by WTT columnist Gail Kailing with WTT Staff February 21, 2003 -- Today Creo is scheduled to begin litigation in Delaware Chancery Court against Printcafe and EFI. The company is asking the court either to invalidate or cause Printcafe to remove several mechanisms that could effectively prevent Creo from consummating its agreement with Seligman for the purchase of 1,078,060 shares of stock. Those shares would bring Creo’s ownership of Printcafe to approximately 55%. Creo currently owns 44% of Printcafe’s shares. Creo’s Filing From Creo’s filing, the following are the “mechanisms” that Creo is asking to have removed: - A poison pill that unlawfully purports to prohibit Creo from owning Printcafe shares that the company is unconditionally supposed to buy from a third party (the Seligman shares) pursuant to a contract that Printcafe and the Special Committee knew about for several weeks. - Stock options granted to EFI (a party Creo believes to have only submitted a non-binding, conditional offer to acquire Printcafe) to acquire 19.9% of Printcafe and subsequently re-sell such shares to Printcafe at the same price. This option accomplishes no legitimate business purpose. - Agreed with EFI, among other things, that Printcafe will not talk to all parties interested in acquiring Printcafe. This agreement eliminates the ability of the Special Committee to conduct a fair sale process and investigate all strategic alternatives for Printcafe. - Agreed to give EFI a "break-up" fee of over $500,000 despite the fact that EFI has submitted only a preliminary, non-binding, conditional proposal to acquire Printcafe. The Lawsuit Details – Prayer for Relief (An actual legal phrase): In particular, the litigation asks the following: i. Declaring that the Rights Plan is unlawful and was entered into in breach of the fiduciary duties of the Special Committee; ii. Enjoining any exercise of the Rights Plan or any issuance of rights or Common Stock under such Rights Plan; iii. Declaring that Printcafe's refusal to negotiate in good faith with Creo is a breach of the fiduciary duties of the defendant directors and compelling such defendant directors to fulfill their fiduciary duties and take all steps necessary to provide Creo and other bidders a fair and equal opportunity to acquire the outstanding shares of Printcafe; iv. Invalidating certain rights granted by Printcafe to defendant EFI; v. Enjoining any further action by defendant EFI intended to cause or with the effect of causing Printcafe to forego the opportunity to explore other strategic alternatives; vi. Invalidating any attempt by Printcafe or EFI to enter into a definitive merger agreement prior to the entry of the Delaware Chancery Court's final judgment in the Litigation. Conflict of Interest? Creo also alleges a conflict of interest on the Special Committee to evaluate all proposals for the purchase of Printcafe. Charles Billerbeck, Chairman of Special Committee, has been a director of Printcafe since February 2000. Mr. Billerbeck is a Senior Managing Director of Mellon Ventures, Inc., a venture capital division of Mellon Financial Corporation. Mellon Ventures owns 1,616,789 shares of Printcafe. Mellon Bank, an affiliate of Mellon Ventures, is the sixth largest stockholder of EFI; it holds 1,631,000 shares of EFI, representing 3.009% of EFI's outstanding stock. Billerbeck’s employer, Mellon Ventures Inc., together with its affiliates, owns more than 3.2 million EFI shares. Seligman Agreement An unconditional, binding contract for the purchase of shares from J. & W. Seligman & Co., Inc., was executed and delivered on January 21, 2003. The Seligman transaction is scheduled to close on or before February 24, 2003. Thus, Creo is the beneficial owner of Seligman's Printcafe shares, but not yet the record owner. Creo alleges that Printcafe’s Poison Pill will be triggered when Creo completes the acquisition of Seligman's shares on February 24, 2003. D-Day – February 24, 2003 If the court does not invalidate the Poison Pill, Creo believes that on Monday it acquires the Seligman shares -- as it is contractually entitled (and bound) to do. This will trigger the Poison Pill. The effect of the Pill will be to dilute Creo's stake, destroying Creo's majority interest, and considerably devaluing its shares. Thus, absent immediate injunctive relief, Creo will be forced either to give up its rights to the Seligman shares and breach an unconditional contract or trigger a Poison Pill that would purport to destroy the economic value of Creo's majority stake in Printcafe. Printcafe’s Position Based on our understanding of these matters, Printcafe is not against Creo acquiring the company. However, Printcafe apparently believes they are obligated to secure the best possible price from a suitable buyer. EFI and Creo are both suitable buyers. If Printcafe did not implement the poison pill, Creo would close on the Seligman shares and own 55% of Printcafe. At that point, Creo could potentially assume control of the board and complete the acquisition for $1.30 per share. It is difficult to imagine Creo offering more per share after gaining majority ownership. (Creo could offer more, there would just be less competitive pressure to do so.) Theoretically Creo could turn down any offer from another company for their Printcafe shares, even if it were $10 per share. Creo has already said they would not dispose of their shares because Printcafe is so strategic to their business. (Plus, Creo has invested nearly $100 million in Printcafe.) Speaking of all shareholders... Creo has said that the two fund companies (holding the shares needed for Creo to gain majority ownership) were unaware of their intention to acquire Printcafe. Creo’s move to lock up majority ownership first may have been a savvy strategic move, but arguably not in the best interest of all Printcafe’s shareholders. Creo says that Printcafe should consider all alternatives. But with two quality companies at the table, it is unclear what other items should be considered outside of gaining the best possible price for shareholders. Will the judge rule that Printcafe’s actions unfairly limit Creo’s options? Or will the judge rule that Creo’s actions will unfairly limit options for other Printcafe shareholders?