2,706 2,245
Purchased technology, net................................... 2,806 11
Customer lists, net......................................... 2,487 296
Goodwill.................................................... 22,480 22,480
Other intangibles, net...................................... 162 78
--------- ---------
Total assets............................................ $ 53,673 $ 44,667
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 2,000 $ 2,000
Accounts payable.......................................... 2,099 2,778
Accrued compensation and related liabilities.............. 1,470 1,541
Accrued and other liabilities............................. 1,221 1,681
Deferred revenue.......................................... 9,653 9,052
Restructuring reserve..................................... 67 26
Current portion of long term debt- related party, (net of
Debt origination costs of $2,637 at March 31, 2003)..... 2,100 13,612
Current portion of long-term debt......................... 326 278
Current portion of capital lease obligations.............. 33 22
--------- ---------
Total current liabilities............................... 18,969 30,990
--------- ---------
Long-term debt- related party, (net of debt origination
costs of $3,507 at December 31, 2002)..................... 12,745 1,575
Long-term debt.............................................. -- --
Commitments and contingencies (Note 5)...................... -- --
Redeemable preferred stock.................................. -- --
Stockholders' equity:
Common stock.............................................. 1 1
Additional paid-in capital................................ 253,823 253,327
Warrants.................................................. 8,677 8,677
Deferred compensation..................................... (3,836) (2,959)
Accumulated other comprehensive loss:
Foreign translation adjustment............................ (46) (22)
Retained deficit.......................................... (234,690) (244,952)
Treasury stock............................................ (1,930) (1,930)
Notes receivable from stockholders........................ (40) (40)
--------- ---------
Total stockholders' equity.............................. 21,959 12,102
--------- ---------
Total liabilities and stockholders' equity.............. $ 53,673 $ 44,667
========= =========
See accompanying notes to consolidated financial statements.
F-2
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
-------------------------
2002 2003
----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Revenue:
License and subscription.................................. $ 5,613 $ 2,565
Maintenance............................................... 5,377 5,742
Professional services and other........................... 725 1,096
-------- --------
Total revenue.......................................... 11,715 9,403
Cost of revenues:
License and subscription.................................. 998 588
Maintenance............................................... 1,309 1,254
Professional services and other........................... 374 434
-------- --------
Total cost of revenues................................. 2,681 2,276
-------- --------
Gross profit................................................ 9,034 7,127
Operating expenses:
Sales and marketing....................................... 3,947 4,068
Research and development.................................. 3,034 3,025
General and administrative(1)............................. 1,783 3,117
Depreciation.............................................. 763 593
Amortization.............................................. 7,388 5,090
Stock-based compensation and warrants..................... 203 381
Restructuring charge...................................... -- --
-------- --------
Total operating expenses............................... 17,118 16,274
-------- --------
Loss from operations........................................ (8,084) (9,147)
Amortization of debt origination fees....................... (180) (851)
Interest expense, net....................................... (12) (25)
Interest expense, related-party............................. (1,605) (239)
Other....................................................... 1 --
-------- --------
Net loss.................................................... (9,880) (10,262)
-------- --------
Accretion of redeemable preferred stock..................... (3,341) --
-------- --------
Net loss attributable to common stock....................... $(13,221) $(10,262)
======== ========
Net loss per share, basic and diluted....................... $ (81.12) $ (0.97)
Weighted average shares used to compute basic and diluted
loss per share............................................ 163 10,633
---------------
(1) Amount excludes stock-based compensation as follows:
General and administrative.................................. 203 381
See accompanying notes to consolidated financial statements.
F-3
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2003
---------- -----------
(UNAUDITED, IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(9,880) $(10,262)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 8,151 5,683
Provision for doubtful accounts........................... 30 55
Write-down of stockholder note principal.................. -- --
Issuance of warrants...................................... -- --
Stock-based compensation.................................. 203 381
Interest on note receivable from stockholders............. (6) --
Interest accretion on related party debt discount......... 180 851
Changes in assets and liabilities:
Accounts receivable....................................... (3,489) 1,329
Other assets.............................................. (408) (304)
Accounts payable.......................................... (62) 679
Accrued liabilities....................................... 291 531
Restructuring reserve..................................... (133) (41)
Deferred revenue.......................................... 2 (601)
------- --------
Net cash used in operating activities.................. (5,121) (1,699)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................. (416) (132)
------- --------
Net cash used in investing activities.................. (416) (132)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt -- related party................. -- (525)
Principal payments on debt.................................. (30) (32)
Principal payments on capital lease obligations............. (26) (11)
Issuance of redeemable preferred stock...................... 755 --
Proceeds from note receivable repayment by stockholder...... 56 --
Debt origination costs...................................... (188) --
------- --------
Net cash provided by(used in)financing activities...... 567 (568)
------- --------
Decrease in cash and cash equivalents....................... (4,970) (2,399)
Cash and cash equivalents -- beginning of period............ 8,648 8,775
------- --------
Cash and cash equivalents -- end of period.................. $ 3,678 $ 6,376
======= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion of preferred stock.............................. 3,341 --
See accompanying notes to consolidated financial statements.
F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Printcafe Software, Inc. is a leading provider of software solutions
designed specifically for the printing industry supply chain. Our enterprise
resource planning and collaborative supply chain software solutions enable
printers and print buyers to lower costs and improve productivity. Our
procurement applications, which are designed for print buyers, facilitate
collaboration between printers and print buyers over the Web. Our software
solutions have been installed by more than 4,000 customers in over 8,000
facilities worldwide, including 24 of the 25 largest printing companies in North
America and over 50 businesses in the Fortune 1000.
On February 26, 2003, we entered into a merger agreement with Electronics
for Imaging, Inc., or EFI. If the merger is completed, Printcafe would become a
wholly-owned subsidiary of EFI. Under the terms of the merger agreement, each
share of our common stock will be converted into $2.60 of consideration which
will be paid, at the election of each of our stockholders, in shares of EFI's
common stock or cash. EFI's common stock is traded on the NASDAQ National Market
under the symbol "EFII". Our board of directors has approved the merger with EFI
and has called a special meeting of our stockholders to vote on the merger. The
merger will be adopted if the holders of a majority of our outstanding shares of
common stock vote for the proposed merger with EFI.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
INTERIM BASIS OF PRESENTATION
The Company's financial statements include the accounts of the Company and
its wholly-owned subsidiaries after the elimination of all significant
intercompany balances and transactions. Amounts within the financial statements
and footnote disclosures have been recorded in thousands except for the share
and per share data.
The accompanying consolidated financial statements as of March 31, 2003,
and for the three month periods ended March 31, 2002 and 2003, respectively, are
unaudited. The unaudited interim consolidated financial statements have been
prepared on the same basis as the annual consolidated financial statements and,
in the opinion of management, reflect all adjustments, which include only
normal, recurring accruals necessary to state fairly the Company's financial
position as of March 31, 2003, and the results of operations and cash flows for
the three month periods ended March 31, 2002 and 2003, respectively. These
consolidated financial statements and notes thereto should be read in
conjunction with the Company's audited consolidated financial statements and
related notes included in its Form 10K, as filed with the Securities and
Exchange Commission on March 21, 2003. The results for interim periods are not
necessarily indicative of the expected results for any other interim period or
the year ending December 31, 2003. The amounts included in the consolidated
balance sheet at December 31, 2002 were derived from our audited financial
statements.
REVENUE RECOGNITION
The Company's revenue recognition policy is governed by Statement of
Position (SOP) 97-2, Software Revenue Recognition, issued by the American
Institute of Certified Public Accountants (AICPA). The Company derives its
revenues from licenses and subscriptions for its products as well as from the
provision of related services, including installation and training, consulting,
customer support, and maintenance contracts.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues are recognized only if persuasive evidence of an agreement exists,
delivery has occurred, all significant vendor obligations are satisfied, the fee
is fixed, determinable, and collectible and there is vendor-specific objective
evidence (VSOE) to support the allocation of the total fee to a multi-element
arrangement. The Company does not have VSOE for the license component or the
fixed price installation component and these have historically been sold bundled
together with post-contract support. Therefore, the Company follows the residual
method as outlined in SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions, under which revenue is
allocated to the undelivered elements and the residual amounts of revenue are
allocated to the delivered elements. Many of the Company's agreements include
warranty provisions. Historically, these provisions have not had a significant
impact on the Company's revenue recognition. In those instances where customer
acceptance may be in question, all revenue relating to that arrangement is
deferred until the warranty period has expired. Additional revenue recognition
criteria by revenue type are listed below.
License and Subscription Revenue
License and subscription revenue includes fees for perpetual licenses and
periodic subscriptions. The Company recognizes revenues on license fees after a
license agreement has been signed, the product has been delivered, the fee is
fixed, determinable and collectible, and there is VSOE to support the allocation
of the total fee to a multielement arrangement (if applicable). If VSOE cannot
be obtained for certain elements of the contract, the Company recognizes revenue
using the residual method under which revenue is allocated to the undelivered
elements and the residual amounts of revenue are allocated to the delivered
elements. The Company recognizes revenues on periodic subscriptions over the
subscription term for unlimited subscriptions and based on the value of orders
processed for its customers through the system for limited subscriptions.
Revenue is recognized for subscription orders processed through resellers over
the subscription term of the underlying agreement, beginning upon installation.
Maintenance Revenue
Maintenance revenue is derived from the sale of maintenance and support
contracts, which provide customers with the right to receive maintenance
releases of the licensed products and access to customer support staff.
Maintenance revenue is recognized on a straight-line basis over the term of the
contract, which is typically one year. Payments for maintenance revenue are
normally received in advance and are nonrefundable.
Professional Services and Other Revenue
Professional services and other revenue are derived from variable fees for
installation, training, and consulting. Revenue for professional services such
as installation and training, system integration projects, and consulting is
primarily recognized as the services are performed. If these services are part
of a multielement contract under which VSOE cannot be obtained for certain
elements, they may be deferred either until acceptance of any related software
or over the license period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and accrued liabilities, recorded amounts
approximate fair value due to the relative short maturity period. On May 31,
2002 and June 10, 2002, the Company entered into new agreements for its related
party debt. As a result, the carrying amount of this debt approximates market
value as of March 31, 2003. The carrying amount of the line of credit
approximates market value because it has an interest rate that varies with
market interest rates. The fair values of the obligations under capital leases
are estimated based on current interest rates available to the Company for debt
instruments with similar terms, degrees of risk, and remaining maturities. The
carrying values of these obligations approximate their respective fair values.
The estimated fair
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
values may not be representative of the actual values of these financial
instruments that could have been realized as of the period end or that will be
realized in the future.
STOCK-BASED COMPENSATION AND WARRANTS
Effective December 2002, the Company adopted the disclosure-only provisions
of SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS No. 148), which is consistent with the Company's utilization of
the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). The Company accounts for equity instruments issued
to non-employees and pursuant to strategic alliance arrangements in accordance
with the provisions of SFAS No. 123, Emerging Issues Task Force (EITF) No.
96-18, Accounting for Equity Instruments that are Issued to Other than Employees
for Acquiring or in Conjunction with Selling Goods or Services, and Emerging
Issues Task Force (EITF) No. 01-9, Accounting for Consideration Given by Vendor
to a Customer or a Reseller of the Vendor's Product.
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to employee stock-based awards:
MARCH 31,
-----------------
2002 2003
------- -------
Reported net loss attributable to common stock.............. $13,221 $10,262
Eliminate: Stock-based compensation expense included in
reported net loss......................................... 203 381
Apply: Total stock-based compensation expense determined
under fair value method for all awards.................... 1,113 744
------- -------
Pro Forma net loss.......................................... $14,131 $10,625
======= =======
Basic and diluted loss per share:
Basic and diluted, as reported............................ $ 81.12 $ .97
Basic and diluted, pro forma.............................. $ 86.71 $ 1.00
RECENT ACCOUNTING PRONOUNCEMENTS
Stock-Based Compensation
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation -- Transition and
Disclosure (SFAS No. 148). SFAS No. 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the prior
disclosure guidance and requires prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. For
entities that voluntarily change to the fair value based method of accounting
for stock-based employee compensation, the transition provisions are effective
for fiscal years ending after December 15, 2002. For all other companies, the
disclosure provisions are effective for interim and annual periods beginning
after December 15, 2002. The Company has complied with the disclosure provisions
of this standard in the consolidated financial statements.
Guarantees
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN No. 45). FIN No. 45 clarifies and
expands on existing disclosure requirements for guarantees, including loan
guarantees. It also would require that, at the inception of a guarantee, the
Company may need to recognize a liability for the fair value, of its obligation
under that guarantee. The initial fair value recognition and measurement
provisions
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will be applied on a prospective basis to certain guarantees issued or modified
after December 31, 2002. The disclosure provisions are effective for financial
statements of periods ending after December 15, 2002. The adoption of FIN No. 45
did not have a material impact on the Company's financial position, results of
operations or cash flows.
2. NET LOSS PER SHARE
Basic and diluted net loss per share have been computed using the weighted
average number of shares of common stock outstanding during the period.
Potential common shares issuable upon conversion of convertible preferred stock
and exercise of stock options and warrants are excluded from historical diluted
net loss per share because they would be antidilutive. At March 31, 2002 and
2003, 3,569,117 and 216,490 potential common shares, respectively, are excluded
from the determination of diluted net loss per share, as the effect of such
shares is antidilutive.
THREE MONTHS ENDED
MARCH 31,
-------------------
2002 2003
-------- --------
Numerator:
Net loss.................................................. $ (9,880) $(10,262)
Preferred stock accretion................................. (3,341) --
-------- --------
Net loss attributable to common stock....................... (13,221) (10,262)
Denominator:
Weighted average shares..................................... 163 10,633
Basic and diluted net loss per share........................ $ (81.12) $ (0.97)
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets and purchased technology are related mainly to the
business acquisitions consummated in early 2000. Amortization is recorded on a
straight-line basis over the estimated useful lives (generally three years) of
the remaining assets and consists of the following at December 31, 2002 and
March 31, 2003:
DECEMBER 31, MARCH 31,
2002 2003
------------ ---------
Customer list............................................... $ 42,713 $ 42,713
Purchased technology........................................ 44,023 44,023
Patent...................................................... 2,065 2,065
Goodwill.................................................... 58,730 58,730
--------- ---------
147,531 147,531
Less: accumulated amortization.............................. (119,596) (124,666)
--------- ---------
Goodwill and other intangible assets, net................... $ 27,935 $ 22,865
========= =========
The Company previously adopted SFAS No. 142, Goodwill and Other Intangible
Assets, which prohibits companies from amortizing goodwill and instead requires
annual impairment testing of the goodwill. As a result, beginning January 1,
2002, the Company no longer amortizes goodwill. As of the adoption date,
December 31, 2002 and March 31, 2003, the unamortized balance of goodwill was
$22,500. Goodwill is subject to annual impairment testing.
The Company previously adopted SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which requires the Company to review its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of long-lived assets may not be recoverable.
No impairment charge has been recorded in any periods presented.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INITIAL PUBLIC OFFERING
In June 2002, the Company issued 3,750,000 shares of its common stock at a
price of $10.00 per share in its initial public offering. The Company received
approximately $33,000 in proceeds, net of underwriting discounts, commissions,
and offering expenses. Simultaneously with the closing of the initial public
offering, each outstanding share of preferred stock was automatically converted
into common stock based on the applicable conversion ratio. In connection with
the offering, the Company repaid approximately $17,800 of related party debt.
5. COMMITMENTS AND CONTINGENCIES
On February 19, 2003, Creo Inc. commenced an action in The Court of
Chancery of the State of Delaware in and for New Castle County captioned Creo,
Inc. v. Printcafe Software, Inc., Electronics For Imaging, Inc. (EFI), Marc D.
Olin, Charles J. Billerbeck, Victor A. Cohn and Thomas J. Gill. Creo requested a
temporary restraining order with respect to (a) triggering, exercising or
otherwise giving effect to the stockholders' rights plan we adopted, (b)
enforcing any action taken or to be taken by us "with the intent or effect of
impeding the operation of market forces in an open bidding contest for
Printcafe," (c) taking any steps or actions to enforce the fee provided for in
the letter agreement we entered into with EFI, (d) taking any steps or any
actions to enforce the option we granted to EFI, (e) taking any steps or actions
to enforce the no solicitation provisions of the standby credit letter that we
entered into with EFI, (f) engaging in any "conduct intended to cause or having
the effect of causing Printcafe to forgo the opportunity to explore and enter
into economically more favorable transactions" and (g) entering into, or
purporting to enter into, a merger agreement between EFI and us before the court
finally rules on the action. On February 21, 2003 the court denied Creo's
request for a temporary restraining order. The matter is still pending in the
Delaware Chancery Court with respect to the other relief sought by Creo. We
intend to vigorously defend ourselves in this matter. If this lawsuit is
resolved unfavorably to us, our business and financial condition could be
adversely affected and we may not be able to complete the merger.
The Company is involved in disputes and litigation in the normal course of
business. In the opinion of management, the ultimate disposition of these
matters is not expected to have a material adverse effect on the Company's
business, financial condition, or results of operations. The Company has accrued
for estimated losses in the accompanying financial statements for those matters
where it believes that the likelihood that a loss has occurred is probable and
the amount of loss is reasonably estimable. Although management currently
believes the outcome of other outstanding legal proceedings, claims, and
litigation involving the Company will not have a material adverse effect on its
business, financial condition, or results of operations, litigation is
inherently uncertain and there can be no assurance that existing or future
litigation will not have a material adverse effect on the Company's business,
financial condition, or results of operations.
6. COMPREHENSIVE LOSS
The components of our comprehensive loss for each period presented are as
follows:
THREE MONTHS ENDED
MARCH 31,
------------------
2002 2003
------- --------
Net loss.................................................... $(9,880) $(10,262)
Foreign currency translation adjustments.................... (1) 15
------- --------
Comprehensive loss........................................ $(9,881) $(10,247)
======= ========
7. DEBT
On February 13, 2003, the Company entered into an agreement with EFI for a
standby credit facility in the amount of $11,000 plus a working capital facility
which will provide up to an additional $3,000 under
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain circumstances. Under the terms of the standby credit facility, EFI is
obligated to disburse up to $11,000 to the Company in the event that certain
amounts under the Company's existing credit facilities become due and payable as
a result of any action taken by the Company in order to facilitate the proposed
business combination with EFI or certain other criteria. All loans made under
this facility bear interest at the rate of 8% per annum payable on January 2,
2004. With certain exceptions, the maturity date would be accelerated if a
business combination with EFI is not consummated on or before June 30, 2003 or
upon the termination of the agreement. Subject to certain conditions, the credit
facility also provides the Company with a working capital facility up to an
aggregate amount of $3,000 to be disbursed in the event that, among other
things, the Company's cash balance as of the close of business on the date
notice is given by the Company is less than $1,000. The Company is obligated to
use the proceeds of any exercise by EFI of the option agreement entered into on
February 13, 2003 to pay down outstanding amounts under the standby credit
facility. All loans under the working capital facility bear interest at a rate
per annum equal to the prime rate as published, from time to time, by Citibank,
plus two percent payable on the maturity date of the loans.
As of March 31, 2003, the Company had a total of $2,637 of unamortized
deferred interest and debt discount fees, which are reflected within the
short-term debt related-party section of the Company's balance sheet.
8. NON-CASH DEFERRED STOCK-BASED COMPENSATION
In February 2002, the Company's board of directors adopted the 2002 Key
Executive Stock Incentive Plan. The Company reserved 766,520 shares of common
stock for grants under the plan. As of September 30, 2002, the Company had
granted options to purchase 766,520 shares of common stock with an exercise
price of $4.21 per share. These option grants resulted in $110 in non-cash stock
compensation for the quarter ended March 31, 2003.
In March 2002, the Company's board of directors adopted the 2002 Stock
Incentive Plan. The Company has reserved 765,765 shares of common stock for
grants under the plan. In April 2002, the Company granted options to purchase
381,603 shares of common stock, with an exercise price of $15.54 per share, to
certain employees. In June 2002, the Company granted an additional 92,910
options to purchase common stock at an exercise price of $2.00 per share. This
option grant resulted in $271 in non-cash stock compensation for the quarter
ended March 31, 2003.
Also in March 2002, the Company's board of directors approved the 2002
Employee Stock Purchase Plan which became effective upon completion of the
Company's initial public offering. The Company has reserved 337,837 shares of
common stock for issuance under the plan.
9. STOCK OPTION
On February 13, 2003, the Company entered into a stock option agreement
with EFI granting them an option to purchase up to 2,126,574 shares of Common
Stock at a purchase price equal to $2.60 per share. Provided that EFI is not in
breach of its obligations under the standby credit agreement (Note 7), EFI may
exercise the option at any time, in whole or in part. The option will terminate
on December 31, 2007. Subject to certain conditions, the option shares must be
repurchased by the Company, at the request of EFI, at a price equal to the
aggregate purchase price paid for such shares by EFI. In addition, subject to
certain conditions, the Company may repurchase from EFI the option shares at a
price equal to the price paid by EFI for those shares.
F-10
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Printcafe Software, Inc.
We have audited the accompanying consolidated balance sheets of Printcafe
Software, Inc. and its subsidiaries as of December 31, 2001 and 2002 and the
related consolidated statements of operations, stockholders' (deficit) equity,
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Printcafe
Software, Inc. and its subsidiaries at December 31, 2001 and 2002 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in 2002,
the Company changed its method of accounting for goodwill and other intangible
assets.
/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
March 10, 2003
F-11
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------
2001 2002
--------- ---------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,648 $ 8,775
Accounts receivable, net of allowance for doubtful
accounts of $570 at December 31, 2001, and $470 at
December 31, 2002....................................... 7,146 12,896
Other current assets...................................... 1,897 1,361
--------- ---------
Total current assets.................................... 17,691 23,032
--------- ---------
Property and equipment, net................................. 4,699 2,706
Purchased technology, net................................... 17,078 2,806
Customer lists, net......................................... 16,725 2,487
Goodwill, net............................................... 22,480 22,480
Other intangibles, net...................................... 830 162
--------- ---------
Total assets............................................ $ 79,503 $ 53,673
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Line of credit............................................ $ 2,000 $ 2,000
Accounts payable.......................................... 2,492 2,099
Accrued compensation and related taxes.................... 1,047 1,470
Accrued and other liabilities............................. 3,292 1,221
Deferred revenue.......................................... 9,109 9,653
Restructuring reserve..................................... 487 67
Current portion of long-term debt-related party........... -- 2,100
Current portion of long-term debt......................... 184 326
Current portion of capital lease obligations.............. 65 33
--------- ---------
Total current liabilities............................... 18,676 18,969
--------- ---------
Long-term debt-related party, net of debt origination costs
of $2,561 at December 31, 2001, and $3,507 at December 31,
2002)..................................................... 33,039 12,743
Long-term debt.............................................. 326 --
Obligations under capital leases............................ 34 --
Stock purchase plan......................................... 125 2
Redeemable preferred stock.................................. 132,676 --
Stockholders' (deficit) equity:
Series A convertible preferred stock, $0.0001 par value;
2,455,798 shares authorized at December 31, 2001 and no
shares authorized at December 31, 2002; 2,455,798 shares
issued and outstanding at December 31, 2001 and no
shares issued and outstanding at December 31, 2002...... -- --
Series A-1 convertible preferred stock, $0.0001 par value;
10,090,707 shares authorized at December 31, 2001 and no
shares authorized at December 31, 2002; 9,815,249 shares
issued at December 31, 2001 and no shares issued at
December 31, 2002; 9,609,558 shares outstanding at
December 31, 2001 and no shares outstanding at December
31, 2002................................................ 1 --
Class A common stock, $.0001 par value; 100,000,000 shares
authorized at December 31, 2001 and December 31, 2002;
162,970 and 10,643,608 shares issued at December 31,
2001 and December 31, 2002, respectively; 156,548, and
10,632,877 shares outstanding at December 31, 2001 and
December 31, 2002, respectively......................... -- 1
Additional paid-in capital................................ 76,095 253,823
Warrants.................................................. 8,651 8,677
Deferred compensation..................................... (100) (3,836)
Accumulated other comprehensive loss:
Foreign translation adjustment............................ (50) (46)
Retained deficit.......................................... (187,692) (234,690)
Treasury stock, 6,422 and 10,731 shares of common stock at
December 31, 2001 and December 31, 2002, respectively,
205,691 and no shares of Series A-1 convertible
preferred stock at December 31, 2001 and
December 31, 2002, respectively........................... (1,808) (1,930)
Notes receivable from stockholders........................ (470) (40)
--------- ---------
Total stockholders' (deficit) equity.................... (105,373) 21,959
--------- ---------
Total liabilities and stockholders' (deficit) equity.... $ 79,503 $ 53,673
========= =========
See accompanying notes.
F-12
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
---------- --------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Revenue:
License and subscription................................. $ 8,880 $ 18,103 $ 21,119
Maintenance.............................................. 15,239 20,601 21,701
Professional services and other.......................... 1,215 3,164 3,701
--------- -------- ----------
Total revenue......................................... 25,334 41,868 46,521
Cost of revenue:
License and subscription................................. 2,684 3,936 3,650
Maintenance.............................................. 7,337 6,088 5,091
Professional services and other.......................... 637 1,572 1,636
--------- -------- ----------
Total cost of revenue................................. 10,658 11,596 10,377
--------- -------- ----------
Gross profit............................................... 14,676 30,272 36,144
Operating expenses:
Sales and marketing (exclusive of warrant expense of
$3,841, $1,054 and $26 for the years ended December
31, 2000, 2001 and 2002, respectively)................ 20,542 19,114 16,989
Research and development................................. 11,307 12,180 12,003
General and administrative (exclusive of stock-based
compensation expense of $866, $49 and $1,360 for the
years ended December 31, 2000, 2001 and 2002,
respectively)......................................... 24,525 7,645 6,193
Depreciation............................................. 2,060 3,821 2,922
Amortization............................................. 39,481 49,052 29,511
Stock-based compensation and warrants.................... 5,144 1,103 1,386
Restructuring charge..................................... 1,185 2,098 525
--------- -------- ----------
Total operating expenses.............................. 104,244 95,013 69,529
--------- -------- ----------
Loss from operations....................................... (89,568) (64,741) (33,385)
Other income (expense):
Amortization of debt origination fees -- related party... -- -- (3,300)
Interest income (expense), net........................... 336 127 (55)
Interest expense -- related party........................ (6,253) (5,434) (3,588)
Other.................................................... (233) 45 (469)
--------- -------- ----------
Total other expense................................... (6,150) (5,262) (7,412)
--------- -------- ----------
Net loss................................................... (95,718) (70,003) (40,797)
Accretion of redeemable preferred stock.................... (4,858) (5,635) (6,201)
--------- -------- ----------
Net loss attributable to common stock...................... $(100,576) $(75,638) $ (46,998)
========= ======== ==========
Net loss per share, basic and diluted...................... $ (687.66) $(468.67) $ (8.11)
Weighted average shares used to compute basic and diluted
loss per share........................................... 146,258 161,390 5,796,658
See accompanying notes.
F-13
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
SERIES A SERIES A-1 CLASS A CLASS C
PREFERRED PREFERRED COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL
--------------- --------------- --------------- --------------- --------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ----------
(IN THOUSANDS)
Balance at December 31,
1999................... 2,456 $-- 9,725 $ 1 58 $-- -- $-- -- $-- $ 18,055
Reclassification of
common stock........... -- -- -- -- (58) -- 58 -- -- -- --
Repurchase of 190,948
shares of Series A-1
preferred stock........ -- -- -- -- -- -- -- -- -- -- --
Issuance of common stock
for acquisitions....... -- -- -- -- -- -- 79 -- -- -- 43,571
Issuance of common
stock.................. -- -- -- -- -- -- 4 -- 17 -- 11,928
Issuance of common stock
for services........... -- -- -- -- -- -- 5 -- -- -- 1,174
Exercise of stock
options................ -- -- 31 -- -- -- -- -- -- -- 40
Sale of stock to 401(k)
plan................... -- -- 53 -- -- -- -- -- -- -- 306
Accretion of 401(k)
plan................... -- -- -- -- -- -- -- -- -- -- (229)
Repurchase of 14,653
shares of Series A-1
preferred stock from
401(k) plan............ -- -- -- -- -- -- -- -- -- -- --
Stock-based
compensation........... -- -- -- -- -- -- -- -- -- -- 1,015
Amortization of
stock-based
compensation........... -- -- -- -- -- -- -- -- -- -- --
Issuance of warrants..... -- -- -- -- -- -- -- -- -- -- --
Interest on note
receivable............. -- -- -- -- -- -- -- -- -- -- --
Repayment of note
receivable, net of
interest............... -- -- -- -- -- -- -- -- -- -- --
Accretion of redeemable
preferred stock........ -- -- -- -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- -- -- -- --
Total comprehensive
loss............... -- -- -- -- -- -- -- -- -- -- --
------ --- ------ --- --- --- ------ --- --- --- --------
Balance at December 31,
2000................... 2,456 -- 9,809 1 -- -- 146 -- 17 -- 75,860
ACCUMULATED NOTES
OTHER RECEIVABLE
DEFERRED COMPREHENSIVE RETAINED TREASURY FROM
WARRANTS COMPENSATION LOSS DEFICIT STOCK STOCKHOLDERS TOTAL
-------- ------------ ------------- --------- -------- ------------ ---------
(IN THOUSANDS)
Balance at December 31,
1999................... $ -- $ -- $ -- $ (11,478) $ -- $(1,721) $ 4,857
Reclassification of
common stock........... -- -- -- -- -- -- --
Repurchase of 190,948
shares of Series A-1
preferred stock........ -- -- -- -- (1,107) -- (1,107)
Issuance of common stock
for acquisitions....... -- -- -- -- -- -- 43,571
Issuance of common
stock.................. -- -- -- -- -- -- 11,928
Issuance of common stock
for services........... -- -- -- -- -- -- 1,174
Exercise of stock
options................ -- -- -- -- -- -- 40
Sale of stock to 401(k)
plan................... -- -- -- -- -- -- 306
Accretion of 401(k)
plan................... -- -- -- -- -- -- (229)
Repurchase of 14,653
shares of Series A-1
preferred stock from
401(k) plan............ -- -- -- -- (59) -- (59)
Stock-based
compensation........... -- (1,015) -- -- -- -- --
Amortization of
stock-based
compensation........... -- 866 -- -- -- -- 866
Issuance of warrants..... 6,220 -- -- -- -- -- 6,220
Interest on note
receivable............. -- -- -- -- -- (86) (86)
Repayment of note
receivable, net of
interest............... -- -- -- -- -- 335 335
Accretion of redeemable
preferred stock........ -- -- -- (4,858) -- -- (4,858)
Net loss................. -- -- -- (95,718) -- -- (95,718)
Foreign currency
translation
adjustment............. -- -- (33) -- -- -- (33)
---------
Total comprehensive
loss............... -- -- -- -- -- -- (95,751)
------- ------- ---- --------- ------- ------- ---------
Balance at December 31,
2000................... 6,220 (149) (33) (112,054) (1,166) (1,472) (32,793)
F-14
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY -- (CONTINUED)
SERIES A SERIES A-1 CLASS A CLASS C
PREFERRED PREFERRED COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL
--------------- --------------- --------------- --------------- --------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ----------
(IN THOUSANDS)
Reclassification of
common stock........... -- $-- -- $-- -- $-- 17 $-- (17) $-- $ --
Issuance of common stock
as legal settlement.... -- -- -- -- -- -- -- -- -- -- 15
Exercise of warrants for
redeemable preferred
stock.................. -- -- -- -- -- -- -- -- -- -- --
Repurchase of 6,422
shares of common
stock.................. -- -- -- -- -- -- -- -- -- -- --
Interest on notes
receivable............. -- -- -- -- -- -- -- -- -- -- --
Exercise of stock
options................ -- -- 7 -- -- -- -- -- -- -- 11
Accretion of 401(k)
plan................... -- -- -- -- -- -- -- -- -- -- 209
Amortization of
stock-based
compensation........... -- -- -- -- -- -- -- -- -- -- --
Issuance of warrants..... -- -- -- -- -- -- -- -- -- -- --
Repayment (issuance) of
note receivable........ -- -- -- -- -- -- -- -- -- -- --
Accretion of redeemable
preferred stock........ -- -- -- -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- -- -- -- --
Total comprehensive
loss............... -- -- -- -- -- -- -- -- -- -- --
------ --- ------ --- --- --- ------ --- --- --- --------
Balance at December 31,
2001................... 2,456 -- 9,816 1 -- -- 163 -- -- -- 76,095
ACCUMULATED NOTES
OTHER RECEIVABLE
DEFERRED COMPREHENSIVE RETAINED TREASURY FROM
WARRANTS COMPENSATION LOSS DEFICIT STOCK STOCKHOLDERS TOTAL
-------- ------------ ------------- --------- -------- ------------ ---------
(IN THOUSANDS)
Reclassification of
common stock........... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
as legal settlement.... -- -- -- -- -- -- 15
Exercise of warrants for
redeemable preferred
stock.................. (2,283) -- -- -- -- -- (2,283)
Repurchase of 6,422
shares of common
stock.................. -- -- -- -- (642) -- (642)
Interest on notes
receivable............. -- -- -- -- -- (110) (110)
Exercise of stock
options................ -- -- -- -- -- -- 11
Accretion of 401(k)
plan................... -- -- -- -- -- -- 209
Amortization of
stock-based
compensation........... -- 49 -- -- -- -- 49
Issuance of warrants..... 4,714 -- -- -- -- -- 4,714
Repayment (issuance) of
note receivable........ -- -- -- -- -- 1,112 1,112
Accretion of redeemable
preferred stock........ -- -- -- (5,635) -- -- (5,635)
Net loss................. -- -- -- (70,003) -- -- (70,003)
Foreign currency
translation
adjustment............. -- -- (17) -- -- -- (17)
---------
Total comprehensive
loss............... -- -- -- -- -- -- (70,020)
------- ------- ---- --------- ------- ------- ---------
Balance at December 31,
2001................... 8,651 (100) (50) (187,692) (1,808) (470) (105,373)
F-15
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY -- (CONTINUED)
SERIES A SERIES A-1 CLASS A CLASS C
PREFERRED PREFERRED COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL
--------------- --------------- --------------- --------------- --------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ----------
(IN THOUSANDS)
Interest on note
receivable............. -- $-- -- $-- -- $-- -- $-- -- $-- $ --
Valuation adjustment to
shareholder notes
receivable............. -- -- -- -- -- -- -- -- -- -- --
Stock-based compensation,
net of forfeitures..... -- -- -- -- -- -- -- -- -- -- 5,096
Amortization of
stock-based
compensation, net of
forfeitures............ -- -- -- -- -- -- -- -- -- -- --
Repayment of note
receivable............. -- -- -- -- -- -- -- -- -- -- --
Accretion of redeemable
preferred stock........ -- -- -- -- -- -- -- -- -- -- --
Repurchase of 1,222
shares of common stock
from 401(k) plan....... -- -- -- -- -- -- -- -- -- -- 122
Issuance of warrants..... -- -- -- -- -- -- -- -- -- -- --
Conversion of preferred
stock into common stock
at IPO................. (2,456) -- (9,816) (1) -- -- 6,692 1 -- -- 139,530
Issuance of common stock
for IPO................ -- -- -- -- -- -- 3,750 -- -- -- 32,935
Issuance of shares in
employee stock purchase
plan................... -- -- -- -- -- -- 38 -- -- -- 45
Net loss................. -- -- -- -- -- -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- -- -- -- --
Total comprehensive
loss............... -- -- -- -- -- -- -- -- -- -- --
------ --- ------ --- --- --- ------ --- --- --- --------
Balance at December 31,
2002................... -- $-- -- $-- -- $-- 10,643 $ 1 -- $-- $253,823
====== === ====== === === === ====== === === === ========
ACCUMULATED NOTES
OTHER RECEIVABLE
DEFERRED COMPREHENSIVE RETAINED TREASURY FROM
WARRANTS COMPENSATION LOSS DEFICIT STOCK STOCKHOLDERS TOTAL
-------- ------------ ------------- --------- -------- ------------ ---------
(IN THOUSANDS)
Interest on note
receivable............. $ -- $ -- $ -- $ -- $ -- $ (18) $ (18)
Valuation adjustment to
shareholder notes
receivable............. -- -- -- -- -- 393 393
Stock-based compensation,
net of forfeitures..... -- (5,096) -- -- -- -- --
Amortization of
stock-based
compensation, net of
forfeitures............ -- 1,360 -- -- -- -- 1,360
Repayment of note
receivable............. -- -- -- -- -- 55 55
Accretion of redeemable
preferred stock........ -- -- -- (6,201) -- -- (6,201)
Repurchase of 1,222
shares of common stock
from 401(k) plan....... -- -- -- -- (122) -- --
Issuance of warrants..... 26 -- -- -- -- -- 26
Conversion of preferred
stock into common stock
at IPO................. -- -- -- -- -- -- 139,530
Issuance of common stock
for IPO................ -- -- -- -- -- -- 32,935
Issuance of shares in
employee stock purchase
plan................... -- -- -- -- -- -- 45
Net loss................. -- -- -- (40,797) -- -- (40,797)
Foreign currency
translation
adjustment............. -- -- 4 -- -- -- 4
---------
Total comprehensive
loss............... -- -- -- -- -- -- (40,793)
------- ------- ---- --------- ------- ------- ---------
Balance at December 31,
2002................... $ 8,677 $(3,836) $(46) $(234,690) $(1,930) $ (40) $ 21,959
======= ======= ==== ========= ======= ======= =========
See accompanying notes.
F-16
PRINTCAFE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
2000 2001 2002
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(95,718) $(70,003) $(40,797)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 41,541 52,873 32,433
Provision for doubtful accounts........................... 935 576 592
Valuation adjustment to stockholder note receivable....... -- -- 393
Common stock issued for services.......................... 1,174 15 --
Issuance of warrants...................................... 6,220 2,431 26
Stock-based compensation.................................. 866 49 1,360
Interest expense on note receivable from stockholders..... (86) (110) (18)
Interest accretion on related party debt discount......... -- -- 3,300
Changes in assets and liabilities, net of effects from
acquisition of business:
Accounts receivable....................................... 520 (1,642) (6,353)
Receivables from related parties.......................... 335 -- --
Other assets.............................................. 138 (237) 536
Accounts payable.......................................... 665 (3,114) (393)
Accrued liabilities....................................... 1,796 (115) (1,645)
Restructuring reserve..................................... 638 (151) (420)
Deferred revenue.......................................... 1,256 1,565 337
-------- -------- --------
Net cash used in operating activities................... (39,720) (17,863) (10,649)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired............. (23,705) -- (307)
Issuance of note receivable to management................... -- (642) --
Proceeds from notes receivable repayment by stockholder..... -- 1,112 55
Intellectual property acquisition costs..................... (1,200) (950) --
Purchase of property, plant, and equipment.................. (5,100) (1,539) (734)
-------- -------- --------
Net cash used in investing activities................... (30,005) (2,019) (986)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt--related party........................... -- 23,600 --
Principal payments on debt--related party................... (3,920) (30,099) (17,800)
Principal payments on debt.................................. (891) (170) (184)
Net proceeds from line of credit............................ 1,500 -- --
Principal payments on capital lease obligations............. (238) (268) (66)
Repurchase of employee stock under 401(k) plan.............. -- -- (122)
Proceeds from issuance of shares under employee stock
purchase plan............................................. -- -- 45
Repurchase of common and preferred stock.................... (1,166) -- --
Issuance of common stock.................................... 12,234 -- 32,935
Net proceeds from bridge loans.............................. 15,000 -- --
Issuance of redeemable preferred stock...................... 62,372 20,527 654
Debt origination costs--related party....................... -- (277) (3,700)
Exercise of stock options................................... 40 11 --
-------- -------- --------
Net cash provided by financing activities............... 84,931 13,324 11,762
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ 15,206 (6,558) 127
Cash and cash equivalents--beginning of year................ -- 15,206 8,648
-------- -------- --------
Cash and cash equivalents--end of year...................... $ 15,206 $ 8,648 $ 8,775
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 4,571 $ 4,713 $ 3,500
NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets recorded under capital leases........................ 411 -- --
Common stock issued for acquisitions........................ 43,571 -- --
Warrants attached to debt................................... -- 2,283 --
Accretion of redeemable preferred stock..................... 4,858 5,635 6,201
Accretion of 401(k) plan.................................... 229 (209) --
Common stock received in satisfaction of receivable from
related party............................................. -- 642 --
See accompanying notes.
F-17
PRINTCAFE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Printcafe Software, Inc. (the Company) provides software solutions designed
specifically for the printing industry supply chain. The Company's procurement
applications, which are designed for print buyers, integrate with its software
solutions designed for printers, and facilitate collaboration between printers
and print buyers over the Web. The Company's enterprise resource planning and
collaborative supply chain software solutions are designed to enable printers
and print buyers to lower costs and improve productivity.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after the elimination of all significant
intercompany balances and transactions. Amounts within the financial statements
and footnote disclosures have been recorded in thousands except for the share
and per share data.
REVENUE RECOGNITION
The Company's revenue recognition policy is governed by Statement of
Position (SOP) 97-2, Software Revenue Recognition, issued by the American
Institute of Certified Public Accountants (AICPA). The Company derives its
revenues from licenses and subscriptions for its products as well as from the
provision of related services, including installation and training, consulting,
customer support, and maintenance contracts. Revenues are recognized only if
persuasive evidence of an agreement exists, delivery has occurred, all
significant vendor obligations are satisfied, the fee is fixed, determinable,
and collectible and there is vendor-specific objective evidence (VSOE) to
support the allocation of the total fee to a multi-element arrangement. The
Company does not have VSOE for the license component or the fixed price
installation component and these have historically been sold bundled together
with post-contract support. Therefore, the Company follows the residual method
as outlined in SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition
with Respect to Certain Transactions, under which revenue is allocated to the
undelivered elements and the residual amounts of revenue are allocated to the
delivered elements. Many of the Company's agreements include warranty
provisions. Historically, these provisions have not had a significant impact on
the Company's revenue recognition. In those instances where customer acceptance
may be in question, all revenue relating to that arrangement is deferred until
the warranty period has expired. Additional revenue recognition criteria by
revenue type are listed below.
License and subscription revenue
License and subscription revenue includes fees for perpetual licenses and
periodic subscriptions. The Company recognizes revenues on license fees after a
license agreement has been signed, the product has been delivered, the fee is
fixed, determinable and collectible, and there is VSOE to support the allocation
of the total fee to a multielement arrangement (if applicable). If VSOE cannot
be obtained for certain elements of the contract, the Company recognizes revenue
using the residual method under which revenue is allocated to the undelivered
elements and the residual amounts of revenue are allocated to the delivered
elements. The Company recognizes revenues on periodic subscriptions over the
subscription term for unlimited subscriptions and based on the value of orders
processed for its customers through the system for limited subscriptions.
Revenue is recognized for subscription orders processed through resellers over
the subscription term of the underlying agreement, beginning upon installation.
Maintenance revenue
Maintenance revenue is derived from the sale of maintenance and support
contracts, which provide customers with the right to receive maintenance
releases of the licensed products and access to customer
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
support staff. Maintenance revenue is recognized on a straight-line basis over
the term of the contract, which is typically one year. Payments for maintenance
revenue are normally received in advance and are nonrefundable.
Professional services and other revenue
Professional services and other revenue is derived from variable fees for
installation, training, and consulting. Revenue for professional services such
as installation and training, system integration projects, and consulting is
primarily recognized as the services are performed. If these services are part
of a multielement contract under which VSOE cannot be obtained for certain
elements, they may be deferred either until acceptance of any related software
or over the license period.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are expensed as incurred and are included in
license and subscription cost of revenue.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and interest-bearing money market
deposits with financial institutions having original maturities of 90 days or
less. The balance at December 31, 2001 included approximately $7,200 of cash
received on January 2, 2002 in connection with the issuance of Series F
preferred stock (Note 12). Cash equivalents are stated at cost, which
approximates market value. The amounts held by major financial institutions may
exceed the amount of insurance provided on such deposits. These deposits may
generally be redeemed upon demand and, therefore, are subject to minimal risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and accrued liabilities, recorded amounts
approximate fair value due to the relative short maturity period. On May 31,
2002 and June 10, 2002, the Company entered into new agreements for its related
party debt (Note 9). As a result, the carrying amount of this debt approximates
market value as of fiscal year end 2002. The carrying amount of the line of
credit approximates market value because it has an interest rate that varies
with market interest rates. The fair values of the obligations under capital
leases are estimated based on current interest rates available to the Company
for debt instruments with similar terms, degrees of risk, and remaining
maturities. The carrying values of these obligations approximate their
respective fair values. The estimated fair values may not be representative of
the actual values of these financial instruments that could have been realized
as of the period end or that will be realized in the future.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line and accelerated methods over the estimated useful lives of the
related assets (generally three to five years). Leasehold improvements are
amortized over the lesser of their useful lives or the remaining term of the
lease. Amortization of assets recorded under capital leases is included in
depreciation expense. Upon disposal, assets and related accumulated depreciation
are removed from the Company's accounts and the resulting gains or losses are
reflected in the statement of operations.
IDENTIFIED INTANGIBLE ASSETS, PURCHASED TECHNOLOGY AND GOODWILL
Identified intangible assets, purchased technology and goodwill are related
mainly to the business acquisitions discussed in Note 3. Amortization of
identified intangible assets and purchased technology is recorded on a
straight-line basis over the estimated useful lives (generally three years) of
the remaining assets. Goodwill represents the excess of cost over the fair value
of net intangible and identifiable intangible assets of
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired businesses. Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). Prior to the adoption of SFAS No. 142, the Company amortized
goodwill over its estimated useful life of three years. Upon adoption of SFAS
No. 142, the Company performed an initial impairment analysis. Under SFAS No.
142, goodwill is no longer amortized to expense, but is instead subjected to a
periodic impairment test at least annually. The impairment test is a two-step
process, which analyzes whether or not goodwill has been impaired. Step one
requires that the fair value be compared to book value. If the fair value is
higher than the book value, no impairment is indicated and there is no need to
perform the second step of the process. If the fair value is lower than the book
value, step two must be evaluated. Step two requires the fair value to be
allocated to its assets and liabilities in a manner similar to a purchase price
allocation in order to determine the implied fair value of the goodwill. This
implied fair value is then compared with the carrying amount, and if it were
less, the Company would then recognize an impairment loss. Annually, the
goodwill is tested for impairment in the fourth quarter.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). This Statement
supercedes or amends existing accounting literature related to the impairment
and disposal of long-lived assets.
In accordance with SFAS No. 144, whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable, the Company reviews its long-lived assets for impairment by first
comparing the carrying value of the assets to the sum of the undiscounted cash
flows expected to result from the use and eventual disposition of the assets. If
the carrying value exceeds the sum of the assets' undiscounted cash flows, the
Company estimates an impairment loss by taking the difference between the
carrying value and fair value of the assets. No impairment charge has been
recorded in any of the periods presented.
STOCK-BASED COMPENSATION AND WARRANTS
The Company has adopted SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure (SFAS No. 148) and the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No.
123). SFAS No. 123 permits the Company to continue accounting for stock-based
compensation as set forth in APB Opinion No. 25, Accounting for Stock Issued to
Employees, provided the Company discloses the pro forma effect on net income and
earnings per share of adopting the full provisions of SFAS No. 123. Accordingly,
the Company continues to account for stock-based compensation under APB Opinion
No. 25 and has provided the required pro forma disclosures. The Company accounts
for equity instruments issued to nonemployees and pursuant to strategic alliance
arrangements in accordance with the provisions of SFAS No. 123, Emerging Issues
Task Force (EITF) No. 96-18, Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring or in Conjunction with Selling Goods or
Services, and Emerging Issues Task Force (EITF) No. 01-9, Accounting for
Consideration Given by Vendor to a Customer or a Reseller of the Vendor's
Product.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to employee stock-based awards (Note 13).
DECEMBER 31,
----------------------------
2000 2001 2002
-------- ------- -------
Reported net loss attributable to common stock......... $100,576 $75,638 $46,998
Eliminate: Stock-based compensation expense included in
reported net loss.................................... (866) (49) (1,360)
Apply: Total stock-based compensation expense
determined under fair value method for all awards.... 3,067 4,557 5,766
-------- ------- -------
Pro Forma net loss..................................... $102,777 $80,146 $51,404
======== ======= =======
Basic and diluted loss per share:
Basic and diluted, as reported....................... $ 687.66 $468.67 $ 8.11
Basic and diluted, pro forma......................... $ 702.71 $496.60 $ 8.87
SOFTWARE DEVELOPMENT COSTS
Costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized in accordance with SFAS No. 86, Computer Software to
be Sold, Leased or Otherwise Marketed. Because the Company believes its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date, with the exception of the technology acquired from acquisitions (Note 3).
The value of the purchased technology was capitalized and is being amortized on
a straight-line basis over three years (its estimated useful life).
INCOME TAXES
The Company follows the liability method of accounting for income taxes
pursuant to SFAS No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax laws and rates applicable to
the periods in which the differences are expected to reverse. The Company
provides for a valuation allowance to reduce deferred tax assets to their
estimated realizable value.
CONCENTRATION OF CREDIT RISK
For the years ended December 31, 2000, 2001, and 2002, revenues from
foreign customers approximated 5%, 11%, and 15%, respectively, of the Company's
total revenues.
The Company does not require collateral from its customers. Credit losses
related to such customers historically have been minimal and within management's
expectations.
ADVERTISING
Advertising and promotion costs are expensed as incurred and totaled
approximately $1,829, $1,437, and $1,146 for the years ended December 31, 2000,
2001, and 2002, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries is the local
currency. The Company translates all assets and liabilities to U.S. dollars at
the current exchange rates as of the applicable balance
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sheet date. Revenue and expenses are translated at the average of the beginning
and ending exchange rate prevailing during the period. Gains and losses
resulting from the translation of the foreign subsidiaries' financial statements
are reported as a separate component of total other comprehensive loss in
stockholder's equity. Net gains and losses resulting from foreign exchange
transactions, which are recorded in the consolidated statements of operations,
were not significant during any of the periods presented.
COMPREHENSIVE LOSS
The Company reports comprehensive income or loss in accordance with the
provisions of SFAS No. 130, Reporting Comprehensive Income. Comprehensive income
or loss, as defined, includes all changes in equity (net assets) during a period
from nonowner sources. Tax effects of other comprehensive income or loss are not
considered material for any period.
RECENT ACCOUNTING PRONOUNCEMENTS
Debt extinguishment costs
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 62, Amendment of FASB Statement No. 13 and Technical Corrections
(SFAS No. 145). SFAS No. 145, which becomes effective for financial statements
issued for fiscal years beginning after May 15, 2002 and requires gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under the provisions of Accounting Principles Board Opinion No. 30, Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. As of December 31, 2002, the Company early adopted SFAS No. 145
and reclassified an extraordinary loss of $1,143 recognized in the second
quarter of 2002 to other expense.
Exit and disposal activities
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS No. 146), which becomes effective for
exit or disposal activities that are initiated after December 31, 2002. SFAS No.
146 addresses financial accounting and reporting for costs associated with exit
or disposal activities and requires that a liability for a cost associated with
an exit or disposal activity be recognized at fair value when the liability is
incurred, rather than at the date of an entity's commitment to an exit plan. The
Company does not believe that SFAS No. 146 will have a material impact on its
financial position and results of operations.
Stock-Based Compensation
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation -- Transition and
Disclosure (SFAS No. 148). SFAS No. 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the prior
disclosure guidance and requires prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. For
entities that voluntarily change to the fair value based method of accounting
for stock-based employee compensation, the transition provisions are effective
for fiscal years ending after December 15, 2002. For all other companies, the
disclosure provisions are effective for interim and annual periods beginning
after December 15, 2002. The Company has complied with the disclosure provisions
of this standard in the consolidated financial statements.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Guarantees
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN No. 45). FIN No. 45 clarifies and
expands on existing disclosure requirements for guarantees, including loan
guarantees. It also would require that, at the inception of a guarantee, the
Company may need to recognize a liability for the fair value, of its obligation
under that guarantee. The initial fair value recognition and measurement
provisions will be applied on a prospective basis to certain guarantees issued
or modified after December 31, 2002. The disclosure provisions are effective for
financial statements of periods ending after December 15, 2002. The adoption of
FIN No. 45 did not have a material impact on the Company's financial position,
results of operations or cash flows.
LOSS PER SHARE
Basic and diluted loss per share have been computed using the weighted
average number of shares of common stock outstanding during the period.
Potential common shares from conversion of convertible preferred stock and
exercise of stock options and warrants are excluded from historical diluted net
loss per share because they would be antidilutive. The total number of shares
excluded from diluted net loss per share relating to these securities was
5,037,288, 6,892,403, and 2,125,833 shares for the years ended December 31,
2000, 2001, and 2002, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
2. INITIAL PUBLIC OFFERING
In June 2002, the Company issued 3,750,000 shares of its common stock at a
price of $10.00 per share in its initial public offering. The company received
approximately $32,950 in proceeds, net of underwriting discounts, commissions,
and offering expenses. Simultaneously with the closing of the initial public
offering, each outstanding share of preferred stock was automatically converted
into common stock based upon the applicable conversion ratio (see Note 12). In
connection with the offering, the Company repaid approximately $17,800 of
related party debt (see Note 9)
3. ACQUISITIONS
The number of shares of common stock and the valuations thereof, included
in the acquisition information presented below, has been adjusted to reflect the
one-for-thirty reverse split and the 1-for-2.22 reverse split that occurred in
January 2002 and May 2002, respectively, and certain share calculations have
been rounded.
Programmed Solutions, Inc.
On February 9, 2000, the Company acquired the outstanding common stock of
Programmed Solutions, Inc. (PSI), a provider of software for the printing
industry. The aggregate purchase price of $25,130 (including transaction costs
of $130) consisted of 25,887 shares of common stock valued at $386.28 per share
and $15,000 in cash. This transaction was accounted for as a purchase in
accordance with APB 16. The excess of the purchase price over the fair value of
assets acquired and liabilities assumed in the acquisition of $6,309 is
classified as goodwill.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair value of the assets acquired and liabilities assumed of
PSI are as follows:
AMOUNT
-------
Current assets (including cash of $398)..................... $ 2,517
Property and equipment...................................... 649
Purchased technology........................................ 9,569
Customer list............................................... 7,947
Goodwill.................................................... 6,309
Other long-term assets...................................... 81
Current liabilities......................................... (1,942)
-------
$25,130
=======
A.H.P. Systems, Inc.
On March 8, 2000, the Company acquired the outstanding common stock of
A.H.P. Systems, Inc. (AHP), a provider of software for the printing industry.
The aggregate purchase price of $4,446 (including transaction costs of $144)
consisted of 5,954 shares of common stock valued at $588.08 per share and $800
in cash. This transaction was accounted for as a purchase in accordance with APB
16. The excess of the purchase price over the fair value of assets acquired and
liabilities assumed in the acquisition of $4,429 is classified as goodwill.
The estimated fair value of the assets acquired and liabilities assumed of
AHP are as follows:
AMOUNT
-------
Current assets (including cash of $27)...................... $ 412
Property and equipment...................................... 23
Purchased technology........................................ 632
Customer list............................................... 307
Goodwill.................................................... 4,429
Other long-term assets...................................... 3
Current liabilities......................................... (1,360)
-------
$ 4,446
=======
Hagen Systems, Inc.
On March 9, 2000, the Company acquired the outstanding common stock of
Hagen Systems, Inc. (Hagen), a provider of software for the printing industry.
The aggregate purchase price of $40,561 (including transaction costs of $161)
consisted of 34,689 shares of common stock valued at $588.08 per share, notes
payable of $12,000 and $8,000 in cash. This transaction was accounted for as a
purchase in accordance with APB 16. The excess of the purchase price over the
fair value of assets acquired and liabilities assumed in the acquisition of
$15,406 is classified as goodwill.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair value of the assets acquired and liabilities assumed of
Hagen are as follows:
AMOUNT
-------
Current assets (including cash of $1,401)................... $ 2,660
Property and equipment...................................... 440
Purchased technology........................................ 13,163
Customer list............................................... 11,857
Goodwill.................................................... 15,406
Current liabilities......................................... (2,965)
-------
$40,561
=======
M Data, Inc. d/b/a PrintSmith
On March 10, 2000, the Company acquired the outstanding common stock of M
Data, Inc. (M Data), a provider of software for the printing industry. The
aggregate purchase price of $11,174 (including transaction costs of $124)
consisted of 2,555 shares of common stock valued at $782.55 per share, $7,000 in
notes payable and $2,050 in cash. This transaction was accounted for as a
purchase in accordance with APB 16. The excess of the purchase price over the
fair value of assets acquired and liabilities assumed in the acquisition of
$2,669 is classified as goodwill.
The estimated fair value of the assets acquired and liabilities assumed of
M Data are as follows:
AMOUNT
-------
Current assets (including cash of $57)...................... $ 492
Property and equipment...................................... 108
Purchased technology........................................ 4,088
Customer list............................................... 4,491
Goodwill.................................................... 2,669
Current liabilities......................................... (674)
-------
$11,174
=======
Logic Associates, Inc.
On April 7, 2000, the Company acquired the outstanding common stock of
Logic Associates, Inc. (Logic), a provider of software for the printing
industry. The aggregate purchase price of $55,991 (including transaction costs
of $223) consisted of 9,800 shares of common stock valued at $782.55 per share
and $48,099 in notes payable. This transaction was accounted for as a purchase
in accordance with APB 16. The excess of the purchase price over the fair value
of assets acquired and liabilities assumed in the acquisition of $19,824 is
classified as goodwill.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair value of the assets acquired and liabilities assumed of
Logic are as follows:
AMOUNT
-------
Current assets (including cash of $1,045)................... $ 3,000
Property and equipment...................................... 2,445
Purchased technology........................................ 16,155
Customer list............................................... 17,816
Goodwill.................................................... 19,824
Other long-term assets...................................... 4
Current liabilities......................................... (2,281)
Long-term debt.............................................. (972)
-------
$55,991
=======
Had these acquisitions taken place at the beginning of fiscal 2000 the
unaudited pro forma results of operations would have been as follows for the
year ended December 31, 2000.
YEAR ENDED
DECEMBER 31,
2000
------------
Revenue..................................................... $ 32,727
Operating loss.............................................. (81,750)
Net loss.................................................... (89,139)
Net loss attributable to common stock....................... (93,997)
Pro forma loss per share, basic and diluted................. (579.55)
Weighted average shares, basic and diluted.................. 162,191
The unaudited pro forma results are not necessarily indicative of the
results of operations, which would have been reported had the acquisitions
occurred prior to the beginning of the periods presented, and they are not
intended to be indicative of future results.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Activity in the allowance for doubtful accounts is as follows:
BALANCE
-------
Balance, December 31, 1999.................................. $ 250
Net charge to expense....................................... 935
Amounts written off......................................... (500)
-----
Balance, December 31, 2000.................................. $ 685
Net charge to expense....................................... 576
Amounts written off......................................... (691)
-----
Balance, December 31, 2001.................................. 570
Net charge to expense....................................... 592
Amounts written off......................................... (692)
-----
Balance, December 31, 2002.................................. $ 470
=====
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. RECEIVABLES
Receivables consist of the following:
DECEMBER 31,
----------------
2001 2002
------ -------
Billed receivables.......................................... $6,087 $11,948
Unbilled receivables........................................ 1,629 1,418
------ -------
7,716 13,366
Allowance for doubtful accounts............................. (570) (470)
------ -------
$7,146 $12,896
====== =======
Unbilled receivables represent recorded revenue that is billable by the
Company at future dates based on contractual payment terms.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
------------------
2001 2002
------- --------
Buildings and leasehold improvements........................ $ 1,734 $ 1,739
Equipment and fixtures...................................... 12,602 13,545
------- --------
14,336 15,284
Less accumulated depreciation............................... (9,637) (12,578)
------- --------
$ 4,699 $ 2,706
======= ========
7. IDENTIFIED INTANGIBLE ASSETS, PURCHASED TECHNOLOGY AND GOODWILL
Identified intangible assets, purchased technology and goodwill relate
mainly to the business acquisitions consummated in early 2000. Amortization is
recorded on a straight-line basis over the estimated useful lives (generally
three years) of the remaining assets and consists of the following as of
December 31, 2001 and 2002:
DECEMBER 31,
--------------------
2001 2002
-------- ---------
Customer list............................................... $ 42,713 $ 42,713
Purchased technology........................................ 43,708 44,023
Patent...................................................... 2,047 2,065
Goodwill.................................................... 58,730 58,730
-------- ---------
147,198 147,531
Less accumulated depreciation............................... (90,085) (119,596)
-------- ---------
$ 57,113 $ 27,935
======== =========
Effective July 1, 2001 and January 1, 2002, the Company adopted SFAS No.
141, Business Combinations (SFAS No. 141), and SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), respectively. SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separate from
goodwill. SFAS No. 142 requires that goodwill and
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain intangibles no longer be amortized, but instead tested for impairment at
least annually. There was no impairment of goodwill upon adoption of SFAS No.
142 in 2002.
As required by SFAS 142, prior year results have not been restated. A
reconciliation of the previously reported net loss and loss per common share for
the years ended December 31, 2000 and 2001, as if SFAS No. 142 had been adopted
as of January 1, 2000, is as follows:
DECEMBER 31,
----------------------------
2000 2001 2002
-------- ------- -------
Net loss:
Reported net loss attributable to common stock....... $100,576 $75,638 $46,998
Goodwill amortization................................ 16,653 19,576 --
-------- ------- -------
Adjusted net loss...................................... $ 83,923 $56,062 $46,998
======== ======= =======
Basic and diluted loss per share:
Reported net loss per share.......................... $ 687.66 $468.67 $ 8.11
Goodwill amortization................................ 113.86 121.30 --
-------- ------- -------
Adjusted basic and diluted net loss per share.......... $ 573.80 $347.37 $ 8.11
======== ======= =======
8. LINE OF CREDIT
The Company's line of credit agreement has a maximum borrowing capacity of
$2,000. The line of credit accrues interest at prime (4.25% at December 31,
2002). Interest is due monthly and the principal balance is due on demand. The
line of credit is collateralized by substantially all of the Company's assets.
As of December 31, 2001 and 2002, the entire $2,000 was outstanding.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DEBT AND RELATED PARTY DEBT
Long-term debt consists of the following:
DECEMBER 31,
-----------------
2001 2002
------- -------
DEBT:
Note payable to bank, payable in monthly installments of $18
through July 2004 including interest at 7.62%,
collateralized by substantially all of the Company's
assets.................................................... $ 510 $ 326
Less current portion........................................ 184 326
------- -------
$ 326 $ --
======= =======
RELATED PARTY DEBT:
Notes payable to stockholders in connection with the
acquisition of Hagen Systems, Inc......................... $ 8,000 $ --
Notes payable to stockholders in connection with the
acquisition of M Data, Inc................................ 4,000 --
Notes payable to stockholders in connection with Certain
debt refinancings which occurred in December 2001......... 23,600 --
Notes payable to stockholders in connection with the
acquisition of M Data, Inc., due in twenty-four successive
monthly installments of $175 commencing January 1, 2003,
plus interest at 8%....................................... -- 4,200
Notes payable to stockholders in connection with the
acquisition of Hagen Systems, Inc. due in January 2004.
Current interest is due and payable at 8% and is payable
in monthly installments Collateralized by substantially
all of the Company's assets............................... -- 2,350
Note payable to stockholder due in January 2004. Current
interest is due and payable at 4% and is payable in
quarterly installments commencing September 2002.
Collateralized by substantially all of the Company's
assets.................................................... -- 11,800
------- -------
35,600 18,350
Less current portion........................................ -- 2,100
Less debt origination costs................................. 2,561 3,507
------- -------
$33,039 $12,743
======= =======
The note payable to the bank includes various restrictive covenants, which
among other things require the Company to maintain a certain debt service
coverage ratio. At December 31, 2001 and 2002, the Company was not in compliance
with this covenant. The bank waived compliance with this covenant through
January 1, 2004.
During 2001, the Company received bridge loans in the amount of $4,500 from
certain Series B, C, D, and E-1 preferred stockholders. The bridge loans bore
interest at 12% and converted into $2,250 of long-term stockholder debt and
562,500 shares of Series F preferred stock at $4.00 per share on December 31,
2001. The Company issued warrants to purchase 9,382 shares of common stock and
75,000 shares of Series E-1 preferred stock shares in conjunction with these
bridge loans which were valued at $1,161, using the Black-Scholes valuation
model with the following assumptions: volatility of 1.0; no expected dividend
yield; risk-free interest rate of 5.09%; and an estimated life of ten years
(Note 14). The estimated fair value of these warrants was recorded as interest
expense in 2001.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At the close of business on December 31, 2001, the Company entered into new
agreements for its related-party debt. Notes payable to stockholders issued in
connection with the acquisition of Logic totaling $23,604 were repaid along with
$4,000 of the outstanding notes payable to stockholders issued in connection
with the acquisition of Hagen. In addition, new agreements were entered into
with the former stockholders of Hagen and M Data. Accordingly, new payment
periods and interest rates related to the remaining $8,000 of debt for Hagen and
$4,000 of debt for M Data were established as disclosed above. Funds used for
the repayments were obtained from a $23,600 note payable issued to Iris
Graphics, a subsidiary of one of the Company's stockholders, and the issuance of
3,722,096 shares of Series F preferred stock at $4 per share (Note 12). The
financial statements reflect these transactions as of December 31, 2001, in
accordance with the terms of the agreements described above. The related cash
transfers occurred on January 2, 2002. The Iris Graphics note included financial
covenants based on cash flows and revenues. At December 31, 2001, the Company
was not in compliance with the quarterly cash flow covenant, which would have
resulted in an additional 3% of interest until the default was cured. Iris
Graphics waived compliance with this covenant through March 31, 2002. In
conjunction with incurrence of the debt, Iris Graphics was also issued a warrant
to purchase 570,874 shares of Series F preferred stock at an exercise price of
$.01 per share. The estimated fair value of this warrant of $2,283 will be
recorded to interest expense over the term of the related debt (Note 14).
On May 31, 2002 and June 10, 2002, the Company executed agreements with
certain of its debt holders to modify the terms of certain related-party debt,
effective upon the completion of the Company's initial public offering. An
amendment to the promissory note issued to the former shareholders of M Data,
dated as of May 31, 2002, provided for an increase in the principal amount of
the note to $4,200 from $4,000 in return for a reduction in the annual interest
rate to 8.0% from 12.0%. Principal payments are due in 24 equal installments
commencing January 2003. Interest is payable monthly beginning June 2002. The
$200 increase in principal was accounted for as deferred interest and will be
amortized as interest expense in addition to the 8.0% stated rate over the
remaining term of the loan (resulting in an effective annual interest rate of
approximately 11.1%).
An amendment to the credit agreement with Iris Graphics, dated as of June
10, 2002: (i) reduced the annual interest rate to a fixed rate of 4.0%; (ii)
provided for the payment of a total of $11,800 of the outstanding principal
balance of $23,600 at December 31, 2001 and all accrued and deferred interest
upon the completion of the Company's initial public offering; and (iii)
eliminated the financial condition covenants associated with the original loan.
In return, the Company agreed to pay a $3,700 restructuring fee upon completion
of the Company's initial public offering. The restructuring fee was accounted
for as deferred interest and will be amortized as interest expense in addition
to the stated 4.0% rate over the remaining term of the loan (resulting in an
effective annual interest rate of approximately 23.8%). The $11,800 remaining
principal balance is due in one installment on January 2, 2004. Interest is
payable quarterly beginning in June 2002. The covenants under the amended
agreement provide certain limitations on the Company's product development and
capital expenditures, future investments and certain other financial criteria.
In connection with this amendment and subsequent repayment, the Company
wrote off approximately $1,143 of debt origination fees associated with the fair
value of the Iris Graphic warrant. This write-off has been included in other
expense.
Additionally, under an amendment to the loan agreement with the former
shareholders of Hagen Systems, dated as of June 10, 2002, the Company was not
required to prepay $2,000 of the $8,000 otherwise due upon an initial public
offering and the annual interest rate was reduced to 8.0%, in return for an
increase of $350 to the remaining principal balance of the loan. The remaining
principal amount due under the restructured agreement, after the prepayment of
$6,000, is $2,350, which is due on January 2, 2004. Interest at an annual rate
of 8.0% is payable monthly beginning in June 2002. The $350 increase in
principal was accounted for as deferred interest and will be amortized as
interest expense in addition to the stated 8.0% rate over the remaining term of
the loan (resulting in an effective annual interest rate of approximately
17.4%).
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum debt payments at December 31, 2002 are as follows:
2003 -- $2,299 and 2004 -- $16,377.
10. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases office equipment, vehicles, and office facilities in
various locations. Rental expense under these operating leases was $1,373,
$1,670, and $1,388 for the years ended December 31, 2000, 2001, and 2002,
respectively. At December 31, 2002, future commitments under all noncancelable
operating leases are as follows :
THIRD RELATED
PARTY PARTY
------ -------
2003........................................................ $ 920 $ 469
2004........................................................ 468 443
2005........................................................ 474 444
2006........................................................ 448 364
Thereafter.................................................. 145 27
------ ------
$2,455 $1,747
====== ======
The Company leases equipment under various capital leases. These capital
leases expire in various years through 2003 and may be renewed for periods
ranging from one to five years. Amortization of leased assets is included in
depreciation and amortization expense.
Future minimum payments under capital leases with initial terms of one year
or more consisted of the following at December 31, 2002:
CAPITAL LEASES
--------------
2003........................................................ $34
---
Total minimum lease payments................................ 34
Amounts representing interest............................... (1)
---
Present value of net minimum lease payments................. $33
===
LEGAL PROCEEDINGS
The Company is involved in disputes and litigation in the normal course of
business. In the opinion of management, the ultimate disposition of these
matters is not expected to have a material adverse effect on the Company's
business, financial condition, or results of operations. The Company has accrued
for estimated losses in the accompanying financial statements for those matters
where it believes that the likelihood that a loss has occurred is probable and
the amount of loss is reasonably estimable. Although management currently
believes the outcome of other outstanding legal proceedings, claims, and
litigation involving the Company will not have a material adverse effect on its
business, financial condition, or results of operations, litigation is
inherently uncertain and there can be no assurance that existing or future
litigation will not have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The reconciliation of the effective income tax rate is as follows:
DECEMBER 31,
---------------------
2000 2001 2002
----- ----- -----
Federal income tax statutory rate........................... 34.0% 34.0% 34.0%
Increases (decreases):
Nondeductible items, including goodwill amortization...... (8.0) (12.0) (3.3)
State income taxes, net of federal benefit................ 6.0 6.0 6.0
Change in valuation allowance............................. (32.0) (28.0) (36.7)
----- ----- -----
Total income tax expense.................................... 0.0% 0.0% 0.0%
===== ===== =====
Significant components of the Company's deferred tax assets and liabilities
are as follows :
DECEMBER 31,
-----------------
2001 2002
------- -------
Deferred tax assets:
Net operating loss carryforwards.......................... $29,363 $30,565
Deferred revenue.......................................... 1,581 1,471
Bad debt expense.......................................... 228 186
Depreciation/amortization................................. 842 1,048
Accrued expenses.......................................... 2,994 2,836
Stock-based compensation.................................. -- 531
Other..................................................... 3 6
------- -------
Total deferred tax assets.............................. 35,011 36,643
Deferred tax liabilities:
Identified intangibles.................................... 13,481 1,998
Tax accounting change..................................... 104 27
------- -------
Total deferred tax liabilities......................... 13,585 2,025
Valuation allowance....................................... 21,426 34,618
------- -------
Net deferred tax asset................................. $ -- $ --
======= =======
A valuation allowance has been recorded on the amount of the net deferred
tax asset at December 31, 2001 and 2002, based on management's determination
that the recognition criteria for realization of the net deferred tax assets has
not been met.
At December 31, 2002, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $76,413, which will expire
beginning in 2011 through 2022. Utilization of certain net operating loss
carryforwards is subject to limitations under Section 382 of the Internal
Revenue Code. Additionally, certain state tax restrictions will apply to the
utilization amount and timing of the net operating loss carryforwards.
12. STOCKHOLDERS' EQUITY
At December 31, 2002, the number of authorized shares of common stock and
preferred stock was 100,000,000 shares and 1,000,000 shares, respectively, of
which 10,632,877 and 0, respectively were
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding, 10,731 and 0, respectively, were held in treasury and 2,125,833 and
0, respectively, were reserved for future issuance.
On January 2, 2002, the Company effected a one-for-thirty reverse stock
split of its issued and outstanding common stock. On May 31, 2002, the Company
affected a 1-for-2.22 reverse stock split of its issued and outstanding common
stock. All common stock prices and amounts impacted by the splits have been
retroactively adjusted. Certain share calculations resulting in fractional
amounts have been rounded to the nearest whole number.
PREFERRED STOCK
At December 31, 2001 the following Redeemable preferred stock was
authorized and outstanding:
NUMBER OF NUMBER OF
SHARES SHARES
AUTHORIZED OUTSTANDING
---------------- ----------------
Redeemable preferred stock:
Series B............................................ 31,186,312 31,186,312
Series C............................................ 1,915,080 1,915,080
Series D............................................ 283,125 283,125
Series E-1.......................................... 20,333,333 17,375,000
Series F............................................ 4,525,602 4,292,970
On February 9, 2000, the Company issued 31,186,312 shares of Series B
preferred stock for consideration of $25,011.
On February 15, 2000, the Company issued 1,915,080 shares of Series C
preferred stock for consideration of $11,107.
On March 8, 2000, 190,948 shares of Series A-1 preferred stock were
repurchased by the Company for consideration of $1,107.
On March 8, 2000, the Company issued 283,125 shares of Series D preferred
stock for consideration of $2,500.
On October 30, 2000 and March 1, 2001, the Company issued 15,625,000 shares
and 1,750,000 shares, respectively, of Series E-1 preferred stock for
consideration of $62,500 and $7,000, respectively.
On December 31, 2001, the Company issued 3,722,096 shares of Series F
preferred stock for consideration of $14,888. Additionally on December 31, 2001,
warrants to purchase 570,874 shares of Series F preferred stock were exercised
for $6.
On January 31, 2002, the Company issued 188,736 shares of Series F
preferred stock for consideration of $755.
The Company paid $2,807 in transaction costs in conjunction with the
issuance of Series B, C, D, E-1, and F preferred stock.
LIQUIDATION AND REDEMPTION
Prior to the conversion of all preferred stock to common stock in
connection with the Company's initial public offering (Note 2), Series B, C, D,
E-1, and F preferred stock had the right to request the Company to redeem all
shares. The redemption price for all series of preferred stock would have been
the higher of (i) the liquidation preference of a share of such series of
preferred stock plus unpaid declared dividends, and (ii) the fair market value
of a share of preferred stock as determined by an independent appraiser plus all
dividends declared that remain unpaid. During 2000, 2001 and 2002, approximately
$4,858, $5,635 and $6,201,
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, were accreted as dividends utilizing the interest method so that,
at the redemption date, the accreted amount would equal the redemption amount.
CONVERSION
In connection with the Company's initial public offering (see Note 2),
67,512,270 shares of preferred stock converted into 6,691,652 shares of common
stock. The outstanding shares of preferred stock were multiplied by the
following conversion ratio:
Series A.................................................... .015
Series A-1.................................................. .015
Series B.................................................... .015
Series C.................................................... .016
Series D.................................................... .017
Series E-1.................................................. .271
Series F.................................................... .291
COMMON STOCK
On February 7, 2000, the Company issued 3,822 shares of common stock for
$585 of software services.
On March 9, 2000, the Company issued 1,000 shares of common stock for $589
of advertising services.
On March 10, 2000, the Company issued 20,396 shares of common stock for
consideration of $11,928.
In connection with its initial public offering (see Note 2), on June 18,
2002, the Company issued 3,750,000 shares of common stock for consideration of
approximately $32,950, net of underwriting discounts, commissions and offering
expenses.
13. STOCK OPTION PLANS
1999 STOCK OPTION PLAN
During 1999, the Company adopted a stock option plan (the 1999 Plan), which
provides for the issuance of stock options for officers, directors, employees,
and consultants. A total of 9,831 options to purchase the Company's common stock
have been granted pursuant to the 1999 Plan at an exercise price equal to the
estimated grant date fair value, as determined by the board of directors.
Options under the 1999 Plan will generally expire ten years from the date of
grant. Options granted under the plan vested immediately in March 2000 upon the
Company's filing of a registration statement on Form S-1. A new measurement date
did not occur since the accelerated vesting was included in the original grant
agreement. As of December 31, 2002, the weighted average remaining contractual
life on the 1999 Plan options outstanding was 6.73 years.
STOCK INCENTIVE PLANS
Effective February 10, 2000, the Company adopted the 2000 stock incentive
plan (the 2000 Plan), which provides for the issuance of stock options for
officers, directors, employees, and consultants. A total of 112,526 shares of
common stock may be issued pursuant to the 2000 Plan. Options generally vest
over a four-year period in equal annual amounts, or over such other period as
the board of directors determines, and may be accelerated in the event of
certain transactions such as a merger or a sale of the Company. These options
generally expire ten years after the date of grant. As of December 31, 2002, no
additional shares have been granted pursuant to this Plan. The weighted average
remaining contractual life on the 2000 Plan options outstanding at December 31,
2002 was 7.84 years.
During 2000, the Company granted stock options to certain employees below
fair value and to nonemployees for professional services, which resulted in the
recognition of $1,016 of deferred stock-based
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation. The deferred stock-based compensation is being amortized over the
remaining vesting period. The employee grants were determined utilizing the
intrinsic value method under APB Opinion No. 25. The nonemployee grants were for
professional services at exercise prices that approximated fair value at the
date of grant. The average fair value of these options was estimated at $6.66
per share on the date of grant using the Black-Scholes option pricing model with
the following assumptions: volatility of 1.00, dividend yield of 0.0%, risk-free
interest rate of 6.0%, and an expected life of four years. During 2000, 2001 and
2002, the Company recognized compensation expense of approximately $866, $49 and
$32, respectively, related to these grants.
Effective February 5, 2002, the Company adopted the 2002 key executive
stock incentive plan (the 2002 Executive Plan) under which 766,520 shares of
common stock were reserved for grants to senior management, officers, and
directors. As of December 31, 2002, the Company had granted options to purchase
766,520 shares of common stock, with an exercise price of $4.21 per share.
Options to purchase 10,307 and 756,213 shares vest over one- and four-year
periods, respectively. As these options were granted below fair market value,
$4,433 of deferred stock-based compensation was recorded. For the year ended
December 31, 2002, $1,148 of stock-based compensation expense was recognized
with respect to these options. As of December 31, 2002, the weighted average
remaining contractual life on the 2002 Executive Plan options outstanding was
9.1 years.
Effective March 5, 2002, the Company adopted the 2002 Stock Incentive Plan
(the 2002 Plan), which provides for the issuance of stock options for officers,
directors, employees, and consultants. The Company has reserved 765,765 shares
of common stock for grants under the plan. The options generally vest over a
four-year period in equal annual amounts, or over such other period as the board
of directors determines, and may be accelerated in the event of certain
transactions such as a merger or a sale of the Company. These options generally
expire ten years after the date of grant. During 2002, the Company granted
92,910 options to employees below fair value at the date of grant. The
transaction resulted in $743 and $179 of deferred stock-based compensation and
compensation expense, respectively. The deferred stock-based compensation is
being amortized over the remaining vesting period. As of December 31, 2002, the
weighted average remaining contractual life on the 2002 Plan options outstanding
was 9.34 years.
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes option activity for options to purchase
common stock for the 1999 Plan, the 2000 Plan, the 2002 Executive Plan and the
2002 Plan for the years ended December 31, 2000, 2001 and 2002:
COMMON STOCK OPTION PRICE WEIGHTED
OPTIONS RANGE PER AVERAGE
OUTSTANDING SHARE EXERCISE PRICE
------------ --------------- --------------
Options outstanding, December 31, 1999... 7,850 $79.92 $ 79.92
Options granted.......................... 5,719 $76.59 $ 76.59
Options granted.......................... 46,635 $199.80-$266.40 $265.07
Options granted.......................... 19,015 $386.28-$782.55 $510.16
Options exercised........................ 498 $76.59-$79.92 $ 79.67
Options forfeited........................ 1,867 $76.59-$782.55 $273.78
--------- -------
Options outstanding, December 31, 2000... 76,854 $76.59-$782.55 $206.96
Options granted.......................... 72,114 $99.90-$266.40 $103.23
Options exercised........................ 144 $76.59-$79.92 $ 79.56
Options forfeited........................ 22,047 $79.92-$266.40 $159.58
--------- -------
Options outstanding, December 31, 2001... 126,777 $76.59-$782.55 $203.13
Options granted.......................... 1,241,033 $2.00-$15.54 $ 7.53
Options exercised........................ -- -- --
Options forfeited........................ 79,382 $2.00-$782.55 $ 33.09
--------- -------
Options outstanding, December 31, 2002... 1,288,428 $2.00-$782.55 $ 23.90
========= =======
The options to purchase common stock outstanding as of December 31, 2002
have been segregated into ranges for additional disclosure as follows:
COMMON STOCK COMMON STOCK
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------------------
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING AS REMAINING WEIGHTED EXERCISABLE AS WEIGHTED
RANGE OF OF DECEMBER 31, CONTRACTUAL AVERAGE OF DECEMBER 31, AVERAGE
EXERCISE PRICES 2002 LIFE EXERCISE PRICE 2002 EXERCISE PRICE
--------------- --------------- ----------- -------------- --------------- --------------
$ 2.00-$ 15.54............. 1,175,950 9.18 $ 7.21 819,599 $ 4.77
$ 76.59-$ 99.90............. 66,978 7.92 $ 97.02 36,104 $ 94.80
$199.80-$266.40............. 31,108 7.70 $264.47 18,762 $264.21
$386.28-$782.55............. 14,392 7.17 $526.67 10,096 $523.06
--------- ---- ------- ------- -------
1,288,428 9.06 $ 23.90 884,561 $ 19.86
========= ==== ======= ======= =======
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans.
Had compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net loss and net loss per share would have been
increased by approximately $2,201, $4,508, and $4,406 or $15.05, $27.93 and $.76
per share, in 2000, 2001, and 2002, respectively. The following weighted average
assumptions were used in the Black-Scholes pricing model: volatility of 1.58,
1.0 and 1.17, dividend yield of 0.0%, an expected life of three and four years,
and average risk-free interest rates of 6.50%, 4.05% and 3.63% for 2000, 2001,
and 2002, respectively. The effects of applying SFAS No. 123 in this pro forma
disclosure are not likely to be representative of the effects on reported net
income for future years.
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Effective March 5, 2002, the Company adopted the 2002 Employee Stock
Purchase Plan, which became effective upon the Company's initial public
offering. The Company has reserved 337,837 shares of common stock for issuance
under the plan. Under the Plan, employees participating in the Plan may purchase
shares of common stock at the lower of (i) 85% of the price of a share of common
stock at the beginning of an offering period and (ii) 85% of the price of a
share of common stock on the purchase date. An offering period is defined as a
two-year period consisting of four (4) purchase dates, April 30 and October 31
of each year. Employees are eligible to join the plan and begin their offering
period on May 1 and November 1 of each calendar year. On October 31, 2002,
employees purchased 38,986 shares for $.99 (85% of $1.16 on October 31, 2002)
resulting in cash proceeds of approximately $38.
14. WARRANTS
STRATEGIC
In early 2000, the Company entered into two agreements pursuant to which
the Company develops private label Web sites. The Company is permitted to
disclose these agreements in sales and marketing publications. The Company
generates no revenues under these agreements. In return for certain marketing
related services during 2000, the Company issued warrants to purchase 29,603
shares of common stock with exercise prices ranging from $386.28 to $592.07.
Warrants to purchase 6,723 shares of common stock vested immediately and the
remaining warrants vest dependent upon various installation and usage
milestones, which vary by agreement. During 2000 and 2001, the Company recorded
$2,903 and $324, respectively, as warrant expense related to the warrants that
vested. The remaining warrants to purchase 22,880 shares, which vest dependent
upon installation and usage milestones, will be recorded as warrant expense at
the fair value on the dates the milestones are achieved in accordance with EITF
No. 96-18.
CUSTOMERS AND RESELLERS
During March 2000, the Company issued a warrant to purchase 1,501 shares of
common stock at an exercise price of $386.28 per share to a customer. This
warrant was immediately exercisable and expires four years from the date of
grant. It is exercisable for a period of four years. The fair value of this
warrant of $437 has been recorded as warrant expense in 2000 in accordance with
EITF No. 96-18, because no revenue was generated from the related customer. In
March 2000, the Company also granted a warrant to purchase 3,753 shares of
common stock to a potential customer at an exercise price of $999. The warrant
is exercisable upon entering into a private label site agreement. The warrant is
not currently exercisable.
In January 2001, the Company granted a warrant to purchase 37,537 shares of
common stock to a reseller of the Company's products. This warrant is
exercisable until the earlier of 12 months after termination of the agreement
with the reseller or the closing date of a merger or consolidation of the
Company with or into any other entity. The warrant was exercisable for 3,753
shares as of the date of grant. The Company has recorded $647 as warrant expense
related to this warrant. The remaining 33,784 shares of common stock are to vest
based on performance targets. As of December 31, 2001, warrants to purchase
3,002 of the remaining shares had vested, resulting in a $47 reduction in
revenue and $83 of warrant expense. To the extent the Company generates revenue
under the agreement with this reseller, the fair value of the warrant as it
vests will continue to be recorded as a reduction of revenue. These warrants
will be recorded at fair value on the date the performance targets are met.
DEBT
In conjunction with certain bridge loans issued in July and August of 2000,
the Company issued warrants to purchase 11,257 shares of common stock at an
exercise price of $266.40 per share. The fair value of these warrants of $1,942
was initially recorded as a debt discount and then amortized as interest expense
upon the conversion of the notes to equity in October 2000.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with the bridge loans issued in September and November of
2001 (Note 6), the Company issued warrants to purchase 9,382 shares of common
stock and 75,000 shares of Series E-1 preferred stock at exercise prices of
$39.96 per share and $4.00 per share, respectively. The fair value of these
warrants of $1,161 was initially recorded as a debt discount and then amortized
as interest expense upon the conversion of the notes to equity in December 2001.
On December 31, 2001, the Company issued warrants to purchase 570,874
shares of Series F preferred stock to Iris Graphics in connection with a note
payable (Note 8). The fair value of these warrants of $2,283 has been recorded
as a debt discount and will be amortized as interest expense over the repayment
term using the interest method.
OTHER
In March 2000, the Company issued warrants to purchase 1,250 shares and
1,501 shares of common stock to an advertising agency and a law firm,
respectively, for services. These warrants vested immediately at exercise prices
of $999 and $386.28, respectively. They are exercisable for a period of four
years. In accordance with EITF No. 96-18, the fair values of these warrants of
$501 and $437 were recorded to sales and marketing expense and general and
administrative expense, respectively, in 2000.
In April 2000, the Company also issued warrants to purchase 375 shares of
common stock to an equipment manufacturer in return for equipment discounts and
a comarketing agreement. These warrants became exercisable upon the initial
public offering (Note 2) of the Company's stock at the initial public offering
price per share. The Company recognized $1 of sales and marketing expense
associated with this transaction.
In March 2001, the Company granted warrants to purchase 50,000 shares of
Series E-1 preferred stock to a broker in connection with the issuance of Series
E-1 preferred stock. The fair value of these warrants of $168 has been recorded
as stock issuance cost.
On February 5, 2002, the Company granted a warrant to purchase 3,378 shares
of common stock to a software provider. The warrant became exercisable upon the
initial public offering of the Company's common stock at the initial public
offering price per share. The Company recognized $25 of sales and marketing
expense associated with this transaction.
FAIR VALUE
The fair values of all the warrants described above were estimated using
the Black-Scholes valuation model with the following assumptions: volatility of
1.0, no expected dividend yield, risk-free interest rates of 3.22% to 5.09%, and
an estimated life of three to ten years.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes common stock warrant activity for the years
ended December 31, 2000, 2001 and 2002:
WARRANTS WARRANT PRICE
OUTSTANDING RANGE PER SHARE
----------- ---------------
Balance, December 31, 1999............................... -- --
Warrants granted......................................... 37,481 $266.40-$386.28
Warrants granted......................................... 11,759 $ 592.07-999.00
-------
Balance, December 31, 2000............................... 49,240 $266.40-$999.00
Warrants granted......................................... 33,817 $ 6.66
Warrants granted......................................... 9,382 $ 39.96
Warrants granted......................................... 37,537 $ 266.40
-------
Balance, December 31, 2001............................... 129,976 $ 39.96-$999.00
Warrants granted......................................... 3,378 $ 10.00
-------
Balance, December 31, 2002............................... 133,354 $ 6.66-$999.00
=======
During 2001, the Company also granted warrants to purchase 125,000 shares
and 570,874 shares of Series E-1 and Series F preferred stock, respectively, at
exercise prices of $4.00 and $.01 per share, respectively. All Series F
preferred stock warrants were exercised during 2001. In association with the
initial public offering (Note 2), the 125,000 Series E-1 warrants were converted
into 33,817 common shares.
15. DEFINED CONTRIBUTION PLAN
The Company has a 401(k) Retirement Plan (the Plan) which covers
substantially all eligible employees. The Plan is a defined contribution profit
sharing plan in which all eligible participants may elect to have a percentage
of their compensation contributed to the Plan, subject to certain guidelines
issued by the Internal Revenue Service. The Company may contribute to the Plan
at the discretion of the Board of Directors. As of December 31, 2000 and 2001,
the Plan held 83,385 shares and 83,294 shares, respectively, of the Company's
Series A-1 preferred stock. The holder of the stock under the Plan had an option
to put the stock to the Company at the then current fair value during August and
February of each year. However, the Company reserves the right not to purchase
any shares of Series A-1 preferred stock if the purchase, in the reasonable
discretion of the Company, could have an adverse affect on the Company's
financial position. As of December 31, 2001, the Company had recorded a stock
purchase plan liability of $125, equal to the fair value of the stock held by
the Plan. In association with the initial public offering (Note 2), the
outstanding shares of Series A-1 preferred stock were converted into common
stock. During 2002, the Company purchased 1,222 shares for a total purchase
price of $122. As of December 31, 2002, the Plan held 29 shares of the Company's
common stock. As of December 31, 2002, the remaining liability related to shares
in the Plan is immaterial. To date, the Company has not made any cash
contributions to the Plan.
16. RESTRUCTURING CHARGE
In September 2000, the Company announced a strategic restructuring to
consolidate certain redundant tasks related to the acquisitions completed during
2000. The plan of restructuring approved by the board of directors resulted in a
restructuring charge of $1,185. This restructuring charge consisted primarily of
severance benefits and costs related to the termination of 78 employees during
the period from September through December 2000.
In May 2001, the Company announced a restructuring that primarily related
to the consolidation of certain client support operations into existing
facilities, resulting in a restructuring charge of $2,098. The plan included
terminations of 45 employees and the reduction of leased office space.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 2002, the Company announced a restructuring effecting an
organizational realignment of its product management customer service and
support operations. This resulted in a restructuring charge of $525 in the
quarter ended September 30, 2002. This charge consisted primarily of severance
and benefits, including involuntary termination and COBRA benefits, outplacement
costs, and payroll taxes for the approximately 40 employees impacted by this
restructuring.
Activity in the restructuring reserve is as follows (in thousands):
EMPLOYEE
SEVERANCE LEASE
AND BENEFITS OBLIGATIONS TOTAL
------------- ----------- -------
Balance, December 31, 1999.......................... $ -- $ -- $ --
Restructuring charge................................ 1,185 -- 1,185
Amounts paid against the reserve.................... (547) -- (547)
------- ----- -------
Balance, December 31, 2000.......................... 638 -- 638
Restructuring charge................................ 1,468 630 2,098
Amounts paid against the reserve.................... (2,106) (143) (2,249)
------- ----- -------
Balance, December 31, 2001.......................... -- 487 487
Restructuring charge................................ 525 -- 525
Amounts paid against the reserve.................... (511) (434) (945)
------- ----- -------
Balance, December 31, 2002.......................... $ 14 $ 53 $ 67
======= ===== =======
The remaining restructuring reserve of approximately $67 is expected to be
paid during 2003.
17. RELATED PARTY TRANSACTIONS
On November 8, 1999 and December 22, 1999, promissory notes in the amount
of $1,714 were received by the Company in conjunction with the sale of 58,678
shares of common stock. The notes bear interest at the annual rate of 6% and are
due on November 7, 2004. In the event the value of the stock is insufficient to
pay the full amount due under the notes, the Company may seek reimbursement from
the borrower for any deficiency up to 30% of the original balance of the note
plus accrued interest. The notes receivable are included in stockholders' equity
on the accompanying balance sheet. During 2000, $335 (including interest of $86)
was repaid in exchange for cash of $61 and a note payable of $274. During 2001,
$1,112 (including interest of $63) was repaid by a Company executive utilizing
proceeds he received from the sale of his common stock to certain preferred
stockholders. Additionally, during 2000, 2001 and 2002, approximately $86, $90
and 18, respectively, was recorded as interest income. As of December 31, 2002,
the Company recorded a valuation adjustment of approximately $393 to adjust the
fair value of the non-recourse portion of the notes receivable balance.
On April 26, 2001, the Company entered into a secured promissory note with
a Company executive for $642 plus interest at the annual rate of 4.58%. The note
matured October 5, 2001 and was secured by 6,422 shares of common stock owned by
the executive. During 2001, the Company took possession of these shares in
satisfaction of this note. The fair value of the shares on the date that the
loan was provided and the date that the loan matured was approximately $642. In
addition, the Company repaid an unsecured promissory note issued to the same
executive in April 2001 in the original principal amount of $99.
The Company has also issued notes to related parties (Note 9) and entered
into various leases with related parties (Note 10).
In February 2000, the Company entered into a strategic alliance agreement,
which was restated in December 2001, with Creo, Inc (Creo), a stockholder. As
part of the alliance, the Company signed a
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comprehensive services agreement. During 2001 and 2002, $61 and $1,
respectively, were paid as commissions under the agreement.
18. SUBSEQUENT EVENTS
On January 21, 2003, the Company received notification from Creo, one of
its stockholders, that Creo had entered into private, binding agreements to
acquire an additional 2.6 million shares of the Company's outstanding common
stock ("Common Stock") for $1.30 per share increasing its ownership from
approximately 30% to approximately 55% of the outstanding Common Stock. In
connection with these transactions, Creo presented the Company an unsolicited
offer to purchase all of the remaining outstanding shares of Common Stock for
$1.30 per share.
On January 22, 2003, the Company received an unsolicited offer from
Electronics for Imaging, Inc. ("EFI"), an unrelated party, to purchase all of
the outstanding shares of Common Stock for $2.60 per share.
Also, on January 22, 2003, the Company's Board of Directors ("Board")
appointed a Special Committee ("Special Committee") of the Board to consider its
strategic alternatives, including the two outstanding offers for the acquisition
of the Company. On January 31, 2003, the Special Committee announced it had
selected a financial advisor to assist in their review of the various
alternatives.
On February 13, 2003, the Special Committee adopted a Stockholders Rights
Agreement (the "Rights Agreement") pursuant to which dividend distribution of
one Right on each outstanding share of Common Stock was declared. The Rights
become exercisable if a person or group of affiliated or associated persons
acquires beneficial ownership of 30% or more of the outstanding shares of Common
Stock and other voting securities (the "Voting Securities") of the Company or
announces a tender offer or exchange offer for 15 percent or more of the
outstanding Voting Securities. The Board of Directors is entitled to redeem the
Rights at $.001 per Right at any time before any such person or affiliated group
thereafter acquires beneficial ownership of 30% or more of the outstanding
Voting Securities. If a person or affiliated group hereafter acquires beneficial
ownership of 30% or more of the outstanding Voting Securities of the Company (an
"Acquiring Person"), each Right will entitle its holder, except any such
Acquiring Person whose Rights shall become null and void, to purchase, at an
exercise price of $6.80 per share (subject to adjustment in certain events), a
number of shares of Common Stock having a market value at that time of twice the
Right's exercise price. Subject to certain exceptions, existing stockholders
that would otherwise become Acquiring Persons upon adoption of the Rights
Agreement are considered "Grandfathered Stockholders" and are not Acquiring
Persons, unless after such date they acquire beneficial ownership of additional
Voting Securities or exercise a contractual right to acquire Voting Securities
or enter into a new agreement to acquire or vote Voting Securities beneficially
owned by them. Before any such Acquiring Person shall become the beneficial
owner of 75% or more of the total voting power of the aggregate of all shares of
Voting Securities then outstanding, the Board may exchange each Right (other
than Rights that previously have become void as described above) in whole or in
part, at an exchange ratio of one share of Common Stock per Right (subject to
adjustment in certain events). If the Company is acquired in a merger or other
business combination transaction after a Person or group of affiliated or
associated Persons acquires beneficial ownership of 30% or more of the Company's
outstanding Voting Securities, each Right (except Rights that previously have
been voided as described above) will entitle its holder to purchase, at the
Right's then-current exercise price, a number of shares of the common stock or
other equity interest of the ultimate parent of such acquiring entity having a
market value at that time of twice the Right's exercise price.
The dividend distribution is payable to stockholders of record on February
14, 2003. The Rights will expire in ten years.
On February 13, 2003, the Company entered into the following three
agreements with EFI: a letter agreement that places certain restrictions on the
Company's ability to take actions in order to facilitate a business combination
with an entity other than EFI; a stock option agreement granting EFI an option
to purchase up to 2,126,574 shares of Common Stock at a purchase price equal to
$2.60 per share; and a standby
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit facility in the amount of $11,000 plus a working capital facility which
will provide up to an additional $3,000 under certain circumstances.
Printcafe entered into the EFI letter agreement and the option agreement in
order to induce EFI to provide Printcafe with the standby credit facility.
Subject to certain conditions, the Company has agreed under the terms of the EFI
agreement not to, among other things, solicit any takeover proposal, participate
in any discussions or negotiate regarding any takeover proposal, or enter into
any merger agreement, acquisition agreement, option or similar agreement with a
third party. The agreement specifies that the Company cannot solicit other
offers but may respond to a bona fide written offer that is superior to the EFI
proposal.
The Company has also granted to EFI an option to purchase up to 2,126,574
shares of Common Stock at a purchase price equal to $2.60 per share. Provided
that EFI is not in breach of its obligations under the standby credit agreement,
EFI may exercise the option at any time, in whole or in part. The option will
terminate on December 31, 2007. Subject to certain conditions, the option shares
must be repurchased by the Company, at the request of EFI, at a price equal to
the aggregate purchase price paid for such shares by EFI. In addition, subject
to certain conditions, the Company may repurchase from EFI the option shares at
a price equal to the price paid by EFI for those shares.
Under the terms of the standby credit facility, EFI is obligated to
disburse up to $11,000 to the Company in the event that certain amounts under
the Company's existing credit facilities become due and payable as a result of
any action taken by the Company in order to facilitate the proposed business
combination with EFI or certain other criteria. All loans made under this
facility bear interest at the rate of 8% per annum payable on January 2, 2004.
With a certain exception, the maturity date would be accelerated if a business
combination with EFI is not consummated on or before June 30, 2003 or upon the
termination of the agreement. Subject to certain conditions, the credit facility
also provides the Company with a working capital facility up to an aggregate
amount of $3,000 to be disbursed in the event that, among other things, the
Company's cash balance as of the close of business on the date notice is given
by the Company is less than $1,000. The Company is obligated to use the proceeds
of any exercise of the option agreement to pay down outstanding amounts under
the standby credit facility. All loans under the working capital facility bear
interest at a rate per annum equal to the prime rate as published, from time to
time, by Citibank, plus two percent payable on the maturity date of the loans.
On February 19, 2003 Creo initiated legal action in the State of Delaware
against the Special Committee and certain members of the Company's Board of
Directors. Creo initially sought a temporary restraining order with respect to
the Rights Agreement and the three Agreements with EFI. On February 21, 2003,
the temporary restraining order was denied by the Delaware court. This
litigation is still pending and the Company cannot predict the eventual outcome
at this time.
On February 26, 2003 the Company and EFI entered into a merger agreement
providing for EFI's acquisition of the Company for $2.60 per share for each
outstanding share of the Company's stock. The merger is subject to regulatory
review and stockholder approval by the Company's stockholders.
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUPPLEMENTARY QUARTERLY DATA (UNAUDITED)
A summary of the Company's quarterly financial results for the years ended
December 31, 2001 and 2002 follows (in thousands):
FOR THE QUARTER ENDED
-----------------------------------------------------------------------
MARCH 31, 2001 JUNE 30, 2001 SEPTEMBER 30, 2001 DECEMBER 31, 2001
-------------- ------------- ------------------ -----------------
Revenue........................... $ 9,561 $ 10,315 $ 10,734 $ 11,258
Loss from operations.............. (18,625) (19,221) (13,885) (13,009)
Net loss.......................... (19,542) (20,345) (15,685) (14,431)
Net loss attributable to
common stock.................... (23,147) (24,425) (19,929) (8,137)
Net loss per share, basic and
diluted......................... $(142.15) $(149.98) $(122.31) $ (50.42)
FOR THE QUARTER ENDED
-----------------------------------------------------------------------
MARCH 31, 2002 JUNE 30, 2002 SEPTEMBER 30, 2002 DECEMBER 31, 2002
-------------- ------------- ------------------ -----------------
Revenue........................... $ 11,715 $ 12,206 $ 11,281 $ 11,319
Loss from operations.............. (8,084) (8,067) (8,960) (8,274)
Net loss.......................... (9,880) (11,133) (10,285) (9,499)
Net loss attributable to
common stock.................... (13,221) (13,993) (10,285) (9,499)
Net loss per share, basic and
diluted......................... $ (81.12) $ (9.00) $ (0.97) $ (0.89)
The quarters ended June 30, 2001 and September 30, 2002 include a
restructuring charge of $2,098 and $575, respectively (Note 15). Effective
January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." As a result, the Company does not amortize goodwill after
December 31, 2001. Goodwill amortization was approximately $4,900 in each
quarter of 2001.
F-43
ELECTRONICS FOR IMAGING, INC.
INTRODUCTORY NOTE TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
are presented to illustrate the effects of the merger on the historical
financial position and operating results of EFI. The unaudited pro forma
condensed combined balance sheet gives effect to the merger as if it was
completed on March 31, 2003. The unaudited pro forma condensed combined
statement of operations for the year ended December 31, 2002 gives effect to the
merger as if it was completed on January 1, 2002.
The following unaudited pro forma condensed combined financial statements
were derived from (a) EFI's audited consolidated financial statements for the
year ended December 31, 2002, which are incorporated by reference into this
document; (b) Printcafe's audited consolidated financial statements for the year
ended December 31, 2002 which are included in this document; (c) EFI's unaudited
consolidated financial statements as of and for the quarter ended March 31,
2003, which are incorporated by reference in this document; and (d) Printcafe's
unaudited consolidated financial statements as of and for the quarter ended
March 31, 2003, which are included in this document.
The following unaudited pro forma condensed combined financial statements
are not necessarily indicative of EFI's financial position or results of
operations if the merger had been completed as of the dates indicated.
Additionally, the following unaudited pro forma condensed combined financial
statements are not necessarily indicative of EFI's future financial condition or
operating results.
The following unaudited pro forma condensed combined financial statements
are based on estimates and assumptions set forth in the notes to these
statements. We prepared the unaudited pro forma condensed combined financial
statements using the purchase method of accounting with EFI as the acquirer.
Accordingly, EFI's cost to acquire Printcafe will be allocated to the assets and
the liabilities assumed based upon their estimated fair values as of the date of
acquisition. The allocation is dependent upon certain valuations that have not
progressed to a stage where there is sufficient information to make a definitive
allocation. As such, the pro forma purchase price allocation adjustments are
preliminary and have been made solely for the purpose of providing unaudited pro
forma condensed combined financial statements. The preliminary valuation of the
intangible assets was based upon EFI's evaluation of Printcafe's technology, the
knowledge of the technology embedded in Printcafe's products, as well as EFI's
extensive knowledge of the industry and the marketplace. From this evaluation,
the developed technology was considered to have an estimated useful life of 5
years. Trademarks and tradenames and patents were considered to have estimated 7
year average useful lives. Customer lists were considered to have an estimated
useful life of 3 years. The final allocation may be materially different than
the amounts shown in the following unaudited pro forma condensed combined
financial statements. If the final valuation, which is expected to be completed
during the third quarter of 2003, ascribes a higher value to the identifiable
intangible assets, the resulting amortization expense would increase, causing
pro forma net income to decrease. If the final valuation allocates either a
higher or lower value to the purchased in-process research and development, the
net acquired intangible assets would change correspondingly.
F-44
ELECTRONICS FOR IMAGING, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2003
(IN THOUSANDS)
EFI PRINTCAFE PRO FORMA EFI
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
ASSETS
Cash and cash equivalents.................... $172,221 $ 6,376 $ (37,407)(a) $141,190
Short-term investments....................... 328,117 -- -- 328,117
Accounts receivable, net..................... 40,940 11,512 -- 52,452
Inventories.................................. 5,222 -- -- 5,222
Other current assets......................... 20,218 1,669 -- 21,887
-------- --------- --------- --------
Total current assets.................... 566,718 19,557 (37,407) 548,868
Property and equipment, net.................. 52,575 2,245 -- 54,820
Restricted investments....................... 43,080 -- -- 43,080
Goodwill..................................... 48,598 22,480 1,260(b) 72,338
Intangible assets, net....................... 21,167 307 23,390(b) 44,864
Other assets................................. 6,794 78 -- 6,872
-------- --------- --------- --------
Total assets............................ $738,932 $ 44,667 $ (12,757) $770,842
======== ========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................. $ 18,669 $ 2,778 -- $ 21,447
Line of credit............................... -- 2,000 $ (2,000)(c) --
Accrued and other liabilities................ 42,148 3,222 -- 45,370
Deferred revenue............................. -- 9,052 (2,263)(d) 6,789
Restructuring reserve........................ -- 26 -- 26
Current portion, long-term obligations,
related party.............................. -- 16,249 (16,249)(c) --
Current portion, long-term debt.............. -- 278 (278)(c) --
Debt discount................................ -- (2,637) 2,637(c) --
Current portion of capital lease
obligations................................ -- 22 -- 22
Income taxes payable......................... 34,982 -- -- 34,982
-------- --------- --------- --------
Total current liabilities............... 95,799 30,990 (18,153) 108,636
Long-term obligations, related party......... -- 1,575 (1,575)(c) --
Long-term debt............................... 278 278
Other long-term liabilities.................. -- 9,479(e) 9,479
Common stock................................. 593 1 6(f)(g) 600
Treasury stock............................... (99,959) (1,930) 1,930(f) (99,959)
Additional paid-in capital................... 276,141 253,327 (237,815)(f)(g) 291,653
Warrants..................................... -- 8,677 (8,677)(f) --
Deferred compensation........................ -- (2,959) 2,959(f) --
Other comprehensive income................... 1,989 (22) 22(f) 1,989
Notes receivable from stockholders........... -- (40) 40(f) --
Retained earnings (deficit).................. 464,091 (244,952) 239,027(f) 458,166
-------- --------- --------- --------
Total stockholders' equity.............. 642,855 12,102 (2,508) 652,449
-------- --------- --------- --------
Total liabilities and stockholders'
equity................................ $738,932 $ 44,667 $ (12,757) $770,842
======== ========= ========= ========
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
F-45
ELECTRONICS FOR IMAGING, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS EXCEPT PER SHARE DATA)
EFI PRINTCAFE PRO FORMA EFI
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
Revenue......................................... $350,185 $ 46,521 $ -- $396,706
Cost of revenue................................. 167,685 10,377 749(h) 178,811
-------- -------- -------- --------
Gross profit............................... 182,500 36,144 (749) 217,895
Research and development........................ 89,973 12,003 976(h) 102,952
Sales and marketing............................. 50,624 16,989 814(h) 68,427
General and administrative...................... 21,778 6,193 383(h) 28,354
Amortization of identified intangibles and other
acquisition related charges................... 4,391 29,511 (24,817)(i) 9,085
Depreciation.................................... -- 2,922 (2,922)(h) --
Stock-based compensation and warrants........... -- 1,386 -- 1,386
Restructuring charge............................ -- 525 -- 525
-------- -------- -------- --------
Total operating expenses................... 166,766 69,529 (25,566) 210,729
-------- -------- -------- --------
Income (loss) from operations................... 15,734 (33,385) 24,817 7,166
Other income (expense), net..................... 7,077 (524) (977)(j) 5,576
Debt discount................................... -- (3,300) 3,300(k) --
Interest expense related party.................. -- (3,588) 3,588(l) --
-------- -------- -------- --------
Income (loss) before income taxes.......... 22,811 (40,797) 30,728 12,742
Provision for income taxes...................... (6,843) -- 3,390(m) (3,453)
-------- -------- -------- --------
Net income (loss).......................... 15,968 (40,797) 34,118 9,289
Accretion of redeemable preferred stock......... -- (6,201) -- (6,201)
-------- -------- -------- --------
Net income (loss) attributable to common
stock......................................... $ 15,968 $(46,998) $ 34,118 $ 3,088
======== ======== ======== ========
Shares used in basic per share calculation...... 54,256 5,797 664(n) 54,920
Net income (loss) per basic common share........ $ 0.29 $ (8.11) $ 0.06
Shares used in diluted per share calculation.... 54,852 5,797 664(n) 55,516
Net income (loss) per diluted common share...... $ 0.29 $ (8.11) $ 0.06
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-46
ELECTRONICS FOR IMAGING, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS EXCEPT PER SHARE DATA)
EFI PRINTCAFE PRO FORMA EFI
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
Revenue......................................... $85,715 $ 9,403 $ -- $95,118
Cost of revenue................................. 36,228 2,276 154(o) 38,658
------- -------- ------- -------
Gross profit............................... 49,487 7,127 (154) 56,460
Research and development........................ 22,810 3,025 196(o) 26,031
Sales and marketing............................. 14,730 4,068 166(o) 18,964
General and administrative...................... 4,991 3,117 77(o) 8,185
Amortization of identified intangibles and other
acquisition related charges................... 2,545 5,090 (3,916)(p) 3,719
Depreciation.................................... -- 593 (593)(o) --
Stock-based compensation and warrants........... -- 381 -- 381
------- -------- ------- -------
Total operating expenses................... 45,076 16,274 (4,070) 57,280
------- -------- ------- -------
Income (loss) from operations................... 4,411 (9,147) 3,916 (820)
Other income (expense), net..................... 2,578 (25) (234)(q) 2,319
Debt discount................................... -- (851) 851(r) --
Interest expense, related party................. -- (239) 239(s) --
------- -------- ------- -------
Income (loss) before income taxes.......... 6,989 (10,262) 4,772 1,499
Provision for income taxes...................... (1,887) -- 1,668(t) (219)
------- -------- ------- -------
Net income (loss).......................... $ 5,102 $(10,262) $ 6,440 $ 1,280
======= ======== ======= =======
Shares used in basic per share calculation...... 54,707 10,633 664(n) 55,371
Net income (loss) per basic common share........ $ 0.09 $ (0.97) $ 0.02
Shares used in diluted per share calculation.... 55,190 10,633 664(n) 55,854
Net income (loss) per diluted common share...... $ 0.09 $ (0.97) $ 0.02
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-47
ELECTRONICS FOR IMAGING, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 DESCRIPTION OF TRANSACTION AND BASIS OF PRESENTATION
On February 26, 2003, EFI and Printcafe signed the merger agreement
providing for the acquisition of Printcafe for $2.60 for each outstanding
Printcafe share of common stock. The merger agreement provides each Printcafe
stockholder with the right to elect whether to receive the merger consideration
in cash or shares of EFI's common stock. Following completion of the merger, EFI
currently plans to buy back approximately the same number of shares of its
common stock issued in connection with the merger. The merger agreement contains
customary conditions to closing and may be terminated by each party under
certain conditions, including a superior proposal for Printcafe. The transaction
must be approved by Printcafe's stockholders and is expected to close in the
third calendar quarter of 2003.
NOTE 2 PURCHASE PRICE
Printcafe's stockholders may elect to receive cash or shares of EFI common
stock in the merger. The unaudited pro forma condensed combined financial
statements were prepared assuming that holders of approximately 50% of
Printcafe's outstanding shares will elect to receive shares of EFI common stock
in connection with the merger. The earnings per share amounts in the unaudited
pro forma condensed combined financial statements were prepared using an
exchange ratio of 0.1252 shares of EFI common stock for each share of Printcafe
common stock. The exchange ratio was derived as follows:
(A) Consideration per share of Printcafe common stock........... $ 2.6000
(B) The average closing price of EFI's common stock for the ten
consecutive trading days ending on and including June 23,
2003........................................................ $ 20.7650
(C) Assumed exchange ratio (A / B).............................. 0.1252
APPROXIMATE VALUATION OF STOCK MERGER CONSIDERATION
5,300 Printcafe shares of common stock outstanding as of
March 31, 2003 multiplied by the assumed exchange ratio of
0.1252 multiplied by EFI stock price of $20,7650............ $ 13,780
The actual exchange ratio will be the average closing price of EFI's common
stock for the ten consecutive trading days ending on and including the fifth
trading day before the special meeting of Printcafe's stockholders to vote on a
proposal to adopt the merger agreement. The actual exchange ratio may be
different based on changes in the market price of EFI common stock. Using the 52
week high and low of EFI common stock as of June 23, for the basis of the
exchange ratio calculation, the exchange ratio would be as follows:
52 WEEK HIGH
(A) Merger consideration per share of Printcafe common stock.... $ 2.6000
(B) 52 week high price of EFI common stock as of June 23,
2003........................................................ $22.2010
(C) Assumed exchange ratio (A / B).............................. 0.1171
52 WEEK LOW
(A) Merger consideration per share of Printcafe common stock.... $ 2.6000
(B) 52 week low price of EFI common stock as of June 23, 2003... $13.2200
(C) Assumed exchange ratio (A / B).............................. 0.1967
The actual percentage of Printcafe's stockholders receiving shares of EFI
common stock in connection with the merger will be determined based on the
number of valid elections received by EFI before the election deadline, which is
the day immediately before the date of the special meeting of Printcafe's
stockholders.
F-48
ELECTRONICS FOR IMAGING, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
If 100% of Printcafe's common stockholders (other than EFI) elect to take
cash consideration for their Printcafe common stock, the total cash
consideration would increase to approximately $27,560 from the $13,780 amount
used in the preparation of the unaudited pro forma condensed combined financial
statements. If 100% of Printcafe's common stockholders (other than EFI) elect to
take EFI common stock as consideration for their Printcafe common stock, the
total EFI shares issued in conjunction with the merger would increase to
approximately 1,328 from the approximately 664 amount used in the preparation of
the unaudited pro forma condensed combined financial statements. EFI intends to
initiate a stock repurchase program to offset any dilution associated with the
merger.
The preliminary allocation of the purchase price was made as follows:
PURCHASE PRICE
Fair value of the shares of EFI common stock issued in the merger... $13,780
Cash consideration paid in connection with the merger............... $13,780
Estimated acquisition costs comprised of approximately $1,000 in
investment banking fees, $425 in employee retention bonuses,
$1,500 in legal fees and $600 in accounting and administrative
fees.............................................................. $ 3,525
Fair value of stock options and warrants is approximated by using
Black-Scholes valuation with the following assumptions: stock
price at grant of $20.7650; volatility of 68%; risk free interest
rate of 2.5%; no dividend yield; and the contractual remaining
term of the option or warrant..................................... $ 1,739
-------
Total purchase price................................................ $32,824
NET ASSETS ACQUIRED
Excess of Printcafe liabilities over its tangible assets............ $12,102
In-process research and development................................. $ 5,924
Developed technology...................................... 10,071
Trademarks, tradenames and patents........................ 9,775
Customer lists............................................ 3,851
Identifiable intangibles............................................ $23,697
Goodwill............................................................ $23,740
ADJUSTMENTS TO RECORDED BALANCES
Increase in deferred tax liability related to intangibles........... $ 9,479
Elimination of debt discount........................................ $ 2,637
Reduction in deferred revenue....................................... $(2,263)
F-49
ELECTRONICS FOR IMAGING, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
If the percentage of Printcafe common stock exchanged for either cash or
EFI common stock differs materially from EFI's assumptions used in the
preparation of the unaudited pro forma condensed combined financial statements,
the pro forma results could be impacted as follows:
% OF ELECTING CASH/ OPERATING OTHER NET EPS PER EPS PER BASIC DILUTED
% OF ELECTING STOCK INCOME (LOSS) INCOME INCOME BASIC SHARE DILUTED SHARE SHARES SHARES
------------------- ------------- ------ ------ ----------- ------------- ------ -------
FOR THE THREE MONTHS ENDED
MARCH 31, 2003
0% Cash/100% Stock......... $ (820) $2,405 $1,354 $0.02 $0.02 56,035 56,518
50% Cash/50% Stock*........ $ (820) $2,319 $1,280 $0.02 $0.02 55,371 55,854
100% Cash/0% Stock......... $ (820) $2,233 $1,207 $0.02 $0.02 54,707 55,190
FOR THE YEAR ENDED DECEMBER
31, 2002
0% Cash/100% Stock......... $7,166 $5,921 $3,399 $0.06 $0.06 55,584 56,180
50% Cash/50% Stock*........ $7,166 $5,576 $3,088 $0.06 $0.06 54,920 55,516
100% Cash/0% Stock......... $7,166 $5,232 $2,837 $0.05 $0.05 54,256 54,852
---------------
* This is the ratio used for the preparation of the unaudited pro forma
condensed combined financial statements.
NOTE 3 ACCOUNTING POLICIES AND FINANCIAL STATEMENT CLASSIFICATION
Upon completion of the merger, EFI and Printcafe will review their
accounting policies and financial statement classifications. As a result of that
review, it may become necessary to make certain reclassifications to the
combined company's financial statements to conform to those accounting policies
and classifications.
NOTE 4 PRO FORMA ADJUSTMENTS
Effective January 1, 2002, both EFI and Printcafe adopted SFAS 142,
Goodwill and Other Intangible Assets, at which time they each ceased amortizing
goodwill.
(a) To record the cash portion of the purchase price, acquisition costs and
retirement of Printcafe debt that becomes due upon completion of the merger.
Cash portion of purchase price.............................. $(13,780)
Acquisition costs........................................... (3,525)
Retirement of Printcafe's outstanding debt balances at March
31, 2003.................................................. (20,102)
--------
$(37,407)
========
(b) To record the elimination of Printcafe intangibles as of March 31,
2003, and record the EFI intangible assets recognized as a result of the merger.
Elimination of Printcafe goodwill........................... $(22,480)
Recognition of goodwill as a result of the EFI/Printcafe
merger.................................................... 23,740
--------
$ 1,260
========
Elimination of Printcafe other intangibles.................. $ (307)
Recognition of other intangibles as a result of the
EFI/Printcafe merger...................................... 23,697
--------
$ 23,390
========
F-50
ELECTRONICS FOR IMAGING, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(c) To record the payment by EFI of Printcafe's outstanding debt balances
as of March 31, 2003.
Line of credit.............................................. $ (2,000)
Current portion, long-term obligations, related party....... (16,249)
Current portion, long-term debt............................. (278)
Long-term obligations, related party........................ (1,575)
--------
Subtotal.................................................. (20,102)
Debt discount............................................... 2,637
--------
$(17,465)
========
(d) To reduce deferred revenue by 25%, which represents EFI's estimate of
the fair value of the deferred revenue balance as of March 31, 2003.
Deferred revenue............................................ $(2,263)
=======
(e) To establish deferred tax liability related to identifiable
intangibles.
Deferred tax liability...................................... $9,479
======
(f) Elimination of Printcafe equity balance at March 31, 2003 and the
write-off of EFI acquisition-related in-process research and development.
Common stock................................................ $ (1)
Treasury stock.............................................. 1,930
Additional paid-in capital.................................. (253,327)
Warrants.................................................... (8,677)
Deferred compensation....................................... 2,959
Other comprehensive income.................................. 22
Notes receivable from stockholder........................... 40
Retained deficit (Printcafe March 31, 2003 balance of
$244,952 adjusted for EFI acquisition-related in-process
research and development expense of $(5,924))............. $ 239,027
---------
$ (18,027)
=========
(g) Increase common stock and paid-in capital for equity related activity.
Shares of EFI common stock issued as merger consideration... $ 7
=======
Additional paid-in capital on common stock issued........... $13,773
Assumed Printcafe stock options and warrants................ 1,739
-------
$15,512
=======
(h) Reclassification of Printcafe depreciation expense for the year ended
December 31, 2002 to conform with EFI's financial statement presentation.
Elimination of depreciation expense presented as a separate
line item................................................. $(2,922)
Reclassification of depreciation expense to cost of
revenue................................................... 749
Reclassification of depreciation expense to research and
development expense....................................... 976
Reclassification of depreciation expense to sales and
marketing expense......................................... 814
Reclassification of depreciation expense to general and
administrative expense.................................... 383
-------
$ 0
=======
F-51
ELECTRONICS FOR IMAGING, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(i) To eliminate Printcafe's amortization of identifiable intangible assets
offset by EFI's amortization of acquired identifiable intangible assets of
$23,697, including core/developed technology, trademarks and trade names,
patents and customer lists. The preliminary value of these identifiable
intangible assets was based upon EFI's evaluation of Printcafe's technology, the
knowledge of the technology embedded in Printcafe's products, as well as EFI's
extensive knowledge of the industry and the marketplace. From this evaluation,
the developed technology was considered to have an estimated useful life of 5
years, with the trademarks and tradenames and patents considered to have
estimated average useful lives of 7 years. The customer lists were considered to
have estimated useful lives of 3 years.
Eliminate Printcafe amortization of identifiable intangible
assets recorded during 2002............................... $(29,511)
Recognize 2002 EFI amortization of acquired identifiable
intangible assets......................................... 4,694
--------
$(24,817)
========
(j) To reduce interest income related to reduction in cash balances
expended upon completion of acquisition (cash consideration and payoff of
Printcafe's debt) and to eliminate interest related to the forgiveness of a
shareholder loan.
Reduction of interest income earned on cash balance through
December 31, 2002......................................... $(977)
=====
(k) To eliminate debt origination fees related to Printcafe debt.
Elimination of debt origination fees........................ $3,300
======
(l) To eliminate interest expense associated with Printcafe's related party
outstanding debt.
Elimination of interest expense............................. $3,588
======
(m) Reduction of income tax liability related to the incorporation of
Printcafe losses.
Reduction in provision for income taxes..................... $3,390
======
(n) Increase of 664 EFI common shares outstanding ($13,780 consideration /
the average price of EFI common stock for the ten consecutive trading days
ending on and including June 23, 2003, or $20.7650). This assumes holders of 50%
of Printcafe's outstanding common stock elect to receive shares of EFI common
stock.
(o) Reclassification of Printcafe depreciation expense for the 3 months
ended March 31, 2003 to conform with EFI's financial statement presentation.
Elimination of depreciation expense presented as a separate
line item................................................. $(593)
Reclassification of depreciation expense to cost of
revenue................................................... 154
Reclassification of depreciation expense to research and
development expense....................................... 196
Reclassification of depreciation expense to sales and
marketing expense......................................... 166
Reclassification of depreciation expense to general and
administrative expense.................................... 77
-----
$ 0
=====
(p) To eliminate Printcafe's amortization of identifiable intangible assets
offset by EFI amortization of acquired identifiable intangible assets of
$23,697, including core/developed technology, trademarks and tradenames, patents
and customer lists. The preliminary value of these identifiable intangible
assets was based
F-52
ELECTRONICS FOR IMAGING, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
upon EFI's evaluation of Printcafe's technology, the knowledge of the technology
embedded in Printcafe's products, as well as EFI's extensive knowledge of the
industry and the marketplace. From this evaluation, the developed technology was
considered to have an estimated useful life of 5 years, with the trademarks and
tradenames and patents considered to have estimated average useful lives of 7
years. The customer lists were considered to have estimated useful lives of 3
years.
Eliminate Printcafe amortization of identifiable intangible
assets recorded during the three months ended March 31,
2003...................................................... $(5,090)
Recognize EFI amortization of acquired identifiable
intangible assets for the three months ended March 31,
2003...................................................... 1,174
-------
$(3,916)
=======
(q) To reduce interest income related to reduction in cash balances
expended upon completion of acquisition (cash consideration and payoff of
Printcafe's debt), and to eliminate interest related to the forgiveness of a
stockholder note.
Reduction of interest income earned on cash balance through
March 31, 2003............................................ $(234)
=====
(r) To eliminate debt origination fees related to Printcafe debt.
Elimination of debt origination fees........................ $851
====
(s) To eliminate interest expense associated with Printcafe's related party
outstanding debt.
Elimination of interest expense............................. $239
====
(t) Reduction of income tax liability related to the incorporation of
Printcafe losses.
Reduction in provision for income taxes..................... $1,668
======
NOTE 5 COMMITMENTS
On February 13, 2003, EFI and Printcafe entered into the following three
agreements:
1) A standby credit facility in the amount of $11,000 plus a working
capital facility which will provide up to an additional $3,000 under
certain circumstances. EFI is obligated under the standby credit
facility to disburse to Printcafe up to $11,000 in the event that
certain amounts under Printcafe's existing credit facilities become due
and payable as a result of any action taken by Printcafe in order to
facilitate the proposed business combination with EFI. All loans made
under this facility bear interest at the rate of 8% per annum payable on
January 2, 2004 or sooner upon the termination of this agreement. With a
certain exception, the maturity date would be accelerated if a business
combination with EFI is not consummated on or before August 31, 2003.
Subject to certain conditions, the credit facility also provides
Printcafe with a working capital facility up to an aggregate amount of
$3,000 to be disbursed to Printcafe in the event that, among other
things, Printcafe's cash balance (as of the close of business on the
date notice is given by Printcafe) is less than $1,000. Printcafe is
obligated to use the proceeds of any exercise of the option agreement to
pay down outstanding amounts under the standby credit facility. All
loans under the working capital facility bear interest at a rate per
annum equal to the prime rate as published, from time to time, by
Citibank, plus two percent payable and due on January 2, 2004 or sooner
upon the termination of the credit agreement. There are currently no
borrowings under this credit agreement.
F-53
ELECTRONICS FOR IMAGING, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2) Printcafe granted to EFI an option to purchase up to approximately 2,127
shares of Printcafe common stock at a purchase price equal to $2.60 per
share. EFI exercised the option on June 11, 2003.
3) A letter agreement that places certain restrictions on Printcafe's
ability to take actions in order to facilitate a business combination
with a party other than EFI. The letter agreement was superceded by the
merger agreement.
The agreements were entered into in connection with EFI's proposal to acquire
all of the outstanding shares of common stock of Printcafe at a purchase price
equal to $2.60 per share, payable in cash or EFI stock.
F-54
ANNEX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER,
DATED AS OF FEBRUARY 26, 2003,
BY AND AMONG
ELECTRONICS FOR IMAGING, INC.,
STRATEGIC VALUE ENGINEERING, INC.
AND
PRINTCAFE SOFTWARE, INC.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 THE MERGER....................................................... A-1
SECTION 1.1 The Merger.................................................. A-1
SECTION 1.2 The Closing................................................. A-1
SECTION 1.3 Effective Time.............................................. A-1
SECTION 1.4 Effects of the Merger....................................... A-2
SECTION 1.5 Certificate of Incorporation and Bylaws..................... A-2
SECTION 1.6 Board of Directors and Officers............................. A-2
ARTICLE 2 EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES........................... A-2
SECTION 2.1 Effect on Capital Stock..................................... A-2
SECTION 2.2 Election Procedures......................................... A-3
SECTION 2.3 Exchange of Certificates.................................... A-4
SECTION 2.4 Dissenting Shares........................................... A-6
SECTION 2.5 Company Stock Options; Restricted Shares; ESPP.............. A-6
SECTION 2.6 Certain Adjustments......................................... A-8
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................... A-8
SECTION 3.1 Organization, Standing and Corporate Power.................. A-8
SECTION 3.2 Title to Assets; Subsidiaries............................... A-9
SECTION 3.3 Capital Structure........................................... A-9
SECTION 3.4 Authority; Noncontravention................................. A-10
SECTION 3.5 SEC Documents; Undisclosed Liabilities...................... A-11
SECTION 3.6 Intellectual Property....................................... A-12
SECTION 3.7 Absence of Certain Changes or Events........................ A-13
SECTION 3.8 Litigation.................................................. A-14
SECTION 3.9 Certain Contracts........................................... A-14
SECTION 3.10 Customers................................................... A-15
SECTION 3.11 Compliance with Applicable Laws............................. A-15
SECTION 3.12 Benefit Plans............................................... A-15
SECTION 3.13 Taxes....................................................... A-17
SECTION 3.14 Information Supplied........................................ A-18
SECTION 3.15 Voting Requirements......................................... A-19
SECTION 3.16 State Takeover Statutes..................................... A-19
SECTION 3.17 Brokers..................................................... A-19
SECTION 3.18 Opinion of Financial Advisor................................ A-19
SECTION 3.19 Absence of Questionable Payments............................ A-19
SECTION 3.20 Insider Interests........................................... A-19
SECTION 3.21 Rights Agreement............................................ A-19
A-i
PAGE
----
ARTICLE 4 REPRESENTATIONS OF THE PARENT AND MERGER SUB..................... A-20
SECTION 4.1 Organization, Standing and Corporate Power.................. A-20
SECTION 4.2 Capital Structure........................................... A-20
SECTION 4.3 Authority; Noncontravention................................. A-20
SECTION 4.4 SEC Documents; Undisclosed Liabilities...................... A-21
SECTION 4.5 Information Supplied........................................ A-21
SECTION 4.6 Absence of Certain Changes or Events........................ A-22
SECTION 4.7 Voting Requirements......................................... A-22
SECTION 4.8 Operations of Merger Sub.................................... A-22
SECTION 4.9 Litigation.................................................. A-22
SECTION 4.10 Brokers..................................................... A-22
SECTION 4.11 Absence of Questionable Payments............................ A-22
SECTION 4.12 Insider Interests........................................... A-22
ARTICLE 5 COVENANTS........................................................ A-22
SECTION 5.1 Conduct of the Company's Business........................... A-22
SECTION 5.2 Advice of Changes........................................... A-24
SECTION 5.3 No Solicitation by the Company.............................. A-24
SECTION 5.4 The Form S-4 and the Proxy Statement; the Stockholders
Meeting..................................................... A-26
SECTION 5.5 Letters of the Company's Accountants........................ A-27
SECTION 5.6 Access to Information; Confidentiality...................... A-27
SECTION 5.7 Reasonable Efforts.......................................... A-27
SECTION 5.8 Employee Matters............................................ A-28
SECTION 5.9 Indemnification, Exculpation and Insurance.................. A-29
SECTION 5.10 Fees and Expenses........................................... A-29
SECTION 5.11 Public Announcements........................................ A-30
SECTION 5.12 Affiliates.................................................. A-30
SECTION 5.13 Listing..................................................... A-30
SECTION 5.14 Litigation.................................................. A-30
SECTION 5.15 Rights Agreement............................................ A-30
SECTION 5.16 Obligations of Merger Sub; Voting of Shares................. A-30
SECTION 5.17 Stockholders Agreement Legend............................... A-31
ARTICLE 6 CONDITIONS PRECEDENT............................................. A-31
SECTION 6.1 Conditions to Each Party's Obligation To Effect the
Merger...................................................... A-31
SECTION 6.2 Conditions to Obligations of the Parent and Merger Sub...... A-31
SECTION 6.3 Conditions to Obligations of the Company.................... A-32
ARTICLE 7 TERMINATION...................................................... A-32
SECTION 7.1 Termination................................................. A-32
SECTION 7.2 Effect of Termination....................................... A-33
SECTION 7.3 Procedure for Termination................................... A-33
A-ii
PAGE
----
ARTICLE 8 GENERAL PROVISIONS............................................... A-33
SECTION 8.1 Nonsurvival of Representations and Warranties............... A-33
SECTION 8.2 Amendment................................................... A-33
SECTION 8.3 Extension; Waiver........................................... A-33
SECTION 8.4 Notices..................................................... A-34
SECTION 8.5 Definitions................................................. A-34
SECTION 8.6 Construction and Interpretation............................. A-35
SECTION 8.7 Counterparts................................................ A-35
SECTION 8.8 Entire Agreement; No Third-Party Beneficiaries.............. A-36
SECTION 8.9 Governing Law............................................... A-36
SECTION 8.10 Assignment.................................................. A-36
SECTION 8.11 Enforcement................................................. A-36
SECTION 8.12 Severability................................................ A-36
A-iii
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of February 26, 2003 (this
"Agreement"), by and among Electronics for Imaging, Inc., a Delaware corporation
(the "Parent"), Strategic Value Engineering, Inc., a Delaware corporation and a
direct wholly owned Subsidiary of the Parent ("Merger Sub"), and Printcafe
Software, Inc., a Delaware corporation (the "Company").
RECITALS
The respective boards of directors of each of the Parent, Merger Sub and
the Company (and, in the case of the Company, upon recommendation of a special
committee of its board of directors) have approved and declared advisable this
Agreement and the merger of Merger Sub with and into the Company (the "Merger"),
upon the terms and subject to the conditions set forth in this Agreement,
whereby each issued and outstanding share of common stock, par value $0.0001 per
share, of the Company (the "Company Common Stock"), other than shares owned by
the Parent, Merger Sub or the Company and Dissenting Shares, will be converted
into the right to receive Merger Consideration.
Simultaneously with the execution and delivery of this Agreement and as a
condition and inducement to the willingness of the Parent and Merger Sub to
enter into this Agreement, the Parent and certain stockholders of the Company
(collectively, the "Stockholders") are entering into an agreement (the
"Stockholders Agreement"), substantially in the form of Exhibit A, pursuant to
which the Stockholders will agree to vote to adopt this Agreement and to take
other actions in furtherance of the Merger upon the terms and subject to the
conditions set forth in the Stockholders Agreement.
AGREEMENT
In consideration of the foregoing and the mutual covenants and agreements
in this Agreement, the parties, intending to be legally bound, agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the General Corporation Law of
the State of Delaware (the "DGCL"), Merger Sub shall be merged with and into the
Company at the Effective Time. Following the Effective Time, the Company shall
be the surviving corporation (the "Surviving Corporation") and shall succeed to
and assume all the rights and obligations of the Company in accordance with the
DGCL.
SECTION 1.2 The Closing. The closing of the Merger (the "Closing") will
take place at 9:00 a.m. on a date to be specified by the parties (the "Closing
Date"), which shall be no later than the second Business Day after satisfaction
or waiver of the conditions set forth in Article 6 (other than those conditions
that by their nature are to be satisfied at the Closing, but subject to the
satisfaction or waiver of those conditions), unless another time or date is
agreed to by the parties. The Closing will be held at the offices of Morgan
Lewis & Bockius LLP, One Oxford Centre, 32nd Floor, Pittsburgh, Pennsylvania
15219-6401, or such other place as is agreed to by the parties.
SECTION 1.3 Effective Time. Subject to the provisions of this Agreement,
as soon as practicable on the Closing Date, the parties shall file a certificate
of merger or other appropriate documents (in any such case, the "Certificate of
Merger") executed in accordance with the relevant provisions of the DGCL and
shall make all other filings or recordings required under the DGCL. 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 subsequent date
or time as the Parent and the Company shall agree and specify in the Certificate
of Merger (the date and time the Merger becomes effective being hereinafter
referred to as the "Effective Time").
A-1
SECTION 1.4 Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL.
SECTION 1.5 Certificate of Incorporation and Bylaws.
(a) The certificate of incorporation of the Company, as in effect
immediately prior to the Effective Time, shall be amended as of the Effective
Time so that such certificate of incorporation is identical to the certificate
of incorporation of Merger Sub immediately prior to the Effective Time, except
that the Company's name shall be the name of the Surviving Corporation, and, as
so amended, such certificate of incorporation shall be the certificate of
incorporation of the Surviving Corporation until thereafter changed or amended
as provided therein or by applicable law.
(b) The bylaws of the Company, as in effect immediately prior to the
Effective Time, shall be amended as of the Effective Time so that such bylaws
are identical to the bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, except that the Company's name shall be the name of the
Surviving Corporation, and, as so amended, such bylaws shall be the bylaws of
the Surviving Corporation until thereafter changed or amended as provided
therein or by applicable law.
SECTION 1.6 Board of Directors and Officers.
(a) The directors of Merger Sub immediately prior to the Effective Time
shall be the directors of the Surviving Corporation until the earlier of their
death, disability, resignation or removal or until their respective successors
are duly elected and qualified.
(b) The officers of Merger Sub immediately prior to the Effective Time
shall be the officers of the Surviving Corporation, until the earlier of their
death, disability, resignation or removal or until their respective successors
are duly elected and qualified.
ARTICLE 2
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 2.1 Effect on Capital Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any shares of
Company Common Stock or any shares of capital stock of Merger Sub:
(a) Each share of capital stock of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be converted into and become one
fully paid and nonassessable share of Common Stock, par value $0.0001 per share,
of the Surviving Corporation.
(b) Each share of Company Common Stock that is owned by the Company, Merger
Sub or the Parent shall automatically be canceled and shall cease to exist, and
no consideration shall be delivered or deliverable in exchange therefor.
(c) Subject to the provisions of this Article 2, each share of Company
Common Stock issued and outstanding immediately prior to the Effective Time
(other than shares to be canceled pursuant to Section 2.1(b) and Dissenting
Shares) shall be converted into the right to receive the Merger Consideration.
Each holder of a share of Company Common Stock shall have the right to elect, in
accordance with the procedures set forth in Section 2.2 and subject to Sections
2.2 and 2.3, to receive the following as Merger Consideration:
(i) for each share of Company Common Stock with respect to which an
election to receive cash has been effectively made and not revoked or lost
pursuant to Section 2.2 (a "Cash Election"), the right to receive in cash
the Transaction Value (the "Cash Consideration");
(ii) for each share of Company Common Stock with respect to which an
election to receive shares of common stock, par value $.01 per share, of
the Parent (the "Parent Common Stock"), has been
A-2
effectively made and not revoked or lost pursuant to Section 2.2 (a "Stock
Election"), the right to receive the Exchange Ratio of a share of Parent
Common Stock (the "Stock Consideration"); and
(iii) for each share of Company Common Stock with respect to which no
Election has been effectively made or with respect to which an Election has
been revoked or lost pursuant to Section 2.2 (collectively, "Non-Election
Shares"), the right to receive the Cash Consideration.
(d) The following terms shall have the following meanings:
(i) "Closing Parent Share Value" means the average of the closing
sales prices of Parent Common Stock quoted on the Nasdaq National Market
for the ten consecutive trading days immediately preceding, and including,
the fifth trading day before the date of the Company Stockholders Meeting,
rounded to four decimal places.
(ii) "Exchange Ratio" means the Transaction Value divided by the
Closing Parent Share Value, rounded to four decimal places.
(iii) "Transaction Value" means $2.60.
(iv) The Cash Consideration and the Stock Consideration are sometimes
referred to collectively (and on a per share basis) as the "Merger
Consideration."
(e) As of the Effective Time, all shares of Company Common Stock issued and
outstanding immediately prior to the Effective Time shall no longer be
outstanding and shall automatically be canceled and shall cease to exist, and,
subject to Section 2.4, each holder of a Certificate shall cease to have any
rights with respect thereto, except the right to receive Merger Consideration
and any cash in lieu of fractional shares of Parent Common Stock to be issued or
paid in consideration therefor upon surrender of such Certificate in accordance
with Section 2.3, without interest.
SECTION 2.2 Election Procedures. Each holder of record of shares (other
than Dissenting Shares) of Company Common Stock ("Holder") shall have the right,
subject to the limitations set forth in this Article 2, to submit an election in
accordance with the following procedures:
(a) Each Holder may specify in a request made in accordance with the
provisions of this Section 2.2 (an "Election") (i) the number of shares of
Company Common Stock owned by such Holder with respect to which such Holder
desires to make a Stock Election and (ii) the number of shares of Company Common
Stock owned by such Holder with respect to which such Holder desires to make a
Cash Election.
(b) The Parent shall prepare a form reasonably acceptable to the Company
(the "Form of Election") which shall be mailed to the Company's stockholders
entitled to vote at the Company Stockholders Meeting so as to permit the
Company's stockholders to exercise their right to make an Election prior to the
Election Deadline.
(c) The Parent shall make the Form of Election initially available at the
time that the Proxy Statement is made available to the stockholders of the
Company, to such stockholders, and shall use commercially reasonable efforts to
make available as promptly as possible a Form of Election to any stockholder of
the Company who requests such Form of Election following the initial mailing of
the Forms of Election and prior to the Election Deadline. In no event shall the
Form of Election initially be made available less than twenty days prior to the
Election Deadline.
(d) Any Election shall have been made properly only if the bank or trust
company designated by the Parent (the "Exchange Agent"), shall have received, by
5:00 p.m. local time in the city in which the principal office of such Exchange
Agent is located, on the day before the Company Stockholders Meeting (the
"Election Deadline"), a Form of Election properly completed and signed and
accompanied by certificates representing the shares of Company Common Stock (the
"Certificates") to which such Form of Election relates or by a customary
guarantee of delivery of such Certificates, as set forth in such Form of
Election, from a member of any registered national securities exchange or a
commercial bank or trust company in the United States; provided, that such
Certificates are in fact delivered to the Exchange Agent by the time required in
such guarantee of delivery. Failure to deliver shares of Company Common Stock
covered by a guarantee of
A-3
delivery within the time set forth in such guarantee shall be deemed to
invalidate any otherwise properly made Election, unless otherwise determined by
the Parent, in its sole discretion. The Company and the Parent shall cooperate
to issue a press release reasonably satisfactory to each of them announcing the
date of the Election Deadline not more than fifteen Business Days before, and at
least five Business Days before, the Election Deadline.
(e) Any Holder may, at any time prior to the Election Deadline, change his,
her or its Election by written notice received by the Exchange Agent prior to
the Election Deadline accompanied by a properly completed and signed, revised
Form of Election. If the Parent shall determine in its reasonable discretion
that any Election is not properly made with respect to any shares of Company
Common Stock, such Election shall be deemed to be not in effect, and the shares
of Company Common Stock covered by such Election shall be deemed to be
Non-Election Shares, unless a proper Election is thereafter timely made.
(f) Any Holder may, at any time prior to the Election Deadline, revoke his,
her or its Election by written notice received by the Exchange Agent prior to
the Election Deadline or by withdrawal prior to the Election Deadline of his,
her or its Certificate, or of the guarantee of delivery of such Certificates,
previously deposited with the Exchange Agent. All Elections shall be revoked
automatically if the Exchange Agent is notified in writing by the Parent or the
Company that this Agreement has been terminated in accordance with Article 7.
(g) The Parent shall have the right to make all determinations, not
inconsistent with the terms of this Agreement, governing the validity of the
Forms of Election and compliance by any Holder with the Election procedures in
this Article 2. Neither the Parent nor the Exchange Agent shall have any
obligation to inform the Holder of any such determination.
SECTION 2.3 Exchange of Certificates.
(a) The Parent shall enter into an agreement with the Exchange Agent which
shall provide that the Parent shall deposit with the Exchange Agent at the
Effective Time, for the benefit of the holders of shares of Company Common Stock
issued and outstanding immediately prior to the Effective Time, for exchange in
accordance with this Article 2, certificates representing the shares of Parent
Common Stock and the Cash Consideration (such shares of Parent Common Stock,
together with any dividends or distributions with respect thereto with a record
date after the Effective Time, the Cash Consideration and any cash payable in
lieu of any fractional shares of Parent Common Stock being hereinafter referred
to as the "Exchange Fund") issuable or payable pursuant to Section 2.1 in
exchange for outstanding shares of Company Common Stock.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each Holder whose shares were converted into the
right to receive Merger Consideration pursuant to Section 2.1 and who did not
properly complete a Form of Election, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as the Parent and
the Company may reasonably specify) and (ii) instructions for use in
surrendering the Certificates in exchange for Merger Consideration. Upon
surrender of a Certificate for cancellation to the Exchange Agent, together with
either (x) an Election by Holders making an effective Election or (y) letter of
transmittal by Holders not making an effective Election, in each case duly
executed, and such other documents as may reasonably be required by the Exchange
Agent, the holder of such Certificate shall receive in exchange therefor either
(A) (1) a certificate representing that number of whole shares of Parent Common
Stock which such holder has the right to receive pursuant to the provisions of
this Article 2, (2) dividends or other distributions, if any, in accordance with
Section 2.3(c), and (3) cash in lieu of any fractional share of Parent Common
Stock in accordance with Section 2.3(e) or (B) a check representing that portion
of the Cash Consideration issuable in respect of the shares of Company Common
Stock formerly represented by such Certificate, and, in either case, the
Certificate so surrendered shall forthwith be canceled. If a transfer of
ownership of shares of Company Common Stock has not then been registered in the
transfer records of the Company, the Merger Consideration issuable in respect of
the shares of Company Common Stock formerly represented by such Certificate may
be issued to a Person other than the Person in whose name the Certificate so
surrendered is registered if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer, and the Person requesting such
issuance shall pay any transfer or other Taxes required by reason of
A-4
the issuance of shares of Parent Common Stock to a Person other than the
registered holder of such Certificate or establish to the reasonable
satisfaction of the Parent that such Tax has been paid or is not applicable.
(c) No dividends or other distributions with respect to shares of Parent
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby, and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 2.3(e), and all such
dividends, other distributions and cash in lieu of fractional shares of Parent
Common Stock shall be paid by the Parent to the Exchange Agent and shall be
included in the Exchange Fund, in each case until the surrender of such
Certificate in accordance with this Article 2. Subject to the effect of
applicable escheat or similar laws, following surrender of any such Certificate
there shall be paid to the holder of the certificate representing whole shares
of Parent Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to such whole
shares of Parent Common Stock, and the amount of any cash payable in lieu of a
fractional share of Parent Common Stock to which such holder is entitled
pursuant to Section 2.3(e) and (ii) at the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective Time
but prior to such surrender and with a payment date subsequent to such surrender
payable with respect to such whole shares of Parent Common Stock.
(d) All shares of Parent Common Stock issued and any cash paid pursuant to
this Article 2 upon the surrender for exchange of Certificates in accordance
with the terms of this Article 2 shall be deemed to have been issued (and paid)
in full satisfaction of all rights pertaining to the shares of Company Common
Stock theretofore represented by such Certificates, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time that may have been
declared or made by the Company on such shares of Company Common Stock that
remain unpaid at the Effective Time, and there shall be no further registration
of transfers on the stock transfer books of the Surviving Corporation of the
shares of Company Common Stock that were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation or the Exchange Agent for any reason, they shall be
canceled and exchanged as provided in this Article 2, except as otherwise
provided by law.
(e) No certificates or scrip representing fractional shares of Parent
Common Stock shall be issued upon the surrender for exchange of Certificates, no
dividend or distribution of the Parent shall relate to such fractional share
interests and such fractional share interests will not entitle the owner thereof
to vote or to any rights of a stockholder of the Parent. The Parent shall pay
each former holder of shares of Company Common Stock an amount in cash equal to
(i) the fractional share interest to which such former holder (after taking into
account all shares of Company Common Stock held at the Effective Time by such
holder) would otherwise be entitled multiplied by (ii) the Closing Parent Share
Value.
(f) Any portion of the Exchange Fund that remains undistributed to the
holders of the Certificates for six months after the Effective Time shall be
delivered to the Parent, upon demand, and any holders of the Certificates who
have not theretofore complied with this Article 2 shall thereafter look only to
the Parent for payment of their claim for Merger Consideration, any dividends or
distributions with respect to the Parent Common Stock and any cash in lieu of
fractional shares of Parent Common Stock.
(g) None of the Parent, Merger Sub, the Company or the Exchange Agent shall
be liable to any Person in respect of any shares of Parent Common Stock, any
dividends or distributions with respect thereto, any cash in lieu of fractional
shares of Parent Common Stock or any cash from the Exchange Fund, in each case
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law. If any Certificate shall not have been surrendered
immediately prior to the date on which any amounts payable pursuant to this
Article 2 would otherwise escheat to or become the property of any Governmental
Entity, any such amounts shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation, free and clear of all claims
or interest of any Person previously entitled thereto.
A-5
(h) The Exchange Agent shall invest any cash included in the Exchange Fund,
as directed by the Parent, on a daily basis. Any interest and other income
resulting from such investments shall be paid to the Parent. Any losses
resulting from such investments shall not reduce the right of any holder of a
Certificate to receive the amounts otherwise payable pursuant to this Article 2.
(i) If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the Person claiming such Certificate to
be lost, stolen or destroyed and, if required by the Parent, the posting by such
Person of a bond in such reasonable amount as the Parent may direct as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration with respect thereto and, if applicable,
any unpaid dividends and distributions on shares of Parent Common Stock
deliverable in respect thereof and any cash in lieu of fractional shares, in
each case pursuant to this Agreement.
(j) The Parent, the Surviving Corporation and the Exchange Agent shall be
entitled to deduct and withhold from the amounts otherwise payable to a holder
of shares of Company Common Stock pursuant to this Article 2 such amounts as any
of them reasonably determine to be required to be deducted and withheld under
the Internal Revenue Code of 1986 (the "Code") or provisions of other Tax law.
To the extent that such amounts are so withheld, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the former
holder of shares of Company Common Stock in respect of which such deduction and
withholding was made by the Parent, the Surviving Corporation or the Exchange
Agent.
SECTION 2.4 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of Company Common Stock as to which the holder thereof has demanded and
properly perfected appraisal in accordance with Section 262 of the DGCL and has
neither effectively withdrawn nor lost the right to such appraisal ("Dissenting
Shares") shall not be converted into or represent a right to receive Merger
Consideration, but the holder thereof shall be entitled to only such rights as
are granted by the DGCL.
(b) Notwithstanding the provisions of Section 2.4(a), if any holder of
shares of Company Common Stock who demands appraisal of shares of Company Common
Stock under the DGCL effectively withdraws or loses (through failure to perfect
or otherwise) the right to appraisal, then as of the Effective Time or the
occurrence of such event, whichever later occurs, such holder's shares of
Company Common Stock shall automatically be converted into and represent only
the right to receive Merger Consideration as provided in Sections 2.1 and 2.2,
without interest, upon surrender of the Certificates representing such shares of
Company Common Stock pursuant to Section 2.3.
(c) The Company shall give the Parent (i) prompt notice of any written
demands for appraisal or payment of the fair value of any shares of Company
Common Stock, withdrawals of such demands and any other instruments related to
Dissenting Shares received by the Company or any of its directors or officers
and (ii) the opportunity to direct all negotiations and proceedings with respect
to demands for appraisal under the DGCL. Except with the prior written consent
of the Parent, the Company shall not voluntarily make any payment, admissions or
statements against interest with respect to any demands for appraisal, or settle
or offer to settle any such demands.
SECTION 2.5 Company Stock Options; Restricted Shares; ESPP.
(a) At the Effective Time, the Parent shall assume each Adjusted Option,
subject to the provisions of this Section 2.5. As soon as practicable following
the date of this Agreement, the board of directors of the Company (or, if
appropriate, any committee thereof administering the Company Stock Plans) shall
adopt such resolutions or take such other actions as may be required to effect
the following as of the Effective Time:
(i) adjust the terms of all outstanding Company Stock Options granted
under the Company Stock Plans, whether vested or unvested, as necessary to
provide that, at the Effective Time, each Company Stock Option outstanding
immediately prior to the Effective Time shall be amended and converted into
an option to acquire on the same terms and conditions as were applicable
under such Company Stock Option, the number of shares of Parent Common
Stock (rounded down to the nearest whole share) equal
A-6
to (A) the number of shares of Company Common Stock subject to such Company
Stock Option immediately prior to the Effective Time multiplied by the
Exchange Ratio, plus (B) the product of ((x) the number of shares of
Company Common Stock subject to such Company Stock Option immediately prior
to the Effective Time multiplied by (y) the Cash Consideration divided by
(z) the Closing Parent Share Value (each, as so adjusted, an "Adjusted
Option");
(ii) provide that an Adjusted Option may not be assigned, except to
the extent that its predecessor Company Stock Option could be assigned
under the terms of the applicable Company Stock Plan; and
(iii) make such other changes to the Company Stock Plans as the
Company and the Parent may agree are appropriate to give effect to the
Merger.
No cash Merger Consideration will be paid with respect to any Adjusted
Option. The exercise price per share of Parent Common Stock issuable upon
exercise of an Adjusted Option shall be equal to the quotient obtained by
dividing (x) the aggregate exercise price payable for shares of Company Common
Stock subject to the Company Stock Option immediately prior to the Effective
Time by (y) the number of shares of Parent Common Stock subject to the Adjusted
Option immediately after the assumption and rounding up to the next whole cent.
For purposes of adjusting Company Stock Options pursuant to this Section 2.5(a),
each Company Stock Option shall be adjusted separately and shall not be
aggregated with any other Company Stock Option held by the same holder.
(b) After the Effective Time, the Parent shall deliver to the holders of
Company Stock Options notices setting forth such holders' rights pursuant to the
respective Company Stock Plans and the agreements evidencing the grants of such
Company Stock Options and that such Company Stock Options and agreements have
been assumed by the Parent and shall continue in effect on the same terms and
conditions (subject to the adjustments required by this Section 2.5 after giving
effect to the Merger). The Parent shall reserve for issuance from its authorized
but unissued shares of Parent Common Stock a number of shares of Parent Common
Stock equal to the number of shares subject to the Adjusted Options.
(c) The parties intend that the assumption of Company Stock Options
pursuant to this Section 2.5 shall satisfy the provisions of Section 424(a) of
the Code and that each Adjusted Option shall qualify, to the maximum permissible
extent, as incentive stock options under Section 422 of the Code to the extent
its predecessor Company Stock Option qualified as an incentive stock option
under Section 422 of the Code immediately prior to the Effective Time.
(d) A holder of an Adjusted Option may exercise such Adjusted Option in
whole or in part in accordance with its terms by following procedures to be
communicated by the Parent in the notice contemplated by Section 2.5(b),
together with the consideration therefor and the federal withholding Tax
information, if any, required in accordance with the related the Company Stock
Plan.
(e) Except as otherwise contemplated by this Section 2.5 and except to the
extent described in Section 3.3 of the Company Disclosure Letter, all
restrictions or limitations on transfer and vesting with respect to the Company
Stock Options awarded under the Company Stock Plans or any other plan, program
or arrangement of the Company or any of its Subsidiaries, to the extent that
such restrictions or limitations shall not have already lapsed, shall remain in
full force and effect with respect to such Company Stock Options after giving
effect to the Merger and the assumption by the Parent as set forth above.
(f) As soon as practicable following the Effective Time and in any event
within five Business Days following the Effective Time, the Parent shall prepare
and file with the SEC a registration statement on Form S-8 (or another
appropriate form) registering a number of shares of Parent Common Stock equal to
the number of shares subject to the Adjusted Options. Such registration
statement shall be kept effective (and the current status of the prospectus or
prospectuses required thereby shall be maintained) at least for so long as the
Adjusted Options remain outstanding. The Company shall cooperate with, and
assist the Parent in the preparation of, such registration statement. The Parent
shall not be required to register any shares of Parent Common Stock that are
subject to an Adjusted Option that may not be registered on Form S-8.
A-7
(g) If any shares of Company Common Stock outstanding immediately prior to
the Effective Time are unvested or are otherwise subject to a repurchase option,
risk of forfeiture or other condition under any Company Stock Option Plan or any
applicable Contract, then (except to the extent those shares vest by virtue of
the Merger pursuant to the express terms of the documents governing those
shares) the shares of Parent Common Stock issued in exchange for such unvested
shares of Company Common Stock will also be unvested and subject to the same
repurchase option, risk of forfeiture or other condition, and the certificates
representing such shares of Parent Common Stock may accordingly bear any
appropriate legends. In addition, any portion of the Cash Consideration payable
with respect to those outstanding unvested shares shall be held by the Parent
and shall be paid out if, as and when those shares vest in accordance with the
vesting schedule in effect for such shares immediately prior to the Effective
Time. Any cash held with respect to unvested shares repurchased by the Parent
shall revert to the Parent. The Company shall take all action that may be
necessary to ensure that, from and after the Effective Time, the Parent is
entitled to exercise any such repurchase option or other right set forth in any
such restricted stock purchase agreement or other agreement. Section 2.6(g) of
the Company Disclosure Letter sets forth a true, correct and complete list as of
the date hereof of all holders of shares of Company Common Stock that are
subject to such repurchase options, forfeiture provisions or other restrictions
and the nature of those options, provisions or restrictions.
(h) Outstanding purchase rights under the Company's 2002 Employee Stock
Purchase Plan (the "Company ESPP") shall be exercised immediately prior to the
Effective Time, and each participant in the Company ESPP will accordingly be
issued shares of Company Common Stock at that time which shall be converted into
Merger Consideration pursuant to Sections 2.1 and 2.2. The Company's board of
directors (or the committee thereof administering the Company ESPP) shall take
whatever action may be required to amend the Company ESPP to provide for such
exercise date and to terminate the Company ESPP with that exercise date so that
no further purchase rights shall be subsequently granted or exercised under the
Company ESPP.
(i) All warrants to purchase shares of Company Common Stock (the "Company
Warrants") that are outstanding and unexercised at the Effective Time, shall,
unless otherwise expressly provided by the terms of such Company Warrant, (i)
remain subject to any vesting requirements applicable to such Company Warrant,
and (ii) be exercisable for the Cash Consideration applicable to the number of
shares of Company Common Stock that may be acquired upon exercise of such
Company Warrant.
SECTION 2.6 Certain Adjustments. If the Parent changes (or establishes a
record date for changing) the number of shares of Parent Common Stock issued and
outstanding prior to the Effective Time as a result of a stock split, stock
dividend, recapitalization, subdivision, reclassification, combination, exchange
of shares or similar transaction with respect to the outstanding Parent Common
Stock and the record date therefor shall be prior to the Effective Time, the
Stock Consideration shall be proportionately adjusted to reflect such stock
split, stock dividend, recapitalization, subdivision, reclassification,
combination, exchange of shares or similar transaction.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as disclosed in the disclosure letter delivered by the Company to
the Parent concurrently with the execution of this Agreement (the "Company
Disclosure Letter") and making reference to the particular Section of this
Agreement to which exception is being taken, including by cross-reference to any
other section of the Company Disclosure Letter to which such disclosure relates,
the Company represents and warrants to the Parent and Merger Sub as follows:
SECTION 3.1 Organization, Standing and Corporate Power. The Company and
each of its Subsidiaries is a corporation or other legal entity duly organized,
validly existing and in good standing (with respect to jurisdictions which
recognize such concept) under the laws of the jurisdiction in which it is
organized and has the requisite corporate or other power, as the case may be,
and authority to carry on its business as now being conducted, except for those
jurisdictions where the failure to be so organized, existing or in good
standing,
A-8
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on the Company. Each of the Company and its Subsidiaries
is duly qualified or licensed to do business and is in good standing (with
respect to jurisdictions which recognize such concept) in each jurisdiction in
which the nature of its business or the ownership, leasing, licensing, or
operation of its assets makes such qualification or licensing necessary, except
for those jurisdictions where the failure to be so qualified or licensed or to
be in good standing, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect on the Company. The Company has
provided to the Parent prior to the execution of this Agreement complete and
correct copies of its certificate of incorporation and bylaws, as amended to the
date of this Agreement.
SECTION 3.2 Title to Assets; Subsidiaries.
(a) The Company and its Subsidiaries have good and marketable title to, or
the right to use, the assets and properties owned by them or used in their
respective businesses, free and clear of all pledges, claims, liens, charges,
encumbrances, mortgages and security interests of any kind or nature whatsoever
(collectively, "Liens"), except for (i) Liens securing indebtedness disclosed in
Section 3.5(c) of the Company Disclosure Letter, (ii) purchase money security
interests arising by operation of law with respect to assets acquired in the
ordinary course of business subsequent to December 31, 2002, (iii) any (A)
mechanics', carriers', workers' and other similar Liens arising in the ordinary
course of business which are not delinquent and which in the aggregate are not
material in amount, and do not interfere with the present use of the assets of
the Company or any of its Subsidiaries to which they apply; (B) Liens for
current Taxes not yet due and payable; (C) Liens that have arisen in the
ordinary course of business and that do not (individually or in the aggregate)
materially detract from the value of the assets subject thereto or materially
impair the operations of the Company or any of its Subsidiaries; and (iv) with
respect to any asset of the Company or any of its Subsidiaries which consists of
a leasehold or other possessory interest in real property, all Liens, covenants,
imperfections in title, easements, restrictions and other title matters (whether
or not the same are recorded) not known to the Company or such Subsidiary to
which the underlying fee estate in such real property is subject which were not
created by or incurred by the Company or its Subsidiaries (the Liens referred to
in clauses (i) through (iv) are collectively, "Permitted Liens").
(b) Section 3.2 of the Company Disclosure Letter sets forth a true and
complete list of each of the Company's Subsidiaries. All the outstanding shares
of capital stock of, or other equity interests in (other than shares held by
directors or officers of the Company or its Subsidiaries for regulatory
reasons), each Subsidiary of the Company have been validly issued, are fully
paid and nonassessable and are owned, directly or indirectly, by the Company,
free and clear of all Liens and free of any restriction on the right to vote,
sell or otherwise dispose of such capital stock or other ownership interests,
except restrictions arising under applicable securities laws.
SECTION 3.3 Capital Structure.
(a) The authorized capital stock of the Company consists of 100,000,000
shares of Company Common Stock and 1,000,000 shares of preferred stock, par
value $0.0001 per share, of the Company (the "Company Authorized Preferred
Stock"). At the close of business on February 20, 2003, (i) 10,632,877 shares of
Company Common Stock were issued and outstanding; (ii) 10,732 shares of Company
Common Stock were held by the Company in its treasury; (iii) no shares of
Company Authorized Preferred Stock were issued or outstanding; (iv) 1,942,895
shares of Company Common Stock were reserved for issuance pursuant to the
Prograph Systems, Inc. 1999 Stock Option/Stock Incentive Plan, the Company ESPP,
the Company's 2000 Stock Incentive Plan, the Company's 2002 Key Executive Stock
Incentive Plan and the Company's 2002 Stock Incentive Plan (such plans,
collectively, the "Company Stock Plans") (of which 1,287,097 shares are subject
to outstanding Company Stock Options and 298,851 shares are reserved for
issuance under the Company ESPP); (v) 133,354 shares of Company Common Stock
were reserved for issuance upon exercise of outstanding Company Warrants; and
(vi) 7,341,975 shares of Company Common Stock were reserved for issuance in
connection with the rights (the "Rights") to purchase shares of Company Common
Stock issued pursuant to the Rights Agreement, dated as of February 13, 2003, by
and between the Company and Mellon Investor Services LLC (the "Rights
Agreement"). Except as set forth above, at the close of business on
A-9
February 20, 2003, no shares of capital stock or other voting securities of the
Company were issued, reserved for issuance or outstanding. Other than Company
Stock Options, there are no outstanding stock appreciation rights, phantom
shares or other rights to receive shares of Company Common Stock on a deferred
basis or other rights linked to the value of shares of Company Common Stock
granted under the Company Stock Plans or otherwise. No bonds, debentures, notes
or other indebtedness of the Company having the right to vote (or convertible
into, or exchangeable for, securities having the right to vote) on any matters
on which stockholders of the Company or any of its Subsidiaries may vote are
issued or outstanding or subject to issuance.
(b) Concurrently with the delivery of this Agreement, the Company is
delivering to the Parent a complete and correct list, as of February 20, 2003,
of each holder of outstanding stock options or other rights to purchase or
receive Company Common Stock (collectively, the "Company Stock Options") and
each holder of Company Warrants, the number of shares of Company Common Stock
subject to such Company Stock Option or Company Warrant, the name of the Company
Stock Plan pursuant to which such Company Stock Option was granted, the exercise
price of such Company Stock Option or Company Warrant, the vesting schedule of
such Company Stock Option or Company Warrant, the extent to which such Company
Stock Option or Company Warrant is vested, the Tax status under Section 422 of
the Code of such Company Stock Option, the term of such Company Stock Option or
Company Warrant and the events (including the Transactions or termination of
service following the Merger) which could accelerate the vesting of such Company
Stock Option or Company Warrant.
(c) All outstanding shares of Company Common Stock are, and all shares
which may be issued by the Company before the Effective Time will be, when
issued, duly authorized, validly issued, fully paid and nonassessable and will
be delivered free and clear of all Liens (other than Liens created by or imposed
upon the holders thereof) and not subject to preemptive rights. Except as set
forth in this Section 3.3 (including pursuant to the conversion or exercise of
the securities referred to above) and except pursuant to Company Stock Options
issued as expressly permitted by the terms of Section 5.1(b), (i) there are not
issued, reserved for issuance or outstanding (A) any shares of capital stock or
other voting securities of the Company or any of its Subsidiaries (other than
shares of capital stock or other voting securities of such Subsidiaries that are
directly or indirectly owned by the Company free and clear of Liens), (B) any
securities of the Company or any of its Subsidiaries convertible into or
exchangeable or exercisable for shares of capital stock or other voting
securities of, or other ownership interests in, the Company or any of its
Subsidiaries, or (C) any warrants, calls, options or other rights to acquire
from the Company or any of its Subsidiaries, and no obligation of the Company or
any of its Subsidiaries to issue, any capital stock or other voting securities
of, or other ownership interests in, or any securities convertible into or
exchangeable or exercisable for any capital stock or other voting securities of,
or other ownership interests in, the Company or any of its Subsidiaries and (ii)
there are no outstanding obligations of the Company or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any such securities or to issue,
deliver or sell, or cause to be issued, delivered or sold, any such securities.
The Company is not a party to any voting agreement with respect to the voting of
any such securities. Other than the capital stock of, or other equity interests
in, its Subsidiaries, the Company does not directly or indirectly beneficially
own any securities or other beneficial ownership interests in any other entity.
The terms of the Company Stock Plans and the provisions of the agreements
evidencing such Company Stock Options expressly permit the assumption by the
Parent of the outstanding Company Stock Options as provided in Section 2.5,
without the consent or approval of the holders of such securities, the Company's
stockholders or otherwise.
SECTION 3.4 Authority; Noncontravention.
(a) The Company has all requisite corporate power and authority to enter
into this Agreement and, subject to receipt of the Company Stockholder Approval,
to consummate the transactions contemplated by this Agreement (the
"Transactions"). The execution and delivery of this Agreement by the Company and
the consummation by the Company of the Transactions have been duly authorized by
all necessary corporate action on the part of the Company, subject, in the case
of the Merger, to receipt of the Company Stockholder Approval. This Agreement
has been duly executed and delivered by the Company and, assuming the due
authorization, execution and delivery by the Parent and Merger Sub, constitutes
a legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.
A-10
(b) The execution and delivery of this Agreement does not, and the
consummation of the Transactions and compliance with the provisions of this
Agreement will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of amendment, termination, cancellation or acceleration of any obligation
or to the loss of a benefit under or increase of obligation under, or result in
the creation of any Lien upon any of the properties or assets owned by, licensed
to, or leased by the Company or any of its Subsidiaries under, (i) the
certificate of incorporation or bylaws of the Company or the comparable
organizational documents of any of its Subsidiaries, (ii) any Contract,
commitment, arrangement, understanding, instrument, permit, concession,
franchise or similar authorization applicable to the Company or any of its
Subsidiaries or their respective assets or (iii) subject to the governmental
filings and other matters referred to in Section 3.4(c), (A) any judgment, order
or decree or (B) any statute, law, ordinance, rule or regulation, in each case
applicable to the Company or any of its Subsidiaries or their respective
properties or assets, other than, in the case of clauses (ii) and (iii), any
such conflicts, violations, defaults, rights, losses or Liens that individually
or in the aggregate would not reasonably be expected to (x) have a Material
Adverse Effect on the Company, (y) impair the ability of the Company to perform
its obligations under this Agreement or (z) prevent or materially delay the
consummation of the Transactions.
(c) No consent, approval, order or authorization of, action by or in
respect of, or registration, recordation, declaration or filing with, any
federal, state, local or foreign government, any court, administrative,
regulatory or other governmental agency, commission or authority or any
non-governmental self-regulatory agency, commission or authority (each a
"Governmental Entity") is required by or with respect to the Company or any of
its Subsidiaries in connection with the execution and delivery of this Agreement
by the Company or the consummation by the Company of the Transactions, except
for (i) the filing with the Securities and Exchange Commission (the "SEC") of
(A) a proxy statement relating to the Company Stockholders Meeting (such proxy
statement, as amended or supplemented from time to time, the "Proxy Statement")
and (B) such reports under Section 13(a), 13(d), 15(d) or 16(a) of the
Securities Exchange Act of 1934 (the "Exchange Act") as may be required in
connection with this Agreement, the Stockholders Agreement and the Transactions;
(ii) the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware and appropriate documents with the relevant authorities of
other states in which the Company is qualified to do business and such filings
with Governmental Entities to satisfy the applicable requirements of state
securities or "blue sky" laws; and (iii) such other consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of which to
be made or obtained individually or in the aggregate would not reasonably be
expected to (x) have a Material Adverse Effect on the Company, (y) impair the
ability of the Company to perform its obligations under this Agreement or (z)
prevent or materially delay the consummation of the Transactions.
SECTION 3.5 SEC Documents; Undisclosed Liabilities.
(a) The Company has filed all required reports, schedules, forms,
statements and other documents (including exhibits and all other information
incorporated therein) with the SEC since June 18, 2002 the ("Company SEC
Documents"). As of their respective dates, the Company SEC Documents complied in
all material respects with the requirements of the Securities Act of 1933 (the
"Securities Act") or the Exchange Act, as the case may be, and none of the
Company SEC Documents when filed (unless amended or superseded in a Company
Filed SEC Document, then on the date of such later filing) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Except to the
extent that information contained in a Company SEC Document has been revised or
superseded in a Company Filed SEC Document, none of the Company SEC Documents
contains any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) The financial statements of the Company included in the Company SEC
Documents comply as to form, as of their respective dates of filing with the
SEC, in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto (the "Accounting
A-11
Rules"), have been prepared in accordance with generally accepted accounting
principles ("GAAP") (except, in the case of unaudited statements, as permitted
by Form 10-Q of the SEC) applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and fairly present,
in all material respects, the consolidated financial position of the Company and
its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal recurring non-material year-end
audit adjustments).
(c) Section 3.5(c) of the Company Disclosure Letter contains the unaudited
consolidated financial statements of the Company as of December 31, 2002 and
such financial statements have been prepared in accordance with GAAP applied on
a consistent basis and present fairly, in all material respects, the financial
position of the Company and its consolidated Subsidiaries as of December 31,
2002 and their consolidated results of operations and cash flows for the year
then ended (except for the omission of the notes thereto and subject to
non-material year-end audit adjustments).
(d) Except (i) as reflected in the most recent financial statements
included in the Company Filed SEC Documents or in the notes thereto or (ii) for
liabilities incurred in connection with this Agreement or the Transactions,
neither the Company nor any of its Subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
which, individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on the Company.
SECTION 3.6 Intellectual Property.
(a) The Company and its Subsidiaries have such ownership of or such rights
by license or otherwise in all patents and patent applications, mask works,
trademarks and service marks, trademark and service mark registrations and
applications, trade names, logos, brands, titles, copyrights, subsidiary rights,
copyright registrations and applications, trade secrets, names and likenesses,
know-how, proprietary processes, compositions of matter, formulae, designs,
computer software programs, domain names and other proprietary rights as are
necessary to conduct and permit the conduct of the business of the Company and
its Subsidiaries as currently conducted and currently proposed to be conducted
(collectively, the "Intellectual Property Rights"), except where the failure to
have such ownership or right by license or otherwise, individually and in the
aggregate, would not reasonably be expected to have a Material Adverse Effect on
the Company.
(b) Except as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on the Company, the conduct of the
business of the Company and its Subsidiaries as currently conducted and
currently proposed to be conducted does not infringe upon the intellectual
property rights of any third party or violate the privacy rights of any third
party or defame any third party. There are no present or, to the Knowledge of
the Company, threatened infringements or violations of or factual basis on which
a claim for infringement or violation could reasonably be asserted with respect
to the Intellectual Property Rights by any third party, except, in either case,
for such infringements or violations which, individually and in the aggregate,
would not reasonably be expected to have a Material Adverse Effect on the
Company.
(c) Except as set forth in Section 3.6 (c) of the Company Disclosure
Letter, neither the Company nor any of its Subsidiaries is a party to or bound
by any Contract (i) that contains any non-competition covenant or exclusivity
commitment that restricts, in any material respect, the manner in which, medium
in which, or the localities in which, all or a material portion of the business
of the Company and its Subsidiaries, taken as a whole, is conducted, (ii)
pursuant to which the Company or any of its Subsidiaries has assigned,
transferred, licensed or granted to a third party any Intellectual Property
Right on an exclusive basis or (iii) that contains any "most favored nation"
pricing provision.
(d) The Company and each of its Subsidiaries has taken all commercially
reasonable steps to protect the Company's and its Subsidiaries' rights in the
Company's or its Subsidiaries' confidential information and trade secrets that
it wishes to protect or any trade secrets or confidential information of third
parties provided to the Company or any of its Subsidiaries, and, without
limiting the foregoing, each of the Company and its Subsidiaries has and
enforces a policy requiring each employee and contractor to execute a
proprietary information/confidentiality agreement substantially in the form
provided to the Parent and all current and former employees and contractors of
the Company and any of its Subsidiaries have executed such an
A-12
agreement and the Company or its Subsidiaries has secured valid written
assignments from all consultants and employees who contributed to the creation
or development of any Intellectual Property Rights of the rights to such
contributions that the Company or its Subsidiaries does not already own by
operation of law. The Company has entered into written agreements with all third
parties whose confidential information the Company or its Subsidiaries have used
or to whom rights to access have been to the Company's or its Subsidiaries
confidential information. To the Company's Knowledge, all use, disclosure or
appropriation of the Company's or its Subsidiaries' confidential information by,
or to, a third party has been pursuant to the terms of a written agreement
between the Company or its Subsidiaries and such third party. To the Company's
Knowledge, all use, disclosure or appropriation of confidential information of a
third party by the Company, its Representatives or its Subsidiaries has been
pursuant to the terms of a written agreement between the Company or its
Subsidiaries and such third party, or is otherwise lawful.
(e) Except as set forth in Section 3.6(e) of the Company Disclosure Letter,
neither the Company nor any of its Subsidiaries has received any opinion of
counsel regarding any third party patents.
(f) Except as set forth in Section 3.6(f) of the Company Disclosure Letter,
neither the Company nor any of its Subsidiaries has disclosed or delivered, or
permitted the disclosure or delivery, to any escrow holder or other third party,
all or any part of the source code (including any algorithm or documentation
contained in, or relating to, any source code) of the Intellectual Property
Rights.
(g) Except as set forth in Section 3.6(g) of the Company Disclosure Letter
and except for non-exclusive license agreements entered into in the ordinary
course of business, there are no Contracts of any kind related to the
Intellectual Property Rights, nor is the Company or any Subsidiary bound by, or
a party to, any Contracts with respect to the Intellectual Property Rights.
SECTION 3.7 Absence of Certain Changes or Events. Except as contemplated
by this Agreement (including those actions not prohibited under Section 5.1) or
the Transactions and except for changes disclosed in the Company SEC Documents
filed and publicly available prior to the date of this Agreement (as amended to
the date of this Agreement, the "Company Filed SEC Documents"), since December
31, 2002, the Company and its Subsidiaries have conducted their business only in
the ordinary course, and since such date there has not been (a) any Material
Adverse Change in the Company, (b) any declaration, setting aside or payment of
any dividend or other distribution (whether in cash, stock or property) with
respect to any of the Company's capital stock (other than as expressly permitted
by the terms of Section 5.1(a)), (c) any purchase, redemption or other
acquisition of any shares of capital stock or any other securities of the
Company or any of its Subsidiaries or any options, warrants, calls or rights to
acquire such shares or other securities; (d) any split, combination or
reclassification of any of the Company's capital stock or any issuance or the
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for shares of the Company's capital stock, (e)(i) any
granting by the Company or any of its Subsidiaries to any current or former
director, executive officer or other employee of the Company or its Subsidiaries
of any increase in compensation, bonus or other benefits, except for normal
increases in cash compensation to non-executive employees in the ordinary course
of business consistent with past practice or as was required under any
employment agreements in effect as of the date of the most recent financial
statements included in the Company Filed SEC Documents and other than as
expressly permitted by the terms of Section 5.1(k), (ii) any granting by the
Company or any of its Subsidiaries to any such current or former director,
executive officer or employee of any increase in severance or termination pay,
except to non-executive employees in the ordinary course of business consistent
with past practice, (iii) any entry by the Company or any of its Subsidiaries
into, or any amendments of, any Benefit Plan with any current or former
director, executive officer or employee, except with non-key employees in the
ordinary course of business consistent with past practice, (iv) any amendment
to, or modification of, any Company Stock Option, (v) except insofar as may have
been required by a change in GAAP, any change in accounting methods, principles
or practices by the Company or any of its Subsidiaries materially affecting
their respective assets, liabilities, results of operations or businesses, (vi)
any Tax election that, individually or in the aggregate, would reasonably be
expected to adversely affect in any material respect the Tax liability or Tax
attributes of the Company or any of its Subsidiaries, (vii) any settlement or
compromise of any material income Tax liability, (viii) any acquisition, sale or
transfer of any material asset of the Company or any of its Subsidiaries other
than in the ordinary
A-13
course of business consistent with past practice, (ix) any entering into by the
Company or any of its Subsidiaries of any material contract or agreement, or
material amendment or termination of any material contract or agreement (other
than in the ordinary course of business) or default by the Company or any of its
Subsidiaries under, any material Contract to which the Company or any of its
Subsidiaries is a party or by which it is bound (or to the Knowledge of the
Company, by any other party thereto), (x) any revaluation by the Company or any
of its Subsidiaries of any of their respective material assets or (xi) except as
would not individually or in the aggregate reasonably be expected to have a
Material Adverse Effect on the Company, any lapse, reversion, termination or
expiration of any Intellectual Property Rights.
SECTION 3.8 Litigation. There is no suit, arbitration, action, proceeding
or written claim ("Litigation") pending or, to the Knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries that,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on the Company nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against the Company or any of its Subsidiaries having, or which would reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on the Company. Section 3.8 of the Company Disclosure Letter sets forth as of
the date of this Agreement of a complete list of all suits, arbitrations,
actions or proceedings to which the Company, or its Subsidiaries or any of their
assets are, or could reasonably be expected to be, a party or bound.
SECTION 3.9 Certain Contracts.
(a) Neither the Company nor any of its Subsidiaries is bound by, or a party
to, any non-competition or similar restriction relating to any business, product
or service anywhere in the world.
(b) No purchase Contracts of the Company or any of its Subsidiaries
continue for a period of more than twelve months or are in excess of the normal,
ordinary and usual requirements of its or their business or at any excessive
price.
(c) There is no outstanding sales Contract of the Company or any of its
Subsidiaries which continue for a period of more than twelve months.
(d) Neither the Company nor any of its Subsidiaries has any outstanding
Contracts with officers, employees, agents, consultants, advisors, salesmen,
sales representatives, distributors or dealers that are not cancelable by it on
notice of not longer than thirty days and without liability, penalty or premium
or any agreement or arrangement providing for the payment of any bonus or
commission based on sales or earnings.
(e) Except as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on the Company, neither the Company
nor any of its Subsidiaries is in default, nor to its Knowledge is there any
basis for any valid claim of default, under any Contract made or obligation owed
by any of them.
(f) Neither Company nor any of its Subsidiaries has entered into any
Contract to indemnify any other party against any charge of infringement of any
intellectual property, other than indemnification provisions contained in
license agreements or purchase orders arising in the ordinary course of business
(other than guarantees by the Company or one of its wholly owned Subsidiaries on
behalf of the Company or one of its wholly owned Subsidiaries).
(g) Neither the Company nor any of its Subsidiaries has any debt obligation
for borrowed money, including guarantees (other than guarantees by the Company
or one of its wholly owned Subsidiaries on behalf of the Company or one of its
wholly owned Subsidiaries) of or agreements to acquire any such debt obligation
of others.
(h) Neither the Company nor any of its Subsidiaries has any outstanding
loan to any Person, other than to the Company or a wholly owned Subsidiary of
the Company.
(i) Neither the Company nor any of its Subsidiaries has any power of
attorney outstanding or any obligations or liabilities (whether absolute,
accrued, contingent or otherwise), as guarantor, surety, co-signer, endorser,
co-maker, indemnitor or otherwise in respect of the obligation of any Person,
corporation,
A-14
partnership, joint venture, association, organization or other entity (other
than guarantees by the Company or one of its wholly owned Subsidiaries on behalf
of the Company or one of its wholly owned Subsidiaries).
SECTION 3.10 Customers. There has not been any Material Adverse Change in
the business relationship of the Company or any of its Subsidiaries with any
customer who accounted for more than five percent of the Company's and its
Subsidiaries' sales (on a consolidated basis) during the twelve months preceding
the date of this Agreement.
SECTION 3.11 Compliance with Applicable Laws.
(a) The Company and its Subsidiaries hold all material permits, licenses,
variances, exemptions, orders, registrations and approvals of all Governmental
Entities (the "Company Permits") that are required for them to own, lease or
operate their assets and to carry on their businesses, except where the failure
to have any such Company Permits, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on the Company. The
Company and its Subsidiaries are in compliance with the terms of the Company
Permits and all applicable statutes, laws, ordinances, rules and regulations,
except where the failure so to comply, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect on the Company.
(b) No action, demand, requirement or investigation by any Governmental
Entity and no suit, action or proceeding by any Person, in each case with
respect to the Company, any of its Subsidiaries, any of their respective assets
or any Benefit Plan, is pending or, to the Knowledge of the Company, threatened,
other than, in each case, those which, individually or in the aggregate, would
not reasonably be expected to (i) have a Material Adverse Effect on the Company,
(ii) impair the ability of the Company to perform its obligations under this
Agreement or (iii) prevent or materially delay the consummation of any of the
Transactions.
(c) To the Company's Knowledge and except as would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect on the
Company, (i) there have been no Releases of any Hazardous Materials at, on or
under any facility or property currently or formerly owned, leased, or operated
by the Company or any of its Subsidiaries, (ii) neither the Company nor any of
its Subsidiaries is the subject of any pending or threatened investigation or
proceeding under Environmental Law relating in any manner to the off-site
treatment, storage or disposal of any Hazardous Materials generated at any
facility or property currently or formerly owned, leased or operated by the
Company or any of its Subsidiaries and (iii) neither the Company nor any of its
Subsidiaries has assumed or otherwise agreed to be responsible for any
liabilities arising under Environmental Law. The term "Environmental Law" means
any and all applicable laws or regulations or other requirements of any
Governmental Entity concerning the protection of human health or the
environment. The term "Hazardous Materials" means all explosive or regulated
radioactive materials, hazardous or toxic substances, wastes or chemicals,
petroleum (including crude oil or any fraction thereof) or petroleum
distillates, asbestos or asbestos-containing materials, and all other materials
or chemicals regulated under any Environmental Law. The term "Release" means any
spill, emission, leaking, pumping, injection, deposit, disposal, discharge,
dispersal, leaching, emanation or migration in, into, onto, or through the
environment.
SECTION 3.12 Benefit Plans.
(a) Section 3.12(a) of the Company Disclosure Letter lists (i) each
individual employment, termination, or severance agreement with employees or
former employees of the Company whose annual compensation is at a base rate
equal to or exceeding $100,000, (ii) all employee benefit plans as that term is
defined in Section 3(3) of the Employee Retirement and Income Security Act of
1974 ("ERISA") and (iii) all other plans or compensation arrangements,
maintained or contributed to by the Company for the benefit of its employees (or
former employees) and/or their beneficiaries ("Benefit Plans"). An arrangement
will not fail to be a Benefit Plan simply because it only covers one individual.
(b) The Company has delivered or made available to the Parent a true and
complete copy of the following documents (to the extent that they are
applicable): (i) each Benefit Plan and any related funding agreements, including
all amendments (and Section 3.12(b) of the Company Disclosure Letter includes a
description of any such amendment that is not in writing), and (ii) the two most
recent Form 5500s
A-15
(including all applicable schedules and the opinions of the independent
accountants) that were filed on behalf of any Benefit Plan.
(c) To the Knowledge of the Company, each Benefit Plan at all times has
been operated in accordance with its terms, and complies currently, and has
complied in the past, both in form and in operation, with all applicable laws,
including ERISA and the Code.
(d) The Company does not maintain any Benefit Plan that provides (or will
provide) medical, death, or other fringe benefits to former employees or
independent contractors (including retirees), other than benefits that are
required to be provided pursuant to Section 4980B of the Code or state law
continuation coverage or conversion rights.
(e) Except as provided in Section 3.12(e) of the Company Disclosure Letter,
none of the Benefit Plans provide any benefits that would result in excess
parachute payments (within the meaning of Section 280G of the Code), either (i)
solely as a result of the consummation of the Transactions or (ii) as a result
of the consummation of the Transactions and any actions taken after the Closing.
Furthermore, the consummation of the Transactions will not require the funding,
whether formal or informal, of the benefits under any Benefit Plan (e.g.,
contributions to a Rabbi Trust).
(f) No Benefit Plan is subject to Title IV of ERISA.
(g) Except as would not, individually or in the aggregate reasonably be
expected to have a Material Adverse Effect on the Company, none of the Persons
performing services for the Company have been improperly classified as being
independent contractors, leased employees or as being exempt from the payment of
wages for overtime.
(h) Other than routine claims for benefits under the Benefit Plan and those
relating to qualified domestic relations orders, there are no (i) pending or
(ii) to the Knowledge of the Company, threatened lawsuits or other claims
against or involving any Benefit Plan, or any Fiduciary (within the meaning of
Section 3(21)(A) of ERISA) of such Benefit Plan brought on behalf of any
participant, beneficiary, or Fiduciary thereunder, nor is there any reasonable
basis for any such claim.
(i) The Company has no intention or commitment, whether legally binding or
not, to create any additional Benefit Plan, or to modify any existing Benefit
Plan so as to increase benefits to participants or the cost of maintaining the
Benefit Plan. The benefits under all Benefit Plans are as represented, and have
not been, and will not be, increased subsequent to the date of this Agreement.
No statement, either oral or written, has been made by the Company (or any agent
of the Company) to any Person regarding any Benefit Plan that is not in
accordance with such Benefit Plan that could have adverse economic consequences
to the Parent or the Surviving Corporation.
(j) To the Knowledge of the Company, all costs of administering and
contributions required to be made to each Benefit Plan under the terms of that
Benefit Plan, ERISA, the Code, or any other applicable law have been timely
made, and are fully deductible in the year for which they were paid, and all
other amounts that should be accrued to date as liabilities of the Company under
or with respect to each Benefit Plan (including administrative expenses and
incurred but not reported claims) for the current plan year of the Benefit Plan
have been recorded on the books of the Company.
(k) For purposes of this Section 3.12(k) "Company International Plans"
means each compensation and benefit plan required to be maintained or
contributed to by the law or applicable custom or rule of the relevant
jurisdiction outside of the United States. As regards each such Company
International Plan, unless disclosed in Section 3.12(k) of the Company
Disclosure Letter, to the Knowledge of the Company, (i) each of the Company
International Plans is in compliance with the provisions of the laws of each
jurisdiction in which each such Company International Plan is maintained, to the
extent those laws are applicable to the Company International Plans; (ii) all
material contributions to, and material payments from, the Company International
Plans that may have been required to be made in accordance with the terms of any
such Company International Plan, and, when applicable, the law of the
jurisdiction in which such Company International Plan is maintained, have been
timely made or shall be made by the Closing Date, and all such contributions to
A-16
the Company International Plans, and all payments under the Company
International Plans, for any period ending before the Closing Date that are not
yet, but will be, required to be made, are reflected as an accrued liability in
the most recent financial statements included in the Company Filed SEC
Documents; (iii) the Company has materially complied with all applicable
reporting and notice requirements, and all of the Company International Plans
have obtained from the governmental body having jurisdiction with respect to
such plans any required determinations, if any, that such Company International
Plans are in compliance with the laws of the relevant jurisdiction if such
determinations are required in order to give effect to the Company International
Plan; (iv) each of the Company International Plans has been administered in all
material respects at all times in accordance with its terms and applicable law
and regulations; (v) to the Knowledge of the Company, there are no pending
investigations by any governmental body involving the Company International
Plans, and no pending claims (except for claims for benefits payable in the
normal operation of the Company International Plans), suits or proceedings
against any Company International Plan or asserting any rights or claims to
benefits under any Company International Plan; and (vi) the consummation of the
transactions contemplated by this Agreement will not by itself create or
otherwise result in any liability with respect to any Company International Plan
other than the triggering of payment to participants.
(l) For purposes of this Section 3.12 only, the term the "Company" shall
include any entity that is aggregated with the Company under Section 414(b),
(c), (m), or (o) of the Code.
(m) Section 3.12(m) of the Company Disclosure Letter contains a complete
listing of all employees of the Company as of the date of this Agreement.
SECTION 3.13 Taxes.
(a) As used in this Agreement, (i) the terms "Tax" or "Taxes" mean (A) all
federal, state, local, foreign and other net income, gross income, gross
receipts, sales, use, ad valorem, alternative minimum, transfer, franchise,
profits, license, lease, service, service use, withholding, payroll, employment,
excise, severance, stamp, occupation, estimated, premium, property, windfall
profits, customs, duties or other taxes, fees, assessments or charges of any
kind whatsoever imposed by any Governmental Entity (a "Taxing Authority")
responsible for the imposition, collection or administration of any such taxes,
fees, assessments or charges, together with any interest and any penalties,
additions to tax or additional amounts with respect thereto, and (B) any
liability for any Tax described in the immediately preceding clause (A) as a
result of being a transferee or successor, by contract or otherwise, or as a
result of being or having been a member of an affiliated, consolidated or
combined group, including under Treasury Regulation Section 1.1502-6 or similar
state, local or foreign law or (C) any liability for any amount described in the
immediately preceding clauses (A) or (B) pursuant to a tax indemnity, tax
sharing or similar agreement, arrangement or understanding; and (ii) the term
"Returns" means all returns, declarations, reports, statements and other
documents (including any related or supporting information, schedules or
exhibits) required to be filed in respect of Taxes, including any amendment with
respect thereto.
(b) There have been properly completed and filed on a timely basis (taking
into account all properly obtained extensions) and in correct form all material
Returns required to be filed by or with respect to the Company or any of its
Subsidiaries. The foregoing Returns were correct and complete in all material
respects and the Company and each of its Subsidiaries has paid or there has been
paid on its behalf all Taxes due whether or not shown (or required to be shown)
on a Return. An extension of time within which to file any Return that has not
been filed has not been requested or granted.
(c) As of the date of this Agreement, there are no current or pending or
proposed audits or examinations of any Return relating to the Company or any of
its Subsidiaries by any Taxing Authority in connection with any of the Returns.
No waivers of statutes of limitation with respect to the Returns or the
assessment of Taxes have been given by the Company or any of its Subsidiaries
(or with respect to any Return which a Taxing Authority has asserted should have
been filed by the Company or any of its Subsidiaries) which waivers are still in
effect. All deficiencies asserted or assessments made as a result of any
examinations have been fully paid, or are being contested in good faith and an
adequate reserve therefor has been established in accordance with GAAP and is
fully reflected in the financial statements included in the Company Filed SEC
Documents or the financial statements included in Section 3.5(c) of the Company
Disclosure Letter.
A-17
(d) The accruals and reserves for unpaid Taxes of the Company or any of its
Subsidiaries (excluding any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) set forth or included in the
most recent financial statements included in the Company Filed SEC Documents are
adequate in accordance with GAAP to cover all Taxes accrued or accruable through
the date thereof. The Company has no liability for unpaid Taxes incurred after
the date of the most recent financial statements included in the Company Filed
SEC Documents, other than Taxes incurred by it in the ordinary course of
business.
(e) Neither the Company nor any of its Subsidiaries has been a member of an
affiliated group filing consolidated, combined or similar Returns other than the
group of which the Company is the common parent. Neither the Company nor any of
its Subsidiaries is or at any time has been a party to or bound by (nor will the
Company or any of its Subsidiaries become a party to or bound by) any tax
indemnity, tax sharing, tax allocation or similar agreement that includes a
party other than the Company or any of its Subsidiaries.
(f) Neither the Company nor any of its Subsidiaries has constituted either
a "distributing corporation" or a "controlled corporation" in a distribution of
stock qualifying for tax-free treatment under Section 355 of the Code (i) in the
two years prior to the date of this Agreement or (ii) in a distribution which
could otherwise constitute part of a "plan" or "series of related transactions"
(within the meaning of Section 355(e) of the Code) in conjunction with the
Merger.
(g) The Company and each of its Subsidiaries has complied in all material
respects with the provisions of the Code (and similar provisions under any other
laws) relating to the withholding and payment of Taxes and has, within the time
and in the manner prescribed by Law, withheld from employee wages and paid over
to the proper Governmental Entities all material amounts required to be withheld
and paid over. The Benefit Plans and the other Company employee compensation
arrangements in effect as of the date of this Agreement have been designed so
that the disallowance of a material deduction under Section 162(m) of the Code
for employee remuneration will not apply to any amounts paid or payable by the
Company or any of its Subsidiaries under any such plan or arrangement and, to
the Knowledge of the Company, no fact or circumstance exists that would
reasonably be expected to cause such disallowance to apply to any such amounts.
(h) To the Knowledge of the Company, no claim has ever been made by a
Taxing Authority with respect to the Company or any of its Subsidiaries in a
jurisdiction where such entity does not file Returns that the Company or any of
its Subsidiaries is or may be subject to taxation by that jurisdiction.
(i) The Company is not, and has not been, a "United States real property
holding corporation" within the meaning of Section 897(c)(2) of the Code during
the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(j) Except for liens for real and personal property Taxes that are not yet
due and payable, there are no liens for any material Tax upon any of the assets
or properties of the Company or any of its Subsidiaries.
(k) Neither the Company nor any of its Subsidiaries owns an interest in an
entity that would be treated as a partnership for federal income Tax purposes.
(l) Neither the Company nor any of its Subsidiaries has been required to
make, nor has there been proposed, any adjustment pursuant to Section 481 of the
Code.
(m) The Company is not a collapsible corporation under Section 341 of the
Code and has not filed an election as a consenting corporation under Section
341(f) of the Code.
SECTION 3.14 Information Supplied. None of the information supplied or to
be supplied by the Company specifically for inclusion or incorporation by
reference in (a) the registration statement on Form S-4 to be filed with the SEC
by the Parent in connection with the offer and sale of shares of Parent Common
Stock in connection with the Merger (the "Form S-4") will, at the time the Form
S-4 becomes effective under the Securities Act, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading or (b) the Proxy
Statement will, at the date it is first mailed to the Company's stockholders or
at the time of the Company Stockholders Meeting, contain any untrue statement of
a material fact or omit to state any material fact
A-18
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material respects
with the requirements of the Exchange Act. No representation or warranty is made
by the Company with respect to statements made or incorporated by reference
therein based on information supplied by the Parent specifically for inclusion
or incorporation by reference in the Proxy Statement.
SECTION 3.15 Voting Requirements. The affirmative vote of the holders of
a majority of the voting power of all outstanding shares of Company Common
Stock, as of the record date for the Company Stockholders Meeting, adopting this
Agreement (the "Company Stockholder Approval") is the only vote of the holders
of any class or series of the Company's capital stock necessary to approve and
adopt this Agreement or any of the Transactions.
SECTION 3.16 State Takeover Statutes. The board of directors of the
Company, either directly or through action of a duly authorized committee
thereof has taken all necessary action to ensure that the provisions of Section
203 of the DGCL do not apply to the Parent or Merger Sub in connection with the
Stockholders Agreement, the Merger and the other Transactions. No other state
takeover statute or similar statute or regulation is applicable to the Merger or
the other Transactions.
SECTION 3.17 Brokers. No broker, investment banker, financial advisor or
other Person, other than UBS Warburg, the fees and expenses of which will be
paid by the Company, is entitled to any broker's, finder's, financial advisor's
or other similar fee or commission in connection with the Transactions based
upon arrangements made by or on behalf of the Company. The Company has furnished
to the Parent true and complete copies of all agreements under which any such
fees or expenses are payable and all indemnification and other agreements
related to the engagement of the Persons to whom such fees are payable.
SECTION 3.18 Opinion of Financial Advisor. The Company has received the
written opinion of UBS Warburg, dated February 25, 2003, to the effect that, as
of such date, the Merger Consideration is fair, from a financial point of view,
to the stockholders of the Company, a signed copy of which opinion has been or
promptly will be delivered to the Parent.
SECTION 3.19 Absence of Questionable Payments. Neither the Company nor
any of its Subsidiaries nor, to the Knowledge of the Company, any director,
officer, agent, employee or other Person acting on behalf of the Company or any
of its Subsidiaries, has used any corporate or other funds for unlawful
contributions, payments, gifts, or entertainment, or made any unlawful
expenditures relating to political activity to government officials or others or
established or maintained any unlawful or unrecorded funds in violation of
Section 30A of the Exchange Act. Neither the Company nor any of its Subsidiaries
nor, to the Knowledge of the Company, any current director, officer, agent,
employee or other Person acting on behalf of the Company or any of its
Subsidiaries, has accepted or received any unlawful contributions, payments,
gifts or expenditures. The Company and each of its Subsidiaries that is required
to file reports pursuant to Section 12 or 15(d) of the Exchange Act is in
compliance with the provisions of Section 13(b) of the Exchange Act.
SECTION 3.20 Insider Interests. To the Knowledge of the Company, no
officer or director of the Company or any of its Subsidiaries has any material
interest in any property, real or personal, tangible or intangible, including
inventions, patents, trademarks or trade names, used in or pertaining to the
business of the Company or any of its Subsidiaries.
SECTION 3.21 Rights Agreement. The Company has taken all actions
necessary to ensure that the execution of this Agreement and the consummation of
the Transactions will not cause the Parent or any of its Subsidiaries to be
deemed an Acquiring Person (as defined in the Rights Agreement). Neither the
Distribution Date nor the Stock Acquisition Date (each as defined in the Rights
Agreement) has occurred or will occur as a result of this Agreement or any of
the Transactions.
A-19
ARTICLE 4
REPRESENTATIONS OF THE PARENT AND MERGER SUB
Except as disclosed in the disclosure letter delivered by the Parent to the
Company concurrently with the execution of this Agreement (the "Parent
Disclosure Letter") and making reference to the particular Section of this
Agreement to which exception is being taken (which disclosures shall also
constitute representations and warranties hereunder), the Parent and Merger Sub
represent and warrant to the Company as follows:
SECTION 4.1 Organization, Standing and Corporate Power. Each of the
Parent and Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is incorporated and
has the requisite corporate power and authority to carry on its business as now
being conducted. Each of the Parent and Merger Sub is duly qualified or licensed
to do business and is in good standing (with respect to jurisdictions which
recognize such concept) in each jurisdiction in which the nature of its business
or the ownership, leasing, licensing or operation of its assets makes such
qualification or licensing necessary, except for those jurisdictions where the
failure to be so qualified or licensed or to be in good standing, individually
or in the aggregate, would not reasonably be expected to have a Material Adverse
Effect on the Parent. The Parent has made available to the Company prior to the
execution of this Agreement complete and correct copies of its certificate of
incorporation and bylaws and the certificate of incorporation and bylaws of
Merger Sub, in each case as amended to the date of this Agreement.
SECTION 4.2 Capital Structure. The authorized capital stock of the Parent
consists of 150,000,000 shares of Parent Common Stock and 5,000,000 shares of
preferred stock, par value $.001 per share, of the Parent (the "Parent
Authorized Preferred Stock"). As of February 18, 2003, (a) 54,782,061 shares of
Parent Common Stock were issued and outstanding, (b) no shares of Parent
Authorized Preferred Stock were issued and outstanding, and (c) 32,097,186
shares of Parent Common Stock are reserved for issuance under the Parent's 1989
Stock Plan, the Parent's 1990 Stock Plan, the Parent's 1999 Equity Incentive
Plan, the Parent's Employee Stock Purchase Plan, the Management Graphics, Inc.
1985 Nonqualified Stock Option Plan, and the Splash Technology Holdings, Inc.
1996 Stock Option Plan (of which there were 11,763,408 outstanding options or
rights as of February 20, 2003 to acquire shares of Parent Common Stock). No
bonds, debentures, notes or other indebtedness of the Parent having the right to
vote (or convertible into, or exchangeable for, securities having the right to
vote) on any matters on which stockholders of the Parent may vote are issued or
outstanding. All outstanding shares of capital stock of the Parent are, and all
shares which may be issued in connection with the Transactions will be, when
issued, duly authorized, validly issued, fully paid and nonassessable, not
subject to preemptive rights and free and clear of any Liens (other than Liens
created by the holders thereof and restrictions on transfer arising under
applicable securities laws).
SECTION 4.3 Authority; Noncontravention.
(a) Each of the Parent and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the Transactions. The
execution and delivery of this Agreement by the Parent and Merger Sub and the
consummation by the Parent and Merger Sub of the Transactions have been duly
authorized by all necessary corporate action on the part of the Parent and
Merger Sub, as applicable. This Agreement has been duly executed and delivered
by the Parent and Merger Sub and, assuming the due authorization, execution and
delivery by each of the other parties hereto, constitutes a legal, valid and
binding obligation of the Parent and Merger Sub, enforceable against each of
them in accordance with its terms.
(b) The execution and delivery of this Agreement does not, and the
consummation of the Transactions and compliance with the provisions of this
Agreement will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of amendment, termination, cancellation or acceleration of any obligation
or loss of a benefit under or increase of any obligation under, or result in the
creation of any Lien upon any of the properties or assets of the Parent or
Merger Sub under, (i) the certificate of incorporation or bylaws of the Parent
or Merger Sub, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other contract, agreement, obligation, commitment,
arrangement, understanding, instrument, permit, concession, franchise, license
or similar authorization applicable to the Parent or Merger Sub or their
respective properties or assets or (iii) subject to the
A-20
governmental filings and other matters referred to in Section 4.3(c), (A) any
judgment, order or decree or (B) any statute, law, ordinance, rule or
regulation, in each case, applicable to the Parent or Merger Sub or their
respective properties or assets, other than, in the case of clauses (ii) and
(iii), any such conflicts, violations, defaults, rights, losses or Liens that
individually or in the aggregate would not reasonably be expected to (x) have a
Material Adverse Effect on the Parent, (y) impair the ability of the Parent or
Merger Sub to perform its obligations under this Agreement or (z) prevent or
materially delay the consummation of the Transactions.
(c) No consent, approval, order or authorization of, action by, or in
respect of, or registration, recordation, declaration or filing with, any
Governmental Entity is required by or with respect to the Parent or Merger Sub
in connection with the execution and delivery of this Agreement by the Parent
and Merger Sub, the consummation by the Parent and Merger Sub of the
Transactions, except for (i) the filing with the SEC of (A) the Proxy Statement,
(B) the Form S-4 and (B) such reports under Section 13(a), 13(d), 15(d) or 16(a)
of the Exchange Act as may be required in connection with this Agreement, the
Stockholders Agreement and the Transactions; (ii) the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware and such filings
with Governmental Entities to satisfy the applicable requirements of state
securities or "blue sky" laws; (iii) such filings with and approvals of the
NASDAQ National Market to permit the shares of Parent Common Stock that are to
be issued in connection with the Merger to be listed on The NASDAQ National
Market; and (iv) such other consents, approvals, orders, authorizations,
registrations, declarations and filings the failure of which to be made or
obtained individually or in the aggregate would not reasonably be expected to
(x) have a Material Adverse Effect on the Parent, (y) impair the ability of the
Parent or Merger Sub to perform its obligations under this Agreement or (z)
prevent or materially delay the consummation of the Transactions.
SECTION 4.4 SEC Documents; Undisclosed Liabilities.
(a) The Parent has filed all required reports, schedules, forms, statements
and other documents (including exhibits and all other information incorporated
therein) with the SEC since December 31, 2001 (the "Parent SEC Documents"). As
of their respective dates, the Parent SEC Documents complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and none of the Parent SEC Documents when filed (and if amended or
superseded in a Parent Filed SEC Document, then on the date of such filing)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except to the extent that information contained in a Parent SEC
Document has been revised or superseded in a Parent Filed SEC Document, none of
the Parent SEC Documents contains any untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
(b) The financial statements of Parent included in the Parent SEC Documents
comply as to form, as of their respective dates of filing with the SEC, in all
material respects with the Accounting Rules, have been prepared in accordance
with GAAP (except, in the case of unaudited statements, as permitted by Form
10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present in all
material respects the consolidated financial position of the Parent and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal non-material recurring year-end audit
adjustments).
(c) Except (i) as reflected in the financial statements included in the
Parent SEC Documents or in the notes thereto or (ii) for liabilities incurred in
connection with this Agreement or the Transactions, neither the Parent nor any
of its Subsidiaries has any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) which, individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect on the
Parent.
SECTION 4.5 Information Supplied. None of the information supplied or to
be supplied by the Parent specifically for inclusion or incorporation by
reference in (a) the Form S-4 will, at the time the Form S-4
A-21
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading or (b) the Proxy
Statement will, at the date it is first mailed to the Company's stockholders or
at the time of the Company Stockholders Meeting, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Form S-4 will
comply as to form in all material respects with the requirements of the
Securities Act. No representation or warranty is made by the Parent with respect
to statements made or incorporated by reference therein based on information
supplied by the Company specifically for inclusion or incorporation by reference
in the Form S-4.
SECTION 4.6 Absence of Certain Changes or Events. Except for liabilities
incurred in connection with this Agreement, the Stockholders Agreement or the
Transactions and except as disclosed in the Parent SEC Documents filed and
publicly available prior to the date of this Agreement (the "Parent Filed SEC
Documents"), since December 31, 2001, the Parent and its Subsidiaries have
conducted their business only in the ordinary course, and since such date there
has not been any Material Adverse Change in the Parent.
SECTION 4.7 Voting Requirements. No vote of any class or series of
capital stock of the Parent is necessary to approve and adopt this Agreement and
the Transactions.
SECTION 4.8 Operations of Merger Sub. Merger Sub has engaged in no
business activities and has conducted its operations only as contemplated
hereby.
SECTION 4.9 Litigation. There is no Litigation pending, or to the
Knowledge of the Parent, threatened against or affecting the Parent or any of
its Subsidiaries nor is there any judgment, decree, injunction, rule or order of
any Governmental Entity or arbitrator outstanding against the Parent or any of
its Subsidiaries having, or which would reasonably be expected to (a) have,
individually or in the aggregate, a Material Adverse Effect on the Parent, (b)
impair the ability of the Parent or Merger Sub to perform its obligations under
this Agreement or (c) prevent or materially delay the consummation of any of the
Transactions.
SECTION 4.10 Brokers. No broker, investment banker, financial advisor or
other Person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the Transactions based upon
arrangements made by or on behalf of the Parent.
SECTION 4.11 Absence of Questionable Payments. Neither the Parent nor any
of its Subsidiaries nor any director, officer, agent, employee or other Person
acting on behalf of the Parent or any of its Subsidiaries, has used any
corporate or other funds for unlawful contributions, payments, gifts, or
entertainment, or made any unlawful expenditures relating to political activity
to government officials or others or established or maintained any unlawful or
unrecorded funds in violation of Section 30A of the Exchange Act. Neither the
Parent nor any of its Subsidiaries nor any current director, officer, agent,
employee or other Person acting on behalf of the Parent or any of its
Subsidiaries, has accepted or received any unlawful contributions, payments,
gifts or expenditures. The Parent and each of its Subsidiaries which is required
to file reports pursuant to Section 12 or 15(d) of the Exchange Act is in
compliance with the provisions of Section 13(b) of the Exchange Act.
SECTION 4.12 Insider Interests. No officer or director of the Parent or
any of its Subsidiaries has any material interest in any property, real or
personal, tangible or intangible, including inventions, patents, trademarks or
trade names, used in or pertaining to the business of the Parent or any of its
Subsidiaries.
ARTICLE 5
COVENANTS
SECTION 5.1 Conduct of the Company's Business. Except as set forth in
Section 5.1 of the Company Disclosure Letter, as otherwise expressly
contemplated by this Agreement or as consented to in writing by the Parent,
during the period from the date of this Agreement to the Effective Time, the
Company shall, and shall cause its Subsidiaries to, carry on their respective
businesses in the ordinary course consistent with past practice and use
commercially reasonable efforts to preserve intact their business to the end
that their goodwill
A-22
and ongoing businesses shall not be impaired in any material respect at the
Effective Time. Without limiting the generality of the foregoing (but subject to
the above exceptions), during the period from the date of this Agreement to the
Effective Time, the Company shall not, and shall not permit any of its
Subsidiaries to:
(a) other than dividends and distributions (including liquidating
distributions) by a direct or indirect wholly-owned Subsidiary of the Company to
its parent, (i) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock, property or otherwise) in respect of, any
of its capital stock, (ii) split, combine or reclassify any of its capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or (iii) purchase,
redeem or otherwise acquire, directly or indirectly, any shares of capital stock
of the Company or any of its Subsidiaries or any other securities thereof or any
rights, warrants or options to acquire any such shares or other securities,
(other than pursuant to the exercise of existing stock repurchase rights listed
in Section 3.3 of the Company Disclosure Letter);
(b) issue, deliver, sell, pledge or otherwise encumber or subject to any
Lien any shares of its capital stock, any other voting securities or any
securities convertible into, or any rights, warrants or options to acquire, any
such shares, voting securities or convertible securities, other than (i) the
issuance of Company Stock Options granted consistent with past practice to new
employees (other than executive officers) of the Company; provided that each
such Company Stock Option shall have an exercise price per share equal to the
closing price per share of Company Common Stock on the grant date, shall have
standard vesting provisions in conformity with customary practice and shall not
have any provisions which accelerate in whole or in part the vesting or
exercisability of such option in connection with the Transactions or any
termination of service at or at any time following the Merger, (ii) the issuance
of Company Common Stock upon the exercise of (A) the Company Stock Options, and
(B) the Company Warrants, in each case outstanding as of the date hereof in
accordance with their present terms, or upon the exercise of the Company Stock
Options referred to in clause (i) in accordance with their terms, or (iii) the
issuance of shares of Company Common Stock pursuant to the ESPP in accordance
with its present terms and not in violation of this Agreement;
(c) amend its certificate of incorporation, bylaws or other comparable
organizational documents;
(d) acquire or agree to acquire by merging or consolidating with, or by
purchasing all or substantially all of assets of, or by any other manner, any
business or any Person;
(e) sell, lease, license, sell and leaseback, mortgage or otherwise
encumber or subject to any Lien (other than Permitted Liens) or otherwise
dispose of any of its properties or assets (including securitizations), other
than in the ordinary course of business consistent with past practice;
(f) (i) purchase, prepay or incur any indebtedness for borrowed money or
guarantee any such indebtedness of another Person, issue or sell any debt
securities or warrants or other rights to acquire any debt securities of the
Company or any of its Subsidiaries, guarantee any debt securities of another
Person, enter into any "keep well" or other Contract to maintain any financial
statement condition of another Person or enter into any Contract having the
economic effect of any of the foregoing, except for intercompany indebtedness
between the Company and any of its wholly-owned Subsidiaries or between such
Subsidiaries, or (ii) make any loans, advances or capital contributions to, or
investments in, any other Person, except for employee advances made in the
ordinary course of business consistent with past practice;
(g) make or agree to make any new capital expenditures which, individually,
are in excess of $25,000 or, in the aggregate, are in excess of $100,000 or
enter into any commitment for the purchase, lease or use of any real property;
(h) make any Tax election that, individually or in the aggregate, would
reasonably be expected to adversely affect in any material respect the Tax
liability or Tax attributes of the Company or any of its Subsidiaries or settle
or compromise any material income Tax liability;
(i) (A) pay, discharge, settle or satisfy any material claims, liabilities
or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), or Litigation (whether or not commenced prior to the date of this
Agreement) other than (1) the payment of an aggregate of $250,000 in connection
with Litigation or
A-23
(2) the payment, discharge, settlement or satisfaction, in the ordinary course
of business consistent with past practice or in accordance with their terms, of
liabilities recognized or disclosed in the most recent financial statements
included in the Company Filed SEC Documents or incurred in the ordinary course
of business consistent with past practices since the date of such financial
statements, or (B) waive the benefits of, agree to modify in any manner,
terminate, release any Person from or fail to enforce any confidentiality,
standstill or similar Contract to which the Company or any of its Subsidiaries
is a party or of which the Company or any of its Subsidiaries is a beneficiary;
(j) except as required by law or contemplated hereby, enter into, adopt or
amend or terminate any Benefit Plan or any other Contract, plan or policy
involving the Company or its Subsidiaries, and one or more of its directors,
officers or employees, or change the manner in which contributions to any
Benefit Plan are made or the basis on which such contributions are determined;
(k) except for normal increases relating to non-executive employees in the
ordinary course of business consistent with past practice or as required by the
terms of any employment agreement (the existence of which does not constitute a
violation of this Agreement), increase the compensation of any director, officer
or other employee or pay any benefit or amount not required by a Benefit Plan as
in effect on the date of this Agreement to any such Person;
(l) increase the aggregate number of employees of the Company to more than
ten employees/ consultants from the number of employees set forth in Section
3.12(m) of the Company Disclosure Letter;
(m) enter into any operating lease or incur (other than in the ordinary
course of business consistent with past practice) any liability or obligation
not required by GAAP to be recorded on the Company's consolidated balance sheet
at the time of incurrence;
(n) manage its cash, cash equivalents and working capital except in
accordance with past practices (which practices include applying commercially
reasonable efforts to collect receivables and not paying liabilities or other
obligations until they become due and payable);
(o) transfer or license to any Person or entity or otherwise extend, amend
or modify any rights to the Intellectual Property Rights of the Company or its
Subsidiaries other than in the ordinary course of business consistent with past
practices; provided that in no event shall the Company or any of its
Subsidiaries license on an exclusive basis or sell any Intellectual Property
Rights;
(p) enter into or amend any Contract pursuant to which any Person is
granted exclusive marketing, manufacturing or other rights with respect to any
product, service, process or technology of the Company or its Subsidiaries;
(q) enter into any Contract which, if it were in existence on the date of
this Agreement, would be required to be disclosed pursuant to Section 3.9; or
(r) authorize, commit or agree to take any of the foregoing actions.
SECTION 5.2 Advice of Changes. The Company and the Parent shall promptly
advise the other party orally and in writing to the extent it has Knowledge of
(a) any representation or warranty made by it (and, in the case of the Parent,
made by Merger Sub) contained in this Agreement becoming untrue or inaccurate
such that the condition set forth in Section 6.2(a) or Section 6.3(a),
respectively, would not be satisfied, (b) the failure by it (and, in the case of
the Parent, by Merger Sub) to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement or (c) any change or event causing, or which is reasonably likely
to cause, any of the conditions set forth in Article 6 not to be satisfied;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties (or remedies with respect
thereto) or the conditions to the obligations of the parties under this
Agreement.
SECTION 5.3 No Solicitation by the Company.
(a) The Company shall not, nor shall it permit any of its Subsidiaries to,
nor shall it authorize or permit any of its directors, officers or employees or
any investment banker, financial advisor, attorney, accountant or
A-24
other representative retained by it or any of its Subsidiaries to directly or
indirectly through another Person, (i) solicit, initiate, resume or encourage
(including by way of furnishing or disclosing non-public information) any
Takeover Proposal, (ii) participate in any discussions or negotiations regarding
any Takeover Proposal, or (iii) enter into any Acquisition Agreement; provided,
however, that if, at any time prior to the date of the Company Stockholders
Meeting (the "Applicable Period"), the board of directors of the Company (or the
special committee thereof) determines in its good faith judgment, after
consultation with outside legal counsel, that the failure to furnish such
information or participate in such negotiations or discussions would likely
result in a breach of its fiduciary duties to the Company's stockholders under
applicable law, the Company and its representatives may, in response to a
Takeover Proposal with a price greater than the Transaction Value that is
otherwise reasonably likely to lead to a Superior Proposal which was not
solicited by it in violation of this Section 5.3(a), and subject to providing
prior written notice of its decision to take such action to the Parent and
compliance with Section 5.3(c), (x) furnish information with respect to the
Company and its Subsidiaries to any Person making a Takeover Proposal with a
price greater than the Transaction Value that is otherwise reasonably likely to
lead to a Superior Proposal pursuant to a customary confidentiality agreement on
terms at least as restrictive as the Confidentiality Agreement that permits the
disclosures to the Parent required by this Agreement and (y) participate in
discussions or negotiations regarding such Takeover Proposal. For purposes of
this Agreement, "Takeover Proposal" means any inquiry, proposal or offer from
any Person or "group" (as such term is defined in Section 13(d) of the Exchange
Act) relating to any direct or indirect acquisition or purchase of 15% or more
of the assets of the Company and its Subsidiaries, taken as a whole, or 15% or
more of any class or series of equity securities of the Company or any of its
Subsidiaries, any tender offer or exchange offer that if consummated would
result in any Person or "group" (as such term is defined in Section 13(d) of the
Exchange Act) beneficially owning 15% or more of any class or series of equity
securities of the Company or any of its Subsidiaries, or any merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction or the sale or other transfer of all or substantially all
of its assets involving the Company or any of its Subsidiaries, other than the
Transactions.
(b) Neither the board of directors of the Company nor any committee thereof
shall (i) withdraw, modify or supplement, or propose publicly to withdraw modify
or supplement, in a manner adverse to the Parent, the approval or recommendation
by such board of directors or such committee of this Agreement, (ii) approve or
recommend, or propose publicly to approve or recommend, any Takeover Proposal,
or (iii) approve or recommend, or propose to approve or recommend, or execute or
enter into, any letter of intent, agreement in principle, merger agreement,
acquisition agreement, option agreement or other similar agreement or propose
publicly or agree to do any of the foregoing (each, an "Acquisition Agreement")
related to any Takeover Proposal, other than any such agreement entered into
concurrently with a termination pursuant to the next sentence in order to
facilitate such action. Notwithstanding the foregoing, during the Applicable
Period, in response to a Superior Proposal which did not arise out of or was not
related to a breach of Section 5.3(a), the board of directors of the Company (or
the independent committee thereof) may (subject to this and the following
sentence) terminate this Agreement and recommend such Superior Proposal (and
concurrently with or after such termination, if it so chooses, cause the Company
to enter into any Acquisition Agreement with respect to any Superior Proposal),
but only at a time that is during the Applicable Period and is after the fifth
Business Day following the Parent's receipt of written notice advising the
Parent that the board of directors of the Company (or the independent committee
thereof) is prepared to accept a Superior Proposal, specifying the material
terms and conditions of such Superior Proposal and identifying the Person making
such Superior Proposal. For purposes of this Agreement, a "Superior Proposal"
means any proposal made by a third party to acquire, directly or indirectly,
including pursuant to a tender offer, exchange offer, merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction, for consideration consisting of cash and/or securities, more than
50% of the combined voting power of the shares of Company Common Stock then
outstanding or all or substantially all the assets of the Company and otherwise
on terms which the board of directors of the Company determines in its good
faith judgment (after consultation with a financial advisor of nationally
recognized reputation), after considering all terms and conditions of such
proposal, including the likelihood and timing of its consummation, that such
proposal would result in a transaction delivering to the Company's stockholders
superior value, from a financial point of view,
A-25
to the Merger and for which financing, to the extent required, is then committed
or which, in the good faith judgment of the board of directors of the Company
(or the independent committee thereof), is reasonably capable of being obtained
by such third party.
(c) In addition to the obligations of the Company set forth in Sections
5.3(a) and 5.3(b), the Company shall promptly (and no later than 24 hours after
receipt) advise the Parent orally and in writing of any request for information
or of any inquiry with respect to a Takeover Proposal, the material terms and
conditions of such request, inquiry or Takeover Proposal and the identity of the
Person making such request, inquiry or Takeover Proposal. The Company will
promptly keep the Parent informed of the status and details (including
amendments or changes or proposed amendments or changes) of any such request,
inquiry or Takeover Proposal.
(d) Nothing contained in this Agreement shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to the
Company's stockholders if, in the good faith judgment of the board of directors
of the Company (after consultation with outside legal counsel), failure so to
disclose would constitute a breach of its obligations under applicable law.
SECTION 5.4 The Form S-4 and the Proxy Statement; the Stockholders
Meeting.
(a) As soon as practicable following the date of this Agreement, the Parent
and the Company shall prepare, and the Parent shall file with the SEC, the Form
S-4, in which the Proxy Statement will be included as a prospectus. Each of the
Company and the Parent shall use commercially reasonable efforts (including the
preparation of amendments to such documents and the provision of supplemental
information in response to SEC comments) to have the Form S-4 declared effective
under the Securities Act as promptly as practicable after such filing. The
Company will use commercially reasonable efforts to cause the Proxy Statement to
be mailed to its stockholders as promptly as practicable after the Form S-4 is
declared effective under the Securities Act. The Parent shall also take any
action (other than qualifying to do business in any jurisdiction in which it is
not now so qualified or to file a general consent to service of process)
required to be taken under any applicable state securities laws in connection
with the issuance of Parent Common Stock in connection with the Merger and the
Company shall furnish all information concerning the Company and the holders of
capital stock of the Company as may be reasonably requested in connection with
any such action. If at any time prior to the Effective Time any information
relating to the Company or the Parent, or any of their respective affiliates,
officers or directors, should be discovered by the Company or the Parent which
should be set forth in an amendment or supplement to either the Form S-4 or the
Proxy Statement, so that (i) the Form S-4 would not include any misstatement of
a material fact or omit to state a material fact necessary to make the
statements therein not misleading or (ii) the Proxy Statement would not include
any misstatement of a material fact or omit to state any material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, as applicable, the party which discovers such
information shall promptly notify the other parties hereto and an appropriate
amendment or supplement describing such information shall be promptly filed with
the SEC and, to the extent required by law, disseminated to the stockholders of
the Company. No filing of, or amendment or supplement to, or correspondence to
the SEC or its staff with respect to, the Form S-4 or the Proxy Statement
(including documents incorporated therein by reference) will be made by either
the Parent or the Company without providing the other party a reasonable
opportunity to review and comment thereon. The Parent will advise the Company,
promptly after it receives notice thereof, of the time when the Form S-4 has
become effective or any supplement or amendment has been filed, the issuance of
any stop order, the suspension of the qualification of the shares of Parent
Common Stock issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Form S-4 or the
Proxy Statement or comments thereon and responses thereto or requests by the SEC
for additional information. The Company will advise the Parent, promptly after
it receives notice thereof, of any request by the SEC for the amendment of the
Proxy Statement or comments thereon and responses thereto or requests by the SEC
for additional information.
A-26
(b) The Company shall, as soon as practicable following the date of this
Agreement, establish a record date (which will be as soon as practicable
following the date of this Agreement) for, duly call, give notice of, convene
and hold the a meeting of its stockholders (the "Company Stockholders Meeting")
solely for the purpose of obtaining the Company Stockholder Approval. The
Company shall engage a proxy solicitation firm to assist it in attempting to
obtain the requisite vote of its stockholders. Subject to Section 5.3(d), the
Company shall, through its board of directors, recommend to its stockholders the
adoption of this Agreement. Without limiting the generality of the foregoing but
subject to its right to terminate this Agreement pursuant to Section 5.3(b), the
Company agrees that its obligations pursuant to the first sentence of this
Section 5.4(b) shall not be affected by the commencement, public proposal,
public disclosure or communication to the Company of any Takeover Proposal.
SECTION 5.5 Letters of the Company's Accountants. The Company shall use
commercially reasonable efforts to cause to be delivered to the Parent two
letters from the Company's independent public accountants, one dated a date
within two Business Days before the date on which the Form S-4 shall become
effective and one dated a date within two Business Days before the Closing Date,
each addressed to the Parent, in form and substance reasonably satisfactory to
the Parent and customary in scope and substance for comfort letters delivered by
independent public accountants in connection with registration statements
similar to the Form S-4. The Company shall provide all reasonable cooperation to
the Company's independent public accountants to enable them to issue the letters
referred to in this Section 5.5 and shall use all reasonable efforts to cause
them to do so.
SECTION 5.6 Access to Information; Confidentiality. Upon reasonable
notice and subject to the Confidentiality Agreement, dated February 6, 2003,
between the Parent and the Company (the "Confidentiality Agreement"), the
Company shall, and shall cause each of its Subsidiaries to, afford to the Parent
and to its officers, employees, accountants, counsel, financial advisors and
other representatives, reasonable access during normal business hours during the
period prior to the Effective Time to all its properties, books, contracts,
commitments, personnel and records and, during such period, the Company shall,
and shall cause each of its Subsidiaries to, furnish promptly to the Parent (a)
a copy of each report, schedule, registration statement and other document filed
by it during such period pursuant to the requirements of federal or state
securities laws and (b) all other information concerning its business,
properties and personnel as the Parent may reasonably request (including the
Company's outside accountants work papers and the Company's monthly financial
statements). The Company shall not be required to provide access to or disclose
information where such access or disclosure would contravene any law, rule,
regulation, order or decree. No review pursuant to this Section 5.6 shall limit
the Parent's or Merger Sub's reliance on or the enforceability of any
representation or warranty made by the Company herein. The Parent will hold, and
will cause its officers, employees, accountants, counsel, financial advisors and
other representatives and affiliates to hold, any nonpublic information in
accordance with the terms of the Confidentiality Agreement.
SECTION 5.7 Reasonable Efforts.
(a) Prior to the Closing, upon the terms and subject to the conditions of
this Agreement, each of the parties agrees to use commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper or advisable (subject to any applicable laws)
to consummate the Merger and make effective the Merger and the other
Transactions as promptly as practicable including, (i) the preparation and
filing of all forms, registrations and notices required to be filed to
consummate the Merger and the other Transactions and the taking of such actions
as are necessary to obtain any requisite approvals, consents, orders, exemptions
or waivers by any third party or Governmental Entity, and (ii) the satisfaction
of the other parties' conditions to Closing. In addition, no party hereto shall
take any action after the date of this Agreement to materially delay the
obtaining of, or result in not obtaining, any permission, approval or consent
from any Governmental Entity necessary to be obtained prior to Closing.
Notwithstanding any other provision of this Agreement, neither the Company nor
any of its Subsidiaries shall be entitled to (nor shall Parent or any of its
Subsidiaries be required to) divest or hold separate or otherwise take or commit
to take any action that limits the Parent's or the Surviving Corporation's
freedom of action with respect to, or ability to retain, the Company or any of
its Subsidiaries or any material portions thereof or any of the businesses,
product lines, properties or assets of the Company or any of its Subsidiaries,
without the Parent's
A-27
prior written consent (which may be withheld in the Parent's sole and absolute
discretion). Nothing in this Agreement shall require the Parent to commence
Litigation to remove any Restraint issued under any antitrust law.
(b) Prior to the Closing, each party shall promptly consult with the other
parties to this Agreement with respect to, provide any necessary information
with respect to, and provide the other parties (or their respective counsel)
with copies of, all filings made by such party with any Governmental Entity or
any other information supplied by such party to a Governmental Entity in
connection with this Agreement, the Merger and the other Transactions. Each
party hereto shall promptly inform the other of any communication from any
Governmental Entity regarding any of the Transactions. If any party hereto or
Affiliate thereof receives a request for additional information or documentary
material from any such Governmental Entity with respect to any of the
Transactions, then such party shall endeavor in good faith to make, or cause to
be made, as soon as reasonably practicable and after consultation with the other
parties, an appropriate response in compliance with such request. To the extent
that transfers, amendments or modifications of any Company Permits are required
as a result of the execution of this Agreement or consummation of any of the
Transactions, the Company shall, and shall cause the Company Subsidiaries to,
use commercially reasonable efforts to effect such transfers, amendments or
modifications.
(c) In connection with and without limiting the foregoing, the Parent, the
Company and their respective boards of directors shall (i) take all action
necessary to ensure that no takeover statute or similar statute or regulation is
or becomes applicable to this Agreement or any of the Transactions and (ii) if
any takeover statute or similar statute becomes applicable to this Agreement or
any of the Transactions, take all action necessary to ensure the Transactions
are completed as soon as practicable.
(d) Unless the statute of limitations will bar the bringing of such claim
after the termination of this Agreement, no party shall, directly or indirectly,
bring or initiate (including by counterclaim or impleader) any litigation or
other action before a Governmental Entity or arbitration against another party
or involving or affecting their assets.
SECTION 5.8 Employee Matters.
(a) As soon as practicable after the Closing Date (the "Benefits Date"),
the Parent shall provide, or cause to be provided, employee benefit plans,
programs and arrangements to employees of the Company that are the same as those
made generally available to similarly situated non-represented employees of the
Parent who are hired by the Parent after January 1, 2003. From the Effective
Time to the Benefits Date (which the parties acknowledge may occur on different
dates with respect to different plans, programs or arrangements of the Parent),
the Parent shall provide, or cause to be provided, the employee benefit plans,
programs and arrangements of the Company (other than equity-based plans,
programs and arrangements) provided to employees of the Company as of the date
hereof.
(b) With respect to each benefit plan, program, practice, policy or
arrangement maintained by the Parent (the "Parent Plans") in which employees of
the Company participate on the Benefit Date, (i) service with the Company and
its Subsidiaries (or their respective predecessors) prior to the Effective Time
shall be credited against all service and waiting period requirements under the
Parent Plans (provided that such recognition shall not be for the purpose of
determining (A) retirement benefits under the Parent's defined contribution
plans (unless otherwise required by law), (B) any Parent subsidy under the
Parent's retiree health plans) and (C) Parent's sabbatical benefit, (ii) the
Parent Plans shall not provide any pre-existing condition exclusions and (iii)
the deductibles, copayments and out-of-pocket maximums in effect under the
Parent Plans shall be reduced by any deductibles, copayments and out-of-pocket
maximums paid by such individuals under the Company Benefit Plans for the plan
year in which the Effective Time occurs. Unless Parent consents otherwise in
writing, the Company shall take all action necessary to terminate, or cause to
terminate, before the Effective Time, any Benefit Plan that is a 401(k) plan or
other defined contribution retirement plan.
(c) Within a reasonable period of time after the last business day of each
month after the date hereof and on the Closing Date, the Company shall, as and
to the extent necessary, deliver to Parent any additional
A-28
information which Company reasonably believes would affect the determination of
each person who the Company reasonably believes is a "disqualified individual"
(within the meaning of Section 280G of the Code).
(d) Employees of the Company who transfer to the employment of the Parent
or the Surviving Corporation after the Effective Time and meet the eligibility
requirements for participation in the Parent Employee Stock Purchase Plan (the
"Parent ESPP") shall be eligible to begin payroll deductions under that plan as
of the next entry date thereunder beginning after the Effective Time.
SECTION 5.9 Indemnification, Exculpation and Insurance.
(a) The Parent and Merger Sub agree that all rights to indemnification and
exculpation from liabilities for acts or omissions occurring at or prior to the
Effective Time now existing in favor of the current or former directors or
officers of the Company and its Subsidiaries as provided in their respective
certificate of incorporation or bylaws (or comparable organizational documents)
and any indemnification agreements of the Company (as each is in effect on the
date hereof), the existence of which has been disclosed in the Company
Disclosure Letter, shall be assumed by the Parent and the Surviving Corporation,
without further action, as of the Effective Time and shall survive the Merger
and shall continue in full force and effect in accordance with their terms, and
the Parent shall cause the Surviving Corporation to honor all such rights.
(b) If the Surviving Corporation or any of its successors or assigns (i)
consolidates with or merges into any other Person and is not the continuing or
surviving corporation or entity of such consolidation or merger or (ii)
transfers or conveys all or substantially all of its properties and assets to
any Person, or otherwise dissolves the Surviving Corporation, then, and in each
such case, the Parent shall cause proper provision to be made so that the
successors and assigns of the Surviving Corporation assume the obligations set
forth in this Section 5.9.
(c) The Parent shall for a period of not less than six years after the
Effective Time, either (i) maintain the Company's current directors' and
officers' liability insurance covering acts or omissions occurring prior to the
Effective Time ("D&O Insurance") with respect to those Persons who are currently
covered by the Company's directors' and officers' liability insurance policy on
terms with respect to such coverage and amount no less favorable than those of
such policy in effect on the date hereof or (ii) cause to be provided by a
reputable insurance company coverage no less favorable, including with respect
to coverage and amount, to such directors or officers, as the case may be, than
the D&O Insurance, so long as the aggregate premium therefor would not be in
excess of $1.2 million (such amount the "Maximum Premium"). If the existing or
substituted directors' and officers' liability insurance expires, is terminated
or canceled during such six-year period, the Parent will obtain as much D&O
Insurance as can be obtained for the remainder of such period for an aggregate
premium not in excess of the Maximum Premium.
(d) The provisions of this Section 5.9 (i) are intended to be for the
benefit of, and will be enforceable by, each indemnified party, his or her heirs
and his or her representatives and (ii) are in addition to, and not in
substitution for, any other rights to indemnification or contribution that any
such Person may have by contract or otherwise.
SECTION 5.10 Fees and Expenses.
(a) All fees and expenses incurred in connection with the Merger, this
Agreement, the Stockholders Agreement and the Transactions shall be paid by the
party incurring such fees or expenses, whether or not the Merger is consummated,
except that each of the Parent and the Company shall in any event bear and pay
one-half of the costs and expenses incurred in connection with the filing,
printing and mailing of the Form S-4 and the Proxy Statement (including SEC
filing fees).
(b) If this Agreement is terminated pursuant to:
(i) Section 7.1(b)(ii) if the Company or any of its Subsidiaries
enters into an Acquisition Agreement or consummates any Takeover Proposal,
for consideration per share of Company Common Stock equal to or great than
the Transaction Value, within twelve months of such termination of
(changing the 15% amounts referred to in the definitions thereof in Section
5.3(a) to 40% for purposes of
A-29
this Section 5.10(b)), the Company shall, within two Business Days, pay to
the Parent $828,000 (the "Termination Fee") by wire transfer of immediately
available funds;
(ii) Section 7.1(d), the Company shall, within two Business Days of
such termination, pay to the Parent the Termination Fee by wire transfer of
immediately available funds;
(iii) Section 7.1(f), the Company shall, prior to such termination,
pay to the Parent the Termination Fee by wire transfer of immediately
available funds.
The Company acknowledges that the agreements contained in this Section
5.10(b) are an integral part of the Transactions, and that without these
agreements the Parent would not enter into this Agreement; accordingly, if the
Company fails promptly to pay the amount due pursuant to this Section 5.10(b),
and, in order to obtain such payment, the Parent commences a suit which results
in a judgment against the Company for the fee set forth in this Section 5.10(b),
the Company shall pay to the Parent its costs and expenses (including reasonable
attorneys' fees and expenses) in connection with such suit, together with
interest on the amount of the fee at the prime rate of Citibank, N.A. in effect
on the date such payment was required to be made.
SECTION 5.11 Public Announcements. The Parent and the Company will
consult with each other before issuing, and provide each other the opportunity
to review, comment upon and concur with, any press release or other public
statements with respect to the Transactions, the Merger and the Stockholders
Agreement. The parties agree that the initial press release to be issued with
respect to the Transactions shall be in the form heretofore agreed to by the
parties.
SECTION 5.12 Affiliates. The Company shall deliver to the Parent at least
thirty days prior to the Closing Date, a letter identifying all Persons who are,
at the time of such letter, "affiliates" of the Company for purposes of Rule 145
under the Securities Act. The Company shall use commercially reasonable efforts
to cause each such Person to deliver to the Parent at least twenty days prior to
the Closing Date, a written agreement substantially in the form of Exhibit B.
SECTION 5.13 Listing. The Parent shall use commercially reasonable
efforts to cause the Parent Common Stock issuable as part of the Merger
Consideration to be approved for listing on the NASDAQ National Market, subject
to official notice of issuance, as promptly as practicable after the date
hereof, and in any event prior to the Closing Date.
SECTION 5.14 Litigation. The Company shall give the Parent the
opportunity to participate in the defense of any litigation against the Company
and/or its directors relating to the Transactions, this Agreement or the
Stockholders Agreement.
SECTION 5.15 Rights Agreement. The Company's board of directors shall not
after the date of this Agreement, without the prior written consent of the
Parent, (a) waive or amend any provision of the Rights Agreement or (b) take any
action with respect to, or make any determination under, the Rights Agreement,
including redeeming the rights or take any action to facilitate a Takeover
Proposal; provided however, that at any time during the Applicable Period if the
board of directors of the Company (or the special committee thereof) determines
in its good faith judgment, after consultation with outside legal counsel, that
the failure to take such action or make such determination under, waive or amend
the Rights Agreement would likely result in a breach of its fiduciary duties to
the Company's stockholders under applicable law, the Company's board of
directors may take such action or make such determination under, waive or amend
the Rights Agreement.
SECTION 5.16 Obligations of Merger Sub; Voting of Shares.
(a) The Parent shall cause Merger Sub to perform all of its obligations
under this Agreement and in connection with the Transactions.
(b) The Parent shall vote, or cause to be voted, in favor of adoption of
this Agreement, all shares of Company Common Stock owned by the Parent or any of
its Subsidiaries as of the record date (the "Record Date") for the Company
Stockholders Meeting.
A-30
SECTION 5.17 Stockholders Agreement Legend. The Company will inscribe
upon any certificate representing Subject Shares (as defined in the Stockholders
Agreement) tendered by a Stockholder (as defined in the Stockholders Agreement)
in connection with any proposed transfer of any Subject Shares by a Stockholder
in accordance with the terms of the Stockholders Agreement the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
STOCKHOLDERS AGREEMENT DATED AS OF FEBRUARY 26, 2003, AND ARE SUBJECT TO THE
TERMS THEREOF. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE COMPANY";
and the Company will return such certificate containing such inscription to the
Stockholder within three Business Days following the Company's receipt thereof.
ARTICLE 6
CONDITIONS PRECEDENT
SECTION 6.1 Conditions to Each Party's Obligation To Effect the
Merger. The respective obligation of each party to effect the Merger is subject
to the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) The Company Stockholder Approval shall have been obtained.
(b) No judgment, order, decree, statute, law, ordinance, rule or
regulation, entered, enacted, promulgated, enforced or issued by any court or
other Governmental Entity of competent jurisdiction or other legal restraint or
prohibition (collectively, "Restraints") shall be in effect, and there shall not
be pending or threatened any suit, action or proceeding by any Governmental
Entity (i) preventing the consummation of the Merger, (ii) prohibiting or
limiting the ownership or operation by the Company or the Parent and their
respective Subsidiaries of any material portion of the business or assets of the
Company or the Parent and their respective Subsidiaries taken as a whole, or
compelling the Company or the Parent and their respective Subsidiaries to
dispose of or hold separate any material portion of the business or assets of
the Company or the Parent and their respective Subsidiaries, taken as a whole,
as a result of the Merger or any of the other Transactions or the Stockholders
Agreement or (iii) which otherwise would reasonably be expected to have a
Material Adverse Effect on the Company or the Parent, as applicable; provided,
however, that each of the parties shall have used commercially reasonable
efforts to prevent the entry of any such Restraints and to appeal as promptly as
possible any such Restraints that may be entered.
(c) The Form S-4 shall have become effective under the Securities Act and
shall not be the subject of any stop order or proceedings seeking a stop order.
(d) The shares of Parent Common Stock issuable to the Company's
stockholders as contemplated by this Agreement shall have been approved for
listing on The NASDAQ National Market, subject to official notice of issuance.
SECTION 6.2 Conditions to Obligations of the Parent and Merger Sub. The
obligation of the Parent and Merger Sub to effect the Merger is further subject
to satisfaction or waiver of the following conditions:
(a) The representations and warranties of the Company set forth herein
shall be true and correct as of the date hereof and as of the Effective Time,
with the same effect as if made at and as of such time (except to the extent
expressly made as of an earlier date, in which case as of such date), except
where the failure of such representations and warranties to be so true and
correct (without giving effect to any limitation as to "materiality" or
"Material Adverse Effect" set forth therein) does not have, and would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on the Company. The Parent shall have received a certificate
signed on behalf of the Company by the chief executive officer of the Company to
such effect.
A-31
(b) The Company shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date. The Parent shall have received a certificate signed on behalf
of the Company by the chief executive officer of the Company to such effect.
(c) There shall have been no Material Adverse Change in the Company since
the date of this Agreement that shall not have been cured by the Closing Date,
and the Parent shall have received a certificate signed on behalf of the Company
by the chief executive officer and the chief financial officer of the Company to
such effect.
(d) The Parent shall have received the letters described in Section 5.5
from the Company's independent public accountants.
SECTION 6.3 Conditions to Obligations of the Company. The obligation of
the Company to effect the Merger is further subject to satisfaction or waiver of
the following conditions:
(a) The representations and warranties of the Parent and Merger Sub set
forth herein shall be true and correct as of the date hereof and as of the
Effective Time, with the same effect as if made at and as of such time (except
to the extent expressly made as of an earlier date, in which case as of such
date), except where the failure of such representations and warranties to be so
true and correct (without giving effect to any limitation as to "materiality" or
"Material Adverse Effect" set forth therein) does not have, and would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on the Parent. The Company shall have received a certificate
signed on behalf of the Parent by an authorized signatory of the Parent to such
effect.
(b) The Parent and Merger Sub shall have performed in all material respects
all obligations required to be performed by them under this Agreement at or
prior to the Closing Date. The Company shall have received a certificate signed
on behalf of the Parent by an authorized signatory of the Parent to such effect.
(c) There shall have been no Material Adverse Change in the Parent since
the date of this Agreement that shall not have been cured by the Closing Date,
and the Company shall have received a certificate signed on behalf of the
Company by an authorized signatory of the Parent to such effect.
ARTICLE 7
TERMINATION
SECTION 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after the Company Stockholder
Approval:
(a) by mutual written consent of the Parent, Merger Sub and the Company;
(b) by either the Parent or the Company:
(i) if the Merger shall not have been consummated by June 30, 2003,
but the right to terminate this Agreement pursuant to this Section
7.1(b)(i) shall not be available to any party whose failure to perform any
of its obligations under this Agreement results in the failure of the
Merger to be consummated by such time;
(ii) if the Company Stockholder Approval shall not have been obtained
at the Company Stockholders Meeting duly convened therefor (including at
any adjournment or postponement thereof);
(iii) if any Restraint having any of the effects set forth in Section
6.1(b) shall be in effect and shall have become final and nonappealable,
but the party seeking to terminate this Agreement pursuant to this Section
7.1(b)(iii) shall have used commercially reasonable efforts to prevent the
entry of and to remove such Restraint;
(c) by the Parent, if the Company shall have breached or failed to perform
in any material respect any of its representations, warranties, covenants or
other agreements contained in this Agreement, which breach or failure to perform
(i) would give rise to the failure of a condition set forth in Section 6.2(a) or
6.2(b), and
A-32
(ii) is incapable of being or has not been cured by the Company within 30
calendar days following its receipt of written notice from the Parent of such
breach or failure to perform;
(d) by the Parent, if (i) there shall be a breach of Section 5.3 that
results in a Superior Proposal being made or (ii) the Company's board of
directors (or any committee thereof) shall have (whether or not permitted by
this Agreement) modified, withdrawn or supplemented their recommendation of this
Agreement and the Transactions in a manner adverse to the Parent;
(e) by the Company, if the Parent shall have breached or failed to perform
in any material respect any of its representations, warranties, covenants or
other agreements contained in this Agreement, which breach or failure to perform
(i) would give rise to the failure of a condition set forth in Section 6.3(a) or
6.3(b), and (ii) is incapable of being or has not been cured by the Parent
within 30 calendar days following its receipt of written notice from the Company
of such breach or failure to perform;
(f) by the Company in accordance with Section 5.3(b); provided that, in
order for the termination of this Agreement pursuant to this Section 7.1(f) to
be deemed effective, the Company shall have complied with all provisions of
Section 5.3, including the notice provisions therein, and with applicable
requirements of Section 5.10, including the payment of the Termination Fee; or
(g) by the Company, within five Business Days following the Record Date, if
on or before the Record Date, the Parent has not exercised the option in full to
purchase shares of Company Common Stock granted under the Stock Option
Agreement, dated as of February 13, 2003, by and between the Company and the
Parent.
SECTION 7.2 Effect of Termination. If this Agreement is terminated by
either the Company or the Parent as provided in Section 7.1, this Agreement
shall forthwith become void and have no effect, without any liability or
obligation on the part of the Parent or the Company, except to the extent that
such termination results from the willful and material breach by a party of any
of its representations, warranties, covenants or agreements in this Agreement.
The Confidentiality Agreement, the final sentence of Section 5.6, Section 5.10,
this Section 7.2 and Article 8 shall survive any termination of this Agreement.
SECTION 7.3 Procedure for Termination. If a party has a right to
terminate this Agreement under Section 7.1, it may only exercise that right by
delivering notice to the other parties of such termination, stating the
subsection of Section 7.1 providing the basis for such termination and paying
any required fees.
ARTICLE 8
GENERAL PROVISIONS
SECTION 8.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
SECTION 8.2 Amendment. This Agreement may be amended by the parties at
any time prior to the Effective Time; provided that after receipt of the Company
Stockholder Approval, there shall not be made any amendment that by law requires
further approval by the stockholders of the Company without the further approval
of such stockholders. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties.
SECTION 8.3 Extension; Waiver. At any time prior to the Effective Time, a
party may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties of the other parties contained in this Agreement
or in any document delivered pursuant to this Agreement or (c) waive compliance
by the other party with any of the agreements or conditions contained in this
Agreement. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party. The failure of
A-33
any party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.
SECTION 8.4 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied (which is confirmed) or sent by
internationally recognized overnight courier (providing proof of delivery) to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to the Parent or Merger Sub, to:
Electronics for Imaging, Inc.
303 Velocity Way
Foster City, California 94404
Telecopy No.: 650.357.3776
Attention: General Counsel
With a copy (which shall not constitute notice) to:
Richards Layton & Finger P.A.
One Rodney Square
Wilmington, Delaware 19899-0551
Telecopy No.: 302.784.7035
Attention: Gregory V. Varrallo; and
(b) If to the Company, to:
Printcafe Software, Inc.
Forty 24th Street
Pittsburgh, Pennsylvania 15222
Telecopy No.: 412.456.1151
Attention: Chief Executive Officer
With copies (which shall not constitute notice) to:
Potter Anderson & Corroon LLP
1513 North Market Street
Wilmington, Delaware 19801
Telecopy No.: 302.778.6029
Attention: Michael B. Tumas; and
Morgan, Lewis & Bockius LLP
One Oxford Centre, Thirty Second Floor
Pittsburgh, Pennsylvania 15219
Telecopy No.: 412.560.3399
Attention: Kimberly A. Taylor
SECTION 8.5 Definitions. For purposes of this Agreement:
(a) an "Affiliate" of any Person means another Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first Person, where "Control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management policies of a Person, whether through the ownership
of voting securities, by contract, as trustee or executor, or otherwise.
(b) "Business Day" means any day other than Saturday, Sunday or any other
day on which banks are legally permitted to be closed in New York.
(c) "Contract" means any written, oral, electronic or other contract,
lease, license, arrangement, commitment, undertaking or understanding (whether
or not defenses exist to enforceability)
A-34
(d) "Knowledge" of any Person that is not an individual means the actual
knowledge of such Person's executive officers after reasonable inquiry.
(e) "Material Adverse Change" or "Material Adverse Effect" means, when used
in connection with the Company or the Parent, any change, effect, event,
occurrence, condition or development or state of facts that (i) is or would
reasonably be expected to be materially adverse to the business, assets or
results of operations or condition (financial or other) of such party and its
Subsidiaries, taken as a whole, or (ii) prevents or materially delays the
consummation of the Merger or any other Transactions, in each case, other than
any change, effect, event, occurrence, condition or development or state of
facts (A) relating to the U.S. economy in general, (B) relating to the industry
in which such party operates in general (and not having a materially
disproportionate effect on such party relative to most other industry
participants), (C) resulting from the announcement or pendency of the
Transactions or (D) in respect of decreases in such party's stock price
(provided that any effect described in clauses (A), (B) or (C) is direct and
that the party claiming such effect shall have the burden of proving such direct
effect); provided however, in the case of the Company, none of (x) the
acceleration of the maturity date of any of the Company's existing indebtedness,
(y) the delisting of the Company Common Stock from the Nasdaq National Market or
(z) the inclusion of a "going concern" or similar qualification in the audit
opinion delivered by the Company's auditors in connection with their report on
the Company's financial statements for the year ended December 31, 2002 shall
constitute a Material Adverse Effect or a Material Adverse Change.
(f) "Person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity.
(g) a "Subsidiary" of any Person means another Person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its board of directors or
other governing body (or, if there are no such voting interests, 50% or more of
the equity interests of which) is owned directly or indirectly by such first
Person.
SECTION 8.6 Construction and Interpretation. When a reference is made in
this Agreement to a section or article, such reference shall be to a section or
article of this Agreement unless otherwise clearly indicated to the contrary.
Whenever the word "include," "includes" or "including" is used in this Agreement
they shall be deemed to be followed by the words "without limitation." The words
"hereof," "herein" and "herewith" and words of similar import shall, unless
otherwise stated, be construed to refer to this Agreement as a whole and not to
any particular provision of this Agreement, and article, section, paragraph,
exhibit and schedule references are to the articles, sections, paragraphs,
exhibits and schedules of this Agreement unless otherwise specified. The plural
of any defined term shall have a meaning correlative to such defined term, and
words denoting any gender shall include all genders and the neuter. Where a word
or phrase is defined herein, each of its other grammatical forms shall have a
corresponding meaning. A reference to any party to this Agreement or any other
agreement or document shall include such party's successors and permitted
assigns. A reference to any legislation or to any provision of any legislation
shall include any modification, amendment or re-enactment thereof, any
legislative provision substituted therefor and all rules, regulations and
statutory instruments issued thereunder or pursuant thereto. If there is an
ambiguity or a question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties, and no presumption or burden
of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement. Each provision of this Agreement
shall be given full separate and independent effect. Although the same or
similar subject matters may be addressed in different provisions of this
Agreement, the parties intend that, except as expressly provided in this
Agreement, each such provision be read separately, be given independent
significance and not be construed as limiting any other provision in this
Agreement (whether or not more general or more specific in scope, substance or
context). No prior draft of this Agreement nor any course of performance or
course of dealing shall be used in the interpretation or construction this
Agreement.
SECTION 8.7 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered (whether delivered by telecopy or
otherwise) one and the same agreement and shall
A-35
become effective when one or more counterparts have been signed by each of the
parties and delivered to the other parties.
SECTION 8.8 Entire Agreement; No Third-Party Beneficiaries. This
Agreement (including the documents and instruments referred to herein) (a)
constitutes the entire agreement, and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement (including the Exclusivity Letter dated
February 12, 2003) and (b) except for the provisions of Section 5.9, are not
intended to confer upon any Person, other than the parties, any rights or
remedies.
SECTION 8.9 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to any other choice of law or conflict of law provision or rule (whether
of the State of New York or otherwise) that would cause the application of the
laws of any jurisdiction, other than the State of New York, except to the extent
that the DGCL is mandatorily applicable to the Merger; provided, however, that
the laws of the State of Delaware shall govern the relative rights, obligations,
powers, duties and other internal affairs of each party and its board of
directors.
SECTION 8.10 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties hereto without the
prior written consent of the other parties. Any assignment in violation of the
preceding sentence shall be void. Subject to the preceding two sentences, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
SECTION 8.11 Enforcement. The parties agree that irreparable damage would
occur if any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of competent
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity. In addition, each of the parties (a) consents to
submit itself to the personal jurisdiction of the Court of Chancery of the State
of Delaware of and for the County of New Castle if any dispute arises out of
this Agreement or any of the Transactions; provided that if there is no
equitable subject matter jurisdiction in the Court of Chancery, each party
consents to submit itself to the personal jurisdiction of such other federal or
state court within the State of Delaware having subject matter jurisdiction over
such dispute, (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from the Court of
Chancery (or such other court) and (c) agrees that it will not bring any action
relating to this Agreement or any of the Transactions in any court other than
the Court of Chancery of the State of Delaware of and for the County of New
Castle; provided, that if the Court of Chancery declines to exercise equitable
jurisdiction over any such action (or any part thereof), then each party agrees
that it will transfer any such action (or part thereof) only to, or recommence
any such action (or part thereof), only in such other federal or state court
within the State of Delaware having subject matter jurisdiction over such
dispute. EACH OF PARENT, MERGER SUB, AND THE COMPANY IRREVOCABLY AND
UNCONDITIONALLY WAIVE ANY RIGHT IT MAY HAVE 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, THE NEGOTIATION OR ENFORCEMENT
HEREOF OR THE TRANSACTIONS.
SECTION 8.12 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. If the final judgment of a court
of competent jurisdiction or other authority declares that any term or provision
hereof is invalid, void or unenforceable, the parties agree that the court
making such determination shall have the power to and shall, subject to the
discretion of such court, reduce the scope, duration, area or applicability of
the term or provision, to delete specific words or phrases, or to replace any
invalid, void or unenforceable term or provision with a term or provision that
is valid and enforceable and that comes closest to expressing the intention of
the invalid or unenforceable term or provision.
A-36
Each of the Parent, Merger Sub and the Company has caused this Agreement to
be duly executed and delivered as of the date first written above.
ELECTRONICS FOR IMAGING, INC.
By: /s/ GUY GECHT
------------------------------------
Name: Guy Gecht
Title: Chief Executive Officer
STRATEGIC VALUE ENGINEERING, INC.
By: /s/ JOHN RITCHIE
------------------------------------
Name: John Ritchie
Title: Vice President
PRINTCAFE SOFTWARE, INC.
By: /s/ MARC OLIN
------------------------------------
Name: Marc Olin
Title: Chief Executive Officer
A-37
ANNEX B
[UBS WARBURG LLC LETTERHEAD]
February 25, 2003
Special Committee of the Board of Directors
Board of Directors
Printcafe Software, Inc.
Forty 24th Street
Pittsburgh, Pennsylvania 15222
Members of the Special Committee and the Board of Directors:
We understand that Printcafe Software, Inc., a Delaware corporation (the
"Company"), is considering a transaction (the "Transaction") whereby Electronics
for Imaging, Inc., a Delaware corporation ("Parent"), will acquire the Company.
Pursuant to the terms of the Agreement and Plan of Merger, to be dated as of
February 26, 2003 (the "Merger Agreement"), by and among the Company, Parent and
Strategic Value Engineering, Inc., a Delaware corporation ("Merger Sub") and a
wholly owned subsidiary of the Parent, among other things, (i) Merger Sub will
merge with and into the Company (the "Merger"), and (ii) in connection with the
Merger, each issued and outstanding share of common stock, par value $0.0001 per
share (the "Company Common Stock"), of the Company (other than Dissenting Shares
(as defined in the Merger Agreement) and shares, if any, owned by the Company,
Merger Sub or Parent) will be converted into the right to receive either (A)
$2.60 in cash, without interest (the "Cash Consideration"), or (B) a number of
shares of common stock, par value $.01 per share (the "Parent Common Stock"), of
Parent equal to the quotient obtained by dividing $2.60 by the Closing Parent
Share Value (as defined in the Merger Agreement)(the "Stock Consideration"). The
Cash Consideration and the Stock Consideration are referred to herein as the
"Merger Consideration." The Merger Agreement provides the holders of Company
Common Stock with the ability to elect to receive the Merger Consideration
either in the form of the Cash Consideration or the Stock Consideration. The
terms and conditions of the Transaction are more fully set forth in the Merger
Agreement.
You have requested our opinion as to the fairness from a financial point of
view to the holders of Company Common Stock (other than Parent and its
affiliates) of the Merger Consideration to be received by such holders in the
Merger. Our opinion addresses the aggregate value to be received by holders of
the Company Common Stock as a whole, without regard to the individual's size of
holdings, and we are not opining on the particular situations of specific
shareholders, including Creo Inc. and its affiliates and those shareholders
distinguished by size of position or other factors.
UBS Warburg LLC has acted as financial advisor to the Special Committee of
the Board of Directors of the Company in connection with the Transaction. UBS
Warburg LLC will receive a fee from the Company for its services, a significant
portion of which is contingent upon the consummation of the Transaction and a
portion of which is payable upon delivery of this opinion. In the past, UBS
Warburg LLC and its predecessors have provided investment banking services to
the Company and received customary compensation for the rendering of such
services, including acting as lead manager for the Company's initial public
offering in June 2002. In the ordinary course of business, UBS Warburg LLC, its
successors and affiliates may trade or have traded securities of the Company,
Parent and/or Creo Inc. for their own accounts and the accounts of their
customers and, accordingly, may at any time hold a long or short position in
such securities.
Our opinion does not address the Company's underlying business decision to
effect the Transaction or the Merger or constitute a recommendation to any
shareholder of the Company as to how such shareholder should vote with respect
to the Merger Agreement or any other matter. We have not been asked to, nor do
we offer any opinion as to the material terms of the Merger Agreement or the
form of the Transaction. We express no opinion as what the value of Parent
Common Stock will be when issued pursuant to the Merger Agreement or the prices
at which it will trade in the future. In addition, we express no opinion as to
whether certain holders
B-1
of significant numbers of shares of Company Common Stock could sell such shares
for more consideration per share than the Merger Consideration in privately
negotiated transactions. In rendering this opinion, we have assumed, with your
consent, that the final executed form of the Merger Agreement does not differ in
any material respect from the draft that we have examined, and that the Company,
Parent and Merger Sub will comply with all the material terms of the Merger
Agreement. At your request, we have contacted third parties to solicit
indications of interest in a possible transaction with the Company and held
discussions with certain of these parties prior to the date hereof.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to the Company and Parent, (ii) reviewed the reported prices and
trading activity for the Company Common Stock and the Parent Common Stock, (iii)
reviewed certain internal financial information and other data relating to the
business and financial prospects of the Company, including estimates and
financial forecasts for fiscal 2003 prepare by management of the Company, that
were provided to us by the Company and not publicly available, (iv) reviewed
certain publicly available research analysts' estimates of Parent's future
performance, (v) conducted discussions with members of the senior management of
the Company concerning the business and financial prospects of the Company, (vi)
reviewed publicly available financial and stock market data with respect to
certain other companies in lines of business we believe to be generally
comparable to those of the Company and Parent, (vii) reviewed publicly available
financial data with respect to certain other transactions in lines of business
we believe generally comparable to those of the Company, (viii) reviewed drafts
of the Merger Agreement, and (ix) conducted such other financial studies,
analyses, and investigations, and considered such other information as we deemed
necessary or appropriate.
In addition, in connection with our review, with your consent, we have not
assumed any responsibility for independent verification of any of the
information reviewed by us for the purpose of this opinion and have, at your
direction, relied on such information being complete and accurate in all
material respects. In addition, at your direction, we have not made any
independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of the Company or Parent, nor have we been furnished
with any such evaluation or appraisal. With respect to the financial forecasts
and estimates for fiscal 2003 provided to us by the Company and referred to
above, we have assumed, at your direction, that they have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of the Company as to future performance of the
Company. Our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration to be received by the holders of Company
Common Stock (other than Parent and its affiliates) in the Merger is fair, from
a financial point of view, to such holders.
Very truly yours,
UBS Warburg LLC
B-2
ANNEX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SECTION 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 sec. 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 sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
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 sec. 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
sec.sec. 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 sec. 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
(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 subsection (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 such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder'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 stockholder's
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 sec. 228
or sec. 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.
C-2
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court
of Chancery demanding a determination of the value of the stock of all
such stockholders. Notwithstanding the foregoing, at any time within 60
days after the effective date of the merger or consolidation, any
stockholder shall have the right to withdraw such stockholder's 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 such stockholder's
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
that 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 such
stockholder's certificates of stock to the Register in Chancery, if such
is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal
rights under this section.
C-3
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple
or compound, as the Court may direct. Payment shall be so made to each
such stockholder, in the case of holders of uncertificated stock
forthwith, and the case of holders of shares represented by certificates
upon the surrender to the corporation of the certificates representing
such stock. The Court's decree may be enforced as other decrees in the
Court of Chancery may be enforced, whether such surviving or resulting
corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the
circumstances. Upon application of a stockholder, the Court may order
all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorney's fees and the fees and expenses of experts, to be
charged pro rata against the value of all the shares entitled to an
appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded 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 such
stockholder's 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
PROXY
PRINTCAFE SOFTWARE, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Marc D. Olin and Joseph J. Whang, or either
of them, as proxies, with full power of substitution, to vote all shares of
common stock which the undersigned is entitled to vote at a Special Meeting of
Stockholders of Printcafe Software, Inc. to be held on , 2003, or at
any postponements or adjournments thereof, as specified on the other side, and
to vote in his discretion on such other business as may properly come before the
meeting and any adjournments thereof.
PLEASE PROMPTLY PLACE YOUR VOTE
(SEE REVERSE SIDE FOR INSTRUCTIONS)
PRINTCAFE SOFTWARE, INC.
PLEASE MARK YOUR VOTE IN THE BOX IN THE FOLLOWING MANNER
USING DARK INK ONLY. [X]
The Board of Directors recommends a vote FOR Items 1 and 2.
1. Adoption of the Agreement and Plan of Merger, dated as of February ,
2003, by and among Electronics for Imaging, Inc., Strategic Value Engineering,
Inc. and Printcafe Software, Inc.
[ ] For [ ] Against [ ] Abstain
2. Granting proxies discretionary authority.
[ ] For [ ] Withheld
--------------------------------------------
SIGNATURE DATE
--------------------------------------------
SIGNATURE (IF HELD JOINTLY) DATE
Note: Please sign as name appears on this proxy. Joint owners should each
sign. When signing as attorney, executor, trustee or guardian, please give full
title.
FOLD AND DETACH HERE
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the General Corporation Law of the State of Delaware,
Electronics for Imaging, Inc., a Delaware corporation ("EFI"), has broad powers
to indemnify its directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933 (the
"Securities Act"). EFI's Amended and Restated Certificate of Incorporation
requires EFI to indemnify its directors and officers to the fullest extent
permitted by Delaware law. EFI's Amended and Restated Bylaws require EFI to
indemnify any persons by reason of the fact that he or she is or was a director,
officer, employee or agent of EFI, or is or was serving at the request of EFI,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he or she acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of EFI
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his or her conduct was unlawful; provided that if an action or suit
is by or in the right of EFI against such director, officer, employee or agent
of EFI and such person is adjudged to be liable to EFI then EFI shall only
indemnify such person to the extent that the court in which such action or suit
is brought shall have determined that such person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
EFI has entered into indemnity agreements with each of its directors and
executive officers. Such indemnity agreements contain provisions which are in
some respects broader than the specific indemnification provisions contained in
Delaware law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger, dated as of February 26, 2003,
by and among EFI, Strategic Value Engineering, Inc. and
Printcafe Software, Inc.(1)
5.1 Opinion of Richards Layton & Finger P.A.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Richards Layton & Finger P.A. (contained in
Exhibit 5.1)
24.1 Power of Attorney*
99.1 Consent of UBS Warburg LLC*
99.2 Form of Election
* Previously filed.
(1) Incorporated by reference from Exhibit 10 to Amendment No. 2 to the Schedule
13D filed by EFI with the Securities and Exchange Commission (the
"Commission") on February 26, 2003.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedule II -- Valuation and Qualifying Accounts is incorporated by
reference from EFI's Annual Report on Form 10-K (File No. 0-18805) for the year
ended December 31, 2002.
(c) REPORTS, OPINIONS OR APPRAISALS.
The opinion of UBS Warburg LLP is included as Annex B to the proxy
statement-prospectus that forms a part of this registration statement.
II-1
ITEM 22. UNDERTAKINGS.
EFI hereby undertakes:
(1) to file during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement: (x) to include
any prospectus required by Section 10(a)(3) of the Securities Act; (y) to
reflect in the prospectus any facts or events arising after the effective
date of this registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) any deviation from the
low or high end of the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent no more
than a twenty percent change in the maximum aggregate offering price set
forth in "Calculation of the Registration Fee" table in the effective
Registration Statement; (z) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement; provided however that paragraphs (1)(x) and (1)(y)
do not apply if the information required to be included in a post effective
amendment by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by EFI pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that
are incorporated by reference in this registration statement.
(2) that, for purposes of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the
termination of the offering.
(4) that, for purposes of determining any liability under the
Securities Act, each filing of EFI's annual report pursuant to Section
13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in this registration
statement shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(5) to respond to requests for information that is incorporated by
reference into the proxy statement/prospectus pursuant to Item 4, 10(b),
11, or 13 of this form, within one business day of receipt of such request,
and to send the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of this registration statement through the
date of responding to the request.
(6) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in this registration statement
when it became effective.
(7) insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of EFI pursuant to the foregoing provisions, or otherwise, EFI has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by EFI of expenses incurred or paid by
a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, EFI will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act, EFI has duly caused
this amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Foster City, State of California, on June 25, 2003.
ELECTRONICS FOR IMAGING, INC.
By: /s/ JOSEPH CUTTS
------------------------------------
Joseph Cutts
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this registration
statement has been signed below by the following persons in the capacities and
on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
* Director June 25, 2003
------------------------------------------------
Gill Cogan
/s/ JOSEPH CUTTS Chief Financial Officer (and June 25, 2003
------------------------------------------------ Principal Accounting Officer)
Joseph Cutts
* Director June 25, 2003
------------------------------------------------
Jean Louis Gassee
* Chief Executive Officer and June 25, 2003
------------------------------------------------ Director
Guy Gecht
* Director June 25, 2003
------------------------------------------------
James S. Greene
* Director June 25, 2003
------------------------------------------------
Dan Maydan
* President, Chief Operating Officer June 25, 2003
------------------------------------------------ and Director
Fred Rosenzweig
* Director June 25, 2003
------------------------------------------------
Thomas I. Unterberg
*By: /s/ JOSEPH CUTTS
------------------------------------------------
Attorney-in-fact
II-3
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger, dated as of February 26, 2003,
by and among EFI, Strategic Value Engineering, Inc. and
Printcafe Software, Inc.(1)
5.1 Opinion of Richards Layton & Finger, P.A.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Richards Layton & Finger P.A. (contained in
Exhibit 5.1)
24.1 Power of Attorney*
99.1 Consent of UBS Warburg LLC*
99.2 Form of Election
---------------
* Previously filed.
(1) Incorporated by reference from Exhibit 10 to Amendment No. 2 to the Schedule
13D filed by EFI with the SEC on February 26, 2003.
II-4