February 14, 2003 -- EFI (NASDAQ: EFII) has thrown down the gauntlet! Creo’s (NASDAQ: CREO) January 23 offer to acquire all outstanding shares of Printcafe (NASDAQ: PCAF) expired February 7, though no official withdrawal has been published, and Printcafe announced yesterday that three agreements are in place with EFI: - 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. - Standby credit facility in the amount of $11 million plus a working capital facility that would provide up to an additional $3 million. - 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. These agreements are all connected to 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. That Would be Creo While Printcafe can respond to a “bona fide written offer” superior to EFI’s proposal, the agreement that Printcafe now holds with EFI means that Printcafe will not: - Solicit any takeover proposal - Participate in any discussions or negotiate regarding any takeover proposal - Enter into any merger agreement, acquisition agreement, option or similar agreement with a third party Creo’s letter to Printcafe’s Board of Directors, dated January 23, said “our offer will remain open until 5 pm, Pacific Time, on February 7, 2003, and will thereupon expire if we have not entered into a definitive acquisition agreement with you.” Nothing has been announced that an agreement has been reached or the offer withdrawn. Debt to Iris Graphics, Inc.? While Printcafe has not yet filed their 10K (Annual Report) with the SEC, during their fourth quarter earnings call on February 4 the company did describe their current debt as $20.7 million, with balloon payments of about $14.5 million due in January 2004. The earnings call did not identify to whom the debt is owed, however, the company’s third quarter 10Q, filed in October 2002, described an amendment to the June 10, 2002, credit agreement with Iris Graphics, a subsidiary of CREO since 1999. That amendment resulted in a remaining balance of $11,800,000 due in one installment on January 2, 2004. The loan from Iris Graphics is particularly concerning as the obligation was “secured by substantially all of Printcafe’s tangible and intangible assets.” If Iris Graphics (Creo) chooses to call in this loan, and Printcafe cannot pay the debt, Iris Graphics could proceed against the collateral. That is, Iris Graphics would own Printcafe “lock, stock, and barrel!” EFI’s agreement is to provide Printcafe up to $11 Million “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.” Here It Is – The Key Clause If Iris Graphics/Creo does call in their loan, and EFI does loan Printcafe $11 million, then EFI’s loan to Printcafe becomes due June 30, 2003, unless a “business combination” with EFI is completed by that date. Options – Creo’s Majority Could be a Minority Printcafe has also granted EFI an option to purchase up to 2,126,574 shares of Printcafe common stock at $2.60 per share. Assuming there is no breach in EFI’s credit agreement, the company may exercise the option at any time. The option is in place until December 31, 2007. The 2,126,574 million shares that EFI has the option to purchase are new shares, not currently issued shares. If EFI elects to purchase those shares, the total outstanding Printcafe shares would increase to up to 12,759,451 million. EFI would hold 16.7% and Creo’s holding would drop to 45.4%. Printcafe must buy back the option shares from EFI, under the following conditions: - Default under the Standby Letter Agreement, - Any person or group (other than EFI, any subsidiary of EFI, or Creo, Inc.) that has acquired or has the right to acquire beneficial ownership of 50% or more of the then outstanding shares of Printcafe Common Stock. - The consummation of any of the following transactions: 1.) A consolidation with or merger into any person, other than EFI or one of its subsidiaries, where Printcafe is not the continuing or surviving corporation of the consolidation or merger. 2.) A consolidation or merger with any person, other than EFI or one of its subsidiaries, 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 Printcafe common stock are changed into or exchanged for stock or other securities of Printcafe or any other person or cash or any other property 3.) The sale or other transfer of all or substantially all of Printcafe's assets to any person, other than EFI or one of its subsidiaries. Still Unknown Below, we have listed some of the items that remain to be resolved. - Has Creo’s offer to acquire the remaining outstanding shares of Printcafe for $1.30 been officially withdrawn? - Will the agreement to acquire the Seligman shares close on February 24 as scheduled? - Will Iris Graphics call in its loan to Printcafe? - Will Printcafe need the loan from EFI to pay off the Iris Graphics loan, and protect its assets – tangible and intangible? - Will EFI exercise its options and acquire 2,126,574 shares of Printcafe stock, reducing Creo’s majority holding to 45.4%? With all the complicated agreements, the bottom line is that the highest offer on the table is still $2.60 per share. Will anyone else enter with a better offer? These and other questions are still unanswered and much of this will unfold in the coming weeks. We hope to know more soon. Don’t change that dial! See our special Printcafe Watch page. Search the Archive: Printcafe, EFI or Creo. Stock Activity: Printcafe, EFI or Creo. - Compare All Three - - - The Poison Pill? Printcafe’s Shareholder Rights Plan February 14, 2003 -- Yesterday, Printcafe announced the adoption of a shareholder rights plan “designed to assure that all stockholders of Printcafe receive fair and equal treatment in the event of any sale or proposed takeover of Printcafe and to guard against partial tender offers, open market accumulations and other tactics designed to gain control of Printcafe without paying all stockholders a fair price or through other means that otherwise treat stockholders unfairly.” An Interesting Item… On January 23, 2003 the day after Creo made the announcement to acquire Printcafe, WhatTheyThink published a special report entitled Printcafe Software and Creo: This one may take some time, in which the following paragraph appeared: “On November 14, 2002, Creo announced its board of directors adopted a shareholder rights plan. The plan will provide the Creo board of directors and shareholders with more time to fully consider any unsolicited take-over bid. It will also provide the board with more time to pursue, if appropriate, other alternatives to maximize shareholder value. Printcafe has no such shareholder rights plan.” Now they do! Poison Pill A shareholder rights plan – often referred to as a “Poison Pill” – is designed to give the Board of Directors more time to ensure that shareholder rights are protected. So what exactly is a “poison pill?” According to the Financial Glossary on Yahoo! Finance, a “poison pill” is an anti-takeover device that gives a prospective acquiree's (that would be Printcafe’s) shareholders the right to buy shares of the firm or shares of anyone who acquires the firm at a deep discount to their fair market value. Named after the cyanide pill that secret government agents are said to be instructed to swallow if capture is imminent. Two other terms that may be of interest are “takeover” and “tender offer.” Takeover is a general term referring to transfer of control of a firm from one group of shareholders to another group of shareholders. This change of control may be through a friendly acquisition or an unfriendly, hostile bid. A hostile takeover (generally with the aim of replacing current existing management) is usually attempted through a public tender offer, which is made publicly and directly to a firm's shareholders to buy their stock at a price well above the current market price. Drilling Down Dividend distribution “A Special Committee of the Printcafe Board of Directors approved the declaration of a dividend distribution of one Right on each outstanding share of its Common Stock.” Translation: While dividends are generally distributed as cash or additional shares, in this case the dividend is a “Right” or privilege granted to shareholders of a corporation to subscribe to shares of a new issue of common stock before it is offered to the public. The right also entitles the holder to buy the new common stock below the public offering price. Exercise of Rights “The Rights become exercisable if a Person or group of affiliated or associated Persons hereafter acquires beneficial ownership of 15 percent or more of the outstanding shares of Common Stock and other voting securities of Printcafe or announces a tender offer or exchange offer for 15 percent or more of the outstanding Voting Securities.” Translation: The Printcafe board can “exercise” or implement the “Right” when someone acquires or announces an offering to acquire 15% or more of the outstanding Printcafe shares. Redemption “The Board of Directors will be entitled to redeem the Rights at $.001 per Right at any time before any such Person or group hereafter acquires beneficial ownership of 15% or more of the outstanding Voting Securities.” Translation Printcafe’s Board of Directors can pay 1/10 of a cent for each Right to issue additional stock. At that point, the company could double the number of outstanding shares. Exercise Price “If a person hereafter acquires beneficial ownership of 15 percent or more of the outstanding Voting Securities of Printcafe, 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, 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.” Translation: If someone does acquire ownership of 15% or more of the outstanding stock, the following will happen: - The Rights of the “acquiring party” will become void. - Existing shareholders at the time of the adoption of the Rights Agreement are “Grandfathered Stockholders” and they will not be considered “Acquiring Persons” until they acquire additional shares. - Each shareholder – except “Acquiring Persons” – will have the right to purchase, at an exercise price of $6.80, a number of shares of Common Stock having a market value at that time of twice the Right's exercise price. - Note that the last trade on February 13 was for $2.30 per share. Considerably less that the market value of $13.60 (two times $6.80) just described. Dilution – doubling the shares “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 of Directors may exchange each Right, in whole or in part, at an exchange ratio of one share of Common Stock per Right.” Translation: If an “acquiring person” has the potential to own 75% or more of the outstanding shares, Printcafe’s Board of Directors may double the number of shares outstanding, thus reducing the potential earnings per share by half. What Does This Really Mean? If Creo continues to move ahead to acquire more blocks of Printcafe shares, the Printcafe Board of Directors now has a means to “disincent” them by having the ability to double the number of shares and thus dilute their potential earnings per share. The intent is to slow down the whole process, while efforts are made to ensure that Printcafe current shareholders’ value is protected.