SCHEDULE 14A INFORMATION
Proxy Statement Pursuant To Section 14(A) of
The Securities Exchange Act of 1934
Filed by the Registrant þ
Filed by a Party other than the Registrant ¨
Check the appropriate box:
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Preliminary Proxy Statement | ¨ | Confidential, for Use of the Commission Only as permitted by Rule 14a-6(e)(2)) | |||
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Definitive Proxy Statement | |||||
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Definitive Additional Materials | |||||
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Soliciting Material under § 240.14a-12 |
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
| ¨ | No fee required. |
| þ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
| (1) | Title of each class of securities to which transaction applies: |
Common stock, par value $.01 per share of Franklin Electronic Publishers, Incorporated (“Common Stock”).
| (2) | Aggregate number of securities to which transaction applies: |
5,645,173 shares of Common Stock (excluding shares of Common Stock Saunders Acquisition Corporation will acquire prior to the merger) and vested options to purchase 511,097 shares of Common Stock as of November 18, 2009 with a per share exercise price of less than $2.50.
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
The filing fee was determined by multiplying $55.80/$1,000,000 by the sum of: (i) the product of (a) 5,645,173 outstanding shares of Common Stock that are proposed to be acquired in the merger and (b) the per share merger consideration of $2.50 in cash; and (ii) the product of (a) 511,097 shares of Common Stock issuable upon exercise of outstanding vested options to purchase Common Stock with a per share exercise price of less than $2.50 and (b) $1.13 per share in consideration for the cancellation of such options, which is the excess of $2.50 over the weighted average exercise price of such options.
| (4) | Proposed maximum aggregate value of transaction: $14,690,472.11 |
| (5) | Total fee paid: $819.79 |
| þ | Fee paid previously with preliminary materials. |
| ¨ | Check box if any of the fee is offset as provided by Exchange Act Rule 0-11(a) (2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
| (1) | Amount Previously Paid: |
| (2) | Form, Schedule or Registration Statement No.: |
| (3) | Filing Party: |
| (4) | Date Filed: |
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
One Franklin Plaza Burlington, New Jersey 08016
MERGER PROPOSED—YOUR VOTE IS IMPORTANT
Dear Shareholder:
You are cordially invited to attend a special meeting of the shareholders of Franklin Electronic Publishers, Incorporated, which we refer to as “Franklin” or the “Company,” to be held at the offices of Katten Muchin Rosenman LLP, 575 Madison Avenue, New York, New York 10022, 15th floor, conference room A, on February 24, 2010 at 10:00 a.m., local time.
At the special meeting, we will ask you to consider and vote upon a proposal to adopt the merger agreement, dated as of September 30, 2009, by and between Saunders Acquisition Corporation, which we refer to as “Saunders,” and the Company, and the related plan of merger, providing for the merger of Saunders with and into the Company, and a proposal to adjourn or postpone the special meeting if the Company determines such is necessary or appropriate. Saunders is controlled by Barry J. Lipsky, our President and Chief Executive Officer, Toshihide Hokari, our Chief Operating Officer, Frank A. Musto, our Chief Financial Officer, Howard L. Morgan, the Chairman of our board of directors and James A. Simons, a director of the Company.
If our shareholders adopt the merger agreement and the related plan of merger, if the other conditions to the merger contemplated thereby are satisfied, and if the merger is completed, then Saunders will merge with and into Franklin, and all shareholders other than Saunders will be entitled to receive $2.50 in cash, without interest, for each share of our common stock owned, which we refer to as the “merger consideration.”
A special committee of Franklin’s board of directors unanimously approved the merger agreement and the related plan of merger and determined the merger advisable, fair to and in the best interests of Franklin and Franklin’s shareholders. The special committee consists entirely of directors who are not officers or employees of Franklin, and who will not have an economic interest in Franklin following the merger. In connection with its evaluation of the merger agreement, the special committee considered, among other factors, the written opinion, dated September 30, 2009, of Oppenheimer & Co. Inc. (“Oppenheimer”), its independent financial advisor, to the effect that, as of the date of such opinion, the merger consideration of $2.50 per share to be received by holders of Franklin common stock (other than Saunders) was fair to such shareholders from a financial point of view. The full text of Oppenheimer’s opinion is attached to the enclosed proxy statement as Annex C. Franklin’s board of directors (excluding Barry J. Lipsky, Howard L. Morgan and James H. Simons, who recused themselves from the process and did not vote due to their conflicting interests), acting upon the recommendation of the special committee, determined that the merger is advisable and in the best interests of the Company, approved the merger agreement and the related plan of merger, and determined the merger consideration to be fair to the shareholders of the Company (other than Saunders).
The board of directors recommends that Franklin’s shareholders vote “FOR” the adoption of the merger agreement and the related plan of merger and “FOR” the proposal to adjourn or postpone the special meeting if the Company determines such is necessary or appropriate.
The proxy statement attached to this letter provides a detailed description of the merger, the merger agreement and the plan of merger. We urge you to read the proxy statement and its annexes carefully.
The affirmative vote of a majority of the votes cast at the special meeting is required to adopt the merger agreement and the related plan of merger. Saunders and certain of its shareholders collectively hold approximately 40.38% of the outstanding shares of our common stock.
Your vote is very important regardless of the number of shares you own. Whether or not you plan to attend the special meeting in person, please complete, date and sign the enclosed proxy card and return it in the envelope provided as soon as possible. No postage need be affixed if you mail the proxy card in the enclosed
envelope anywhere in the United States. If you receive more than one proxy card because you own shares that are registered differently, please vote all of your shares shown on all of your proxy cards. If your shares are held in an account at a brokerage firm or bank, you must instruct them on how to vote your shares. If you submit a proxy, that will not prevent you from voting your shares in person if you subsequently choose to attend the special meeting.
Under Pennsylvania law, Franklin shareholders are not entitled to exercise dissenters’ rights. If the merger agreement and the plan of merger are adopted and the merger is completed, shareholders who voted against the adoption of the merger agreement and the plan of merger will be treated the same as shareholders who voted for the adoption of the merger agreement and the plan of merger and their shares will automatically be converted into the right to receive the merger consideration.
If you have any questions about the merger, please call the Company’s proxy solicitor, Regan & Associates, Inc., at (800) 737-3426.
Thank you for your cooperation and your continued support.
Edward H. Cohen
Chairman of the Special Committee of the Board of Directors
Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.
THE PROXY STATEMENT IS DATED JANUARY 27, 2010 AND IS FIRST BEING
MAILED TO SHAREHOLDERS ON OR ABOUT JANUARY 27, 2010.
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
One Franklin Plaza
Burlington, New Jersey 08016
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On February 24, 2010
To the Shareholders of Franklin Electronic Publishers, Incorporated:
We will hold a special meeting of the shareholders of Franklin Electronic Publishers, Incorporated, a Pennsylvania corporation, which we refer to as “Franklin” or the “Company,” to be held at the offices of Katten Muchin Rosenman LLP, 575 Madison Avenue, New York, New York 10022, 15th floor, conference room A, on February 24, 2010 at 10:00 a.m., local time:
1. To act on a proposal to approve and adopt the merger agreement, dated as of September 30, 2009, by and between Saunders Acquisition Corporation, a Delaware corporation, which we refer to as “Saunders,” and Franklin, and the related plan of merger, pursuant to which Saunders will merge with and into Franklin and each outstanding share of Franklin common stock (other than shares held by Franklin, any of its subsidiaries or Saunders, which shares will be canceled), will be converted into the right to receive $2.50 in cash, without interest, and to approve the merger and related transactions contemplated by the merger agreement and the plan of merger; and
2. To consider and vote upon a proposal to adjourn or postpone the special meeting, for the purpose of soliciting additional proxies or for such other purpose as the Company shall determine; and
3. To transact any other business that may properly come before the special meeting or any adjournment or postponement of the special meeting, including to consider any procedural matters incident to the conduct of the special meeting.
Only holders of record of Franklin common stock as of the close of business on January 20, 2010 are entitled to notice of, and to vote at, the special meeting and any adjournment or postponement of the special meeting. The affirmative vote of a majority of the votes cast at the special meeting is required in order to adopt the merger agreement and the plan of merger, and to approve the proposal to adjourn or postpone the special meeting. Saunders and certain of its shareholders collectively hold approximately 40.38% of the outstanding shares of our common stock.
Your vote is very important regardless of the number of shares you own.
Whether or not you plan to attend the special meeting in person, please complete, date and sign the enclosed proxy card and return it in the envelope provided as soon as possible. No postage need be affixed if the proxy card is mailed in the United States. If you receive more than one proxy card because you own shares that are registered differently, please vote all of your shares shown on all of your proxy cards. If you return a properly signed proxy card but do not indicate how you want to vote, your shares will be voted “FOR” adoption of the merger agreement and the plan of merger and, within the discretion of the proxies, “FOR” approval of the adjournment or postponement proposal. If your shares are held in an account at a brokerage firm or bank, you must instruct them on how to vote your shares. Submitting a proxy will not prevent you from voting your shares in person if you subsequently choose to attend the special meeting.
Franklin’s board of directors unanimously recommends that shareholders vote “FOR” adoption of the merger agreement and the related plan of merger and “FOR” approval of the adjournment or postponement proposal.
PLEASE DO NOT SEND ANY STOCK CERTIFICATES AT THIS TIME. IF THE MERGER IS COMPLETED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF YOUR STOCK CERTIFICATES.
Under Pennsylvania law, Franklin shareholders are not entitled to exercise dissenters’ rights. If the merger agreement and the plan of merger are adopted and the merger is completed, shareholders who voted against the adoption of the merger agreement and the plan of merger will be treated the same as shareholders who voted for the adoption of the merger agreement and the plan of merger and their shares will automatically be converted into the right to receive the merger consideration.
The enclosed proxy statement provides a detailed description of the merger, the merger agreement, the plan of merger and related matters. We urge you to read the proxy statement and its annexes carefully. If you have any questions about the merger, please call the Company’s proxy solicitor, Regan & Associates, Inc., at (800) 737-3426.
By Order of the Board of Directors,
Edward H. Cohen
Chairman of the Special Committee of the Board of Directors
Date: January 27, 2010
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON FEBRUARY 24, 2010:
Our Proxy Statement for the Special Meeting is available at:
http://www.cfpproxy.com/2898sm
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| Interests of Our Directors and Executive Officers in the Merger |
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| Right to Modify Recommendation and Accept a Superior Proposal |
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FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
One Franklin Plaza
Burlington, New Jersey 08016
PROXY STATEMENT
SUMMARY TERM SHEET
This summary term sheet highlights selected information from this proxy statement and may not contain all of the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to or incorporated by reference in this proxy statement. We have provided to each shareholder a copy of the documents incorporated by reference along with this proxy statement. You also may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under “Where You Can Find More Information” beginning on page 57.
In this proxy statement, the terms “we,” “us,” “our,” “Franklin” and the “Company” refer to Franklin Electronic Publishers, Incorporated and, where appropriate, its subsidiaries. In this proxy statement we refer to Saunders Acquisition Corporation as “Saunders.”
The Merger and Related Matters
| • | The Merger. You are being asked to vote to adopt the merger agreement, dated as of September 30, 2009, by and between Saunders and the Company, and the related plan of merger, providing for the acquisition of the Company by Saunders, sometimes referred to in this proxy statement as the “Rule 13e-3 Transaction.” The merger agreement and the plan of merger provide that Saunders will merge with and into the Company, with the Company as the entity surviving the merger, sometimes referred to in this proxy statement as the “surviving corporation.” See “The Merger Agreement” beginning on page 40. A copy of the merger agreement and the plan of merger are attached as Annex A and Annex B, respectively, to this proxy statement. |
| • | Parties Involved in the Merger: |
| • | Franklin Electronic Publishers, Incorporated, a Pennsylvania corporation, designs, develops, publishes and distributes electronic information on handheld devices, memory media cards, and via internet downloads. We also design, develop, and license to third parties, linguistic technology, such as spelling error detection software in thirty-six languages, for use in application software, electronic products and on the internet. |
| • | Saunders Acquisition Corporation is a Delaware corporation which was incorporated on April 13, 2009 by certain executive officers of the Company solely for the purpose of acquiring the Company and consummating the transactions contemplated by the merger agreement and the plan of merger. Saunders has not engaged in any business except as contemplated in the merger agreement. Saunders is currently owned by Barry J. Lipsky, our President and Chief Executive Officer, Toshihide Hokari, our Chief Operating Officer, Frank A. Musto, our Chief Financial Officer, Howard L. Morgan, the Chairman of our board of directors, James A. Simons, a director of the Company, and certain other of the Company’s shareholders named immediately below. |
See “Parties to the Merger” beginning on page 16.
| • | Exchange Agreements. Each of Barry J. Lipsky, our President and Chief Executive Officer, Toshihide Hokari, our Chief Operating Officer, Frank A. Musto, our Chief Financial Officer, Howard L. Morgan, the Chairman of our Board of Directors, James H. Simons, a director of the Company, and Marcy Lewis, Shining Sea Limited, Julien David and Morton David, who are shareholders of the Company, whom we refer to collectively as the “Saunders Group,” is party to an exchange agreement, which we refer to collectively as the “exchange agreements,” with Saunders, pursuant to which each such person has exchanged the shares of the Company’s common stock they owned (including shares issuable upon the exercise of “in-the-money” options), collectively referred to as the “Rollover Shares,” for equity |
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| securities of Saunders. The equity contribution of the Company’s common stock by the persons party to the exchange agreements represents, in the aggregate, approximately 32.69% of the outstanding common stock of the Company at the record date. See “Special Factors—The Merger—Interests of Our Directors and Executive Officers in the Merger” beginning on page 36. |
| • | Purposes and Reasons for the Merger. One of the purposes of the merger for the Company is to enable its shareholders (other than Saunders) to immediately realize the value of their investment in Franklin through their receipt of the per share merger price of $2.50 in cash, without interest. The purpose of the merger for the Saunders Group is to allow its members, through their equity interests in Saunders, to benefit from any future earnings and growth of Franklin, while simultaneously bearing the risks of such ownership. See “Special Factors—The Merger—Purposes and Reasons for the Merger and Plans for Franklin after the Merger” beginning on page 35. |
| • | Effect of the Merger on Franklin. This is a “going private” transaction. If the merger is completed, Franklin will continue its operations as a privately-held company. After the merger, Franklin’s shares will no longer be listed on the NYSE Amex. In addition, registration of Franklin’s common stock under the Securities Exchange Act of 1934, as amended, referred to as the “Exchange Act,” will be terminated. As a result, Franklin will no longer be required to file periodic or other reports with the Securities and Exchange Commission, referred to in this proxy statement as the “SEC,” with respect to its common stock or to deliver proxy statements or information statements in connection with shareholders’ meetings. See “Special Factors—The Merger—Effects of the Merger on Franklin” beginning on page 35. |
| • | Merger consideration. If the merger is completed, each Franklin shareholder (other than Saunders) will be entitled to receive $2.50 in cash, without interest, for each share of Franklin’s common stock owned as of the effective time of the merger. See “The Merger Agreement—Merger Consideration” beginning on page 40. |
| • | Treatment of Outstanding Options. At the effective time of the merger, each of Franklin’s vested stock options will be cancelled and each holder thereof will receive a payment in cash equal to the product of (i) the excess, if any, of $2.50 over the exercise price per share of common stock subject to such option, multiplied by (ii) the number of shares of Franklin common stock subject to such option as of the effective time of the merger, less applicable withholding taxes. If the exercise price per share of common stock subject to vested options exceeds $2.50, such stock options will be cancelled without consideration. Stock options that have not vested as of the effective time will also be cancelled without consideration. See “The Merger Agreement—Merger Consideration” beginning on page 40. |
| • | Treatment of Restricted Stock. At the effective time of the merger, holders of vested shares of restricted stock will be entitled to receive $2.50 in cash, without interest. All unvested shares of restricted stock will be cancelled without consideration. See “The Merger Agreement—Merger Consideration” beginning on page 40. |
| • | Special Committee. Franklin’s board of directors formed a special committee, referred to in this proxy statement as the “special committee,” to evaluate the merger and related transactions and to solicit and evaluate other proposed transactions to acquire all of Franklin’s stock. In addition, the special committee was charged with recommending action to the full Franklin board of directors with respect to the merger and other proposals. The special committee consists entirely of directors who are not officers or employees of Franklin and who will not have an economic interest in Franklin following the merger. The special committee retained its own legal and financial advisors. The special committee unanimously recommended that Franklin’s board of directors approve the merger agreement and the related plan of merger. See “Special Factors—The Merger—Reasons for the Special Committee’s Recommendation” beginning on page 23. |
| • | Board Recommendation. After careful consideration, Franklin’s board of directors, (excluding Messrs. Lipsky, Morgan and Simons who, with the concurrence of the other members of the board of directors, recused themselves from the process and did not vote due to their conflicting interests), |
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| acting upon the recommendation of the special committee, unanimously: (i) determined that the merger is advisable and in the best interests of the Company and determined the merger consideration to be fair to the shareholders of the Company (other than Saunders), including unaffiliated shareholders; (ii) approved the merger agreement and the plan of merger; and (iii) determined to recommend that Franklin’s shareholders vote “FOR” the adoption of the merger agreement. See “Special Factors—The Merger—Reasons for the Board’s Recommendation” beginning on page 25. |
| • | Opinion of the Special Committee’s Financial Advisor. In connection with the execution of the merger agreement, the special committee received a written opinion, dated September 30, 2009, of its financial advisor, Oppenheimer & Co. Inc. (which we refer to in this proxy statement as “Oppenheimer”), as to the fairness, from a financial point of view and as of the date of the opinion, of the merger consideration to be received by holders of Franklin common stock (other than Saunders). The full text of Oppenheimer’s written opinion, dated September 30, 2009, is attached to this proxy statement as Annex C. Holders of Franklin common stock are encouraged to read this opinion carefully in its entirety for a description of the assumptions made, procedures followed, matters considered and limitations on the review undertaken. Oppenheimer’s opinion was provided to the special committee in connection with its evaluation of the merger consideration from a financial point of view. Oppenheimer’s opinion does not address any other aspect of the merger and does not constitute a recommendation to any shareholder as to how such shareholder should vote or act with respect to any matters relating to the merger. See “Special Factors—The Merger—Opinion of the Financial Advisor to the Special Committee of the Board of Directors” beginning on page 27 and Annex C. |
| • | Interests of Franklin’s Executive Officers and Directors in the Merger. Some of Franklin’s executive officers and directors, including members of the Saunders Group and the members of the special committee, have interests in the merger that are different from, or in addition to, the interests of Franklin’s shareholders generally. These interests in the transaction are described below. |
| • | Franklin’s executive officers and all its directors, including members of the special committee, will be indemnified in respect of their past service and Saunders will maintain Franklin’s current directors’ and officers’ liability insurance, subject to certain conditions. |
| • | Franklin’s directors (other than those in the Saunders Group), including members of the special committee, will be entitled to receive the excess, if any, of $2.50 over the applicable per share exercise price for each vested stock option held by them, less any applicable withholding tax. |
| • | Messrs. Lipsky, Hokari, Musto, Morgan and Simons, as members of the Saunders Group, will receive the benefits of any growth in revenues or income of Franklin after the merger is consummated. |
| • | It is anticipated that Franklin’s current executive officers will hold substantially similar positions with the surviving corporation after completion of the merger. |
See “Special Factors—The Merger—Interests of Our Directors and Executive Officers in the Merger” beginning on page 36.
| • | Interests of Members of the Special Committee. Members of the special committee have interests in the merger that are different from, or in addition to, the interests of Franklin’s shareholders and other Franklin directors generally. In addition to the annual fees received by the directors for their services as a member of Franklin’s board of directors and other committees thereof, for serving on the special committee, each member received a $10,000 fee, plus expenses. |
As described above, Franklin’s executive officers and directors (other than those in the Saunders Group), including the members of the special committee, will be entitled to receive the excess, if any, of $2.50 over the applicable per share exercise price for each vested stock option held by them, less any applicable withholding tax.
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The table provided under “Special Factors—The Merger—Interests of Our Directors and Executive Officers in the Merger—Benefits Accruing Prior to or Upon the Merger” beginning on page 36 sets forth as of January 20, 2010, for each member of the special committee, (a) the number of shares subject to vested options for Franklin common stock, (b) the value of such vested options, calculated by multiplying (i) the excess of $2.50 over the per share exercise price of the option by (ii) the number of shares subject to the option, and without regard to deductions for income taxes and other withholding taxes, (c) the number of shares of Franklin common stock each member owns and the value of such shares based on the merger consideration of $2.50 per share, and (d) the total value of all such shares of Franklin common stock based on the $2.50 per share cash merger consideration.
See “Special Factors—The Merger—Interests of Our Directors and Executive Officers in the Merger” beginning on page 36.
| • | Financing. The total amount of funds required to complete the merger and the related transactions, including payment of fees and expenses in connection with the merger, is anticipated to be approximately $14.5 million. This amount is expected to be provided through a combination of (i) equity contributions from certain members of the Saunders Group to Saunders totaling approximately $2.7 million and (ii) cash and cash equivalents held by Franklin and its subsidiaries. See “Financing” beginning on page 51. |
| • | Material U.S. Federal Income Tax Consequences of the Merger. In general, your receipt of the merger consideration will be a taxable transaction for U.S. federal income tax purposes. For U.S. federal income tax purposes, you will generally recognize capital gain or loss equal to the difference, if any, between the amount of cash received pursuant to the merger and your adjusted basis in the shares surrendered. However, the tax consequences of the merger to you will depend upon your own particular circumstances. You should consult your own tax advisor in order to fully understand how the merger will affect you. See “Material U.S. Federal Income Tax Consequences” beginning on page 38. |
| • | No Solicitation of Transactions. The merger agreement restricts Franklin’s ability to, among other things, solicit or engage in discussions or negotiations with a third party regarding specified transactions involving Franklin. However, under certain circumstances, Franklin’s board of directors or the special committee may: |
| • | respond to an unsolicited written bona fide proposal for an alternative acquisition that could reasonably be expected to lead to a superior proposal; or |
| • | terminate the merger agreement and enter into an acquisition agreement with respect to a superior proposal, so long as Franklin complies with certain terms of the merger agreement, including paying a termination fee to Saunders of $650,000. |
See “The Merger Agreement—Right to Modify Recommendation and Accept a Superior Proposal” beginning on page 43.
| • | Conditions to Closing. Before the merger can be completed, a number of conditions must be satisfied or waived (to the extent permitted by law). These include: |
| • | the adoption of the merger agreement and the related plan of merger by Franklin’s shareholders; |
| • | no law or order being in effect that prevents or restricts the consummation of the merger; |
| • | all actions required by, or filings required to be made with, any governmental entity that are necessary to permit the consummation of the merger having been taken or made; |
| • | subject to applicable materiality qualifications, the truth and correctness of Franklin’s and Saunders’ respective representations and warranties; |
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| • | the performance, in all material respects, by Franklin and Saunders of their respective covenants and agreements in the merger agreement; and |
| • | the absence of any material adverse effect on Franklin. |
See “The Merger Agreement—Conditions to the Merger” beginning on page 41.
| • | Termination of the Merger Agreement. The merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after shareholder approval has been obtained, under certain circumstances, including: |
| • | by mutual written consent of Franklin and Saunders; |
| • | By Franklin or Saunders, if the special meeting is held and Franklin fails to obtain shareholder approval of the merger agreement at the special meeting, provided that such right shall not be available to a party where the failure to obtain shareholder approval has been caused by the action or failure to act by such party and such action or failure to act constitutes a breach of the agreement; |
| • | by Franklin or Saunders, if any court or other governmental entity issues a law, order or injunction that is final and has the effect of prohibiting the merger; |
| • | by Franklin or Saunders, if the effective time of the merger shall not have occurred on or before February 28, 2010; |
| • | by Franklin, if: |
| • | Franklin enters into a definitive agreement containing a superior proposal by a third party provided that Franklin has complied with certain notice and other provisions in the merger agreement; or |
| • | Saunders’ representations and warranties fail to be true and correct or Saunders breaches any of its obligations under the merger agreement, such that, in either case, the applicable conditions to closing would not be satisfied, subject to certain limitations; or |
| • | by Saunders, if: |
| • | Franklin’s representations and warranties fail to be true and correct or Franklin breaches any of its obligations under the merger agreement, such that, in either case, the applicable conditions to closing would not be satisfied, subject to certain limitations; |
| • | There has been a material adverse effect with respect to Franklin; or |
| • | Franklin enters into a definitive agreement containing a superior proposal or the board of directors of Franklin withdraws or adversely modifies its approval of the merger agreement. |
See “The Merger Agreement—Termination of the Merger Agreement” beginning on page 47.
| • | Termination Fees and Expenses. Franklin and Saunders have agreed to pay the other party a termination fee in the amount of $650,000 or the expenses of Saunders under certain circumstances if Franklin or Saunders terminates the merger agreement. See “The Merger Agreement—Termination Fees” beginning on page 48. |
| • | Market Price of Franklin Common Stock. The Company’s common stock is currently listed on the NYSE Amex under the trading symbol “FEP.” The closing price of Franklin common stock on the NYSE Amex on May 29, 2009, the last full day of trading before the Saunders Group filed its Schedule 13D with the SEC announcing its “going private” proposal, was $1.00 per share. The closing price of Franklin common stock on the NYSE Amex on September 30, 2009, the last day of trading |
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| before the announcement of the approval of the merger agreement by the Franklin board of directors, was $2.22 per share. On January 25, 2010, Franklin’s common stock closed at $2.46 per share. See “Market Price and Dividend Data” beginning on page 55. |
| • | Anticipated Closing of Merger. The merger will be completed after all of the conditions to completion of the merger are satisfied or waived, including the adoption of the merger agreement and the related plan of merger by Franklin’s shareholders, and the absence of legal prohibitions to the merger. We currently expect the merger to be completed in the first quarter of 2010, although we cannot assure completion by any particular date, if at all. Franklin will issue a press release and send you a letter of transmittal for your stock certificates once the merger has been completed. |
The Special Meeting and Related Matters
| • | Date, Time and Place. The special meeting of shareholders of Franklin will be held at the offices of Katten Muchin Rosenman LLP, 575 Madison Avenue, New York, New York 10022, 15th floor, conference room A, on February 24, 2010 at 10:00 a.m., local time. |
| • | Record Date and Voting. You are entitled to vote at the special meeting if you owned shares of Franklin common stock at the close of business on January 20, 2010, the record date for the special meeting. Each outstanding share of Franklin common stock on the record date entitles the holder to one vote on each matter submitted to shareholders for approval at the special meeting. As of the record date, there were 8,386,799 shares of Franklin common stock entitled to be voted. See “The Special Meeting of Shareholders—Record Date; Stock Entitled to Vote” beginning on page 13. |
| • | Shareholder Vote Required to Adopt the Merger Agreement and the Plan of Merger. The adoption of the merger agreement and the plan of merger requires the affirmative vote of a majority of the votes cast at the special meeting. The merger agreement and the plan of merger do not require the separate approval of unaffiliated security holders for their adoption. Saunders has agreed to vote the shares of the Company’s common stock that it owns “FOR” the adoption of the merger agreement and the plan of merger. See “The Special Meeting of Shareholders—Vote Required” beginning on page 14. |
Franklin’s board of directors recommends that you vote “FOR” the adoption of the merger agreement.
| • | Share Ownership of Executive Officers and Directors. |
Barry Lipsky, Frank A. Musto and Toshihide Hokari, who are executive officers of the Company, Howard L. Morgan and James H. Simons, who are directors of the Company, and Marcy Lewis, Shining Sea Limited, Julien David and Morton David, who are shareholders of the Company, have contributed their shares of Franklin common stock to Saunders in exchange for shares of Saunders’ equity securities and, as of the record date, Saunders owned 32.69% of the total outstanding votes of the common stock of Franklin entitled to vote on the merger. In accordance with the terms of the merger agreement, Saunders is required to vote such shares of stock “FOR” the adoption of the merger agreement and the plan of merger. Our remaining directors as a group own 65,899 shares (0.79%) of our common stock and are expected to vote their shares “FOR” the adoption of the merger agreement and the plan of merger. See the section captioned “Special Factors—The Merger— Interests of Our Directors and Executive Officers in the Merger” on page 36.
| • | Dissenters’ Rights. Franklin shareholders do not have appraisal or similar rights of dissenters under Pennsylvania law with respect to the merger, any transaction contemplated by the merger agreement and the plan of merger or any other matter described in this proxy statement. See “No Dissenters’ Rights” on page 51. |
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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER
The following questions and answers briefly address some commonly asked questions about the special meeting and the merger. They may not include all of the information that may be important to you. We urge you to read carefully this entire proxy statement, including the annexed documents and the other documents we refer to and incorporate by reference in this proxy statement. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under “Where You Can Find More Information” beginning on page 57.
| Q: | Why am I receiving these materials? |
| A: | You are receiving this proxy statement and proxy card because you own shares of Franklin common stock. Franklin’s board of directors is providing these proxy materials to give you information for use in determining how to vote in connection with the special meeting of Franklin’s shareholders. |
| Q: | Who is soliciting my proxy? |
| A: | This proxy is being solicited by Franklin’s board of directors. |
| Q: | What matters will I be asked to vote on at the special meeting? |
| A: | You will be asked to vote on the following proposals: |
| • | to adopt the merger agreement; |
| • | to approve the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement; and |
| • | to transact such other business as may properly come before the special meeting. |
| Q: | Who is entitled to vote at the special meeting? |
| A: | Franklin’s executive officers, as authorized by Franklin’s board of directors, have set January 20, 2010 as the record date for the special meeting. If you were a shareholder of record, as shown on the stock transfer books of Franklin, at the close of business on the record date, you are entitled to notice of and to vote at the special meeting or any adjournment or postponement thereof. On the record date, there were 8,386,799 shares of Franklin common stock issued and outstanding and, therefore, eligible to vote at the special meeting. |
| Q: | How many shares must be present to hold the special meeting? |
| A: | The holders of at least a majority of the shares of Franklin common stock outstanding and entitled to vote as of the record date must be present, in person or represented by proxy, at the special meeting in order to hold the special meeting and conduct business. This is called a quorum. If you submit a properly executed proxy card, then your shares will be counted as part of the quorum. All shares of Franklin’s common stock present in person or represented by proxy and entitled to vote at the special meeting, no matter how they are voted or whether the holders abstain from voting them, will be counted in determining the presence of a quorum. |
If the special meeting is adjourned for one or more periods aggregating at least 15 days because of the absence of a quorum, those shareholders entitled to vote who attend the reconvened meeting, if less than a quorum as determined under applicable law, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the Notice of Special Meeting.
| Q: | What vote of shareholders is required to adopt the merger agreement? |
| A: | The adoption of the merger agreement and the plan of merger requires the affirmative vote of a majority of the votes cast at the special meeting. The merger agreement and the plan of merger do not require the |
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| separate approval of unaffiliated security holders for their adoption. Saunders has agreed to vote its shares of Franklin common stock, representing approximately 32.69% of our issued and outstanding common stock, “FOR” the adoption of the merger agreement and the plan of merger. |
| Q: | How does Franklin’s board of directors recommend that I vote on the merger agreement and the plan of merger? |
| A: | Franklin’s board of directors recommends that you vote “FOR” the adoption of the merger agreement and the plan of merger. |
| Q: | What vote of shareholders is required to approve the special meeting adjournment proposal? |
| A: | Approval of the special meeting adjournment proposal will require the affirmative vote of a majority of the votes cast on the proposal at the special meeting |
| Q: | How does Franklin’s board of directors recommend that I vote on the special meeting adjournment proposal? |
| A: | Franklin’s board of directors recommends that you vote “FOR” the approval of the special meeting adjournment proposal. |
| Q: | How many votes do I have? |
| A: | You have one vote for each share of Franklin common stock you own as of the record date. |
| Q: | What effects will the merger have on Franklin? |
| A: | As a result of the merger, Franklin will cease to be a publicly traded corporation. Following completion of the merger, the registration of our common stock and our reporting obligations under the Exchange Act will be terminated upon application to the SEC. In addition, upon completion of the merger, our common stock will no longer be listed on the NYSE Amex. |
| Q: | When do you expect the merger to be completed? |
| A: | We expect that the merger will be completed by the end of the first quarter of 2010, after all conditions to the merger have been satisfied or waived. We intend to complete the merger as promptly as practicable. |
| Q: | Will the merger be a taxable transaction to me? |
| A: | Yes. The receipt of cash for shares of our common stock pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes and may also be taxable under applicable state, local, foreign, and other tax laws. In general, you will recognize gain or loss for U.S. federal income tax purposes equal to the difference between the amount of cash you receive and the adjusted tax basis of your shares of our common stock. For a more detailed explanation of the U.S. federal income tax consequences of the merger, see the section captioned “Material U.S. Federal Income Tax Consequences” on page 38 of this proxy statement. You should consult your tax advisor regarding the specific tax consequences of the merger to you. |
| Q: | What if I oppose the merger? |
| A. | If you are a shareholder who objects to the merger, you may vote against adoption of the merger agreement and the plan of merger. However, under Pennsylvania law you will not be entitled to dissenters’ or appraisal rights. See “No Dissenters’ Rights” on page 51. |
| Q: | What happens if the merger is abandoned? |
| A. | If the merger is abandoned, Franklin will remain a publicly traded company listed on the NYSE Amex. In certain circumstances, the Company or Saunders may be required to pay the other party a termination fee. |
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| Q: | How do I vote my shares? |
| A: | In order to vote your shares, you may attend the special meeting and vote in person, or vote by proxy. If your shares are held in “street name” (that is, if your stock is registered in the name of your broker, bank or other nominee) and you wish to vote at the special meeting, you will need to contact your broker, bank or other nominee regarding how to vote at the special meeting. If you are a registered shareholder (that is, if your stock is registered in your name), you may vote by proxy by completing and signing the enclosed proxy card and returning such card in the postage-paid envelope we have provided you. If you hold your shares through a broker, bank or other nominee, that institution will send you separate instructions describing the procedure for voting your shares. |
| Q: | What if I do not specify how I want my shares voted? |
| A: | If you submit a signed proxy card, but do not indicate how you want your shares voted, the persons named in the enclosed proxy will vote your shares of Franklin common stock: |
| • | “FOR” the adoption of the merger agreement and the related plan of merger; and |
| • | “FOR” the adjournment or postponement of the special meeting if Franklin determines such is necessary or appropriate for purposes of soliciting additional proxies or for some other purpose, (However, no proxy voted against the proposal to approve the merger agreement and the plan of merger will be voted in favor of the adjournment proposal). |
Franklin’s board of directors does not currently intend to bring any other proposals to the special meeting. If other proposals requiring a vote of shareholders are brought before the special meeting in a proper manner, the persons named in the enclosed proxy card intend to vote the shares they represent in their best judgment.
| Q: | What if I fail to instruct my broker? |
| A: | A broker “non-vote” occurs when your broker does not vote on a particular proposal because the broker does not have discretionary voting authority to vote on the proposal. Rules applicable to broker/dealers grant your broker discretionary authority to vote your shares without receiving your instruction on certain matters, such as the adjournment or postponement of the special meeting. However, your broker does not have discretionary authority to vote your shares without instruction for certain other types of matters, such as the adoption of the merger agreement and the related plan of merger. If your broker casts a vote on certain types of proposals, such as the adjournment or postponement proposal, the shares voted by your broker will be deemed present for purposes of determining whether a quorum is present for such proposal and any other proposal before the special meeting. However, because adoption of the proposals to be voted upon at the special meeting requires the affirmative vote of a majority of the votes cast at the special meeting under Pennsylvania law, and a broker “non-vote” with respect to such proposals will not be counted as a vote “cast” for or against the proposals, such broker “non-votes” will have no effect on the outcome of the vote on such proposals. |
| Q: | If I abstain from voting or withhold authority to vote for any proposal, will my shares be counted in the vote? |
| A: | Because the adoption of the proposals before the special meeting requires the affirmative vote of a majority of the votes cast at the special meeting under Pennsylvania law, and abstentions and withholdings of authority to vote are not considered as votes “cast,” abstentions and withholdings of authority will have no effect on the outcome of the vote on such proposals. However, abstentions and withholdings of authority will be treated as shares that are present for purposes of determining whether a quorum exists. |
| Q: | What does it mean if I receive more than one proxy card? |
| A: | If you receive more than one proxy card, it means that you hold shares that are registered in more than one account. To ensure that all of your shares are voted, you will need to sign and return each proxy card you receive. |
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| Q: | What do I need to do now? |
| A: | We urge you to read carefully this entire proxy statement, including the annexed documents and the other documents we refer to and incorporate by reference in this proxy statement. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under “Where You Can Find More Information” beginning on page 57. In addition, you should indicate your vote on your proxy card and sign and mail your proxy card in the enclosed return envelope as soon as possible so that your shares may be represented at the special meeting. |
| Q: | Can I change my vote after submitting my proxy? |
| A: | Yes. You can change your vote at any time before your proxy is voted at the special meeting. If you are a shareholder of record, you may revoke your proxy in one of three ways: |
| • | delivering to the Corporate Secretary notice of revocation in writing or by electronic transmission prior to the date of the special meeting; |
| • | delivering to the Corporate Secretary an executed proxy bearing a later date, before the vote is taken at the special meeting; or |
| • | you can attend the special meeting and vote in person. Your attendance alone will not revoke your proxy. You must also vote in person at the special meeting. |
You should send any written notice of revocation, or later dated proxy, to the attention of Frank A. Musto, Corporate Secretary, Franklin Electronic Publishers, Incorporated, One Franklin Plaza, Burlington, New Jersey 08016. The last vote received will supersede any prior vote.
You may hand deliver a written revocation notice, or later dated proxy, to the Corporate Secretary at the special meeting before voting begins. Any notice of revocation by electronic transmission should be given to the Corporate Secretary to the following e-mail address: corporate_secretary@franklin.com.
If you hold your shares in street name, you must contact your broker, bank or other nominee regarding how to change your vote.
| Q: | Should I send in my stock certificates now? |
| A: | No, if the merger is completed, you will receive, shortly after the effective time of the merger, a letter of transmittal to complete and return to Registrar and Transfer Company, the exchange agent. In order to receive the merger consideration as soon as reasonably practicable following the completion of the merger, you must send the exchange agent your properly completed letter of transmittal together with your Franklin stock certificates as instructed in the separate mailing. Once you have submitted your properly completed letter of transmittal, Franklin stock certificates and other required documents to the exchange agent, the exchange agent will send you the merger consideration. If your shares are held in “street name” by your broker, you will receive instructions from your broker as to how to effect the surrender of your “street name” shares and receive cash for those shares. You should not send in your stock certificates now. |
| Q: | I do not know where my stock certificate is—how will I get my cash? |
| A: | The materials the exchange agent will send you after completion of the merger will include the procedures that you must follow if you cannot locate your stock certificate. This will include an affidavit that you will need to sign attesting to the loss of your certificate. The surviving corporation may also require that you provide a bond at your expense to the surviving corporation in order to cover any potential loss. |
| Q: | Who pays for the cost of the solicitation of proxies? |
| A: | Franklin will bear the cost of this solicitation. In addition to solicitation by mail, officers, directors or employees of Franklin may also solicit proxies by telephone, facsimile or in person, without additional compensation. Upon request, Franklin will pay the reasonable expenses incurred by record holders of |
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| Franklin’s common stock who are brokers, dealers, banks or voting trustees, or their nominees, for mailing proxy material to the beneficial owners of the shares they hold of record. |
| Q: | Who can answer further questions? |
| A: | If you would like additional copies of this proxy statement or a new proxy card or if you have questions about the merger, you should contact the Company’s proxy solicitor, Regan & Associates, Inc., at (800) 737-3426. |
| Q. | If the merger is completed, what will I be entitled to receive for my shares of Franklin common stock? |
| A. | You will be entitled to receive $2.50 in cash, without interest, for each share of our common stock that you own. After the merger closes, the exchange agent will arrange for a letter of transmittal containing detailed instructions to be sent to each shareholder. The letter of transmittal and instructions will tell you how to surrender your common stock certificates in exchange for the merger consideration. The merger consideration will be paid to a shareholder once that shareholder submits a properly completed letter of transmittal accompanied by that shareholder’s stock certificates and any other required documentation. |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The “safe harbor” statements with respect to forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended contained in Franklin’s annual report on Form 10-K and its Forms 10-Q, attached to this proxy statement as Annexes D, E and F, do not apply to any forward-looking statements the Company makes in connection with the proposed merger.
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THE SPECIAL MEETING OF SHAREHOLDERS
We are furnishing this proxy statement to you, as a holder of our common stock, as part of the solicitation of proxies by Franklin’s board of directors for use at the special meeting of shareholders described below.
Date, Time and Place of the Special Meeting
The special meeting will be held at the offices of Katten Muchin Rosenman LLP, 575 Madison Avenue, New York, New York 10022, 15th floor, conference room A, on February 24, 2010 at 10:00 a.m., local time.
Proposals to be Considered at the Special Meeting
At the special meeting you will be asked:
1. To act on a proposal to adopt the merger agreement, dated as of September 30, 2009, by and between Saunders and Franklin, and the related plan of merger, providing for the merger of Saunders with and into Franklin and to approve the merger and related transactions contemplated by the merger agreement and plan of merger. A copy of the merger agreement and the plan of merger are attached as Annex A and Annex B, respectively, to this proxy statement.
2. To consider and vote upon a proposal to adjourn or postpone the special meeting if Franklin determines such is necessary or appropriate for any purpose, including for the purpose of soliciting additional proxies in favor if there are not sufficient favorable votes at the time of the special meeting to adopt the merger agreement and the related plan of merger.
3. To transact any other business that may properly come before the special meeting or any adjournment or postponement of the special meeting, including to consider any procedural matters incident to the conduct of the special meeting.
If the merger is completed, each share of stock (other than those shares held by Saunders) will be converted into the right to receive $2.50 in cash, without interest. After the merger, these shares will not represent any interest in the surviving corporation other than the right to receive this cash payment.
After careful consideration, our board of directors (excluding Messrs. Lipsky, Morgan and Simons who, with the concurrence of the other members of the board of directors, recused themselves from the process and did not vote due to their conflicting interests), by a unanimous vote at a meeting held on September 30, 2009:
| • | determined that the merger is advisable and in the best interests of the Company, the merger consideration is fair to the shareholders of the Company (other than Saunders) and that the Rule 13e-3 Transaction is substantively and procedurally fair to the Company’s unaffiliated shareholders; |
| • | approved the merger agreement and the related plan of merger; and |
| • | determined to recommend that Franklin’s shareholders vote “FOR” the adoption of the merger agreement and the related plan of merger. |
In addition, it is the belief of Messrs. Lipsky, Morgan and Simons, as well as of Frank Musto, Toshihide Hokari and Shining Sea Limited (collectively, the “Saunders Principal Shareholders”), members of the Saunders Group, that the Rule 13e-3 Transaction is substantively and procedurally fair to the Company’s unaffiliated shareholders.
Record Date; Stock Entitled to Vote
Only holders of record of Franklin common stock as of the close of business on January 20, 2010 are entitled to notice of, and to vote at, the special meeting and any adjournment or postponement of the special
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meeting. Each outstanding share of our common stock on the record date entitles the holder to notice of and to one vote on each matter submitted to shareholders for approval at the special meeting. As of the record date, there were 8,386,799 shares of our common stock outstanding and entitled to be voted on the proposals to be considered at the special meeting.
A quorum of our shareholders is necessary to have a valid shareholders’ meeting. The required quorum for the transaction of business at the special meeting is the presence, in person or represented by proxy, of holders of a majority of the outstanding Franklin common stock entitled to vote at the special meeting. Abstentions will be counted as present for purposes of determining the existence of a quorum. Broker “non-votes” will be counted as present for purposes of determining the existence of a quorum only if the broker votes on certain matters, such as the proposal to adjourn the special meeting if Franklin determines such to be necessary or appropriate. In the event that a quorum is not present at the special meeting, we currently expect that we will adjourn or postpone the special meeting to solicit additional proxies in favor of adoption of the merger agreement and the plan of merger.
Under Pennsylvania law, and pursuant to the merger agreement, we cannot complete the merger unless the merger agreement and the related plan of merger are adopted by the affirmative vote of a majority of the votes cast by the holders of the outstanding shares of our common stock that are entitled to vote at the special meeting. The merger agreement and the plan of merger do not require the separate approval of unaffiliated security holders for their adoption. Under Pennsylvania law, the affirmative vote of a majority of the votes cast by the holders of the outstanding shares of our common stock that are entitled to vote at the special meeting is required to approve all other proposals to be voted upon at the special meeting.
The Saunders Principal Shareholders, along with certain other shareholders of the Company named above, have contributed their shares of Franklin common stock to Saunders in exchange for shares of Saunders’ equity securities. Consequently, as of the record date, Saunders owned 2,741,126 shares, or approximately 32.69% of our common stock, which, in accordance with the terms of the merger agreement, Saunders will vote “FOR” the merger. In addition, Marcy Lewis, one of the shareholders of Saunders, has indicated that she will vote 645,350 shares, or approximately 7.69% of our common stock, that will not be contributed to Saunders “FOR” the merger. Our remaining directors as a group own 65,899 shares, or approximately 0.79% of our common stock, and are expected to vote their shares “FOR” the adoption of the merger agreement and the plan of merger.
Holders of record of our common stock may vote their shares by attending the special meeting and voting their shares of our common stock in person, or by completing the enclosed proxy card, dating and signing it and mailing it in the enclosed postage-prepaid envelope.
Shareholders who hold their shares of our common stock in “street name,” meaning in the name of a bank, broker or other person who is the record holder, must either direct the record holder of their shares of our common stock how to vote their shares or obtain a proxy from the record holder to vote their shares at the special meeting.
Shareholders who have questions or requests for assistance in completing and submitting proxy cards should contact the Company’s proxy solicitor, Regan & Associates, Inc., at (800) 737-3426.
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Voting of Proxies and Failure to Vote
All shares of our common stock represented by properly executed proxies received in time for the special meeting will be voted at the special meeting in the manner specified by the holder. If a shareholder returns a properly signed proxy card but does not indicate how the shareholder wants to vote, the shareholder’s proxy will be counted as a vote “FOR” adoption of the merger agreement and the plan of merger and “FOR” approval of the adjournment or postponement proposal.
Abstentions and withheld votes will be considered as being present at the meeting for purposes of determining the existence of a quorum. Broker “non-votes” will be considered as being present at the special meeting for purposes of determining the existence of a quorum only if the broker votes on certain matters, such as the adjournment or postponement proposal. Under Pennsylvania law, the affirmative vote of a majority of the votes cast at the special meeting is required for the approval of the proposals to be voted upon at the special meeting. Because abstentions, withheld votes and broker “non-votes” are not considered as votes “cast,” they will not affect the outcome of the vote on the proposals to be voted upon at the special meeting.
Holders of our common stock may change their vote at any time before their proxy card is voted at the special meeting. A shareholder can do this in one of three ways. First, the shareholder can send a written, dated notice to the Corporate Secretary of Franklin at One Franklin Plaza, Burlington, NJ 08016, who must receive it before the proxy has been voted at the special meeting, stating that the shareholder would like to revoke the proxy. Second, before the proxy has been voted at the special meeting, a shareholder can complete, date and deliver to the Corporate Secretary a new proxy card. Third, a shareholder can attend the meeting and vote in person. Attendance, by itself, will not revoke a proxy. It will only be revoked if the shareholder actually votes at the special meeting. If a shareholder has instructed a broker to vote the shareholder shares, the shareholder must follow directions received from the broker to change those instructions.
In addition to solicitation by mail, our directors, officers and employees may solicit proxies by telephone, other electronic means or in person. Our directors, officers and employees will not receive any additional compensation for their services, but we will reimburse them for their out-of-pocket expenses. We will reimburse banks, brokers, nominees, custodians and fiduciaries for their reasonable expenses in forwarding copies of this proxy statement to the beneficial owners of shares of our common stock and in obtaining voting instructions from those owners. We will pay all expenses of filing, printing and mailing this proxy statement.
The Company retained Regan & Associates, Inc. to solicit proxies in favor of the adoption of the merger agreement and the plan of merger and the approval of the adjournment or postponement proposal, distribute proxy materials to shareholders, answer shareholder questions and collect and tabulate proxies. The Company will pay Regan & Associates, Inc. $8,000 for such services.
We are not currently aware of any business to be acted upon at the special meeting other than the matters discussed in this proxy statement. Under our bylaws, business transacted at the special meeting is limited to matters relating to the purposes stated in the notice of special meeting, which is provided at the beginning of this proxy statement. If other matters do properly come before the special meeting, or at any adjournment or postponement of the special meeting, we intend that shares of our common stock represented by properly submitted proxies will be voted by and at the discretion of the persons named as proxies on the proxy card. In addition, the grant of a proxy will confer discretionary authority on the persons named as proxies on the proxy card to vote in accordance with their best judgment on procedural matters incidental to the conduct of the special meeting.
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Franklin Electronic Publishers, Incorporated
One Franklin Plaza
Burlington, NJ 08016
(609) 386-2500
Franklin Electronic Publishers, Incorporated, a Pennsylvania corporation, designs, develops, publishes and distributes electronic information on handheld devices, memory media cards, and via internet downloads. We also design, develop, and license to third parties, linguistic technology, such as spelling error detection software in thirty-six languages, for use in application software, electronic products and on the internet.
Saunders Acquisition Corporation
c/o Barry J. Lipsky
2 Briarwood Ct.
Princeton Junction, NJ 08550
(609) 509-3024
Saunders Acquisition Corporation, a Delaware corporation, is a private company formed for the purpose of acquiring the Company.
Directors, Executive Officers and Principal Shareholders of Saunders
Set forth below for each of Saunders’ directors, executive officers and principal shareholders is such person’s respective present principal occupation or employment, the name and principal business of the corporation or other organization in which such occupation or employment is conducted and the five-year employment history of each such person. Each person identified below, other than Mr. Hokari and Shining Sea Limited (“Shining Sea”), is a citizen of the United States of America. Mr. Hokari is a citizen of Japan, and Shining Sea is an exempted company organized under the laws of the Island of Bermuda.
During the last five years, none of Saunders’ directors, executive officers or principal shareholders has been (a) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (b) a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment or decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws.
Listed below are the directors, executive officers and principal shareholders of Saunders as well as background information relating to such persons.
Barry J. Lipsky joined Franklin as Vice President in February 1985. He was elected Franklin’s Executive Vice President in 1997, Interim President and Chief Operating Officer in April 1999 and our President and Chief Executive Officer in May 1999. Mr. Lipsky has been a Director or Managing Director of Franklin’s Hong Kong subsidiary since its inception in 1985 and Chairman of such subsidiary since May 2008. Prior to joining Franklin and from 1972, Mr. Lipsky was employed by Mura Corporation of Hicksville, New York, a designer and importer of consumer electronic products and custom components. The principal business office and address of Mr. Lipsky is c/o Franklin Electronic Publishers, Incorporated, One Franklin Plaza, Burlington, New Jersey 08016.
Frank A. Musto joined Franklin as Vice President, Chief Financial Officer in September 2007. Prior to joining Franklin, Mr. Musto had served as Chief Financial Officer of Polarome International, Inc., a manufacturer and distributor of flavor and fragrance ingredients. Mr. Musto was a member of the Executive Committee and Advisory Board of Directors of Polarome since 2002. From July 2000 through September 2001,
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Mr. Musto served as Chief Financial Officer, Treasurer, and Secretary, and a member of the Board of Directors of Matchbook FX Holdings, Inc. Previously, Mr. Musto was Vice President, Chief Financial Officer and a member of the Board of Directors of JLM Industries, Inc. (NASDAQ) from 1986 through 2000. The principal business office and address of Mr. Musto is c/o Franklin Electronic Publishers, Incorporated, One Franklin Plaza, Burlington, New Jersey 08016.
Toshihide Hokari returned to Franklin as Vice President, Chief Corporate Development Officer in September 2007 and became Chief Operating Officer in May 2008 and Senior Vice President in June 2008. Prior to rejoining Franklin, since 2004, Mr. Hokari was Director and Senior Director, Product Management of Altec Lansing (a Division of Plantronics, Inc.), a consumer electronics company. Mr. Hokari previously worked with Franklin from 1996-1999 as a Product Manager and from 1999-2004 holding various positions, including Vice President, Product Management. The principal business office and address of Mr. Hokari is c/o Franklin Electronic Publishers, Incorporated, One Franklin Plaza, Burlington, New Jersey 08016.
Howard L. Morgan is, and for more than the past five years has been, President of Arca Group, Inc., a consulting and investment management firm, and since January 1999 has been a director of and consultant to Idealab, which creates and operates internet companies. Since 2005, he has been a director of First Round Capital, a venture investment firm. Dr. Morgan was Professor of Decision Sciences at the Wharton School of the University of Pennsylvania from 1972 through 1986. He is a director of Internet Brands, Inc. Dr. Morgan is also Chairman of the Board of Directors of Franklin. The principal business office and address of Dr. Morgan is c/o Franklin Electronic Publishers, Incorporated, One Franklin Plaza, Burlington, New Jersey 08016.
James H. Simons was Chairman of the Board of Renaissance Technologies Corp. (now Renaissance Technologies LLC) from 1982 through 2009 and served as President from 1982 to 2008 and Chief Executive Officer from 2008 to 2009. He served as Chairman of our Board of Directors from 1997 to 2005. Dr. Simons is a director of the Paul Simons Foundation, The Simons Foundation, and Math for America, Inc. Dr. Simons is also a member of the Board of Directors of Franklin. The principal business office and address of Dr. Simons is c/o Renaissance Technologies LLC, 800 Third Avenue, New York, New York 10022.
Shining Sea is an exempted company organized under the laws of the Island of Bermuda, its principal business is investment holding and management and the address of its principal office is c/o Bermuda Trust Company Ltd., Compass Point, 9 Bermudiana Road, Hamilton HM11, Bermuda.
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In the course of evaluating the direction of our business, our board of directors periodically considers various strategic options to maximize shareholder value through profitable revenue growth and efficiency gains, as well as through possible acquisitions of other businesses, commercial alliance arrangements and strategic combinations with other companies. Over the past two years, several acquisitions of other businesses were explored but abandoned for various reasons. The two preliminary offers to purchase assets or stock of the Company referenced below as the “potential strategic acquiror” and the “potential financial acquiror” were considered and the offerors were approached anew in the “market check” process described below. During the relevant time periods discussed below, our board of directors consisted of seven non-employee directors and one employee director—Mr. Lipsky, our President and Chief Executive Officer.
In August of 2008, the investment banking firm of Milbank Roy & Co., LLC approached two of our directors, Dr. Morgan and Mr. Cohen, on behalf of a private company, which we refer to as the potential strategic acquiror, regarding the possibility of discussing a business combination with Franklin. Such contacts were reported to Franklin’s board of directors on August 20, 2008, and Mr. Lipsky met with representatives of Milbank Roy to discuss the possibility of a transaction on September 3, 2008.
On September 10, 2008, the Company received a preliminary offer from Milbank Roy on behalf of the potential strategic acquiror to acquire certain assets and liabilities of the Company for approximately $13 million. Following such offer, the Company executed a non-disclosure and standstill agreement with the potential strategic acquiror and provided Milbank Roy with additional financial information.
On October 3, 2008, Milbank Roy delivered a revised preliminary offer on behalf of the potential strategic acquiror that increased the cash component of the potential strategic acquiror’s offer to approximately $14 million. Following the receipt of such offer, our board of directors authorized Mr. Lipsky to continue discussions with the potential strategic acquiror regarding the details of its asset acquisition proposal. Over the next several months, Mr. Lipsky continued discussions with the potential strategic acquiror regarding a potential transaction. At the same time, Franklin’s board of directors continued to evaluate the Company’s strategic position, including acquisition candidates.
On November 10, 2008, the Company’s board of directors met at Katten Muchin Rosenman’s offices in New York City to discuss the status of the negotiations with the potential strategic acquiror. The board also discussed the potential benefits of a “going-private” transaction, a stock buyback program, and several strategic acquisition candidates.
On November 25, 2008, Dr. Morgan and Mr. Lipsky met with representatives of the potential strategic acquiror and Milbank Roy.
On December 2, 2008, the potential strategic acquiror submitted a revised proposal to purchase certain assets, and assume certain liabilities, of the Company. The revised proposal assumed a net value per share of Franklin common stock at between $.83 and $1.19. Franklin’s board of directors met telephonically on December 10, 2008 to review the revised proposal, and following extensive discussion, rejected the proposal as inadequate and decided to cease further discussions with the potential strategic acquiror.
On December 10, 2008, following the meeting of Franklin’s board of directors, Mr. Lipsky contacted representatives of Milbank Roy to inform them of the board’s decision to reject the potential strategic acquiror’s asset purchase offer.
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On December 15, 2008, Milbank Roy contacted Mr. Lipsky and Dr. Morgan to convey a non-binding proposal for the potential strategic acquiror to purchase all of the Company’s equity for cash at a purchase price of $2.15 per share.
On December 19, 2008, Franklin’s board of directors met telephonically to discuss the potential strategic acquiror’s new proposal to purchase the Company’s equity. Mr. Lipsky summarized the material points of his conversation with Milbank Roy and the board discussed the possible transaction’s merits for the Company and its shareholders. At such meeting, without deciding whether or not the Company was “for sale,” the board determined that its audit committee would be delegated the ability to decide various matters arising out of the proposal and in any final draft of an acquisition agreement, subject to the full board’s consideration of any final agreement with the potential strategic acquiror. The board further authorized the Company’s management to entertain future proposals only if they contemplate the purchase of all of the outstanding stock of the Company at a cash price of at least $2.15 per share, not to accept any financing contingency in any proposed acquisition agreement and to require the potential strategic acquiror to demonstrate the capability to finance such a transaction.
On February 18, 2009, Franklin’s board of directors met at the Company’s offices and reviewed the further discussions with the potential strategic acquiror and Milbank Roy. At that meeting, the board unanimously affirmed its previous position with respect to the potential strategic acquiror, i.e., that management is authorized only to entertain an offer to purchase all of the outstanding stock of the Company at a price of at least $2.15 per share provided that the potential strategic acquiror demonstrates credible financial assurance of its ability to finance such a transaction.
On March 30, 2009 Franklin’s board of directors met telephonically and discussed the status of the potential strategic acquiror’s non-binding offer at $2.15 per share and reviewed the potential strategic acquiror’s evidence of financing. The board also discussed a proposal that one of our directors received from an individual dated February 11, 2009, which we refer to as the potential financial acquiror, pursuant to which such potential financial acquiror would purchase all of the Company’s equity at a price of between $2.00 and $2.50 per share. The potential financial acquiror did not submit information with respect to its financing but indicated it would shortly provide evidence of the ability to finance its proposed transaction. After an extensive discussion of these two proposals, the board determined to provide the potential financial acquiror access to due diligence materials after executing a non-disclosure agreement. Following the discussion Mr. Lipsky requested that the board allow him a 30-day period in which to organize a proposal to purchase all of the Company’s equity, which the board agreed to do. Franklin’s board of directors also resolved to communicate to representatives of the potential strategic acquiror and the potential financial acquiror that, although the board of directors had not decided that the Company was “for sale,” if they had an interest in entering into a strategic transaction with the Company, they should consider raising their proposed per share purchase price.
On May 20, 2009, Franklin’s board of directors met at the offices of Renaissance Technologies LLC in New York City and discussed the status of the outstanding offers to acquire the Company’s equity. After this discussion, Mr. Lipsky informed the board that he, Mr. Hokari and Mr. Musto had formed Saunders Acquisition Corporation for the purpose of acquiring the Company. He also indicated that Drs. Morgan and Simons and certain other shareholders of the Company, had agreed to support the proposed acquisition by Saunders. Mr. Lipsky, on behalf of Saunders, submitted a non-binding proposal to the board of directors pursuant to which Saunders would acquire all of the Company’s equity for cash at a price of $2.35 per share. Mr. Lipsky also informed the board that Saunders had retained its own legal counsel and accounting advisors.
In light of the Saunders’ proposal and the two other outstanding proposals to purchase the Company’s equity, the board of directors formed a special committee of non-management, independent members of our board of directors to facilitate a timely and effective process with respect to the board’s review of a potential transaction with each of the three bidders and in order to avoid any appearance of a conflict of interest. Mr. Cohen was appointed as the chairman of the special committee, with Messrs. Meister and Turner as the other
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two members. The board of directors delegated to the special committee the authority to review, negotiate and evaluate the terms of a potential transaction, to solicit offers to purchase the Company from potential buyers in addition to the three current bidders, to engage financial and legal advisors, and, if appropriate, to make a recommendation to the board of directors regarding a possible transaction with a potential acquiror and any alternatives to a sale of the Company.
On May 20, 2009, following the meeting of Franklin’s full board of directors, the special committee met and, after determining that such firm had not participated in any way in the planning and development of the Saunders proposal, appointed Katten Muchin Rosenman LLP as its legal counsel, and determined that it would retain financial advisors as soon as practicable. The special committee also determined that if it were to entertain any proposal to acquire the Company, such proposal must be in the form of an all-cash acquisition for all of the outstanding stock of the Company and not be subject to any financing condition.
On May 29, 2009, Messrs. Lipsky, Hokari and Musto, Drs. Morgan and Simons and certain other shareholders of the Company filed a Schedule 13D with the SEC disclosing the formation of their group and Saunders’ offer to purchase all of the Company’s equity.
On June 1, 2009, the Company issued a press release and filed a Form 8-K with the SEC announcing its receipt of the Schedule 13D filed with respect to the Saunders’ offer and the creation of the special committee to evaluate the Saunders proposal and other proposals.
On June 4, 2009, the special committee and representatives of Katten Muchin Rosenman LLP met at Katten Muchin Rosenman’s offices in New York City. The primary purpose of the meeting was to interview potential financial advisors to the special committee. Following interviews with three potential advisors, the special committee determined to retain Oppenheimer & Co. Inc. as its financial advisor. The special committee also determined that, given that Franklin is a Pennsylvania corporation, it was advisable to retain local counsel and engaged Ballard Spahr LLP to serve as its special Pennsylvania counsel.
On June 12, 2009, representatives of Oppenheimer met with the Company’s senior management team at the Company’s headquarters in Burlington, New Jersey. The primary purpose of the meeting was for representatives of Oppenheimer to conduct due diligence on the Company and gain an understanding of the Company’s business.
On June 29, 2009, the special committee, along with representatives of Oppenheimer, Katten Muchin Rosenman LLP and, for a portion of the meeting, Ballard Spahr (by telephone conference call) met at Katten Muchin Rosenman’s offices in New York City. Oppenheimer’s representatives presented a list of companies that, in their view, might have an interest in purchasing the Company, including strategic and financial buyers, and the level of interest such buyers may have in the Company. The Oppenheimer representatives also provided a preliminary analysis of the Company’s financial performance and of the premiums typically paid in transactions similar to type the special committee would be reviewing. The preliminary analysis of the Company’s financial performance provided by Oppenheimer was a preliminary version of the financial analysis discussed with the special committee at the September 30, 2009 meeting described more fully later in this proxy statement and was based on information available as of June 29, 2009. The special committee authorized Oppenheimer to (i) prepare descriptive materials concerning the Company, subject to the special committee’s final approval, and (ii) subject to pre-clearance by the Company’s management to avoid business conflicts, approach the most probable potential buyers and to provide such potential buyers with due diligence materials upon the execution of non-disclosure and standstill agreements. Representatives from Ballard Spahr also explained certain aspects of Pennsylvania’s corporate law to the special committee.
Between June 12, 2009 and September 30, 2009, approximately 31 parties (12 of which were strategic buyers), not including Saunders, were contacted by representatives of Oppenheimer to solicit indications of interest in the Company. Of these parties, four parties requested, and received, materials containing publicly available information relating to the Company and confidential financial projections prepared by the Company’s
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management. The earlier strategic acquirer did not request or receive the confidential financial projections. Interested parties were requested to submit indications of interest concerning the Company by August 6, 2009.
On July 27, 2009, the special committee, along with representatives of Katten Muchin Rosenman and Oppenheimer, met telephonically to discuss the results of Oppenheimer’s efforts to date to contact approximately 31 parties it identified as potentially interested in a transaction with the Company. The special committee encouraged further discussions with the contacted parties and also discussed with representatives of Oppenheimer the process for moving forward.
On August 6, 2009, an indication of interest from the earlier financial acquirer was received. The proposal reflected a price range of $2.50 to $2.67 per share. Saunders did not submit a formal indication of interest but reaffirmed its offer of $2.35 per share, which it had originally made on May 20, 2009.
On August 13, 2009, the special committee, along with representatives of Katten Muchin Rosenman and Oppenheimer, met telephonically to receive a presentation by Oppenheimer with respect to its discussions with Saunders’ representatives and representatives of the earlier financial acquirer. As to the earlier financial acquirer, Oppenheimer reported that while it appeared to be moving forward and had provided a preliminary range of offering prices per share, it was also clear that this earlier financial acquirer had not yet received commitments for all of its necessary financing. In connection with its discussions with representatives of Saunders, the Oppenheimer representatives indicated that they had urged an increase in the bid price originally submitted. The special committee also discussed with Oppenheimer a suggested timetable for the submission of final bids and Oppenheimer’s representatives reviewed with the special committee its discussions with several other potential bidders, focusing on one additional strategic and one additional financial bidder. Oppenheimer also noted that the earlier strategic acquiror declined to participate further in the sale process. Finally, members of the special committee discussed the views of special Pennsylvania counsel with respect to Pennsylvania law issues relating to the management bid.
On August 18, 2009, the special committee, along with representatives of Katten Muchin Rosenman and Oppenheimer, met telephonically to discuss the timing of the bid process and to provide a further update on the status of the potential bidders that had not officially declined to participate in the process. The special committee also determined that final bids would be due on September 4, 2009, later extended, at the request of the earlier financial acquirer, to September 11, 2009.
On August 19, 2009, Franklin’s board of directors met at the offices of Renaissance Technologies in New York City along with representatives from Katten Muchin Rosenman. At this meeting, Mr. Cohen summarized the results of the special committee’s process to date and the next steps going forward.
On August 31, 2009, members of the Company’s senior management team and the department management teams in Burlington, New Jersey, USA, members of the earlier financial acquirer and representatives of Oppenheimer met telephonically to provide the earlier financial acquirer an opportunity to conduct due diligence on the Company.
On August 31, 2009, the Managing Director of Company’s European operation in Munich, Germany, members of the earlier financial acquirer and representatives of Oppenheimer met telephonically to provide the earlier financial acquirer an opportunity to conduct additional due diligence on the Company.
On September 3, 2009, members of the department management teams in Hong Kong, China, members of the earlier financial acquirer and representatives of Oppenheimer met telephonically to provide the earlier financial acquirer an opportunity to conduct additional due diligence on the Company.
On September 15, 2009, the special committee, along with representatives of Katten Muchin Rosenman, Ballard Spahr and Oppenheimer met at Katten Muchin Rosenman’s offices in New York City. Oppenheimer’s
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representatives explained that on September 11, 2009, the final date to submit bids to Oppenheimer, the only bid received was from Saunders at $2.50 per share, up from $2.35 per share in its original offer. Oppenheimer’s representatives also reported that the potential financial acquiror, from whom Oppenheimer was also expecting a final bid, had decided not to proceed in the process. Following a discussion of the merits of Saunders’ bid, its value to Franklin and its shareholders, the consequences of rejecting the sole bid, the trading price of the Company’s common stock in the months preceding the Saunders’ offer and the likely retention of current employees of the Company, and other considerations discussed below, the special committee unanimously approved recommending the Saunders offer to Franklin’s full board of directors subject to certain conditions, including the negotiation of an acceptable definitive merger agreement and the receipt of an opinion from Oppenheimer regarding the fairness of Saunders’ offer to the Company’s shareholders (other than Saunders), from a financial point of view.
On September 30, 2009, the special committee, along with representatives of Katten Muchin Rosenman, Ballard Spahr and Oppenheimer, met at the offices of Renaissance Technologies in New York City. At this meeting representatives from Katten Muchin Rosenman explained the terms of the merger agreement that representatives from Katten Muchin Rosenman had negotiated with counsel for Saunders. Also at this meeting, Oppenheimer reviewed with the special committee its financial analysis of the merger consideration as set forth in detail under the heading “Opinion of Financial Advisor to the Special Committee of the Board of Directors,” and rendered to the special committee an oral opinion, confirmed by delivery of a written opinion, dated September 30, 2009, to the effect that, as of that date and based on and subject to the matters described in the opinion, the merger consideration to be received by holders of Franklin common stock (other than Saunders) was fair, from a financial point of view, to such holders. Following consideration of all the relevant factors and the receipt of Oppenheimer’s opinion, the special committee determined to recommend the merger agreement to Franklin’s board of directors.
Immediately following the special committee’s meeting, Franklin’s full board of directors met along with representatives of Katten Muchin Rosenman, Ballard Spahr and Oppenheimer, at the offices of Renaissance Technologies in New York City. Mr. Cohen informed the board of directors that the special committee had received from Oppenheimer its oral opinion, to be subsequently confirmed in writing, to the effect that, as of the date of the written opinion and based upon and subject to the factors, assumptions, limitations and other considerations to be described in the written opinion, the merger consideration to be received by holders of Franklin common stock (other than Saunders) pursuant to the merger agreement was fair, from a financial point of view, to such holders. Mr. Cohen, with representatives from Katten Muchin Rosenman, also reviewed with Franklin’s board of directors the terms of the merger agreement with Saunders. Mr. Cohen then reported to the board of directors that the special committee had determined to recommend to the board of directors that it approve Saunders merger agreement and the related plan of merger. After discussing the terms of Saunders’ merger agreement, the board of directors, with Mr. Lipsky and Drs. Morgan and Simons abstaining, determined that the merger is advisable and in the best interests of the Company, approved the merger agreement, determined the merger consideration to be fair to the shareholders of the Company (other than Saunders), determined the Rule 13e-3 Transaction to be substantively and procedurally fair to the Company’s unaffiliated shareholders and recommended to the shareholders that they approve and adopt the merger agreement at a special meeting. In addition, it is the belief of the Saunders Principal Shareholders that the merger consideration is substantively and procedurally fair to unaffiliated shareholders of the Company.
Later on September 30, 2009, Franklin and Saunders and their respective legal advisors finalized the merger agreement and executed the definitive merger agreement and Franklin issued a press release announcing the approval of the merger agreement.
On October 1, 2009, the Company filed a Form 8-K with the SEC announcing the execution of the merger agreement.
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Reasons for the Special Committee’s Recommendation
In reaching its conclusions described above, the special committee considered the factors set forth below, each of which the special committee believes supported its conclusions but which are not listed in any relative order of importance:
| • | the current and historical market prices of Franklin’s common stock, including the market price of Franklin’s common stock relative to those of peer industry participants and general equity markets indices, and the fact that the merger consideration represents a premium of 150% over the closing price of $1.00 on May 29, 2009 (the last full day of trading before the Schedule 13D related to Saunders’ offer was filed with the SEC) and a premium of 184% over the average of the closing prices of Franklin’s common stock over the 180 days prior to May 29, 2009; |
| • | its belief that the merger is the best alternative for Franklin and its shareholders, taking into account the uncertain returns to such shareholders in light of Franklin’s business operations, financial condition, strategy and prospects, as well as the risks of achieving those returns, the nature of Franklin’s industry and general economic and market conditions; |
| • | the potential value to Franklin and its shareholders that might result from other strategic alternatives available to Franklin, including, among other things, remaining a company with publicly traded common stock, entering or acquiring strategically complementary businesses or acquiring other businesses in Franklin’s existing business lines and the execution risks associated with those alternatives, compared to the risks and benefits of the merger; |
| • | the opinion, and financial presentation, dated September 30, 2009, of Oppenheimer to the special committee as to the fairness, from a financial point of view and as of the date of the opinion, of the merger consideration to be received by holders of Franklin common stock (other than Saunders), which holders include all the Company’s unaffiliated shareholders, which opinion is more fully described below under the caption “Opinion of the Financial Advisor to the Special Committee;” |
| • | the fact that the merger consideration to be received by Franklin’s shareholders is all cash, so that the merger allows Franklin’s shareholders to immediately realize a fair value, in cash, for their investment and provides certainty of value to Franklin’s shareholders for their shares; |
| • | the special committee’s belief that the terms of the merger agreement are favorable to Franklin and its shareholders, noting in particular: |
| • | the fact that, subject to compliance with the terms and conditions of the merger agreement, Franklin is permitted to terminate the merger agreement in order to enter into a permitted alternative acquisition agreement that the board believes in good faith constitutes a superior proposal, upon the payment to Saunders of a termination fee of approximately $650,000 (representing approximately 3% of the total equity value of the transaction), which amount was viewed by the special committee as reasonable in light of the benefits of the merger to Franklin’s shareholders and the sale process conducted by Oppenheimer on behalf of Franklin; |
| • | the obligation of Saunders, subject to the terms and conditions of the merger agreement, to pay Franklin a termination fee of approximately $650,000 (representing approximately 3% of the total equity value of the transaction) if Saunders fails to effect the closing as and when required by the merger agreement; and |
| • | the limited number and nature of the conditions to Saunders obligation to close the merger and the limited risk of non-satisfaction of such conditions. |
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The special committee also believed the process by which Franklin entered into the merger agreement was fair. In reaching that conclusion, the special committee considered, in addition to the factors described above, the following:
| • | the fact that the negotiation of the transaction was conducted entirely under the oversight of the special committee. The special committee: |
| • | consists entirely of directors who are not officers or employees of Franklin, and who will not have an economic interest in Franklin following the merger; |
| • | was given exclusive authority to, among other things, consider, negotiate and evaluate the terms of any proposed transaction, including the merger agreement, and any alternative; and |
| • | had ultimate authority to decide whether or not to proceed with a transaction, subject to Franklin’s board of directors’ approval of the merger agreement. |
| • | the fact that the special committee was advised by its own legal and financial advisors who assisted the special committee in evaluating and negotiating the merger; |
| • | the fact that the terms and conditions of the merger agreement were the product of negotiations between the special committee and its advisors, on the one hand, and Saunders and its advisors, on the other hand; |
| • | the absence of any bid competitive with Saunders’ “going private” proposal despite Saunders’ public announcement of such proposal and a sale process during which 31 potential strategic and financial buyers, not including Saunders, were contacted and four of such potential buyers were provided with a confidential information memorandum inviting the submission of a competing bid; and |
| • | the fact that a majority of the directors who are not employees of the Company comprise the board of directors that would consider approval of the Rule 13e-3 Transaction. |
The special committee also considered that Pennsylvania law requires the vote of a majority of the votes cast by the holders of the outstanding shares of our common stock entitled to vote at the special meeting to adopt the merger agreement and the related plan of merger and does not require that the approval of a majority of unaffiliated shareholders be obtained, but noted that the collective vote of Saunders, its shareholders and the Company’s affiliates of the shares of our common stock owned by it and them does not under this provision of Pennsylvania law preclude the possibility that our shareholders could vote to reject the merger agreement and plan of merger at the special meeting.
For the reasons discussed above, the special committee believes that the merger is procedurally fair to the unaffiliated shareholders of the Company despite the fact that the special committee did not retain an unaffiliated representative to act solely on behalf of Franklin’s unaffiliated shareholders and the transaction is not structured so that the vote of a majority of the Company’s unaffiliated shareholders is required. In light of the factors described above, and the fact that the use of a special committee of independent and disinterested directors is a mechanism well recognized to ensure fairness in transactions of this type, the special committee, representing a majority of the Company’s independent directors, did not consider it necessary to (and therefore did not) retain an unaffiliated representative to act solely on behalf of Franklin’s unaffiliated shareholders.
The special committee also took into account a number of potentially adverse factors concerning the merger including, without limitation, the following:
| • | the risk that the merger might not close in a timely manner or at all, including the risk that the merger will not occur if due to insufficient cash balances of the Company at closing or an unexpected default under subscription agreements with Saunders (by others than shareholders of the Company) there is not adequate financing available to Saunders to complete the merger, as well as the costs of a failure to close, including employee attrition and potential negative effects on customer relationships; |
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| • | the fact that Franklin is entering into a merger agreement with a newly-formed corporation with essentially no assets and, accordingly, that its sole remedy in connection with a breach of the merger agreement by Saunders, even a breach that is deliberate or willful, is limited to $650,000; |
| • | the merger consideration consists of cash and will therefore be taxable to Franklin’s shareholders for U.S. federal income tax purposes; |
| • | the opportunities for growth and the potential for increased shareholder value if Franklin were to remain an independent company with publicly traded equity securities and the fact that Franklin’s shareholders (other than the Saunders Group) will not participate in any future appreciation of Franklin’s value; |
| • | the fact that, in order for Franklin to terminate the merger agreement to accept a superior proposal, Franklin must, in addition to complying with certain other terms and conditions of the merger agreement, pay Saunders a $650,000 termination fee; |
| • | the restrictions placed on Franklin’s activities prior to closing of the merger as a result of the restrictive covenants included in the merger agreement, which may prevent Franklin from capitalizing on business opportunities that may arise before closing of the merger; |
| • | the fact that Franklin’s directors and executive officers have interests in the merger that are different from those of other Franklin shareholders; |
| • | the equity interest in Franklin to be received by the Saunders Group as compared to unaffiliated shareholders receiving all cash; |
| • | the disruption to Franklin’s business operations and diversion of management focus and resources from other strategic opportunities because of the pending merger; and |
| • | the fact that under Pennsylvania law, Franklin’s shareholders who are opposed to the merger will not have dissenters’ or similar rights. |
The special committee did not consider Franklin’s net book value, which is an accounting concept, to be a factor in determining the substantive fairness of the transaction to Franklin’s shareholders because it believed that net book value is not a material indicator of the value of Franklin’s equity but rather an indicator of historical costs. The special committee also did not consider the liquidation value of Franklin’s assets as indicative of Franklin’s value primarily because of its belief that the liquidation value would be significantly lower than Franklin’s value as an ongoing business and that, due to the fact that Franklin is being sold as an ongoing business, the liquidation value is irrelevant to a determination as to whether the merger is fair to the unaffiliated shareholders of Franklin. The special committee did not consider a going concern analysis because such an analysis requires a valuation of the liquidation value of the Company. The special committee did not consider purchases of the Company’s common stock by the Company or its affiliates who are Rule 13e-3 purchasers during the past two years because there were no such purchases. For the same reasons, neither Saunders nor the Saunders Principal Shareholders considered these factors.
The foregoing discussion of the information and factors considered by the special committee, while not exhaustive, includes the material considerations considered by the special committee. In view of the wide variety of the factors considered by the special committee and the complexity of these matters, the special committee did not find it practicable to, and did not, quantify or otherwise assign relative or specific weight or values to any of these factors, and individual members of the special committee may have given different weights to different factors. The special committee approved, and recommended that the board of directors approve, the merger based upon its belief that the positive factors relating to the merger outweigh the negative factors, in light of the totality of information presented to and considered by it.
Reasons for the Board’s Recommendation
In reaching its conclusion regarding the fairness of the merger and its decision to approve the merger agreement and the related plan of merger and recommend the adoption of the merger agreement and the related plan of merger by Franklin’s shareholders, the board of directors (excluding Messrs. Lipsky, Morgan and Simons
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who, with the concurrence of the other members of the board of directors, recused themselves from the process and did not vote due to their conflicting interests) relied on the special committee’s recommendations and the factors examined by the special committee as described above. In view of the wide variety of factors considered in connection with its evaluation of the merger, the board of directors (excluding Messrs. Lipsky, Morgan and Simons who, with the concurrence of the other members of the board of directors, recused themselves from the process and did not vote due to their conflicting interests) did not find it practicable to, and did not, quantify or otherwise assign relative weights to the foregoing factors in reaching its conclusion. In addition, individual members of the board of directors may have given different weights to different factors and may have viewed some factors more positively or negatively than others. Rather, the board of directors (excluding Messrs. Lipsky, Morgan and Simons who, with the concurrence of the other members of the board of directors, recused themselves from the process and did not vote due to their conflicting interests) viewed its position as being based on the totality of the information considered by it. As part of its determination with respect to the merger, the board of directors (excluding Messrs. Lipsky, Morgan and Simons who, with the concurrence of the other members of the board of directors, recused themselves from the process and did not vote due to their conflicting interests) adopted the conclusion of the special committee and the analyses underlying the conclusion, based upon its view as to the reasonableness of such conclusion and analyses.
In light of the factors described above, and the fact that the use of a special committee of independent and disinterested directors is a mechanism well recognized to ensure fairness in transactions of this type, neither Franklin’s board of directors nor the special committee considered it necessary to (and therefore did not) retain an unaffiliated representative to act solely on behalf of Franklin’s unaffiliated shareholders for purposes of negotiating the terms of the merger agreement or preparing a report concerning the fairness of the merger agreement and the transactions contemplated by the merger agreement, including the merger.
Based on the factors outlined above, Franklin’s board of directors determined that the merger is advisable and in the best interests of Franklin, approved the merger agreement and the plan merger, determined the merger consideration to be fair to Franklin’s shareholders and that the Rule 13e-3 Transaction is substantively and procedurally fair to the Company’s unaffiliated shareholders.
Belief of Certain Members of the Saunders Group as to Fairness
In addition, it is the belief of the Saunders Principal Shareholders that the Rule 13e-3 Transaction is fair to the Company’s unaffiliated shareholders. The Saunders Principal Shareholders based their belief that the Rule 13e-3 Transaction is fair to the Company’s unaffiliated shareholders on the following factors:
| • | the Company established a special committee comprised of independent directors to evaluate the Saunders proposal and any other proposals the Company received; |
| • | the special committee was empowered to, and did, engage independent financial and legal advisors; |
| • | Oppenheimer contacted 31 parties that it identified as potentially being interested in a strategic transaction with the Company; |
| • | Oppenheimer permitted potentially interested parties to conduct substantial due diligence reviews of the Company; |
| • | potentially interested bidders were encouraged to submit offers to the Company; |
| • | Oppenheimer’s process resulted in an increase of Saunders’ initial offer for the Company; |
| • | Saunders’ offer represented a substantial premium over the current and historical market prices of the common stock, specifically that the merger consideration represents a premium of 150% over the closing price of $1.00 on May 29, 2009 (the last full day of trading before the Schedule 13D related to Saunders’ offer was filed with the SEC) and a premium of 184% over the average of the closing prices of Franklin’s common stock over the 180 days prior to May 29, 2009; |
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| • | while the merger agreement is not structured to require the vote of a majority of the Company’s unaffiliated shareholders to approve the merger agreement and the related plan of merger, but instead complies with the Pennsylvania law requirement that the vote of a majority of the votes cast by the holders of the outstanding shares of Franklin’s common stock entitled to vote at the special meeting is sufficient to adopt the merger agreement and the related plan of merger, the collective vote of Saunders, its shareholders and the Company’s affiliates of the shares of Franklin’s common stock owned by it and them does not under this provision of Pennsylvania law preclude the possibility that Franklin’s shareholders could vote to reject the merger agreement and plan of merger at the special meeting; and |
| • | the fact that a majority of the directors who are not employees of the Company comprise the board of directors that would consider approval of the Rule 13e-3 Transaction. |
For the aforementioned reasons, the Saunders Principal Shareholders believe that the Rule 13e-3 Transaction is fair to the unaffiliated shareholders of the Company from procedural and substantive perspectives.
The Saunders Principal Shareholders did not consider Oppenheimer’s opinion because it was provided to the special committee, none of whose members consisted of Saunders Principal Shareholders. The Saunders Principal Shareholders also did not consider it necessary for the Company to retain an unaffiliated representative to act solely on behalf of Franklin’s unaffiliated shareholders due to the fact that the use of a special committee of independent and disinterested directors is a mechanism well recognized to ensure fairness in transactions of this type.
Opinion of the Financial Advisor to the Special Committee of the Board of Directors
Franklin has engaged Oppenheimer to act as the financial advisor to the special committee in connection with the merger. In connection with this engagement, the special committee requested that Oppenheimer evaluate the fairness, from a financial point of view, to the holders of Franklin common stock (other than Saunders) of the merger consideration to be received by such holders. On September 30, 2009, at a meeting of the special committee held to evaluate the merger, Oppenheimer rendered to the special committee an oral opinion, which was confirmed by delivery of a written opinion, dated September 30, 2009, to the effect that, as of that date and based on and subject to the matters described in its opinion, the merger consideration to be received by holders of Franklin common stock (other than Saunders) was fair, from a financial point of view, to such holders.
The full text of Oppenheimer’s written opinion, dated September 30, 2009, which describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken, is attached to this proxy statement as Annex C. Oppenheimer’s opinion was provided to the special committee in connection with its evaluation of the merger consideration from a financial point of view. Oppenheimer’s opinion does not address any other aspect of the merger and does not constitute a recommendation to any shareholder as to how such shareholder should vote or act with respect to any matters relating to the merger. Below is a summary of Oppenheimer’s opinion. Reference is made to the full text of its opinion attached to this proxy statement as Annex C. Holders of Franklin common stock are encouraged to read the opinion carefully in its entirety.
In arriving at its opinion, Oppenheimer:
| • | reviewed the merger agreement; |
| • | reviewed audited financial statements of Franklin for fiscal years ended March 31, 2007, March 31, 2008 and March 31, 2009 and unaudited financial statements of Franklin for the four months ended July 31, 2009; |
| • | reviewed financial forecasts and estimates relating to Franklin prepared by Franklin’s management; |
| • | held discussions with Franklin’s senior management with respect to Franklin’s business and prospects; |
| • | reviewed historical market prices and trading volume for Franklin common stock; |
| • | reviewed and analyzed certain publicly available financial data and stock market performance data for companies that Oppenheimer deemed relevant in evaluating Franklin; |
| • | analyzed the estimated present value of the future cash flows of Franklin based on financial forecasts and estimates prepared by Franklin’s management; |
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| • | reviewed and analyzed the premiums paid, based on publicly available information, in merger and acquisition transactions that Oppenheimer deemed relevant in evaluating the merger; |
| • | reviewed other public information concerning Franklin; and |
| • | performed such other analyses, reviewed such other information and considered such other factors as Oppenheimer deemed appropriate. |
In rendering its opinion, Oppenheimer relied upon and assumed, without independent verification or investigation, the accuracy and completeness of all of the financial and other information (including, without limitation, the representations and warranties of Franklin stated in the merger agreement) that is publicly available or was provided to Oppenheimer by Franklin or its employees, representatives and affiliates or otherwise reviewed by Oppenheimer. With respect to the forecasts of future financial condition and operating results of Franklin provided to Oppenheimer, Oppenheimer assumed, without independent verification or investigation, that such forecasts were reasonably prepared on bases reflecting the best available information, estimates, assumptions and good faith judgments of Franklin’s management. Oppenheimer assumed, with Franklin’s consent, that the merger would be consummated in accordance with the merger agreement without waiver, modification or amendment of any material term, condition or agreement and in compliance with all applicable laws and other requirements and that, in the course of obtaining the necessary regulatory or third party approvals and consents with respect to the merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on Franklin or the merger. Oppenheimer neither made nor obtained any independent evaluations or appraisals of the assets or liabilities (including, without limitation, any contingent, derivative or off-balance sheet assets and liabilities) of Franklin or its affiliated entities. Oppenheimer did not express any opinion as to Franklin’s underlying valuation, future performance or long-term viability. Oppenheimer expressed no view as to, and its opinion did not address, any terms or other aspects of the merger (other than the merger consideration to the extent expressly specified in its opinion) or any aspect or implication of any other agreement, arrangement or understanding entered into in connection with the merger or otherwise. In addition, Oppenheimer expressed no view as to, and its opinion did not address, Franklin’s underlying business decision to proceed with or effect the merger, the relative merits of the merger as compared to any alternative business strategies that might exist for Franklin, the effect of any other transaction in which Franklin might engage, the tax or legal consequents of the merger to any of Franklin, its shareholders or any other party, or the solvency of Franklin or any other participant in the merger under any applicable laws relating to bankruptcy, insolvency or similar matters. Oppenheimer’ opinion was necessarily based on the information available to it and general economic, financial and stock market conditions and circumstances as they existed and could be evaluated by Oppenheimer on the date of the opinion. It should be understood that, although subsequent developments may affect its opinion, Oppenheimer does not have any obligation to update, revise or reaffirm its opinion.
This summary is not a complete description of Oppenheimer’s opinion or the financial analyses performed and factors considered by Oppenheimer in connection with its opinion. The preparation of a financial 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, a financial opinion is not readily susceptible to summary description. Oppenheimer arrived at its ultimate opinion based on the results of all analyses undertaken by it and assessed as a whole, and did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis for purposes of its opinion. Accordingly, Oppenheimer believes that its analyses and this summary must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying Oppenheimer’s analyses and opinion.
In performing its analyses, Oppenheimer considered industry performance, general business, economic, market and financial conditions and other matters existing as of the date of its opinion, many of which are beyond Franklin’s control. No company, business or transaction used in the analyses is identical or directly
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comparable to Franklin or the merger, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions analyzed.
The estimates contained in Oppenheimer’s analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than those suggested by its analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, Oppenheimer’s analyses are inherently subject to substantial uncertainty.
The type and amount of consideration payable in the merger were determined through negotiation between Franklin and Saunders, and the decision to enter into the merger was solely that of the Franklin board of directors. Oppenheimer’s opinion and financial presentation were only one of many factors considered by the Franklin board of directors in its evaluation of the merger and should not be viewed as determinative of the views of the Franklin board of directors or Franklin’s management with respect to the merger or the merger consideration.
The following is a summary of the material financial analyses reviewed with the special committee in connection with Oppenheimer’s opinion dated September 30, 2009. The financial analyses summarized below include information presented in tabular format. In order to fully understand Oppenheimer’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables 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 Oppenheimer’s financial analyses.
Selected Companies Analysis
Oppenheimer reviewed financial and stock market information for Franklin and certain publicly held microcap companies in the consumer electronics industry that generally had (i) total annual sales less than $1 billion and market capitalizations under $1 billion, (ii) revenues derived from sales domestically and internationally and (iii) in Oppenheimer’s belief, had similar business lines, consumer electronics product offerings or distribution channels common with the Company. The criteria described above was consistently applied by Oppenheimer in determining the list of selected companies, and no company satisfying such criteria was deliberately excluded from such list. The list of selected companies is set forth below:
($ in millions)
| Selected Company |
Enterprise Value |
LTM | Enterprise Value to | |||||||||
| Revenue | EBITDA | Revenue | EBITDA(1) | |||||||||
| Audiovox Corp. |
$ 106.7 | $ 578.3 | $ 6.1 | 0.2X | NM | (2) | ||||||
| Cobra Electronics |
$ 26.6 | $ 106.6 | $ 1.6 | 0.2X | NM | |||||||
| Comarco |
$ 10.6 | $ 16.1 | ($ 8.6 | ) | 0.7X | NM | ||||||
| Group Sense International, Ltd. |
HKD 19.6 | HKD 746.4 | (HKD 45.7 | ) | NM | NM | ||||||
| IGO, Inc. |
$ 6.6 | $ 69.7 | $ 1.9 | NM | NM | |||||||
| IDT International |
HKD 468.3 | HKD 1,720.7 | HKD 134.5 | 0.3X | 3.5X | |||||||
| LeapFrog Enterprises |
$ 201.6 | $ 411.7 | ($ 30.6 | ) | 0.5X | NM | ||||||
| Lexibook Linguistic Electronic Systems |
€ 37.8 | € 42.0 | € 1.6 | 0.9X | NM | |||||||
| Lojack Corp. |
$ 54.5 | $ 164.4 | $ 7.7 | 0.3X | 7.1X | |||||||
| Rockford Corp |
$ 12.0 | $ 58.6 | ($ 3.5 | ) | 0.2X | NM | ||||||
| (1) | EBITDA refers to earnings before interest, taxes, depreciation and amortization |
| (2) | NM refers to not meaningful |
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Oppenheimer reviewed enterprise values of the selected companies, calculated as fully-diluted market value based on closing stock prices on September 28, 2009, plus net debt, as a multiple of the last twelve months’ earnings before interest, taxes, depreciation and amortization, referred to as EBITDA. Oppenheimer also reviewed enterprise values of the selected companies on September 28, 2009 as a multiple of the last twelve months’ revenue. Financial data for the selected companies was based on public filings, publicly available research analysts’ estimates and other publicly available information.
The calculated multiple ranges were as follows:
| Multiple Range | ||||||||
| Multiple Description |
Low | High | Median | Mean | ||||
| LTM Revenue |
0.2x | 0.7x | 0.3x | 0.4x | ||||
| LTM EBITDA |
3.5x | 7.1x | 5.3x | 5.3x | ||||
Oppenheimer applied the following selected multiple ranges derived from the selected companies to corresponding financial data for the Company. The selected companies analysis indicated the following implied enterprise value reference ranges for the Company:
($ in millions)
| Selected Multiple Range | Selected Enterprise Value Range | |||||||||
| Multiple Description |
Low | High | Low | High | ||||||
| LTM Revenue |
0.3x | 0.4x | $ | 12.7 | $ | 17.2 | ||||
| LTM EBITDA |
3.5x | 7.1x | $ | 4.9 | $ | 9.9 | ||||
Oppenheimer’s selected multiple ranges based on a 15% range around the median implied revenue multiple of the selected companies and the low to high implied EBITDA multiple of the selected companies. The selected companies list include only two companies that had meaningful EBITDA multiples. Therefore, Oppenheimer applied the low and high multiple of this group instead of applying a range based on the median.
Financial data for Franklin was based on Franklin’s public filings and internal estimates of Franklin’s management. This analysis indicated the following implied per share equity reference range for Franklin, as compared to the per share merger consideration:
Enterprise Value as Multiple of Last Twelve Months’ EBITDA
| Implied Per Share Equity Reference Range for Franklin |
Per Share Merger Consideration | |
| $1.41 - $1.97 | $2.50 |
Enterprise Value as Multiple of Last Twelve Months’ Revenue
| Implied Per Share Equity Reference Range for Franklin |
Per Share Merger Consideration | |
| $2.28 - $2.77 | $2.50 |
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Discounted Cash Flow Analysis
Using projections for 2010 through 2014 provided by the management of Franklin, Oppenheimer performed a discounted cash flow analysis to calculate the estimated present value of the standalone unlevered, after-tax free cash flows that Franklin could generate. To calculate the value of the Company for the cash flows produced after 2014, the terminal value, Oppenheimer assumed perpetual growth rates of 0.0% to 2.0% for the projected cash flows subsequent to 2014, which were based on Franklin’s historical performance. Oppenheimer did not consider industry average growth rates in connection with the discounted cash flow analysis because it used the Company’s historical performance as the basis for the assumed perpetual growth rates. The cash flows and terminal values were discounted to the present value using discount rates ranging from 18.0% to 20.0%, which were based on the discount rates for the companies identified in the selected companies analysis. This analysis indicated the following implied per share equity reference range for Franklin, as compared to the per share merger consideration:
| Implied Per Share Equity Reference Range for Franklin |
Per Share Merger Consideration | |
| $2.60 - $2.99 | $2.50 |
The projections provided by Franklin’s management for the Company’s free cash flows, along with Oppenheimer’s analysis of such cash flows described above, are set forth herein under the heading “—Financial Projections provided to Oppenheimer.”
Financial Projections provided to Oppenheimer
The Company’s management provided the following financial projections to Oppenheimer in July 2009 in connection with Oppenheimer arriving at its fairness opinion. The financial projections were prepared by Mr. Musto with input from Messrs. Lipsky and Hokari.
Projected Free Cash Flows for Fiscal 2010 to 2014
| Projected | ||||||||||||||||||||
| Fiscal Year End 03/31 |
9 Mos ‘10 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||
| Revenues |
$ | 36.3 | $ | 52.2 | $ | 57.5 | $ | 57.9 | $ | 58.4 | ||||||||||
| EBITDA |
3.7 | 5.6 | 8.7 | 8.4 | 8.1 | |||||||||||||||
| Less: Depreciation |
(0.7 | ) | (1.7 | ) | (1.7 | ) | (1.7 | ) | (1.7 | ) | ||||||||||
| Less: Amortization |
(0.8 | ) | (0.4 | ) | (0.4 | ) | (0.4 | ) | (0.4 | ) | ||||||||||
| EBIT |
2.2 | 3.5 | 6.6 | 6.3 | 6.1 | |||||||||||||||
| Less: Income Taxes @ 39.5% |
(0.9 | ) | (1.4 | ) | (2.6 | ) | (2.5 | ) | (2.4 | ) | ||||||||||
| Unlevered After-Tax Income |
1.4 | 2.1 | 4.0 | 3.8 | 3.7 | |||||||||||||||
| Plus: Depreciation |
0.7 | 1.7 | 1.7 | 1.7 | 1.7 | |||||||||||||||
| Plus: Amortization |
0.8 | 0.4 | 0.4 | 0.4 | 0.4 | |||||||||||||||
| Less: Capital Expenditures |
(1.2 | ) | (1.5 | ) | (1.5 | ) | (1.5 | ) | (1.5 | ) | ||||||||||
| Less: Working Capital Investment |
(1.8 | ) | (0.8 | ) | (0.9 | ) | (0.1 | ) | (0.1 | ) | ||||||||||
| Free Cash Flow |
($ | 0.2 | ) | $ | 1.8 | $ | 3.7 | $ | 4.3 | $ | 4.1 | |||||||||
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| Terminal Value Based on Free Cash Flow |
0.0% Perpetuity Growth Rate |
1.0% Perpetuity Growth Rate |
2.0% Perpetuity Growth Rate | ||||||||||||||||||||||||
| 18.0% | 19.0% | 20.0% | 18.0% | 19.0% | 20.0% | 18.0% | 19.0% | 20.0% | |||||||||||||||||||
| Discounted Free Cash Flows 9 Mos ‘10—2014 |
$ | 7.7 | $ | 7.5 | $ | 7.3 | $ | 7.7 | $ | 7.5 | $ | 7.3 | $ | 7.7 | $ | 7.5 | $ | 7.3 | |||||||||
| Discounted Terminal Value |
10.0 | 9.1 | 8.3 | 10.7 | 9.7 | 6.8 | 11.5 | 10.4 | 9.4 | ||||||||||||||||||
| Enterprise Value |
17.7 | 16.5 | 15.5 | 18.4 | 17.2 | 16.1 | 19.2 | 17.8 | 16.6 | ||||||||||||||||||
| Less: Debt, Preferred & Minority Interest @ 07/31/09 |
0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||||||||
| Plus: Cash @ 07/31/09 |
6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | ||||||||||||||||||
| Implied Equity Value |
$ | 24.6 | $ | 23.5 | $ | 22.5 | $ | 25.3 | $ | 24.1 | $ | 23.0 | $ | 26.1 | $ | 24.8 | $ | 23.6 | |||||||||
Equity Value Per Share Based on Perpetuity Growth
| Discount Rate |
Terminal Growth Rate | |||||
| 0.0% | 1.0% | 2.0% | ||||
| 18.0% | $2.83 | $2.91 | $2.99 | |||
| 19.0% | 2.71 | 2.77 | 2.85 | |||
| 20.0% | 2.60 | 2.65 | 2.72 | |||
Historical and Projected Income Statement
($ in millions)
| Actual | Projected | ||||||||||||||||||||||
| Fiscal Year End 03/31 |
2008 | 2009 | 2010* | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||
| Sales |
$ | 60.6 | $ | 46.8 | $ | 47.0 | $ | 52.2 | $ | 57.5 | $ | 57.9 | $ | 58.4 | |||||||||
| Cost of Goods Sold |
28.7 | 24.0 | 23.4 | 26.0 | 28.7 | 29.0 | 29.2 | ||||||||||||||||
| Gross Profit |
31.9 | 22.8 | 23.6 | 26.2 | 28.8 | 29.0 | 29.2 | ||||||||||||||||
| Operating Expenses |
25.7 | 23.6 | 19.2 | 20.6 | 20.2 | 20.6 | 21.1 | ||||||||||||||||
| EBITDA |
6.2 | (0.8 | ) | 4.4 | 5.6 | 8.7 | 8.4 | 8.1 | |||||||||||||||
| Depreciation & Amortization |
3.2 | 3.1 | 2.0 | 2.1 | 2.1 | 2.1 | 2.1 | ||||||||||||||||
| EBIT |
3.1 | (3.9 | ) | 2.4 | 3.5 | 6.6 | 6.3 | 6.1 | |||||||||||||||
| Interest Expense (Income), net |
(0.1 | ) | 0.4 | 0.1 | 0.2 | 0.2 | .01 | 0.1 | |||||||||||||||
| Other Non-Operating Expense |
0.4 | 0.0 | 1.2 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||||||
| Pre-Tax Income |
2.7 | (4.3 | ) | 1.2 | 3.3 | 6.4 | 6.2 | 6.0 | |||||||||||||||
| Provision for Taxes |
0.2 | 2.8 | 0.3 | 0.3 | 0.4 | 1.5 | 1.8 | ||||||||||||||||
| Net Income |
$ | 2.5 | ($ | 7.1 | ) | $ | 0.9 | $ | 3.0 | $ | 6.0 | $ | 4.7 | $ | 4.2 | ||||||||
| * | Includes actual results for April, May and June of 2009. |
Based on a tracking of various economic data published by the U.S. Commerce Department and the Federal Statistical Office in Germany relating to the retail market sales for products the Company currently produces, as well as the historic performance and external factors impacting the Company’s core business, the foregoing Company projections that were provided to Oppenheimer were prepared on a conservative basis and assumed a “no growth” scenario in this core business. The projections assume an increase in revenues primarily from the development and sale of new products for the reading enhancement and travel markets. Based on the size of these markets, the Company assumed that it would penetrate a relatively small percentage of such markets in fiscal 2011 and increase its penetration in fiscal 2012. Factored into the projections was an assumed expense of approximately $875,000 to support entry into these two markets.
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The non-public financial information and projections that Franklin provided to Oppenheimer during the course of Oppenheimer’s due diligence investigation and analysis were provided solely in connection with Oppenheimer’s due diligence investigation and not for inclusion or incorporation by reference in any publicly filed documents. Such financial projections are by their nature speculative and contain an aspirational element, and there is no guarantee that such projections will be realized or that the assumptions on which they are based will prove to be correct.
Franklin does not as a matter of course make public any projections as to future performance or earnings, and the financial projections set forth above are included in this proxy statement only because this information was provided to Oppenheimer and was information upon which Oppenheimer, with Franklin’s consent, relied and performed its analysis, as noted herein. The projections were not prepared with a view to public disclosure or compliance with the published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants regarding projections or forecasts. The projections do not purport to present operations in accordance with U.S. generally accepted accounting principles, and Franklin’s independent registered public accounting firm has not examined, compiled or otherwise applied procedures to the projections and accordingly assumes no responsibility for them. Franklin’s internal financial forecasts, upon which the projections were based in part, are, in general, prepared solely for internal use, such as budgeting and other management decisions, and are subjective in many respects. As a result, these internal financial forecasts are susceptible to interpretations and periodic revision based on actual experience and business developments. The projections reflect numerous assumptions made by the management of Franklin and general business, economic, market and financial conditions and other matters, all of which are difficult to predict and many of which are beyond Franklin’s control. Accordingly, there can be no assurance that the assumptions made in preparing the projections will prove accurate or that any of the projections will be realized.
Franklin expects that there will be differences between actual and projected results, and actual results may be materially greater or materially less than those contained in the projections due to numerous risks and uncertainties, including but not limited to the important factors listed under “Item 1A. Risk Factors” in Franklin’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009. All projections are forward-looking statements, and these and other forward-looking statements are expressly qualified in their entirety by the risks and uncertainties identified in Franklin’s Form 10-K.
The inclusion of the above projections should not be regarded as an indication that any of Franklin, Oppenheimer, Saunders or their respective affiliates or representatives considered or consider the projections to be a prediction of actual future events, and the projections should not be relied upon as such.
None of Franklin, Oppenheimer, Saunders or any of their respective affiliates or representatives intends to update or otherwise revise the projections to reflect circumstances existing or arising after the date such projections were generated or to reflect the occurrence of future events, even in the event that any or all of the assumptions underlying the projections are shown to be in error.
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Franklin’s shareholders are cautioned not to place undue reliance on the projections included in this proxy statement.
Miscellaneous
Oppenheimer also provided to the special committee information relating to the premiums paid in 72 selected transactions between 2006 and 2009 with transaction values between $5 million and $50 million (excluding restructurings, repurchases, recapitalizations, spin-offs, split-offs, exchange traded funds, financial services firms, insurance companies and government related companies because they were not relevant comparisons), which criteria was consistently applied by Oppenheimer in determining the premiums paid selected transactions, relative to the closing stock prices of the target companies in such transactions one trading day, one week and four weeks prior to public announcement of the relevant transaction. The summary of the premiums paid data is provided in the table below:
| Premiums Prior to Announcement (%) | ||||||||||||
| 1 Day | 1 Week | 1 Month | Average | |||||||||
| High |
477.8 | % | 380.0 | % | 700.0 | % | 519.3 | % | ||||
| 75th Percentile |
74.3 | % | 73.8 | % | 90.9 | % | 79.7 | % | ||||
| Median |
48.3 | % | 54.7 | % | 55.1 | % | 52.7 | % | ||||
| 25th Percentile |
28.2 | % | 23.5 | % | 21.9 | % | 24.5 | % | ||||
| Low |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||
Oppenheimer then applied a range of selected premiums based upon a range of the 25th percentile to the 75th percentile of the historical premiums paid in the selected transactions to the closing prices of Franklin common stock one day, one week and four weeks prior to June 1, 2009.
| Share Price |
Range(1) | Share Value | |||||||||||||
| Low | High | Low | High | ||||||||||||
| 1 Day Prior |
$ | 1.00 | 28.2 | % | 74.3 | % | $ | 1.28 | $ | 1.74 | |||||
| 1 Week Prior |
1.08 | 23.5 | % | 73.8 | % | 1.33 | 1.88 | ||||||||
| 1 Month Prior |
0.82 | 21.9 | % | 90.9 | % | 1.00 | 1.57 | ||||||||
| (1) | Range represents 25th to 75th percentile of transaction premiums |
This analysis indicated the following implied per share equity reference range for Franklin, as compared to the per share merger consideration:
| Implied Per Share Equity Reference Range for Franklin |
Per Share Merger Consideration | |
| $1.00 - $1.88 |
$2.50 |
Franklin has agreed to pay Oppenheimer for its financial advisory services in connection with the merger an aggregate fee estimated to be approximately $625,000. Of this amount, $50,000 was paid in connection with Oppenheimer’s engagement, $300,000 was paid upon delivery of its opinion and $275,000 is contingent upon consummation of the merger. In addition, Franklin has agreed to indemnify Oppenheimer and related parties against liabilities, including liabilities under the federal securities laws, relating to, or arising out of, its engagement. In the ordinary course of business, Oppenheimer and its affiliates may actively trade the securities of Franklin for its and their own accounts and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities.
The special committee selected Oppenheimer as its financial advisor based on Oppenheimer’s reputation and experience. The special committee was aware of the terms of Oppenheimer’s engagement, including the fact that a portion of the fee payable to Oppenheimer for its services is contingent upon the completion of the merger. Oppenheimer is an internationally recognized investment banking firm and, as a part of its investment banking business, is regularly engaged in valuations of businesses and securities in connection with acquisitions and mergers, underwritings, secondary distributions of securities, private placements and valuations for other purposes.
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Purposes and Reasons for the Merger and Plans for Franklin after the Merger
One of the purposes of the merger for Franklin is to enable its unaffiliated shareholders to immediately realize the value of their investment in Franklin through their receipt of the per share merger price of $2.50 in cash, without interest, representing a premium of approximately 150% to the closing market price of Franklin common stock on May 29, 2009, the last full day of trading before the Saunders Group filed their Schedule 13D with the SEC announcing its “going private” proposal. In this respect, the special committee and the board of directors believed that the merger was more favorable to such shareholders than any other alternative reasonably available to Franklin and its unaffiliated shareholders, including remaining as a public company, because of the uncertain returns to such shareholders in light of Franklin’s business, operations, financial condition, strategy and prospects, as well as the risks involved in achieving those prospects, and general industry, economic and market conditions, both on a historical and on a prospective basis. For these reasons, and the reasons discussed under “—Reasons for the Board’s Recommendation,” beginning on page 25, the board of directors of Franklin has determined that the merger is advisable and the merger agreement, the merger consideration and the transactions contemplated by the merger agreement are fair to and in the best interests of Franklin and Franklin’s unaffiliated shareholders.
One of the purposes of the merger for Saunders and the Saunders Principal Shareholders is to allow them to benefit from any future earnings and growth of Franklin after its common stock ceases to be publicly traded. Saunders and the Saunders Principal Shareholders believe that public company status imposes a number of limitations on Franklin, including restraints associated with meeting the expectations of market analysts and the significant costs of being a publicly traded company, which costs are approximately $700,000 annually, and have increased significantly in recent years following the enactment of the Sarbanes-Oxley Act of 2002 and are expected to increase further once the Company’s auditors are required to provide their report on the effectiveness of the Company’s internal controls over financial reporting. Accordingly, Saunders and the Saunders Principal Shareholders expect the merger to afford Franklin greater operating flexibility, allowing management to concentrate on long-term growth, to reduce expenses and to lessen the focus on the quarter to quarter performance often emphasized by the public markets. Saunders and the Saunders Principal Shareholders would, if their expectations are met, enjoy the benefits of the increased free cash flow and net income indicated in the projections of free cash flow and net income at pages 31 and 32 above.
After the effective time of the merger, Saunders and the Saunders Principal Shareholders anticipate that Franklin will continue its current operations, except that it will cease to be an independent public company and will instead be a wholly owned by the shareholders of Saunders prior to the merger. Saunders has advised Franklin that it does not have any current plans or proposals that relate to or would result in an extraordinary corporate transaction following completion of the merger involving Franklin’s corporate structure, business or management, such as a merger, reorganization, liquidation, relocation of any operations or sale or transfer of a material amount of assets. Saunders and the Saunders Principal Shareholders expect to continuously evaluate and review Franklin’s business and operations following the merger and may develop new plans and proposals that they consider appropriate to maximize the value of Franklin. Saunders and the Saunders Principal Shareholders expressly reserve the right to make any changes they deem appropriate in light of such evaluation and review or in light of future developments
As of the record date, Saunders owned 2,741,126 shares, or 32.69% of the Company’s common stock, which represented an approximately $6.78 million and $7.07 million interest in the Company’s net book value as of March 31, 2009 and September 30, 2009, respectively, and an approximately $2.93 million interest in the Company’s net loss for the fiscal year ended March 31, 2009. Following the consummation of the merger, Saunders, as 100% owner of the surviving corporation, will have a corresponding interest in the surviving corporation’s net book value of $20.73 million and $21.64 million as of March 31, 2009 and September 30, 2009, respectively, and net loss of $7.13 million for the fiscal year ended March 31, 2009.
Effects of the Merger on Franklin
Franklin common stock is currently listed on the NYSE Amex under the symbol “FEP.” Following completion of the merger, it is expected that Franklin will cease to be a publicly traded corporation. Following completion of the merger, the registration of our common stock and our reporting obligations under the
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Exchange Act will be terminated upon application to the SEC. In addition, upon completion of the merger, our common stock will no longer be listed on the NYSE Amex and price quotations will no longer be available.
Upon completion of the merger, the articles of incorporation and bylaws of Franklin, as in effect immediately prior to the completion of the merger will be amended and restated accordance with the terms of the merger agreement. In addition, the directors of Saunders immediately prior to the completion of the merger will become the directors of the surviving corporation and officers of Franklin will be the officers of the surviving corporation.
Upon completion of the merger, each share of our common stock that you own immediately prior to the completion of the merger will be converted into the right to receive $2.50 per share, without interest. Upon completion of the merger, you will no longer hold an equity interest in Franklin. Accordingly, you will not have the opportunity to participate in the earnings and growth of Franklin and will not have any right to vote on corporate matters. Similarly, you will not face the risk of losses generated by Franklin’s operations or decline in its stock price after the completion of the merger.
Effects on Franklin if the Merger Is Not Completed
In the event that the merger agreement and the plan of merger are not adopted by Franklin’s shareholders or if the merger is not consummated for any other reason, Franklin’s shareholders will not receive any payment for their shares in connection with the merger. Instead, Franklin will remain an independent public company and its common stock will continue to be listed on the NYSE Amex. In addition, if the merger is not completed, Franklin expects that management will operate the business in a manner similar to that in which it is being operated today and that Franklin’s shareholders will continue to be subject to the same risks and opportunities as they currently are with respect to their ownership of Franklin common stock. If the merger is not completed, there can be no assurance as to the effect of these risks and opportunities on the future value of your Franklin common stock, including the risk that the market price of Franklin common stock may decline to the extent that the current market price of Franklin’s stock reflects a market assumption that the merger will be completed. Accordingly, if the merger is not consummated, there can be no assurance as to the effect of these risks and opportunities on the future value of your Franklin shares. From time to time, Franklin’s board of directors will evaluate and review the business operations, properties, dividend policy and capitalization of Franklin to, among other things, make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to maximize shareholder value. If the merger agreement and the plan of merger are not adopted by Franklin shareholders or if the merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to Franklin will be offered, or that the business, prospects or results of operations of Franklin will not be adversely impacted.
Under certain circumstances, if the merger is not completed, Franklin will be obligated to pay Saunders a termination fee of $650,000, or reimburse Saunders for its actual expenses in connection with the merger. In addition, under certain circumstances, if the merger is not completed, Saunders has agreed to pay Franklin a termination fee of $650,000. See “The Merger Agreement—Termination Fees” beginning on page 48.
Interests of Our Directors and Executive Officers in the Merger
In considering the recommendations of the special committee and Franklin’s board of directors with respect to the merger agreement and the merger, Franklin shareholders should be aware that Franklin’s executive officers and directors may have interests in the merger that are different from or in addition to the interests of Franklin shareholders in general. These interests may present Franklin’s directors and executive officers with actual or potential conflicts of interests, and these interests are described below.
The special committee and Franklin’s board of directors were aware of these differing interests and considered them, among other matters, in evaluating the merger agreement and the merger.
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Benefits Accruing Prior to or Upon the Merger
Special Committee and Board Fees. Each of Edward H. Cohen, James Meister and William H. Turner received a fee of $10,000, plus reimbursement of expenses incurred in attending special committee meetings, for their services as members of the special committee. The fees received by the special committee members discussed above are in addition to the annual fees received by such directors for their services as a member of Franklin’s board of directors and other committees thereof.
Indemnification of Directors and Officers; Insurance. The merger agreement provides that Franklin’s directors and officers will be indemnified in respect of their past service and that Saunders will maintain Franklin’s current directors’ and officers’ liability insurance, subject to certain conditions. See “The Merger Agreement—Indemnification Obligations” on page 50.
Stock Options. Under the terms of the merger agreement, each vested option to purchase Franklin common stock that is outstanding immediately prior to the completion of the merger and has an exercise price less than $2.50, including all such options held by Franklin’s directors and executive officers, will be canceled, and the holder of each such vested option will be entitled to receive in connection with the merger a cash payment equal to the product of (i) the excess of $2.50 over the exercise price per share of common stock subject to such vested option, multiplied by (ii) the number of shares of Franklin common stock subject to each option as of the effective time of the merger. Options that are unvested as of the effective time and options having an exercise price of $2.50 or more will be cancelled without consideration. All vested options that were held by members of the Saunders Group and had an exercise price less than $2.50 per share have been exercised by their holders and the common stock issued upon such exercise was contributed to Saunders in exchange for shares of Saunders’s equity securities. The shares of Franklin common stock contributed to Saunders are not eligible to receive the per share merger consideration.
The table below sets forth, as of the record date, for each Franklin director who is not a member of the Saunders Group, (a) the number of shares subject to vested options for Franklin common stock having an exercise price less than $2.50, (b) the value of such vested options, calculated by multiplying (i) the excess of $2.50 over the per share exercise price of the option by (ii) the number of shares subject to the option, and without regard to deductions for income taxes and other withholding, (c) the number of shares of Franklin common stock directly owned by each director and the value of such shares based on the merger consideration of $2.50 per share and (d) the total value of all such shares of common stock.
| Vested Options having an exercise price less than $2.50 |
Shares of Common Stock |
Totals | |||||||||||||
| Name |
Shares | Value | Shares | Value | Total Shares |
Total Value | |||||||||
| Edward H. Cohen |
87,827 | $ | 99,568 | 5,086 | $ | 12,715 | 92,913 | $ | 112,283 | ||||||
| Leonard M. Lodish |
87,827 | 99,568 | 10,000 | 25,000 | 97,827 | 124,568 | |||||||||
| James Meister |
87,827 | 99,568 | 13,000 | 32,500 | 100,827 | 132,068 | |||||||||
| Jerry Schubel |
87,827 | 99,568 | 14,813 | 38,033 | 102,640 | 124,860 | |||||||||
| William H. Turner |
87,827 | 99,568 | 23,000 | 57,500 | 110,827 | 157,068 | |||||||||
Benefits Accruing After the Merger
Management and Directors’ Investment in Saunders. Each of Messrs. Lipsky, Hokari, Musto, Morgan and Simons has entered into an exchange agreement with Saunders pursuant to which each contributed shares of Franklin common stock to Saunders in exchange for equity securities of Saunders. The shares contributed by such officers and directors will be cancelled at the effective time, without receiving the merger consideration, and such shares of Saunders equity securities will be converted into equity securities of the surviving corporation.
Immediately following the consummation of the merger, it is currently expected that Mr. Lipsky will own approximately 24.85% of the outstanding voting stock of the surviving corporation; Mr. Hokari will own 6.92% of the surviving corporation; Mr. Musto will own 3.88% of the surviving corporation; Dr. Morgan will own 10.32% of the surviving corporation; and Dr. Simons will own 7.90% of the surviving corporation. The equity investment by the management and director participants in Saunders is currently expected to represent, in the aggregate, approximately 53.87% of the outstanding voting stock of Saunders as of the closing of the merger.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material U.S. federal income tax consequences to our shareholders of the receipt of cash in exchange for shares of our common stock pursuant to the merger. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, applicable U.S. Treasury regulations, judicial authority, and administrative rulings and practice, all as in effect on the date of this proxy statement. All of these authorities are subject to change, possibly on a retroactive basis. This discussion generally assumes that the shares of our common stock are held as capital assets by a U.S. person (i.e., a citizen or resident of the U.S. or a domestic corporation). This discussion does not address all aspects of U.S. federal income taxation that may be relevant to a particular shareholder of ours in light of the shareholder’s personal investment circumstances, or those shareholders of ours subject to special treatment under the U.S. federal income tax laws (for example, life insurance companies, dealers or brokers in securities or currencies, traders in securities that elect the mark-to-market method of accounting, regulated investment companies, real estate investment trusts, shareholders whose functional currency is not the U.S. dollar, tax-exempt organizations, banks or other financial institutions, U.S. expatriates, foreign corporations and nonresident alien individuals, entities or arrangements treated as partnerships, trusts or estates for U.S. federal income tax purposes and partners and beneficiaries in such entities or arrangements, our shareholders who hold shares of our common stock as part of a hedging, “straddle,” conversion or other integrated transaction, or shareholders who acquired their shares of our common stock through the exercise of employee stock options or other compensation arrangements). In addition, this discussion does not address any aspect of foreign, state or local or estate and gift taxation that may be applicable to a shareholder of ours. We urge you to consult your own tax advisor to determine the particular tax consequences to you (including the application and effect of any state, local or foreign income and other tax laws) of the receipt of cash in exchange for shares of our common stock pursuant to the merger. This discussion may not be relevant, and different tax rules may apply, to a shareholder who (either directly or indirectly through various attribution rules) remains a shareholder in the surviving company.
The receipt of cash in the merger will be a taxable transaction for U.S. federal income tax purposes. In general, a holder of shares of our common stock will recognize gain or loss upon a surrender of our common stock in the merger in an amount equal to the difference between the holder’s adjusted tax basis in shares of common stock surrendered and the amount of cash received by the holder. Gain or loss will be calculated separately for each block of shares of our common stock (i.e., shares of our common stock acquired at the same cost in a single transaction). If the shares of our common stock have been held for more than one year, the gain or loss will be long-term capital gain or loss subject (in the case of shareholders who are individuals) to tax at a maximum U.S. federal income tax rate of 15%, and will be short-term capital gain or loss if the shares have been held for one year or less. The deductibility of a capital loss recognized on the exchange is subject to limitation.
Under the U.S. federal income tax backup withholding rules, the payor generally is required to and will withhold 28% of all payments to which a shareholder or other payee is entitled in the merger, unless the shareholder or other payee (1) is a corporation or comes within another exempt category and demonstrates this fact or (2) provides its correct tax identification number (social security number, in the case of an individual, or employer identification number in the case of other shareholders) and otherwise complies with the applicable requirements of the backup withholding rules. Each shareholder of ours and, if applicable, each other payee, should complete, sign and return to the exchange agent for the merger the substitute Form W-9 that each shareholder of ours will receive with the letter of transmittal following completion of the merger in order to provide the information and certification necessary to avoid backup withholding, unless an applicable exception exists and is proved in a manner satisfactory to the exchange agent. The exceptions provide that certain shareholders of ours (including, among others, corporations and certain foreign individuals) are not subject to these backup withholding requirements. Backup withholding is not an additional tax. Generally, any amounts withheld under the backup withholding rules described above can be refunded or credited against a holder’s U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS in a timely manner.
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The foregoing discussion of the material U.S. federal income tax consequences is included for general information purposes only and is not intended to be, and should not be construed as, legal or tax advice to any holder of shares of our common stock. We urge you to consult your own tax advisor to determine the particular tax consequences to you (including the application and effect of any state, local or foreign income and other tax laws) of the receipt of cash in exchange for shares of our common stock pursuant to the merger.
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This section of the proxy statement describes the material terms of the merger agreement but does not purport to describe all the terms of the merger agreement. We urge you to read the full text of the merger agreement, which is attached as Annex A to this proxy statement and is incorporated into this proxy statement by reference, because it is the legal document that governs the merger. This description of the merger agreement has been included to provide you with information regarding its material terms.
Structure and Completion of the Merger
The merger agreement provides that, within two business days following the satisfaction or waiver of the conditions to the merger, Saunders will merge with and into Franklin, with Franklin continuing as the surviving corporation. As a result of the merger, we will cease to be a publicly traded company. Following the satisfaction or waiver of the conditions to the merger, the merger will be effective at the time articles of merger are duly filed with the office of the Secretary of State of the Commonwealth of Pennsylvania and a certificate of merger is duly filed with the Secretary of State of the State of Delaware (or at a later time, if agreed upon by the parties to the merger agreement and specified in the articles of merger and certificate of merger).
We expect that the merger will be completed in the first quarter of 2010, after all conditions to the merger have been satisfied or waived. The merger is subject to the conditions described under the caption “—Conditions to the Merger” on page 41. We cannot specify when, or assure you that, all conditions to the merger will be satisfied or waived, however, we intend to complete the merger as promptly as practicable.
Articles of Incorporation; Bylaws; Directors and Officers of the Surviving Corporation
Upon completion of the merger, the articles of incorporation and bylaws of Franklin, as in effect immediately prior to the completion of the merger will be amended and restated in accordance with the terms of the merger agreement. In addition, upon completion of the merger, the directors of Saunders immediately prior to the completion of the merger, will become the directors of the surviving corporation. The executive officers of Franklin immediately prior to the completion of the merger will be the executive officers of the surviving corporation.
If and when the merger is completed, each issued and outstanding share of Franklin common stock (other than shares held by Franklin as treasury stock, its subsidiaries or Saunders immediately prior to the completion of the merger, which will be cancelled without consideration) will be converted into the right to receive $2.50 in cash, without interest. Upon completion of the merger, each holder of a certificate representing shares of Franklin common stock will cease to have any voting or other rights with respect to those shares, except the right to receive the above described per share per share merger consideration. If and when the merger is completed, each outstanding and vested option to purchase shares of Franklin’s common stock will be cancelled and each former holder any such vested stock option (or portion thereof) will be entitled to receive a payment in cash, subject to applicable withholding taxes, equal to the product of (i) the total number of shares of Franklin common stock previously subject to such vested option (or portion thereof), and (ii) the excess, if any, of the per share merger consideration over the exercise price per share previously subject to such option. If the exercise price per share of any option is equal to or greater than the per share merger consideration or any option (or portion thereof) is unvested, such options (or portion thereof) will be cancelled without consideration at the consummation of the merger.
Upon the completion of the merger, holders of each vested share of Franklin’s restricted stock will be entitled to receive the per share merger consideration, without interest. All unvested shares will be cancelled without consideration.
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Additionally, if and when the merger is completed, each share of Saunders’ common stock outstanding immediately prior to the effective time will be converted into and become one share of common stock of the surviving corporation; each share of Saunders’ Series A preferred stock outstanding immediately prior to the effective time will be converted into and become one share of Series A preferred stock of the surviving corporation; and each share of Saunders Series B preferred stock outstanding immediately prior to the effective time will be converted into and become one share of Series B preferred stock of the surviving corporation. Upon completion of the merger, such converted shares of Saunders’ common stock, Series A preferred stock and Series B preferred stock will constitute the only outstanding shares of capital stock of the surviving corporation.
Prior to the completion of the merger, Saunders will select a bank or trust company reasonably acceptable to a majority of Franklin’s independent directors to act as exchange agent for the payment of the merger consideration. At the effective time of the merger, Saunders will deposit with the exchange agent all cash necessary to pay the aggregate merger consideration. Promptly after the completion of the merger, Saunders will mail, or cause the exchange agent to mail, a letter of transmittal to each holder of record immediately prior to the completion of the merger. The letter of transmittal will explain how to surrender Franklin common stock certificates in exchange for the per share merger consideration. Please do not send your Franklin common stock certificates with your proxy card. You should send them only in compliance with the instructions that will be provided in the letter of transmittal. Holders who surrender their certificates to the exchange agent, together with a properly completed letter of transmittal and any other documents reasonably required by the exchange agent, will receive the per share merger consideration for each share of common stock represented by the certificates surrendered. In all cases, the per share merger consideration will be paid only in accordance with the procedures set forth in the merger agreement and the letter of transmittal.
Holders of common stock whose certificates are lost, stolen or destroyed will be required, in order to receive the above described per share merger consideration, to make an affidavit identifying the certificate or certificates as lost, stolen or destroyed and provide such security or indemnity as the exchange agent deems necessary to save and hold the Company and Saunders harmless against any claim that may be made against the Company and Saunders with respect to the certificates. In addition, a person other than the person in whose name a surrendered certificate is registered may receive the per share merger consideration if the certificate has been properly endorsed or otherwise is in proper form for transfer.
None of Saunders, us or the exchange agent or any of such persons’ respective affiliates will be liable to any person in respect of any merger consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. The merger agreement also provides that any amounts due in respect of a certificate that has not been surrendered within twelve months after the completion of the merger will be returned to the surviving corporation and the holders of any stock certificates that have not then been surrendered will look only to the surviving corporation for delivery of the per share merger consideration payable in respect of such certificate without any interest thereon.
Conditions to Each Party’s Obligation To Complete the Merger. Each party’s obligation to complete the merger is subject to the satisfaction or waiver on or prior to the closing date of the merger of the following conditions:
| • | As required by Pennsylvania law, the merger agreement and the related plan of merger must be adopted by the affirmative vote of a majority of the votes cast at the special meeting. |
| • | No law, injunction or order preventing the completion of the merger may be in effect. |
| • | Any authorizations, consents, orders permits or approvals of, or declarations or filings with, and all expirations of waiting periods imposed by, any governmental authority will have been filed, occurred or obtained and will be in full force and effect. |
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| • | Franklin must have received an opinion of Oppenheimer dated the date of the merger agreement to the effect that, based on and subject to the various assumptions, qualifications and limitations set forth in such opinion, as of the date of such opinion, the consideration to be received by the holders of Franklin common stock (other than Saunders) in the merger is fair, from a financial point of view, to those holders. |
Conditions to Obligations of Saunders To Complete the Merger. The obligations of Saunders to complete the merger are further subject to the satisfaction or waiver on or prior to the closing date of the merger of the following conditions:
| • | There does not exist any misrepresentation, breach or inaccuracy of any of the representations and warranties of Franklin in the merger agreement, the effect of which, individually or in the aggregate, constitutes, or could reasonably be expected to constitute a material adverse effect except that the representations and warranties with respect to Franklin’s capitalization will be true and correct in all material respects. |
| • | Franklin having performed in all material respects its obligations under the merger agreement, provided with respect to Franklin’s failure to perform certain of its obligations under the merger agreement, such failure shall have been a result of actions taken by Franklin’s board of directors. |
| • | No material adverse effect shall have occurred with respect to Franklin, |
As defined in the merger agreement, a material adverse effect means with respect to any person, any fact, event, circumstance, change, condition or effect, individually or in the aggregate, that is material and adverse to the business, assets, properties, liabilities, financial condition or results of operations of such person and its subsidiaries, taken as a whole. However, in no event will any of the following be deemed to constitute a material adverse effect:
| • | decrease in the trading or market prices of an entity’s capital stock; or |
| • | any change or effect (A) resulting from changes or effects to the United States or global economy in general, (B) with respect to the Company, resulting primarily from the identities of Saunders and its affiliates or statements or other actions by them, (C) resulting from changes in law or United States generally accepted accounting principles or the interpretation thereof after the date of the merger agreement, (D) resulting from acts of war, armed hostility or terrorism, or (E) resulting from the announcement of Saunders’ proposal to acquire the Company, the negotiation, execution or announcement of the merger agreement or the merger or regulatory approvals contemplated hereby including any litigation resulting therefrom. |
Conditions to Our Obligation to Complete the Merger. Our obligation to complete the merger is further subject to the satisfaction or waiver on or prior to the closing date of the merger of the following conditions:
| • | There does not exist any misrepresentation, breach or inaccuracy of any of the representations and warranties of Saunders in the merger agreement, the effect of which, individually or in the aggregate, constitutes, a material adverse effect with respect to Saunders. |
| • | Saunders shall have complied in all material respects with its obligations under the merger agreement. |
Alternative Takeover Proposals; Recommendation of the Board
From the date of the merger agreement until the completion of the merger, or the earlier termination of the merger agreement, in accordance with the terms thereof, Franklin has agreed that neither it nor its subsidiaries will permit or cause their respective directors, officers, employees or other representatives, to solicit, initiate, knowingly encourage or knowingly act to facilitate any inquiry, engage in discussions concerning an acquisition proposal, or enter into any contract with respect to any proposal for an alternative merger or other business combination involving Franklin or it subsidiaries or other acquisition of over 20% of the stock, assets or business
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of Franklin and its subsidiaries, taken as a whole (we refer to such a proposal as an acquisition proposal). During such period, Franklin has also agreed not to enter into any contract requiring Franklin to abandon, terminate or fail to consummate the merger or cause Franklin’s board of directors or any committee thereof to not endorse or recommend the merger or to change its or their recommendation regarding the merger. Notwithstanding the foregoing, if our special committee or board of directors receives a written proposal in respect of, or that could reasonably be expected to lead to, an alternative merger or other acquisition of 100% of the stock or all or substantially all of the assets of Franklin that our board of directors determines in good faith, after consultation with its legal and financial advisors, is more favorable to the shareholders of Franklin (taking into account all of the terms of such acquisition proposal, as well as the payment of any termination fees under the merger agreement, and the likelihood of such acquisition proposal being consummated) (we refer to such a proposal as a superior proposal), then our board of directors may provide information with respect to Franklin pursuant to a customary confidentiality agreement and participate in discussions regarding such competing proposal. We must promptly advise Saunders orally and in writing of any competing proposal or related inquiry, the identity of the person making the competing proposal and the material terms of the competing proposal or inquiry. We are required to keep Saunders reasonably informed on a current basis of the status and material details of any such competing proposal or inquiry. We must simultaneously provide to Saunders any information that is provided to the person making such competing proposal.
In addition, under the merger agreement, our board of directors and special committee may not, except as described below under “Right to Modify Recommendation and Accept a Superior Proposal,”
| • | withdraw or modify in a manner adverse to Saunders, or propose publicly to withdraw or modify in a manner adverse to Saunders, its recommendation of the merger agreement; |
| • | approve or recommend, any competing proposal or propose publicly to approve or recommend any acquisition proposal; or |
| • | cause the Company to enter into any letter of intent, agreement in principle or acquisition agreement related to any acquisition proposal. |
Right to Modify Recommendation and Accept a Superior Proposal
Our special committees or board of directors may withdraw or modify or propose to withdraw or modify its recommendation in favor of the merger agreement or approve and recommend or propose to approve or recommend a superior proposal, if all of the following conditions are met:
| • | the board’s withdrawal or modification of its recommendation in favor of the merger agreement is precipitated by the submission of an acquisition proposal that has not been withdrawn, the Company’s board of directors (or the special committee) determines that such acquisition proposal constitutes or is reasonably likely to lead to a superior proposal; |
| • | neither the company nor any of its subsidiaries nor any of their respective directors, officers, employees, financial advisors, attorneys or representatives have materially violated any of its covenants or any of the restrictions on soliciting acquisition proposals set forth in the merger agreement; |
| • | the Company shall have delivered to Saunders written notice at least three (3) business days prior to effecting such change of recommendation, which shall (A) state expressly that the Company’s board of directors (or special committee) intends to change its recommendation, and sets forth in reasonable detail the facts and circumstances giving rise to the Company board of directors’ (or the special committee’s) decision to change its recommendation and that the Company’s board of directors (or the special committee) has determined in good faith (after consultation with legal counsel) that the failure to take such action would be inconsistent with the fiduciary duties of the Company’s board of directors (or the special committee) to the shareholders of the Company under applicable law, and (B) if the change of recommendation is precipitated by the submission of an acquisition proposal that has not been withdrawn, such notice shall also disclose the identity of the person or group making such |
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| acquisition proposal and include a copy of any definitive documentation relating to such acquisition proposal and such other documentation reflecting the final terms and conditions of such acquisition proposal as are being considered by the Company’s board of directors (or the special committee); |
| • | after delivering the notice described above, the Company provides Saunders with a reasonable opportunity to propose adjustments in the terms and conditions of the merger agreement during such three (3) business day period, and negotiate in good faith with Saunders with respect thereto during such three (3) business day period; and |
| • | the Company’s board of directors (or the special committee) must have concluded in good faith, after consultation with its outside legal counsel, that in light of the facts and circumstances giving rise to the Company’s board of directors’ (or the special committee’s) decision to effect or consider effecting a change of recommendation as set forth in the notice described above, and after considering any adjustments or negotiations pursuant to the preceding paragraph, if applicable, that failing to make such change of recommendation would be inconsistent with the fiduciary duties of the Company’s board of directors (or the special committee) to the Company’s shareholders under applicable law. |
Representations and Warranties
The merger agreement contains representations and warranties made by Franklin and Saunders to each other as of specific dates. The statements embodied in those representations and warranties were made for purposes of the merger agreement and are subject to qualifications and limitations agreed by the parties in connection with negotiating the terms of the merger agreement. In addition, some of those representations and warranties were made as of a specific date, may be subject to a contractual standard of materiality different from that generally applicable to shareholders or may have been used for the purpose of allocating risk between the parties to the merger agreement rather than establishing matters as facts.
The representations and warranties made by Franklin to Saunders include representations and warranties relating to, among other things:
| • | due organization, power and standing, and other corporate matters; |
| • | capital structure; |
| • | subsidiaries and equity interests; |
| • | authorization, execution, delivery and enforceability of the merger agreement and related matters; |
| • | the consents we are required to obtain and the filings we are required to make in connection with entry into the merger agreement and consummating the merger and related transactions; |
| • | absence of conflicts with, violations of or default under organizational documents, contracts, judgments, orders, laws or regulations as a result of entering into the merger agreement or consummating the merger and related transactions; |
| • | the accuracy and completeness of the information contained in the reports and financial statements that we file with the SEC, and the compliance of our SEC filings with applicable requirements of Federal securities laws; |
| • | the conduct of our business, and the absence of a material adverse effect (as described above under “Conditions to the Merger”), since March 31, 2009; |
| • | the absence of undisclosed liabilities; |
| • | the absence of undisclosed litigation; |
| • | compliance with applicable laws; |
| • | our intellectual property, tax, employee benefit plans, ERISA compliance and excess parachute payments; |
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| • | our material contracts and the absence of our material violation of or material default under such contracts; |
| • | our property and assets; |
| • | environmental matters; |
| • | the absence of undisclosed broker’s fees; |
| • | bank accounts; |
| • | our accounts receivables; and |
| • | transactions with related parties. |
The representations and warranties made by Saunders to Franklin include representations and warranties relating to, among other things:
| • | due organization, power and standing, and other corporate matters; |
| • | authorization, execution, delivery and enforceability of the merger agreement; |
| • | the absence of any conflict with, violation of, or default under, organizational documents, contracts, judgments, orders, laws or regulations as a result of entering into the merger agreement, the financing commitments or consummating the merger and related transactions; |
| • | the consents Saunders is required to obtain and the filings it is required to make in connection with entering into the merger agreement and consummating the merger and related transactions; |
| • | the absence of undisclosed broker’s fees; and |
| • | adequacy of financial resources to consummate the merger. |
The merger agreement provides that the representations and warranties of the parties will not survive the effectiveness of the merger unless any covenant or agreement contemplates performance thereafter.
Conduct of Business Pending the Merger
From September 30, 2009 until the completion of the merger, Franklin is obligated to, and to cause its subsidiaries to, conduct its businesses in the ordinary course of business consistent with past practice and, to the extent consistent with doing so, use commercially reasonable efforts to preserve intact the assets of Franklin and its subsidiaries. In addition, from September 30, 2009 to the completion of the merger, Franklin shall not, and shall not permit any of its subsidiaries to, and shall not authorize them to, do any of the following without the prior written consent of Saunders:
| • | amend or propose to amend its articles of incorporation, bylaws or similar organizational documents; |
| • | issue, sell, grant, transfer, pledge, dispose of, encumber or authorize the issuance of any shares of, or securities convertible into or exchangeable for, or options, warrants, calls, commitments, appreciation rights, performance guarantees or any other rights, or rights of any kind to acquire, any securities of Franklin or any of its subsidiaries except for the issuance and delivery of Shares of Franklin common stock pursuant to the exercise of stock options; |
| • | directly or indirectly, split, combine or reclassify the outstanding shares of our capital stock, or redeem, purchase or otherwise acquire directly or indirectly any of our capital stock; |
| • | declare, set aside, make or pay any dividend or other distribution payable in cash, securities or property or any contribution, loan or other payment or any combination thereof, with respect to our capital stock or the capital stock of any of our subsidiaries; |
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| • | adopt a plan of complete or partial liquidation, dissolution, merger or consolidation; or adopt resolutions, providing for or authorizing such liquidation, dissolution or adoption of any liquidation or dissolution, merger or consolidation; |
| • | (A) increase the compensation or benefits payable to any director or officer, other employee or consultant except in the ordinary course of business consistent with past practice; (B) enter into any new severance or termination agreement with (or amend any such existing arrangement with) any director or officer, other employee or consultant; (C) enter into any new employment, deferred compensation or other similar agreement (or amend any such existing agreement) with any director or officer, other employee or contractor; or (D) increase any benefits payable under any existing severance or termination pay policies or agreements or employment agreements; |
| • | adopt any employee benefit plan; |
| • | authorize any capital expenditure payable by Franklin or any of its subsidiaries in excess of one hundred thousand dollars ($100,000) individually or in the aggregate; |
| • | (A) incur or assume any indebtedness for borrowed money or issue debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible or liable for (whether directly or indirectly), the obligations of any person for borrowed money, except for indebtedness incurred under our existing credit facilities in the ordinary course of business and consistent with past practice; (B) make any loans, advances or capital contributions to, or investments in, any other person (other than to Franklin from its subsidiaries); or (C) enter into any material commitment or transaction (including any borrowing, capital expenditure or purchase, sale or lease of assets) requiring a capital expenditure (including any leases) by Franklin or any of its subsidiaries, other than capital expenditures that do not exceed one hundred thousand dollars ($100,000), individually; |
| • | (A) make, revoke or change a material tax election with respect to Franklin or any of its subsidiaries (unless required by applicable law); (B) change a material method of accounting for tax purposes with respect to Franklin or any of its subsidiaries; (C) consent to extend the period of limitations for the payment or assessment of any material tax with respect to Franklin or any of its subsidiaries; or (D) settle or compromise any material tax liability or refund of Franklin or any of its subsidiaries; |
| • | waive any material defenses with respect to, or, other than in the ordinary course of business, make any payment of any material liability of Franklin or any of its subsidiaries; |
| • | (A) acquire (by merger, consolidation, or acquisition of stock or assets) any person or division thereof or make any investment in another person (other than an existing subsidiary of Franklin and other than incorporation of a wholly-owned subsidiary of Franklin) or, except in the ordinary course of business and consistent with past practice, acquire assets; or (B) sell, transfer, lease, license, pledge, dispose of, or encumber or authorize or propose the sale, pledge, disposition or lien of any of the properties or assets of Franklin or any of its subsidiaries, except in the case of clause (B) above, for sales, transfers, leases, licenses, pledges, dispositions or liens (1) pursuant to existing contracts (the terms of which have been previously disclosed to Saunders); or (2) in the ordinary course of business and consistent with past practice; |
| • | cause our common stock to cease to be listed on the NYSE prior to the closing of the merger; |
| • | except as otherwise provided in the merger agreement, take any action, or fail to take any action, that could materially impair, prevent or impose a delay in consummating the transactions contemplated by the merger agreement, including the merger; |
| • | take any action to cause Franklin or any of its subsidiaries to enter any line of business unrelated to the business conducted by them on the date of the merger agreement; |
| • | fail to maintain insurance at presently existing levels; |
| • | waive any benefits, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which we are a party; |
46
| • | take or suffer any action that would result in the creation, or consent to the imposition, of any lien on any of our assets other than pursuant to existing credit facilities; |
| • | change any method, estimate or practice or any of the accounting principles used by it unless required by GAAP or applicable law; |
| • | except in the ordinary course of business and consistent with past practice, enter into, modify, amend or terminate any material contract or waive, release or assign or compromise any material rights or claims with respect thereto; |
| • | take any action that could reasonably be expected to result in a failure of any of the conditions for closing of the merger; |
| • | enter into a contract to do any of the foregoing, or authorize, recommend, propose or announce an intention to do any of the foregoing; or |
| • | agree or commit to do any of the foregoing. |
Efforts to Complete the Merger
Each of the parties to the merger agreement has agreed to use its reasonable efforts to (i) take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the merger and the other transactions contemplated hereby and to cooperate with each other in connection with the foregoing, including taking actions to obtain any necessary consents, approvals, orders, exemptions or authorizations by or from any governmental authority or other person, (ii) defend all lawsuits or other legal proceedings challenging the merger agreement or the consummation of the merger, (iii) cause to be lifted or rescinded any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the merger, (iv) effect all necessary registrations and filings and submissions of information requested by any governmental authority and (v) execute and deliver any additional instruments necessary to consummate the merger.
At the special meeting, or if any action is taken by written consent with respect to the merger, Saunders has agreed to, and to cause its affiliates owning any Franklin common stock to, vote all shares owned by Saunders and such affiliates in favor of the proposal to adopt the merger agreement and the related plan of merger.
Termination of the Merger Agreement
The merger agreement may be terminated at any time prior to the completion of the merger:
| • | by mutual written consent of Saunders and Franklin; |
| • | by either Saunders or Franklin: |
| • | if our shareholders have voted on the merger agreement and the related plan of merger and the votes shall not have been sufficient to adopt the merger agreement and the plan of merger under our articles of incorporation, bylaws and applicable law; provided, however, that this right to terminate the merger agreement will not be available to either party where the failure to obtain such shareholder approval has been caused by the action or failure to act of such party and such action or failure to act constitutes a breach by such party of the merger agreement; |
| • | if an unappealable judgment, order or injunction prohibits the merger; |
| • | if the merger is not completed on or before February 28, 2010, unless the party seeking to terminate the merger agreement is in material breach of its obligations under the merger agreement; |
47
| • | by us: |
| • | in connection with entering into a definitive agreement to effect a superior proposal, subject to our compliance with provisions of the merger agreement concerning acquisition proposals; |
| • | if Saunders breaches any of its representations, warranties, covenants or other agreements in the merger agreement, in a manner which constitutes the failure of a condition to our obligation to complete the merger or a breach of Saunders’ representation with respect to its financial resources and such breach has not been cured within 30 days after the giving of written notice to Saunders; except where at the time of such intended termination, any material covenant of the Company contained in the merger agreement shall have been breached in any material respect and such breach shall not have been cured, or there exists a breach of or inaccuracy in any representation or warranty of the Company contained in the merger agreement, the effect of which, individually, or in the aggregate constitutes, or could reasonably be expected to constitute, a material adverse effect with respect to the Company, except that the representations and warranties with respect to the Company’s capitalization shall be true and correct in all material respects; |
| • | by Saunders: |
| • | if Franklin breaches any of its representations, warranties or covenants in a manner that constitutes the failure of a condition to Saunders’ obligations to complete the merger and such breach has not been cured within 30 days after the giving of written notice to Franklin; except where at the time of such intended termination, any material covenant of Saunders contained in the merger agreement shall have been breached in any material respect and such breach shall not have been cured, or there exists a breach of or inaccuracy in any representation or warranty of Saunders contained in the merger agreement, the effect of which, individually, or in the aggregate constitutes, or could reasonably be expected to constitute, a material adverse effect with respect to Saunders; |
| • | if Franklin experiences a material adverse effect; |
| • | if we enter into an agreement pursuant to a superior proposal or our board of directors withdraws or adversely modifies its recommendation of the merger agreement; or |
| • | if we violate covenants in the merger agreement restricting our ability to solicit or enter into discussions or negotiations with a third party regarding alternative merger, business combination or acquisition transactions. |
Termination Fee Payable by Franklin. Under the merger agreement, Franklin must pay to Saunders a termination fee of $650,000 if:
| • | Franklin or Saunders terminates the merger agreement following the failure of the merger agreement and plan of merger to be adopted by our shareholders in a vote on such matter by Franklin’s shareholders (which failure was not caused by the action or failure to act by such party in breach of the merger agreement) and (A) at the time of such termination, there was outstanding a plan or proposal, which we refer to as an acquisition proposal, for an alternative merger or other business combination or other sale of over 20% of the stock, assets or business of Franklin (other than with Saunders or any of its affiliates), which we refer to as an alternative transaction, which plan or proposal has not been irrevocably withdrawn, (B) within 18 months after such termination, Franklin enters into an agreement providing for an alternative transaction and (C) the aggregate purchase price for Franklin (or its assets) pursuant to such alternative transaction equals or exceeds the per share merger consideration payable under the merger agreement; |
| • | Franklin or Saunders terminates the merger agreement following the failure of the merger agreement to receive the necessary number of votes in a vote on such matter by Franklin’s shareholders (which |
48
| failure was not caused by the action or failure to act by such party in breach of the merger agreement) if prior to such vote our board of directors withdraws or adversely modifies its recommendation of the merger agreement, or proposes publicly to do so; |
| • | Franklin terminates the merger agreement because our board of directors shall have exercised its rights to cause Franklin to enter into an acquisition agreement with respect to a superior proposal or Franklin’s board of directors withdraws or adversely modifies its recommendation of the merger agreement; or |
| • | Saunders terminates the merger agreement because (A) Franklin shall have entered into a definitive agreement to effect a superior proposal, (B) Franklin’s board of directors shall have withdrawn or adversely modified its recommendation of the merger agreement, or (C) Franklin shall have violated restrictions in the merger agreement concerning solicitation of or entry into discussions or negotiations with a third party regarding alternative merger, business combination or acquisition transactions involving Franklin. |
Expense reimbursement paid by Franklin. If Saunders terminates the merger agreement due to a breach of the merger agreement by Franklin based on a breach of the Company’s covenants set forth under the heading “—Conduct of Business Pending the Merger” which breach is a result of action taken by Franklin’s board of directors, Franklin must pay Saunders its actual costs and expenses.
Reverse Termination Fee Payable to Franklin. Under the merger agreement, Saunders must pay to Franklin a termination fee of $650,000 if Franklin terminates the merger agreement due to a breach of the merger agreement by Saunders which constitutes a failure of a condition to close the merger and such failure is not cured within 30 days after written notice, provided that Franklin has not materially breached or violated the merger agreement.
One purpose of this termination fee and reverse termination fee is to compensate a party, in the event that the merger is abandoned by the other party, for the financial and other resources expended in connection with entering into the merger agreement and seeking to complete the merger. The termination fee provision will make it more expensive for any other potential acquiror of Franklin to acquire control of Franklin.
The merger agreement provides that all fees and expenses incurred in connection with the merger and the other transactions contemplated by the merger agreement will be paid by the party incurring such fees or expenses, whether or not the merger is completed subject to the exceptions described above.
Amendment, Extension and Waiver
Subject to applicable law, the merger agreement may be amended by the parties at any time before or after our shareholders adopt the merger agreement and the plan of merger. However, after our shareholders adopt the merger agreement, any amendment that by law, rule or regulation requires further shareholder approval will be subject to such approval. The merger agreement may not be amended except in writing and signed by both parties to the merger agreement.
Prior to the completion of the merger, the parties to the merger agreement may, subject to applicable law, waive any provision of the merger agreement. However, after Franklin’s shareholders adopt the merger agreement and plan of merger, any waiver that by law, rule or regulation requires further shareholder approval will be subject to such approval. Any agreement by any party to the merger agreement to a waiver under the merger agreement will be valid only if in writing. The failure of any party to the merger agreement to assert any rights under the merger agreement or otherwise will not constitute a waiver of rights nor will any single or partial
49
exercise of any rights under the merger agreement preclude further exercise of rights under the merger agreement.
For a period of six years following completion of the merger: (a) the surviving corporation will be obligated to indemnify to the fullest extent permitted by law Franklin’s and our subsidiaries’ current or former directors and officers in respect of liabilities, including costs and expenses, for acts or omissions occurring on or prior to the completion of the merger, except in the event of bad faith or acting otherwise than in the best interests of Franklin; and (b) the surviving corporation is obligated to maintain in effect directors’ and officers’ liability insurance for all persons covered by Franklin’s existing liability insurance policies in respect of liabilities for acts or omissions occurring on or prior to the completion of the merger on terms no less favorable than those in effect on September 30, 2009.
In the event that the surviving corporation or the surviving corporation in the merger or any of its successors or assigns consolidates or merges and is not the surviving corporation or transfers or conveys all or substantially all of its assets (including by dissolution), the surviving corporation will cause the applicable successor to assume and to honor all such indemnification agreements and obligations.
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Under Pennsylvania law, shareholders of a corporation are not entitled to exercise dissenters’ rights if shares of the corporation are registered on a national securities exchange, designated as a national market system security on an interdealer quotation system by the Financial Industry Regulatory Authority or held beneficially or of record by more than 2,000 persons. Consequently, because Franklin’s common stock is currently listed on the NYSE Amex, Franklin shareholders will not have the right to exercise dissenters’ rights. If the merger agreement and plan of merger are adopted and the merger is completed, shareholders who voted against the adoption of the merger agreement will be treated the same as shareholders who voted for the adoption of the merger agreement and their shares will automatically be converted into the right to receive the merger consideration.
Saunders estimates that the total amount of funds necessary to acquire the 67.31% of the outstanding shares of common stock that Saunders does not already own, to consummate the merger and to pay estimated fees and expenses will be approximately $14,477,000. In connection with the therewith, (i) Mr. Lipsky has subscribed for 200,000 shares of Saunders’ preferred stock for an aggregate purchase price of $500,000, (ii) Dr. Morgan has subscribed for 400,000 shares of Saunders preferred stock for an aggregate purchase price of $1,000,000, (iii) Morton David has subscribed for 80,000 shares of Saunders preferred stock for an aggregate purchase price of $200,000 and (iv) Noah Education Holdings Ltd. has agreed to subscribe for 400,000 shares of Saunders preferred stock for an aggregate purchase price of $1,000,000. We refer to such amounts, collectively, as the “Subscription Funds.” Saunders expects to fund the balance of the merger consideration from generally available working capital of the surviving corporation.
The Company expects to incur the following transaction expenses in connection with the merger, all of which will be paid by the Company:
| Service |
Fee | ||
| Financial Advisory |
$ | 625,000 | |
| Legal |
$ | 550,000 | |
| Proxy Solicitation |
$ | 8,000 | |
| Printing/Mailing |
$ | 15,000 | |
Saunders expects to incur approximately $200,000 in legal expenses in connection with the merger, all of which will be paid by Saunders.
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IMPORTANT INFORMATION REGARDING FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
For a description of our business, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, filed with the SEC on June 29, 2009, which is attached as Annex D to this proxy statement, our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed with the SEC on August 13, 2009, which is attached as Annex E to this proxy statement and our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, filed with the SEC on November 13, 2009, which is attached as Annex F to this proxy statement. We refer to such reports as the “Form 10-K,” the “First Quarter Form 10-Q” and the “Second Quarter Form 10-Q,” respectively. The Form 10-K, the First Quarter Form 10-Q and the Second Quarter Form 10-Q attached to this proxy statement do not include the exhibits originally filed with such reports.
For a description of our properties, see the Form 10-K at page D-14.
For a description of our legal proceedings, see the Form 10-K at page D-14.
In addition, on June 8, 2009 a purported class action suit was filed by Capgrowth Group in the Superior Court of New Jersey naming as defendants the Company and its directors. The Complaint, filed just days after public disclosure of the Saunders Group’s initial offer to purchase all the outstanding shares of the Company, alleges a breach by the defendant directors of their fiduciary duties of good faith, loyalty, fair dealing and due care to the plaintiff. On September 23, 2009, the defendants filed a Motion to Dismiss the lawsuit, stating, in substance, that the purported class action was premature and not ripe for adjudication, that pursuant to Pennsylvania law fiduciary duties are owed by directors to the Company and not directly to shareholders, and that individual shareholders such as Capgrowth Group are owed no duty in their individual capacity, and therefore cannot sue in their individual capacity. On October 9, 2009, plaintiff filed a First Amended Complaint which added a derivative count to its lawsuit. On the same date it also forwarded a demand to the board of directors of the Company to take appropriate legal action against the individual members of the Board. The defendants have withdrawn their Motion to Dismiss the initial Complaint and have filed a Motion to Dismiss the First Amended Complaint, advancing the arguments they made in the initial Motion to Dismiss and further stating, in substance, that the plaintiff has not made proper and sufficient demand upon the Company under Pennsylvania law to entitle the plaintiff to maintain a derivative action.
Our audited financial statements for the years ended March 31, 2009 and 2008 are included in the Form 10-K beginning at page D-25. Our unaudited financial statements for the quarter ended June 30, 2009 are included in the First Quarter Form 10-Q beginning at page E-3 and our unaudited financial statements for the quarter ended September 30, 2009 are including in the Second Quarter Form 10-Q at page F-3.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our management’s discussion and analysis of financial condition and results of operations are included in the Form 10-K, the First Quarter Form 10-Q and the Second Quarter Form 10-Q beginning at pages D-17, E-10 and F-10, respectively.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Quantitative and Qualitative Disclosures about Market Risk
We are a small reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this Item.
Historical Selected Financial Data
We are a small reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this Item.
Ratio of Earnings to Fixed Charges
The following table presents our ratio of earnings to fixed charges for the periods indicated. Ratio of earnings to fixed charges means the ratio of income before fixed charges and income taxes to fixed charges, where fixed charges are the aggregate of interest expense, including amortization of debt issuance costs, and an allocation of rental charges to approximate equivalent interest.
| Years ended March 31, |
Quarter Ended September 30, 2009 | |||||||||
| 2009 | 2008 | |||||||||
| (In thousands, except ratios) |
||||||||||
| Income before income taxes and minority interest |
$ | (4,289 | ) | $ | 2,772 | $ | 222 | |||
| Add fixed charges: |
||||||||||
| Interest expense |
$ | 439 | $ | 94 | $ | 16 | ||||
| Interest portion of rent expense |
53 | 69 | 12 | |||||||
| Income before income taxes, minority interest, and fixed chargers |
$ | (3,739 | ) | $ | 2,935 | $ | 250 | |||
| Fixed charges: |
||||||||||
| Interest expense |
$ | 439 | $ | 94 | $ | 16 | ||||
| Interest portion of rent expenses |
53 | $ | 69 | $ | 12 | |||||
| Total fixed charges |
$ | 492 | $ | 163 | $ | 28 | ||||
| Ratio of earnings to fixed charges |
7.72 | 18.01 | 8.93 | |||||||
Our net book value per share as of September 30, 2009 was $2.62. Our tangible net book value per share, which excludes intellectual property, goodwill, software development costs and deferred tax assets, was $2.23 at the same date.
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Other than as set forth below, as of January 25, 2010, no transaction in our Common Stock has been effected during the past 60 days by Saunders or by officers or directors of Saunders or Franklin.
| Identity of Person |
Date of Transaction |
Number of Shares | Exercise Price per Stock Option Exercised(1) |
Nature of Transaction | |||||
| Barry Lipsky |
December 2, 2009 |
49,322 | N/A | Exchange with Saunders | |||||
| December 4, 2009 |
19,406 | N/A | Exchange with Saunders | ||||||
| Howard Morgan |
December 2, 2009 |
34,000 | N/A | Exchange with Saunders | |||||
| December 4, 2009 |
39,048 | N/A | Exchange with Saunders | ||||||
| James Simons |
December 2, 2009 |
410,000 | N/A | Exchange with Saunders | |||||
| December 4, 2009 |
39,048 | N/A | Exchange with Saunders | ||||||
| Toshihide Hokari |
December 4, 2009 |
2,750 | N/A | Exchange with Saunders | |||||
| December 17, 2009 |
100 | N/A | Exchange with Saunders | ||||||
| December 30, 2009 |
1,508 | $ | 1.40 | Exercise of options | |||||
| January 5, 2010 |
1,508 | N/A | Exchange with Saunders | ||||||
| Frank Musto |
December 4, 2009 |
2,200 | N/A | Exchange with Saunders | |||||
| December 7, 2009 |
1,900 | N/A | Exchange with Saunders | ||||||
| December 30, 2009 |
1,206 | $ | 1.40 | Exercise of options | |||||
| January 5, 2010 |
1,206 | N/A | Exchange with Saunders | ||||||
| Shining Sea Limited |
December 4, 2009 | 1,684,640 | N/A | Exchange with Saunders | |||||
| Saunders Acquisition Corporation |
December 2, 2009 | 34,000 | N/A | Exchange with Dr. Morgan | |||||
| December 2, 2009 | 49,322 | N/A | Exchange with Mr. Lipsky | ||||||
| December 2, 2009 | 410,000 | N/A | Exchange with Dr. Simons | ||||||
| December 4, 2009 | 39,048 | N/A | Exchange with Dr. Morgan | ||||||
| December 4, 2009 | 19,406 | N/A | Exchange with Mr. Lipsky | ||||||
| December 4, 2009 | 39,048 | |
N/A |
Exchange with Dr. Simons | |||||
| December 4, 2009 | 2,750 | N/A | Exchange with Mr. Hokari | ||||||
| December 4, 2009 | 2,200 | |
N/A |
Exchange with Mr. Musto | |||||
| December 4, 2009 | 300,000 | N/A | Exchange with Marcy Lewis | ||||||
| December 4, 2009 | 1,684,638 | N/A | Exchange with Shining Sea Limited | ||||||
| December 7, 2009 | 1,900 | N/A | Exchange with Mr. Musto | ||||||
| December 17, 2009 | 100 | N/A | Exchange with Mr. Hokari | ||||||
| December 29, 2009 | 39,000 | N/A | Exchange with Julien David | ||||||
| December 30, 2009 | 117,000 | N/A | Exchange with Morton David | ||||||
| January 5, 2010 | 1,508 | N/A | Exchange with Mr. Hokari | ||||||
| January 5, 2010 | 1,206 | N/A | Exchange with Mr. Musto | ||||||
| (1) | Each share of Franklin Common Stock issued upon the exercise of a stock option listed in this column was subsequently contributed to Saunders. |
During the 60 days prior to the date of this Proxy Statement, the Company did not issue any shares of common stock other than shares issued on exercise of options to purchase common stock as listed above.
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MARKET PRICE AND DIVIDEND DATA
The principal United States market on which Franklin’s common stock is traded is the NYSE Amex, where it is traded under the symbol “FEP.”
The following table sets forth on a per share basis the high and low sale prices of Franklin common stock for the fiscal quarters indicated, as reported on the NYSE Amex.
| Fiscal 2008 |
High | Low | ||||
| June 30, 2007 |
$ | 3.70 | $ | 2.19 | ||
| September 30, 2007 |
3.95 | 2.27 | ||||
| December 31, 2007 |
3.95 | 2.67 | ||||
| March 31, 2008 |
3.18 | 1.85 | ||||
| Fiscal 2009 |
High | Low | ||||
| June 30, 2008 |
$ | 2.40 | $ | 1.71 | ||
| September 30, 2008 |
2.10 | 1.41 | ||||
| December 31, 2008 |
1.63 | .62 | ||||
| March 31, 2009 |
1.13 | .56 | ||||
| Fiscal 2010 |
High | Low | ||||
| June 30, 2009 |
$ | 2.18 | $ | .80 | ||
| September 30, 2009 |
2.30 | 2.06 | ||||
| December 31, 2009 |
2.49 | 2.16 | ||||
The closing price of Franklin’s common stock on the NYSE Amex on September 30, 2009, which was the last full day of trading before Franklin announced the signing of the merger agreement, was $2.22 The closing price of Franklin common stock on the NYSE Amex on May 29, 2009, the last full day of trading before Saunders filed its Schedule 13D with the SEC announcing its “going private” proposal, was $1.00.
The Company has not declared cash dividends on its common stock and does not have any plans to pay any cash dividends on its common stock in the foreseeable future. The Company’s board of directors anticipates that any earnings that might be available to pay dividends on the Company’s common stock will be retained to finance the business.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Securities And Principal Holders
The record date for determining shares of our common stock, $.01 par value, entitled to vote at the special meeting has been fixed at the close of business on January 20, 2010. On that date Franklin had 8,386,799 shares outstanding, entitled to one vote each. The presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast at the special meeting will constitute a quorum at the special meeting. Abstentions and withheld votes will be considered as being present at the special meeting for purposes of determining the existence of a quorum. Broker “non-votes” will be considered as being present the special meeting for purposes of determining the existence of a quorum only if the broker votes on certain matters, such as the adjournment or postponement proposal. Under Pennsylvania law, the affirmative vote of a majority of the votes cast at the special meeting is required for the approval of the proposals to be voted upon at the special meeting. Because abstentions, withheld votes and broker “non-votes” are not considered as votes “cast,” they will not affect the outcome of the vote on the proposals to be voted upon at the special meeting.
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information regarding the ownership of Common Stock as of January 20, 2010 by (i) all those known by us to be the beneficial owners of more than five percent of the Common Stock, (ii) all directors, (iii) each of our executive officers named in the summary compensation table on page D-52 of the Form 10-K and (iv) all of our executive officers and directors as a group. Unless otherwise indicated, each of the shareholders has sole voting and investment power with respect to the shares listed as beneficially owned by such shareholder.
| Name and Address of Beneficial Owner |
Title |
Amount and Nature of Beneficial Ownership |
Percent of Class | |||||
| Saunders Acquisition Corporation c/o Barry Lipsky 2 Briarwood Court Princeton Junction, NJ 08550 |
Beneficial owner of 5% or more of Common Stock | 2,741,126 | (1) | 32.69 | % | |||
| Marcy Lewis 11111 Biscayne Boulevard North Miami, FL 33181 |
Beneficial owner of 5% or more of Common Stock | 645,350 | (2) | 7.70 | % | |||
| James H. Simons c/o Renaissance Technologies LLC 800 Third Avenue New York, NY 10022 |
Director | 0 | 0.0 | % | ||||
| Dimensional Fund Advisors 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 |
Beneficial owner of 5% or more of Common Stock | 542,964 | (3) | 6.48 | % | |||
| Barry J. Lipsky(4)(5) |
President, Chief Executive Officer and Director | 3,093,245 | 35.40 | % | ||||
| Howard L. Morgan(5) |
Chairman of the Board of Directors | 0 | 0.0 | % | ||||
| Jerry R. Schubel(5) |
Director | 162,462 | 1.94 | % | ||||
| William H. Turner(5) |
Director | 165,633 | 1.98 | % | ||||
| Leonard M. Lodish(5) |
Director | 156,319 | 1.86 | % | ||||
| Edward H. Cohen(5) |
Director | 152,735 | 1.82 | % | ||||
| James Meister(5) |
Director | 150,694 | 1.80 | % | ||||
| Walter Schillings(5) |
Managing Director European Operations | 33,702 | * | |||||
| Toshihide Hokari(5)(6) |
Chief Operating Officer | 2,766,126 | 32.90 | % | ||||
| Frank A. Musto(5)(7) |
Chief Financial Officer | 2,756,126 | 32.80 | % | ||||
| All executive officers and |
3,954,790 | 41.48 | % | |||||
| * | less than 1% |
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| (1) | According to a Schedule 13D filed with the SEC on December 21, 2009, and a Schedule 13D/A filed with the SEC on January 15, 2010, Saunders Acquisition Corporation (“Saunders”) acquired its shares of the Company’s common stock from Barry J. Lipsky, the Company’s President and Chief Executive Officer, Toshihide Hokari, the Company’s Chief Operating Officer, and Frank A. Musto, the Company’s Chief Financial Officer, Howard L. Morgan, Chairman of the Company’s Board of Directors, James H. Simons, a Director of the Company, Marcy Lewis, Morton David and Julien David, shareholders of the Company, Shining Sea Limited, an exempted company organized under the laws of the Island of Bermuda which holds certain investments for the benefit of Dr. Simons and his family (collectively, the “Group”). According to the Schedule 13Ds, Saunders was formed to effect an acquisition of all of the Company’s outstanding shares of common stock, other than those shares owned by Saunders. |
| (2) | Information as to shares of common stock owned by Marcy Lewis is based upon a Schedule 13D/A dated September 4, 2009 as filed with the SEC, and information provided by Saunders, after giving effect to her share contributions to Saunders. |
| (3) | Information as to shares of common stock owned by Dimensional Fund Advisors is as of December 31, 2008 as set forth in an amendment to its Schedule 13G dated February 9, 2009 as filed with the SEC. |
| (4) | Includes 2,741,126 shares of common stock owned by Saunders and vested options to purchase 352,119 shares of common stock. Mr. Lipsky’s options are exercisable at prices greater than $2.50 per share and will be canceled without consideration in the Merger. Mr. Lipsky is a director of Saunders. |
| (5) | The address of our directors and executive officers is Franklin Electronic Publishers, Incorporated, One Franklin Plaza, Burlington, New Jersey 08016. |
| (6) | Includes 2,741,126 shares of common stock owned by Saunders and vested options to purchase 25,000 shares of common stock, which options are exercisable at prices greater than $2.50 per share and will be canceled without consideration in the Merger. Mr. Hokari is an officer of Saunders. |
| (7) | Includes 2,741,126 shares of common stock owned by Saunders and vested options to purchase 15,000 shares of common stock, which options are exercisable at prices greater than $2.50 per share and will be canceled without consideration in the Merger. Mr. Musto is an officer of Saunders. |
The shares of common stock in the foregoing table have not been pledged or otherwise deposited as collateral, are not the subject matter of any voting trust or other similar agreement and are not the subject of any contract providing for the sale or other disposition of securities other than those shares as to which Saunders Acquisition Corporation has a right to receive as described in footnote 1, above.
The foregoing table also includes shares of common stock which the following directors have the right to acquire within sixty days upon the exercise of stock options as follows: Mr. Cohen, 147,649 shares; Dr. Schubel, 147,649 shares; Mr. Turner, 142,633 shares; Dr. Lodish, 146,319 shares; and Mr. Meister 137,694 shares. The foregoing table also includes 33,702 shares of common stock which Mr. Schillings has the right to acquire within sixty days upon the exercise of stock options.
If the merger is completed, we will not have public shareholders and there will be no public participants in any future shareholder meetings. However, if the merger is not completed, we plan to hold our an Annual Meeting of Shareholders. Under applicable SEC rules and regulations, in order to be eligible for inclusion in Franklin’s proxy material for the Annual Meeting of Shareholders, shareholders’ proposals to take action at such meeting must be received by Franklin not earlier than the close of business on the 120th day prior to such Annual Meeting and not later than the close of business on the later of the 90th day prior to such Annual Meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by Franklin.
WHERE YOU CAN FIND MORE INFORMATION
Franklin files annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. You may read and copy this information at, or obtain copies of this information by mail from, the SEC’s Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room.
Franklin’s filings with the SEC are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at http://www.sec.gov. In addition, documents filed by Franklin can be obtained by contacting Franklin at the following address and telephone number: Franklin Electronic Publishers, Incorporated, One Franklin Plaza, Burlington, New Jersey 08016, Attention: Corporate Secretary, Telephone: (609) 386-2500, or from Franklin’s website, at http://www.franklin.com.
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If you have questions about the special meeting, the merger or this proxy statement, would like additional copies of this proxy statement or the proxy card or have questions about or require assistance in completing and submitting proxy cards, please call the Company’s proxy solicitor, Regan & Associates, Inc., at (800) 737-3426.
If you would like to request documents from Franklin, please do so at least 10 business days before the date of the special meeting in order to receive timely delivery of those documents prior to the special meeting.
You should rely only on the information contained in this proxy statement and the annexes attached hereto to vote your shares at the special meeting. We have not authorized anyone to provide you with information that is different from that contained in this proxy statement or such annexes.
This proxy statement is dated January 27, 2010. You should not assume that the information contained in this proxy statement is accurate as of any date other than that date, and the mailing of this proxy statement to shareholders does not create any implication to the contrary. This proxy statement does not constitute a solicitation of a proxy in any jurisdiction where, or to or from any person to whom, it is unlawful to make a proxy solicitation.
The merger agreement has been attached as Annex A to provide you with full information regarding its terms.
The merger agreement contains representations and warranties made by Franklin and Saunders to each other as of specific dates. The statements embodied in those representations and warranties were made for purposes of the merger agreement and are subject to qualifications and limitations agreed by the parties in connection with negotiating the terms of the merger agreement. In addition, some of those representations and warranties were made as of a specific date, may be subject to a contractual standard of materiality different from that generally applicable to shareholders or may have been used for the purpose of allocating risk between the parties to the merger agreement rather than establishing matters as facts.
BY ORDER OF THE BOARD OF DIRECTORS
Edward H. Cohen
Chairman of Special Committee the Board of Directors
Burlington, New Jersey
January 27, 2010
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Execution Version
AGREEMENT AND PLAN OF MERGER
DATED AS SEPTEMBER 30, 2009
BY AND BETWEEN
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
AND
SAUNDERS ACQUISITION CORPORATION
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| SECTION 9.13 Construction; Interpretation; Disclosure Letters |
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| EXHIBITS |
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| Exhibit A—Plan of Merger |
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| Exhibit B—Articles of Incorporation of Buyer |
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| Exhibit C—Bylaws of Buyer |
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”), dated as of September 30, 2009 is entered into by and between Franklin Electronic Publishers, Incorporated, a Pennsylvania corporation (the “Company”), and Saunders Acquisition Corporation, a Delaware corporation (“Buyer”).
RECITALS:
A. A special committee of the Board of Directors of the Company (the “Company Board”) consisting solely of independent directors (the “Company Special Committee”) [unanimously] has determined that the merger of Buyer with and into the Company on the terms and conditions set forth in this Agreement (the “Merger”) is advisable and in the best interests of the Company and has recommended that the Company Board approve and adopt this Agreement and recommend that the Company’s shareholders vote for the adoption of this Agreement;
B. The Company Board has determined that the Merger is advisable and in the best interests of the Company and has approved and adopted this Agreement and has resolved to recommend that the Company’s shareholders vote for the adoption of this Agreement;
C. Pursuant to the terms of this Agreement, Buyer has determined to acquire the Company by means of the Merger; and
D. Buyer and certain shareholders of the Company have previously entered into Exchange Agreements dated as of May 29, 2009 and September 11, 2009, as each may be amended from time to time, pursuant to which such shareholders have agreed to contribute to Buyer, immediately following the approval of this Agreement by the Board of Directors of the Company, 3,024,114 shares of Company Common Stock (as hereinafter defined) owned beneficially or of record by such shareholders in exchange for an equity interest in Buyer, and upon the Effective Time (as hereinafter defined) such Rollover Shares shall be automatically cancelled and shall cease to exist without any payment therefor pursuant to Section 2.2(a)(iv) hereof.
NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, the adequacy of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereby agree as follows:
ARTICLE I
SECTION 1.1 Definitions. When used in this Agreement, the following terms shall have the respective meanings specified therefore below:
“Acquisition Proposal” as defined in Section 6.4(e)(i).
“Action” as defined in Section 4.8(a).
“Affiliate” means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries Controls, is Controlled by, or under common Control with such Person, including without limitation any Subsidiary.
“Agreement” as defined in the first paragraph of this Agreement.
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“Aggregate Merger Consideration” means the dollar amount resulting from multiplying the Merger Consideration by the aggregate number of shares of Company Common Stock outstanding immediately prior to the Effective Time, other than the Rollover Shares.
“Buyer” as defined in the first paragraph of this Agreement and Plan of Merger.
“Buyer Common Stock” as defined in Section 2.2(a)(iii).
“Buyer Disclosure Letter” as defined in the first paragraph of Article V.
“Certificate” as defined in Section 2.2(a)(i).
“Closing” as defined in Section 2.1(b).
“Closing Date” as defined in Section 2.1(b).
“Code” means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.
“Company” as defined in the first paragraph of this Agreement.
“Company Balance Sheet” means the audited consolidated balance sheet of the Company as of March 31, 2009 set forth in the Annual Report on Form 10-K filed by the Company with the SEC on June 29, 2009, as supplemented by the consolidated balance sheets of the Company as of June 30, 2009 set forth in the Quarterly Report on Form 10¬Q filed by the Company with the SEC on August 13, 2009.
“Company Benefit Plan” as defined in Section 4.10(a).
“Company Board” as defined in the Recitals.
“Company Change of Recommendation” as defined in Section 6.4(c).
“Company Common Stock” means the common stock, par value $0.01 per share, of the Company.
“Company Disclosure Letter” as defined in the first paragraph of Article IV.
“Company Financial Statements” as defined in Section 4.5(a).
“Company Options” as defined in Section 2.2(a)(ii).
“Company Permits” means all Permits required for any business operated or services furnished by the Company or its Subsidiaries.
“Company Recommendation” as defined in Section 6.2(a)(ii).
“Company SEC Documents” as defined in Section 4.5(a).
“Company Shareholder Approval” as defined in Section 4.3.
“Company Special Committee” as defined in the Recitals.
“Company Subsidiaries” means the Subsidiaries of the Company set forth in Section 4.2 of the Company Disclosure Letter.
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“Contract” means, with respect to any Person, any agreement, arrangement, undertaking, contract, commitment, obligation, promise, indenture, deed of trust or other instrument or agreement (whether written or oral and whether express or implied) by which that Person is bound or subject.
“Control” means with respect to any corporation or limited liability company the right or power to exercise, directly or indirectly, more than fifty percent (50%) of the voting power of shareholders, members or owners and with respect to any individual, partnership, trust or other entity or association other than a corporation or limited liability company, the possession directly to cause the direction of the management or actions of the controlled entity.
“Copyrights” as defined in Section 4.14(a).
“DGCL” means the General Corporation Law of the State of Delaware.
“Effective Time” as defined in Section 2.1(c).
“Environmental Laws” means federal, state, local and foreign statutes, Laws, judicial decisions, regulations, ordinances, rules, judgments, orders, codes, injunctions, permits and governmental agreements relating to the environment or the protection of human health as it relates to the environment, including those relating to the management or Release of Hazardous Materials.
“ERISA” as defined in Section 4.10(a).
“ERISA Affiliate” as defined in Section 4.10(a).
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Exchange Agent” as defined in Section 2.3(a).
“Expense Reimbursement” as defined in Section 8.4(b)
“Foreign Plans” as described in Section 4.10(i)
“GAAP” as defined in Section 4.5(a).
“Governmental Authority” means any nation or government, any state or other political subdivision thereof, including any domestic (federal, state or local), foreign or supranational governmental or regulatory authority, agency, department, board, commission, administration or instrumentality, any court, tribunal or arbitrator or any self-regulatory organization, including state departments or divisions of insurance or insurance commissioners or superintendents.
“Hazardous Material” means all substances or materials regulated as hazardous, toxic, explosive, dangerous, flammable or radioactive under any Environmental Law including (i) petroleum, asbestos or polychlorinated biphenyls, and (ii) in the United States; all substances defined as Hazardous Substances, Oils, Pollutants or Contaminants in the National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. Section 300.5.
“IP Licenses” as defined in Section 4.14(a).
“Indemnified Parties” as defined in Section 6.9(a).
“Intellectual Property” as defined in Section. 4.14(a).
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“Investment Assets” means bonds, notes, debentures, mortgage loans, collateral loans and all other instruments of indebtedness, stocks, partnership or joint venture interests and all other equity interests, real estate and leasehold and other interests therein, certificates issued by or interests in trusts, cash on hand and on deposit, personal property and interests therein and all other assets acquired for investment purposes.
“IRS” as defined in Section 4.10(b).
“Law” means any law (including common law), ordinance, writ, directive, judgment, order, decree, injunction, statute, treaty, rule, regulation, regulatory requirement or determination of (or an agreement with) a Governmental Authority.
“Leased Real Property” as defined in Section 4.15(b).
“Liability” means any debt, liability, commitment, claim or obligation of any kind whatsoever, whether due or to become due, known or unknown, accrued or fixed, or absolute or contingent.
“Lien” means any and all liens, charges, security interests, options, claims, mortgages, pledges or restrictions on title or transfer of any nature whatsoever.
“Material Adverse Effect” means, with respect to any Person, any fact, event, circumstance, change, condition or effect, individually or in the aggregate, that is material and adverse to the business, assets, properties, liabilities, financial condition or results of operations of such Person and its Subsidiaries, taken as a whole; provided, however, that: “Material Adverse Effect” shall not include any (i) decrease in the trading or market prices of an entity’s capital stock or (ii) any change or effect (A) resulting from changes or effects to the U.S. or global economy in general, (B) with respect to the Company, resulting primarily from the identities of Buyer and its Affiliates or statements or other actions by them, (C) resulting from changes in law or GAAP or the interpretation thereof after the date hereof, (D) resulting from acts of war, armed hostility or terrorism, or (E) resulting from the announcement of Buyer’s proposal to acquire the Company, the negotiation, execution or announcement of this Agreement or the Merger or regulatory approvals contemplated hereby including any litigation resulting therefrom.
“Material Contract(s)” as defined in Section 4.13(a).
“Merger” as defined in the Recitals.
“Merger Consideration” means an amount of cash per share of Company Common Stock equal to $2.50.
“Multiemployer Plan” as defined in Section 4.10(f).
“NYSE AMEX” as defined in Section 4.4(a).
“Oppenheimer” as defined in Section 4.18.
“Option Payments” as defined in Section 2.7(a).
“PBCL” means the Pennsylvania Business Corporation Law of 1988, as amended.
“Patents” as defined in Section 4.15(a).
“Permits” means any licenses, franchises, permits, certificates, approvals, accreditations or other similar authorizations from any Governmental Authority.
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“Permitted Liens” means, collectively, (i) Liens for Taxes not yet payable or the validity of which are being contested in good faith by appropriate proceedings and for which adequate reserves are reflected in the Company SEC Documents, (ii) any minor imperfection of title or similar Lien which does not and would not reasonably be expected to impair in any material respect the operations of the business of the Company or any of its Subsidiaries, and (iii) Liens incurred pursuant to actions of Buyer or any of its Affiliates.
“Person” means and includes an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an association, an unincorporated organization, a Governmental Authority and any other entity or group (as defined in the Exchange Act).
“Proxy Statement” as defined in Section 6.2(a)(ii).
“Quarterly Statements” shall mean, with respect to any Person, the quarterly statements of such Person filed with the SEC.
“Release” means any release, spill, emission, discharge, leaking, pumping, injection, deposit, disposal, dispersal, leaching or migration into the indoor or outdoor environment (including ambient air, surface water, groundwater, and surface or subsurface strata) or into or out of any property.
“Representative” means, with respect to any Person, (a) its Subsidiaries and Affiliates, and (b) its, and its Subsidiaries’ and Affiliates’ respective officers, directors, employees, auditors, financial advisors, attorneys, accountants, consultants, agents, advisors or representatives.
“Requisite Regulatory Approvals” as defined in Section 7.1(c).
“Reverse Termination Fee” as defined in Section 8.4(c).
“Rollover Shares” means such number of shares of Company Common Stock as are owned by Buyer at the Effective Time.
“Schedule 13E-3” as defined in Section 6.2(b).
“SEC” means the United States Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Securities Laws” means the Securities Act and the Exchange Act.
“Software” as defined in Section 4.15(a).
“Special Meeting” as defined in Section 6.2(a).
“Subsidiary” when used with respect to any Person means another Person Controlled by such first Person or another Subsidiary of such first Person.
“Superior Proposal” as defined in Section 6.4(e)(ii).
“Surviving Corporation” as defined in Section 2.1(a).
“Tax” or “Taxes” means any and all federal, state, local, foreign or other taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any taxing authority, including, taxes, fees, duties, levies, customs, tariffs, imposts, assessments, obligations or other similar charges of any kind on or with respect to income, franchises, premiums, windfall or other profits,
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gross receipts, property, sales, use, transfer, capital stock, payroll, employment, social security, workers’ compensation, unemployment compensation or net worth, and taxes or other similar charges of any kind in the nature of excise, withholding, ad valorem or value added.
“Tax Proceeding” means any audit, administrative action, assessment, case, deposition, examination, executive action, filing, hearing, information request, injunction, inquiry, investigation, judgment, levy, litigation, order, reassessment, review, seizure, subpoena, suit, summons, testimony, or other activity involving or conducted by or on behalf of any Governmental Authority relating to Tax.
“Tax Return” means any return, report or similar statement (including any attachment or supplements thereto) supplied to or required to be supplied to any taxing authority, including, any information return, claim for refund, amended return or declaration of estimated Tax.
“Termination Date” as defined in Section 8.1(b)(iii).
“Termination Fee” as defined in Section 8.4(a).
“Third Party” means any Person (or group of Persons) other than the Company, Buyer and their respective Subsidiaries.
“Trademarks” as defined in Section 4.14(a).
ARTICLE II
(a) Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time, Buyer shall be merged with and into the Company in accordance with the requirements of the PBCL and DGCL, whereupon the separate existence of Buyer shall cease, and the Company shall be the corporation surviving the Merger (the “Surviving Corporation”). The Merger will have the effects set forth in Section 1929 of the PBCL and Section 259 of the DGCL. Without limiting the generality of the foregoing, and subject thereto, from and after the Effective Time, the Surviving Corporation shall possess all the rights, privileges, franchises, property, immunities, powers and purposes and assume and be liable for all the debts, liabilities, obligations and penalties of the Company and Buyer.
(b) The closing of the transactions contemplated hereby (the “Closing”) shall take place at the offices of Katten Muchin Rosenman LLP in New York City at 10:00 a.m. local time, as soon as reasonably practicable, but in any event within two (2) business days, after the satisfaction or waiver of the conditions set forth in Article VII (other than those conditions that are to be satisfied at the Closing) (the actual time and date of the Closing being referred to herein as the “Closing Date”).
(c) As soon as reasonably practicable following the Closing on the Closing Date, the Company and Buyer shall execute and file articles of merger with the Department of State of the Commonwealth of Pennsylvania and a certificate of merger with the Secretary of State of the State of Delaware, and make all other filings or recordings required by the PBCL to be made in connection with the Merger. The articles of merger shall have attached thereto a plan of merger in the form of Exhibit A. The Merger shall become effective at such time as articles of merger are duly filed with the Department of State of the Commonwealth of Pennsylvania and a certificate of merger is duly filed with the Secretary of State of the State of Delaware or, if agreed to by the Company and Buyer, at such later time as is specified in the articles of merger (such time, the “Effective Time”).
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SECTION 2.2 Conversion of Shares.
(a) At the Effective Time, by virtue of the Merger and without any action on the part of the holder thereof:
(i) each share of Company Common Stock outstanding immediately prior to the Effective Time shall, except as otherwise provided in Section 2.2(a)(vii), be converted into the right to receive an amount in cash equal to the Merger Consideration, payable in cash upon surrender of the certificate that formerly evidenced such share of Company Common Stock (a “Certificate”) in the manner provided in Section 2.3;
(ii) each outstanding and unexercised option to purchase shares of Company Common Stock (the “Company Options”) under any stock option plan of the Company, including, without limitation, the Company’s 1998 and 2005 Stock Option Plans or any other similar plan, agreement or arrangement outstanding immediately prior to the Effective Time, shall be cancelled and, in exchange therefore, each former holder of any such Company Option shall be entitled to receive a payment in cash (subject to any applicable withholding of Taxes) of an amount equal to the product of (i) the total number of shares of Company Common Stock previously subject to such Company Option which have vested as of the Effective Time, and (ii) the excess, if any, of the Merger Consideration over the exercise price per share previously subject to such Company Option (such amounts payable hereunder being referred to as the “Option Payments”). From and after the Effective Time, any such Company Option shall no longer be exercisable by the holder thereof but shall only entitle such holder to the payment of the Option Payment. If the exercise price per share with respect to any Company Option is equal to or greater than the Merger Consideration, such Company Option will be cancelled pursuant to this Section 2.2(a)(ii) without consideration, as will that portion of any Company Option that has not vested as of the Effective Time.
(iii) each share of common stock, par value $.01 per share, of Buyer (“Buyer Common Stock”) outstanding immediately prior to the Effective Time shall be converted into and become one share of common stock of the Surviving Corporation with the same rights, powers and privileges as the share so converted;
(iv) each share of Series A Preferred Stock, par value $0.01 per share, of Buyer (“Buyer Series A Preferred Stock”) outstanding immediately prior to the Effective Time shall be converted into and become one share of Series A Preferred Stock of the Surviving Corporation with the same rights, powers and privileges as the share so converted;
(v) each share of Series B Preferred Stock, par value $0.01 per share, of Buyer (“Buyer Series B Preferred Stock”) outstanding immediately prior to the Effective Time shall be converted into and become one share of Series B Preferred Stock of the Surviving Corporation with the same rights, powers and privileges as the share so converted;
(vi) each share of Buyer Common Stock, Buyer Series A Preferred Stock and Buyer Series B Preferred Stock converted pursuant to Sections 2.2(a)(iii), 2.2(a)(iv) and 2.2(a)(v), as applicable, shall constitute the only outstanding shares of capital stock of the Surviving Corporation; and
(vii) each share of Company Common Stock held by the Company as treasury stock immediately prior to the Effective Time and each of the Rollover Shares shall be canceled, and no payment shall be made with respect thereto; provided, that shares of Company Common Stock held by the Company or its Subsidiaries in trust accounts, managed accounts, investment accounts and the like shall not be cancelled and shall be treated in accordance with Section 2.2(a)(i).
(b) From and after the Effective Time, all shares of Company Common Stock converted pursuant to Section 2.2(a)(i), all shares of Company Common Stock cancelled in accordance with Section 2.2(a)(vii) and all Company Options shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a Certificate shall cease to have any rights with respect thereto,
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except, in the case of shares of Company Common Stock canceled pursuant to Section 2.2(a)(i), the right to receive the Merger Consideration to which such holder is entitled with respect to the shares of Company Common Stock represented by the Certificate(s) surrendered by such holder pursuant to Section 2.3(b), or in the case of a cancelled Company Option the right to receive the Option Payments. From and after the Effective Time, all certificates representing Buyer Common Stock, Buyer Series A Preferred Stock or Buyer Series B Preferred Stock, as the case may be, shall be deemed for all purposes to represent only the number of shares of capital stock of the Surviving Corporation into which such shares were converted in accordance with Sections 2.2(a)(iii), 2.2(a)(iv) or 2.2(a)(v), as applicable.
SECTION 2.3 Surrender and Payment.
(a) Prior to the Effective Time, Buyer shall appoint an exchange agent (the “Exchange Agent”) reasonably acceptable to a majority of the independent directors of the Company for the purpose of exchanging Certificates for the Merger Consideration. At the Effective Time, Buyer shall deposit, or cause to be deposited, with the Exchange Agent cash sufficient to make the cash payments payable pursuant to Section 2.2(a)(i). Promptly after the Effective Time, Buyer will send, or cause the Exchange Agent to send, to each holder of record of shares of Company Common Stock as of the Effective Time, a letter of transmittal for use in such exchange (which shall specify that the delivery shall be effected, and risk of loss and title shall pass, only upon proper delivery of the Certificates to the Exchange Agent), which letter shall be in such form as the Company and Buyer may reasonably agree to use in effecting delivery of shares of Company Common Stock to the Exchange Agent.
(b) Each holder of shares of Company Common Stock that have been converted into the right to receive the Merger Consideration as provided herein will be entitled to receive the Merger Consideration in respect of the shares of Company Common Stock represented by such Certificate only upon surrender to the Exchange Agent of such Certificate. Until so surrendered, each such Certificate so converted shall, after the Effective Time, represent for all purposes only the right to receive such Merger Consideration. No interest will be paid or accrued on any cash payable as part of the Merger Consideration or in lieu of fractional shares pursuant to Section 2.6.
(c) If any Merger Consideration is to be paid to the name of a Person other than the Person in whose name the applicable surrendered Certificate is registered, it shall be a condition to the registration or payment of such Merger Consideration that the surrendered Certificate shall be properly endorsed or otherwise be in proper form for transfer.
(d) After the Effective Time, there shall be no further registration of transfers of shares of capital stock of the Company on the stock records of, or relating to, the Company. If, after the Effective Time, Certificates are presented to the Exchange Agent, the Surviving Corporation or Buyer, they shall be canceled and, if applicable, exchanged for the Merger Consideration payable in exchange therefor in accordance with the procedures and limitations set forth, in this Article II.
(e) Any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 2.3(a) that remains unclaimed by the holders of shares of Company Common Stock twelve (12) months after the Effective Time shall be returned to Buyer and any such holder who has not exchanged such holder’s shares of Company Common Stock for the Merger Consideration payable in exchange therefor in accordance with this Section 2.3 prior to that time shall thereafter look only to Buyer for delivery of the Merger Consideration in respect of such holder’s shares without any interest thereon. Notwithstanding the foregoing, Buyer shall not be liable to any Person for any Merger Consideration delivered to a public official pursuant to applicable abandoned property, escheat or similar Laws.
(f) The Exchange Agent shall invest any cash made available to the Exchange Agent pursuant to Section 2.3(a) as directed by Buyer on a daily basis in Treasury bills, Treasury notes, Treasury bonds or other short-term instruments guaranteed by the full faith and credit of the United States. Any interest and other income resulting from such investments shall promptly be paid to Buyer.
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SECTION 2.4 Adjustments. If, at any time during the period between the date of this Agreement and the Effective Time, any change in the outstanding shares of capital stock of Buyer or the Company shall occur by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any similar transaction; or any stock dividend thereon with a record date during such period, the Merger Consideration shall be appropriately adjusted to provide the holders of shares of Company Common Stock the same economic effect, in the aggregate, as contemplated by this Agreement prior to such event.
SECTION 2.5 Withholding Rights. Each of the Surviving Corporation, Buyer and Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise payable to any Person pursuant to this Article II such amounts as it is required to deduct and withhold with respect to the making of such payment under any provision of federal, state, local or foreign Tax Law including any withholding from any payment that is treated as wages or compensation for the performance of services. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which such deduction and withholding was made.
SECTION 2.6 Lost Certificates. 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 the providing of such security or indemnity as the Exchange Agent deems necessary to save and hold the Company and Buyer harmless, the Exchange Agent shall pay in exchange for such lost, stolen or destroyed Certificate the Merger Consideration payable in exchange for the shares of Company Common Stock represented thereby.
SECTION 2.7 Treatment of Restricted Stock. As of the Effective Time, the holder of each vested share of restricted stock awarded under the 2005 Restricted Stock Plan or any other similar plan, agreement or arrangement shall be entitled to receive the Merger Consideration, without interest, and subject to any withholding of Taxes. All unvested shares of restricted stock will be cancelled without consideration.
ARTICLE III
SECTION 3.1 Articles of Incorporation of the Surviving Corporation. At the Effective Time, the articles of incorporation of the Company shall be amended and restated so that the articles of incorporation of the Surviving Corporation (until amended in accordance with applicable Law) will read in full as set forth on Exhibit B.
SECTION 3.2 Bylaws of the Surviving Corporation. At the Effective Time, the bylaws of the Company shall be amended and restated so that the bylaws of the Surviving Corporation (until amended in accordance with applicable Law) will read in full as set forth on Exhibit C.
SECTION 3.3 Directors and Officers of the Surviving Corporation. From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with the bylaws and applicable Law, (a) the directors of Buyer immediately prior to the Effective Time shall become the directors of the Surviving Corporation, and (b) the officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as disclosed in the most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q since such Annual Report on Form 10-K (including, in each case, to the extent included in any document filed or incorporated by reference as an exhibit thereto), in each case included in the Company SEC Documents filed and publicly available prior to the date hereof and except as set forth in the disclosure letter delivered by the Company to Buyer simultaneously with the execution of this Agreement (the “Company Disclosure Letter”), the Company represents and warrants to Buyer that the following statements are true and correct in all material respects as of the date hereof:
SECTION 4.1 Organization and Qualification. The Company is a corporation duly incorporated, validly existing and in good standing under the Laws of the Commonwealth of Pennsylvania. Each of the Company Subsidiaries is duly incorporated or organized, validly existing and in good standing under the Laws of the state or country of such Subsidiary’s incorporation or organization (such jurisdictions being those listed on the Company Disclosure Letter). Each of the Company and its Subsidiaries has the requisite power and authority to own, operate and lease the properties that it purports to own, operate or lease and to carry on its business as it is now being conducted, and is duly qualified as a foreign entity to do business, and is in good standing in each jurisdiction where the character of its properties owned, operated or leased or the nature of its activities makes such qualification necessary (such jurisdictions being those listed on the Company Disclosure Letter), except for such failures to be so qualified and in good standing that have not had, and would not reasonably be expected to, have, individually or in the aggregate, a Material Adverse Effect on the Company.
(a) The authorized capital stock of the Company consists of 50,000,000 shares of Company Common Stock, of which, as of the date of this Agreement, 8,281,133 shares were issued and outstanding and 10,000,000 shares of preferred stock, of which, as of the date of this Agreement, no shares were issued and outstanding. As of the date of this Agreement there were no shares of Company Common Stock held in treasury. All the outstanding shares of the Company’s capital stock are in accordance with the respective terms thereof, duly authorized, validly issued, fully paid and non-assessable. Except as set forth in the Company Disclosure Letter or as provided for in this Agreement, as of the date of this Agreement: (A) there are no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the shareholders of the Company or any of its Subsidiaries on any matter, (B) there are outstanding options to purchase an aggregate of 2,511,086 shares of Company Common Stock, (C) there were no warrants, calls, subscriptions, convertible securities, or other rights, agreements or commitments which obligate the Company or any of its Subsidiaries to issue, transfer or sell any shares of capital stock of the Company or any of its Subsidiaries, (D) there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock, partnership interests or any other securities of the Company or any of its Subsidiaries and (E) there are no outstanding preemptive rights, rights of first refusal, rights of co-sale, tag along rights or drag along rights of or for the shareholders of the Company or any of its Subsidiaries on any matter. As of the date hereof, there are no declared but unpaid dividends outstanding with respect to the Company’s capital stock.
(b) Except as set forth in the Company Disclosure Letter, all of the outstanding capital stock of, or other ownership interests in, each Subsidiary of the Company is, directly or indirectly, owned by the Company, and all such capital stock has been validly issued and is fully paid and nonassessable and owned by either the Company or one of its Subsidiaries free and clear of all Liens (other than Permitted Liens) and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests) other than any restrictions imposed under applicable federal and state securities Laws.
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SECTION 4.3 Corporate Authorization; Enforceability; Board Action. The Company has the requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, including the Merger. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company, subject to the approval and adoption by the Company’s shareholders of this Agreement and the consummation of the Merger in accordance with the Company’s articles of incorporation and bylaws and the PBCL (the “Company Shareholder Approval”). This Agreement has been duly executed and delivered by the Company and, subject to Company Shareholder Approval and assuming due authorization, execution and delivery of this Agreement by the other parties hereto, constitutes a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except to the extent that such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws, now or hereafter in effect, affecting creditors’ rights generally, and to general equity principles.
SECTION 4.4 Consents and Approvals; No Violations.
(a) Except as set forth in the Company Disclosure Letter, the execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby, including the Merger, require no consent, approval or action by or in respect of, or notice to or filing with, any Governmental Authority other than: (i) the filing of articles of merger in connection with the Merger in accordance with the PBCL, (ii) compliance with any applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder, (iii) compliance with the rules and regulations of the American Stock Exchange (“NYSE AMEX”), and (iv) any other approvals the absence of which would not reasonably be expected to, individually or in the aggregate, (A) materially impair or delay consummation of the Merger or (B) have a Material Adverse Effect on the Company.
(b) Except as set forth in the Company Disclosure Letter, neither the execution, delivery or performance by the Company of this Agreement nor the consummation by the Company of the transactions contemplated hereby, including the Merger, nor compliance by the Company and its Subsidiaries, with any of the provisions hereof will (i) conflict with or result in any breach of any provisions of the Company’s articles of incorporation or the Company’s bylaws or the organizational documents of any of its Subsidiaries, (ii) assuming compliance with the matters referred to in Section 4.4(a), conflict with or result in any violation of any provision of any Law applicable to the Company or any of its Subsidiaries, (iii) require the consent, approval or authorization of, or notice to or filing with, any Third Party, with respect to, result in any violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, amendment, or acceleration of any right or obligation of the Company or any of its Subsidiaries or to a loss of any benefit to which the Company or any of its Subsidiaries is entitled) under, any provision of any Contract by which the Company or any of its Subsidiaries is bound or subject, or (iv) result in the creation or imposition of any Lien (other than Permitted Liens) on any asset of the Company or any of its Subsidiaries, except in the case of (ii) and (iii) for such conflicts, violations, breaches, defaults, rights or losses, or the failure to obtain any such consents or approvals or to provide such notices or make such filings, that would not reasonably be expected to, individually or in the aggregate, (A) materially impair or delay consummation of the Merger or (B) have a Material Adverse Effect on the Company.
SECTION 4.5 SEC Filings and Financial Statements. The Company has filed with the SEC all forms, reports, schedules, statements and other documents required to be filed or furnished by it and its Subsidiaries since April 1, 2006 under the Exchange Act or the Securities Act (as such documents have been amended since the time of their filing prior to the date hereof, collectively, the “Company SEC Documents”). As of their respective dates or, if amended prior to the date hereof, as of the date of the last such amendment, the Company SEC Documents, including any financial statements or schedules included therein (i) did not contain any untrue statement of a material fact or omit 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, and (ii) complied in all material respects with the applicable requirements of the Exchange Act and the Securities
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Act, as the case may be, and the applicable rules and regulations of the SEC thereunder. Each of the consolidated financial statements included in the Company SEC Documents (the “Company Financial Statements”) has been prepared in accordance with United States generally accepted accounting principles (“GAAP”) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presents in all material respects, as applicable, the consolidated financial position and the consolidated results of operations and cash flows (and changes in financial position, if any) of the Company and its consolidated Subsidiaries as at the dates thereof or for the periods presented therein (subject, in the case of any unaudited interim financial statements, to normal year-end adjustments and for the absence of footnotes).
SECTION 4.6 Absence of Certain Changes. Except (a) as set forth in the Company Disclosure Letter or (b) as disclosed in the Company SEC Documents filed prior to the date hereof, since March 31, 2009, the Company and its Subsidiaries have conducted their respective businesses and operations consistent with past practice only in the ordinary and usual course thereof and there has not occurred, and the Company or any of its Subsidiaries have not:
(i) any fact, event, circumstance, change, condition or effect (including the incurrence of any Liabilities of any nature, whether or not accrued, contingent or otherwise) that can reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company;
(ii) any material change by the Company or any of its Subsidiaries in accounting principles or methods other than those required by Law or GAAP;
(iii) taken any action or made any omission, that, if taken or made on or after the date of this Agreement, would be prohibited by Section 6.1;
(iv) suffered any material physical damage, destruction or loss (whether or not covered by insurance) that would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, affecting each Company’s or any Subsidiary’s respective property or business;
(v) entered into any material transaction involving consideration or obligations in excess of $500,000;
(vi) made or pledged to make any material charitable contribution or capital contribution;
(vii) accelerated, terminated, modified or canceled any material Contract to which the Company is a party or by which the Company or its assets are bound, except where such acceleration, termination, modification or cancellation would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; or
(viii) agreed or committed, whether in writing or otherwise, to do any of the foregoing.
SECTION 4.7 Undisclosed Liabilities. Except for Liabilities (a) set forth in the Company Disclosure Letter or reflected, disclosed or reserved against in the Company Financial Statements (including the footnotes thereto) included in the Company SEC Documents filed prior to the date of this Agreement; (b) incurred in the ordinary course of business and consistent with past practice or (c) that individually or in the aggregate, have not or will not be reasonably expected to have, a Material Adverse Effect on the Company or its Subsidiaries taken as a whole, neither the Company nor any of its Subsidiaries has any Liabilities of any nature whether or not accrued, contingent or otherwise, and whether or not required to be discharged, nor are there any facts or circumstances that would reasonably be expected to result in any obligation or Liability.
(a) As of the date hereof, except as set forth in the Company Disclosure Letter or as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company (i) there is no litigation, suit, action, claim, charge or other proceeding (each, an “Action”) by or before any Governmental Authority or any other Person pending or, to the knowledge of the Company, threatened,
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against, by or affecting the Company or any of its Subsidiaries (other than insurance claims litigation in the ordinary course of business for which claims reserves that are adequate in the aggregate have been established), or any of its or their respective assets, properties or business, and (ii) no investigation or inquiry by or before any Governmental Authority is pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries.
(b) Except as set forth in the Company Disclosure Letter, there are no judgments, injunctions, writs, orders or decrees binding on the Company or any of its Subsidiaries that have had, or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company and its Subsidiaries taken as a whole.
SECTION 4.9 Compliance with Laws.
(a) Except as set forth in the Company Disclosure Letter, the Company and its Subsidiaries have been, since April 1, 2006, and their operations are currently being, conducted in compliance with all applicable Laws and Judgments, except where the failure to so comply would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company and its Subsidiaries taken as a whole.
(b) Except as set forth in the Company Disclosure Letter, the Company and each of its Subsidiaries possess all licenses, Permits and other authorizations required to conduct their businesses as now conducted by them, except where the failure to possess such licenses, permits and other authorizations would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company and its Subsidiaries taken as a whole. The Company has not received notice of pending cancellation or suspension thereof, nor to the knowledge of the Company, is any cancellation thereof threatened.
SECTION 4.10 Employee Benefit Plans.
(a) Company Benefit Plans. The Company Disclosure Letter sets forth a complete list of each “employee benefit plan” as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) (whether or not subject to ERISA), and any other material plan, policy, program practice, agreement, understanding or arrangement (whether written or oral) providing compensation or other benefits to any current or former director, officer, employee or consultant (or to any dependent or beneficiary thereof of the Company or any ERISA Affiliate), which are now, or were within the past 6 years, maintained, sponsored or contributed to by the Company or any ERISA Affiliate, or under which the Company or any ERISA Affiliate has any material obligation or liability, whether actual or contingent, including, without limitation, all incentive, bonus, deferred compensation, vacation, holiday, cafeteria, medical, disability, stock purchase, stock option, stock appreciation, phantom stock, restricted stock, restricted stock unit, stock-based compensation, change-in-control., retention, transaction, employment, consulting, personnel or severance policies, programs, practices, Contracts or arrangements (each a “Company Benefit Plan”). For purposes of this Section 4.10, “ERISA Affiliate” shall mean any entity (whether or not incorporated) other than the Company that, together with the Company, is considered under common control and treated as one employer under Sections 414(b), (c), (m) or (o) of the Code. To the knowledge of the Company, the Company has no express or implied commitment to modify, change or terminate any Company Benefit Plan, other than with respect to a modification, change or termination required by ERISA or the Code and each Company Benefit Plan can be amended, terminated or otherwise discontinued after the Effective Time in accordance with its terms.
(b) Deliveries. The Company has made available to Buyer complete copies of each Company Benefit Plan (or, if not written a written summary of its material terms), including without limitation all plan documents, trust agreements, annuity contracts, insurance contracts or other funding vehicles and all amendments thereto.
(c) General Compliance. Except as would not reasonably be expected to have a Material Adverse Effect on the Company, (i) each Company Benefit Plan has been administered in accordance with its terms
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and all applicable Laws and Orders, including ERISA and the Code, including, without limitation, timely filing of all Tax, annual reporting and other governmental filings required by ERISA and the Code and timely contribution (or, if not yet due, proper financial reporting) of any amounts required to be made under the terms of any of the Company Benefit Plans as of the date of this Agreement, (ii) no prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code and other than a transaction that is exempt under a statutory or administrative exemption) has occurred with respect to any Company Benefit Plan, and (iii) the Company and its ERISA Affiliates have complied with the Consolidated Omnibus Budget Reconciliation Act of 2985, as amended, and the regulations thereunder (“COBRA”), and any similar state law. None of the assets of any Company Benefit Plan which is intended to qualify under Section 401(a), Section 401(k), Section 401(m) or Section 4975(e)(7) of the Code have been invested in any equity interest issued by the Company or any Company Subsidiary.
(d) Legal Actions. Except as would not reasonably be expected to have a Material Adverse Effect on the Company or as set forth in the Company Disclosure Letter, no suit, administrative proceeding, action or other litigation has been brought, or to the knowledge of the Company is threatened, against or with respect to any such Company Benefit Plan, including any audit or inquiry by the IRS or United States Department of Labor (other than routine benefits claims) and any civil action under Section 502 of ERISA.
(e) Title IV of ERISA. No Company Benefit Plan is a multiemployer pension plan (as defined in Section 3(37) of ERISA) (“Multiemployer Plan”) or other pension plan subject to Title IV of ERISA and neither the Company nor any ERISA Affiliate has sponsored or contributed to or been required to contribute to a Multiemployer Plan or other pension plan subject to Title IV of ERISA. No liability under Title IV of ERISA has been incurred by the Company or any ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to the Company or any ERISA Affiliate of incurring or being subject (whether primarily, jointly or secondarily) to a material liability thereunder. None of the assets of the Company or any ERISA Affiliate is, or any reasonably be expected to become, the subject of any Lien arising under ERISA or Section 412(n) of the Code.
(f) Change in Control. Except as set forth in the Company Disclosure Letter, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby (either alone or in conjunction with any other event, such as termination of employment) will (A) result in any payment (including, without limitation, severance, unemployment compensation, parachute or otherwise) becoming due to any director or employee of the Company or any Company Subsidiary or any of their respective affiliates, or to any Governmental Entity or other Person on behalf of any such director or employee, from the Company or any Company Subsidiary or any of their respective affiliates under any Company Benefit Plan or otherwise, (B) significantly increase any benefits otherwise payable under any Company Benefit Plan, (C) result in any acceleration of the time of payment or vesting of ay material benefits or (D) result in the payment of any amount that could, individually or in combination with any other such payment, constitute an “excess parachute payment,” as defined in Section 280g(b)(1) of the Code.
(g) No Retiree Welfare Benefits; Section 409A. Except as required by COBRA, any similar state or local law or pursuant to any employment agreement or severance arrangement providing for Company or Company Subsidiary-paid-post-employment health care benefits for a period of not more than 18 months following termination of employment, no Company Benefit Plan provides any retiree or post-employment medical, disability or life insurance benefits to any Person. Each “nonqualified deferred compensation plan” (as defined in Section 409A(d)(1) of the Code) of the Company has been operated since January 1, 2005 in good faith compliance with Section 409A of the Code, the applicable proposed and final regulations thereunder, and any applicable IRS guidance, except for such noncompliance as would not, individually or in the aggregate, be material to the Company. The Company has no liability or obligation to provide any gross-up of the Tax imposed by Section 409A(a)(1)(B) of the Code.
(h) Foreign Plans.
(i) The only material pension, unemployment insurance, medical insurance, work injury insurance, housing provident fund, welfare, bonus, stock purchase, stock ownership, stock option, deferred
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compensation, incentive, severance, termination or other compensation plan or arrangement, or other material employee fringe benefit plan presently maintained by, or contributed to by the Company, any of the Company Subsidiaries or any ERISA Affiliate for the benefit of any employee of the Company, any of the Company Subsidiaries or any ERISA Affiliate, or with respect to which the Company, any Company Subsidiary or any ERISA Affiliate has any liability, including without limitation any such plan required to be maintained or contributed to by the law of the relevant jurisdiction, which would be described in Section 4.10(a) above, but for the fact that such plans are maintained outside the jurisdiction of the United States (but excluding plans maintained by a governmental entity), are also listed in the Company Disclosure Letter (the “Foreign Plans”), and a true and complete copy of each written Foreign Plan and of any description of each Foreign Plan that is not written has been furnished to Buyer.
(ii) Except as does not have a Material Effect, the Company, each of the Company Subsidiaries, each ERISA Affiliate and each of the Foreign Plans are in compliance (both as to documentation and administration) in all material respects with the provisions of the Laws of each jurisdiction in which any of the Foreign Plans are maintained, to the extent such laws are applicable to the Foreign Plan. Except as does not have a Material Adverse Effect, each Foreign Plan that is required to be registered with any Governmental Entity has been so registered and has been maintained in good standing with all applicable Governmental Entity and, if intended to qualify for special tax treatment, each Foreign Plan meets all requirements for such treatment.
(iii) There are no pending investigations by any Governmental Entity involving the Foreign Plans, no claims pending or threatened in writing (except for claims for benefits payable in the normal operation of the Foreign Plans), suits or proceedings against any Foreign Plan or asserting any rights or claims to benefits under any Foreign Plan which could give rise to any liability that has a Material Adverse Effect.
SECTION 4.11 Employee Matters.
(a) Neither the Company nor any of its Subsidiaries is a party to or bound by any collective bargaining or similar agreement with any labor organization.
(b) Except (i) as set forth in the Company Disclosure Letter or (ii) disclosed in the Company SEC Documents filed prior to the date hereof, as of the date hereof, there are no complaints, charges or claims against the Company or any of its Subsidiaries pending or, to the knowledge of the Company, threatened to be brought or filed with any Governmental Authority or any other Person in connection with the employment by the Company or any of its Subsidiaries of any individual, including, without limitation, any claim relating to employment discrimination, equal pay, sexual harassment, employee safety and health, wages and hours or workers’ compensation.
(a) Each of the Company and its Subsidiaries has (i) timely filed (or there have been timely filed on its behalf) with the appropriate Governmental Authorities all Tax Returns required to be filed by it or them (giving effect to all extensions) and such Tax Returns are correct and complete in all material respects; (ii) timely paid in full (or there has been timely paid in full on its behalf) all material Taxes required to have been paid by it or them, and (iii) made adequate provision (or adequate provision has been made on its behalf) in accordance with GAAP for all material accrued Taxes not yet due.
(b) There are no Liens for Taxes upon any property or assets of the Company or its Subsidiaries, except for Liens for Taxes not yet due and payable or which are being contested in good faith and for which adequate reserves in accordance with GAAP have been established.
(c) Each of the Company and its Subsidiaries has complied in all material respects with all applicable Laws relating to the payment and withholding of Taxes and has, within the time and in the manner
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prescribed by Law, withheld and paid over to the proper Governmental Authorities all material amounts required to be so withheld and paid over under applicable Law.
(d) No federal, state, local or foreign Tax Proceedings are presently pending with regard to any material Taxes or material Tax Returns of the Company or any of its Subsidiaries, and neither the Company nor any of its Subsidiaries has received a written notice of any proposed Tax Proceedings with respect to any material Taxes.
(e) No extension of time to file the Tax Return of the Company or any of its Subsidiaries, which such Tax Return has not since been filed in accordance with applicable law, has been filed.
(f) The statute of limitations for any Tax Proceeding relating to the Company or any of its Subsidiaries has never been modified, extended or waived.
(g) Any assessment, deficiency, adjustment or other similar item relating to any Tax or Tax Return of the Company or any of its Subsidiaries has been reported to all Governmental Authorities in accordance with applicable law.
(h) Since September 30, 2003, no jurisdiction where no Tax Return has been filed or no Tax has been paid has made or threatened to make a claim for the payment of any Tax or the filing of any Tax Return relating to the Company or any of its Subsidiaries.
(i) The Company is not a party to any agreement with any Governmental Authority with respect to Taxes (including, but not limited to, any closing agreement within the meaning of Code Section 7121 or any analogous provision of applicable law). No private letter or other ruling or determination from any Governmental Authority relating to the Tax of the Company or any of its Subsidiaries has ever been requested or received.
(j) Neither the Company nor any of its Subsidiaries has any “tax-exempt bond-financed property” or “tax-exempt use property,” within the meaning of Code Section 168(h) or any similar provision of applicable law.
(k) No asset of the Company or any of its Subsidiaries is required to be treated as being owned by any other Person pursuant to any provision of applicable law (including, but not limited to, the “safe harbor” leasing provisions of Code Section 168(f)(8), as in effect prior to the repeal of those “safe harbor” leasing provisions).
(l) Since September 30, 2003, neither the Company nor any of its Subsidiaries is or has been a beneficiary or otherwise participated in any reportable transaction within the meaning of Treasury Regulation Section 1.6011-4(b)(1).
(m) Since September 30, 2003, neither the Company nor any of its Subsidiaries has distributed stock of another Person nor has its stock been distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Code Section 355 or Code Section 361.
(n) The Company is not, nor since September 30, 2003 has it been, a “United States real property holding corporation” within the meaning of Code Section 897(c)(2).
(o) No election under Code Section 338 or any similar provision of applicable law has been made or required to be made by or with respect to the Company.
(p) The Company has provided to Buyer all Tax Returns of Company and its Subsidiaries filed since September 30, 2003 and all audit reports, closing agreements, letter rulings, or technical advice memoranda relating to any Tax or Tax Return of the Company or any of its Subsidiaries.
(q) The Company Disclosure Letter sets forth a list of all jurisdictions (foreign and domestic) in which the Tax Return of the Company or any of its Subsidiaries has been the subject of any Tax Proceedings since September 30, 2003, a description of each such Tax Return, and the relevant Tax periods.
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(r) The Company Disclosure Letter sets forth a list of all jurisdictions (foreign and domestic) to which any Tax has been paid or in which any Tax Return has been filed by the Company or any of its Subsidiaries since September 30, 2003.
(s) The Company Disclosure Letter sets forth a list of all Tax elections made since September 30, 2003 with respect to the Tax or Tax Return of the Company or any Subsidiary.
SECTION 4.13 Certain Contracts.
(a) The Company Disclosure Letter lists each of the following Contracts, to which either the Company or any of its Subsidiaries is a party, including all amendments and supplements thereto, (collectively, the “Material Contracts” and each a “Material Contract”):
(i) All employment, consultation, retirement, termination, sign-on, buy-out or other Contracts with any present or former officer, director, trustee, employee, agent, broker or independent contractor of the Company or any of its Subsidiaries (including, but not limited to, loans or advances to any such Person (as defined below) or any Affiliate of such Person) excluding (I) such Contracts which are terminable by the Company or any of its Subsidiaries at will without severance and (II) Contracts that involve or are reasonably likely to involve the payment pursuant to the terms of such Contract of less than $100,000;
(ii) All Contracts containing any provision or covenant (A) limiting the ability of the Company or any of its Subsidiaries to compete with any Person in its business, to do business with any Person or in any location or to employ any Person, (B) limiting the ability of any Person to compete with or obtain products or services from the Company or any of its Subsidiaries or (C) restricts the Company or any of its Subsidiaries from engaging in any business or activity anywhere in the world;
(iii) All Contracts relating to the borrowing of money by the Company or any of its Subsidiaries or the direct or indirect guarantee by the Company or any of its Subsidiaries of any obligation of any Person for borrowed money or other specific financial obligation of any Person, or any other liability of the Company or any of its Subsidiaries in respect of indebtedness for borrowed money or other specific financial obligation of any Person, including, but not limited to, any Contract relating to or containing provisions with respect to any lines of credit or similar facilities;
(iv) All Contracts (other than contracts entered into in the ordinary course of business) with any Person containing any provision or covenant relating to the indemnification or holding harmless by the Company or any of its Subsidiaries of any Person which is reasonably likely to result in a liability to the Company or any of its Subsidiaries of $100,000 or more;
(v) All Contracts relating to the future disposition (including, but not limited to, restrictions on transfer or rights of first refusal) or future acquisition of any interest in any business enterprise, and all contracts relating to the future disposition of a material portion of the assets of the Company or any of its Subsidiaries;
(vi) All Contracts with any director or Affiliate of the Company; and
(vii) All other Contracts (other than Contracts which are expressly excluded under any other subsection of this Section 4.14) that involve or are reasonably likely to involve the payment pursuant to the terms of such Contracts by or to the Company or its Subsidiaries of $100,000 or more or the termination of which is reasonably likely to have a Material Adverse Effect on the Company.
(b) Except as has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company and except as provided in the Company Disclosure Letter: (i) each Material Contract is a legal, valid and binding obligation of the Company or any of its Subsidiaries, as the case may be, and, to the knowledge of the Company, of each other party thereto, enforceable against each such party in accordance with its terms, (ii) neither the Company nor any of its Subsidiaries, as the case may be, nor, to the knowledge of the Company, any other party to a Material
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Contract, is in violation or default of any term of any Material Contract, and (iii) no condition or event exists that, with the giving of notice or the passage of time, or both, would constitute a violation or default by the Company or any of its Subsidiaries, as the case may be, or any other party to a Material Contract, or permit the termination, modification, cancellation or acceleration of performance of the obligations of the Company or any of its Subsidiaries, as the case may be, or any other party to the Material Contract.
SECTION 4.14 Intellectual Property.
(a) As used herein: (i) “Intellectual Property” means all U.S. state and foreign (A) trademarks, service marks, trade names, Internet domain names, designs, logos, slogans and general intangibles of like nature, together with the goodwill associated therewith, registrations and applications relating to the foregoing (“Trademarks”), (B) patents and pending patent applications, patent disclosures, and any and all divisions, continuations, continuations-in-part, reissues, reexaminations, and any extensions thereof, any counterparts claiming priority therefrom, utility models, patents of importation/confirmation, certificates of invention and like statutory rights (“Patents”), and (C) registered and unregistered copyrights (including those in Software), rights of publicity and all registrations and applications to register the same (“Copyrights”); (ii) “IP Licenses” means all licenses and agreements (excluding “click-wrap” or “shrink-wrap” agreements or agreements contained in “off-the-shelf” Software or the terms of use or service for any web site) pursuant to which the Company and any of its Subsidiaries have acquired rights in (including usage rights) or to any Intellectual Property, or licenses and agreements pursuant to which the Company and any of its Subsidiaries have licensed or transferred the right to use any Intellectual Property, including license agreements, settlement agreements and covenants not to sue; and (iii) “Software” means all computer programs, including any and all software implementations of algorithms, models and methodologies whether in source code or object code form, databases and compilations, including any and all data and collections of data, all documentation, including user manuals and training materials, related to any of the foregoing and the content and information contained on any Web site.
(b) Except as set forth in the Company Disclosure Letter or as has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, since April 1, 2006, no claims have been asserted by any Third Party against the Company or any of its Subsidiaries related to use of or grant of licenses to use, any Intellectual Property, IP Licenses or Software.
SECTION 4.15 Properties and Assets.
(a) The Company and each of its Subsidiaries has (i) good and valid title to all of the material properties and assets reflected as owned on the most recent balance sheet of the Company contained in the Company SEC Documents, and to the knowledge of the Company, free and clear of any material Liens other than Permitted Liens, except for properties or assets that have been sold or disposed of in the ordinary course of business consistent with past practice since the date of such balance sheet and (ii) a valid leasehold interest or other comparable Contract of use in all material properties and assets (in each case, tangible or intangible) reflected as leased on such balance sheet, and to the knowledge of the Company, free and clear of any material Liens other than Permitted Liens, except for such leases or comparable Contracts terminated in the ordinary course of business consistent with past practice since the date of such balance sheet.
(b) The Company Disclosure Letter sets forth (i) a true and complete list of all real property leased, subleased or otherwise occupied by the Company or any Company Subsidiary (collectively, the “Leased Real Property”), (ii) the address for each parcel of Leased Real Property, (iii) a description of the applicable Contract relating thereto and (iv) the current rent amounts payable by the Company or any Company Subsidiary related to each Leased Real Property. No Lease Agreement is subject to any Lien entered into by the Company or any Company Subsidiary, including without limitation any right to the use or occupancy of any Leased Real Property, other than Permitted Liens. Each Lease Agreement is, with respect to the Company or the applicable Company Subsidiary, a valid and subsisting agreement in full force and effect and constitutes a valid and binding obligation of the Company or the applicable Company Subsidiary, subject to applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws, now or hereafter in effect, affecting creditors’ rights generally, and to general equity principles.
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(c) Each parcel of Leased Real Property is, to the knowledge of the Company or the applicable Company Subsidiary, in material compliance with all existing material Laws applicable to such Leased Real Property, and neither the Company nor any Company Subsidiary has received written notice from any Governmental Entity regarding non-compliance with respect to such Laws. Neither the Company nor any Company Subsidiary has received written notice of any proceedings in eminent domain, condemnation or other similar proceedings that are pending, and there are no such proceedings threatened in writing, affecting any portion of the Leased Real Property and neither the Company nor any Company Subsidiary has received written notice of the existence of any outstanding writ, injunction, decree, order or judgment or of any pending proceeding.
SECTION 4.16 Environmental Matters. No written notice, notification, demand, request for information, citation, summons, complaint or order has been received by, and no action, claim, suit, proceeding or review or, to the knowledge of the Company, investigation is pending or, to the knowledge of the Company, threatened by any Person against, the Company or any of its Subsidiaries with respect to any matters relating to or arising out of any Environmental Law and (b) the Company and its Subsidiaries have been and are in compliance with all Environmental Laws, including possessing all material permits, authorizations, licenses, exemptions and other governmental authorizations required for its operations under applicable Environmental Laws.
SECTION 4.17 Transactions with Related Parties. Except as set forth in the Company Disclosure Letter, the Company SEC Documents disclose Contracts entered into by the Company or its Subsidiaries (which are or will be in effect as of or after the date of this Agreement) involving payments with any person who is an officer, director or Affiliate of the Company or any of its Subsidiaries, or any relative of any of the foregoing. To the Company’s knowledge, no officer, director or Affiliate of the Company or any of its Subsidiaries has, either directly or indirectly:
(a) an equity interest of five percent (5%) or more in any Person that purchases from or sells or furnishes any goods or services to the Company or any of its Subsidiaries or otherwise does business with the Company or any of its Subsidiaries, or
(b) a beneficial interest in any Material Contract, commitment or agreement to which any of the Company or any of its Subsidiaries is a party or under which the Company or any of its Subsidiaries is obligated or bound or to which the property of the Company or any of its Subsidiaries may be subject, other than Material Contracts, commitments or agreements between the Company or any of its Subsidiaries and such Persons in their capacities as officers or directors of the Company; provided that such representation and warranty shall not apply to the ownership, as a passive investment, by any such officer, director or Affiliate of less than one percent (1%) of a class or securities listed for trading on a national securities exchange or publicly traded in the over-the-counter market.
SECTION 4.18 Finders’ or Advisors’ Fees. Except for Oppenheimer & Co. Inc. (“Oppenheimer”), there is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of the Company who might be entitled to any fee or, commission in connection with the transactions contemplated by this Agreement.
SECTION 4.19 Receivables. All of the accounts receivable of the Company and its Subsidiaries on the Company Balance Sheet have arisen from bona fide transactions in the ordinary course of the business consistent with past practice and are not subject to any credits or allowances, other than allowances for doubtful accounts (which allowances have been made in accordance with GAAP).
SECTION 4.20 Absence of Sensitive Matters. To the knowledge of the Company, none of the officers or directors of the Company or any of its Subsidiaries or Affiliates:
(a) has made or has agreed to make any contribution, payment or gift or to provide any other compensation or other benefit to any Governmental Authority or any Person (including, but not limited to, any employee or agent) associated or affiliated with or representing a Governmental Authority, where the
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contribution, payment, compensation or other benefit or the purpose of the contribution, payment, compensation or other benefit was or is illegal under the applicable Law or other rules of any Governmental Authority; or
(b) has made or agreed to make any contribution or expenditure, or has reimbursed any political gift or contribution or expenditure made by any other Person to candidates for public office, whether federal, state or local (foreign or domestic) where such contributions were or would be a violation of applicable Law.
SECTION 4.21 Bank Accounts. The Company Disclosure letter sets forth the names and locations of all banks, depositories and other financial institutions in which the Company or any of its Subsidiaries have an account or safe deposit box and the names of all Persons authorized to draw thereon or to have access thereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Except as set forth in the disclosure letter delivered by Buyer to the Company simultaneously with the execution of this Agreement (the “Buyer Disclosure Letter”), Buyer represents and warrants to the Company that the following statements are true and correct in all material respects as of the date hereof:
SECTION 5.1 Organization and Qualification. Buyer is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Delaware. Buyer has the requisite corporate power and corporate authority and any necessary Governmental Authority, franchise, license, certificate, or permit to own, operate and lease the properties that it purports to own, operate or lease and to carry on its business as it is now being conducted, and is duly qualified as a foreign corporation to do business, and is in good standing in each jurisdiction where the character of its properties owned, operated or leased or the nature of its activities makes such qualification necessary, except for such failures to be so qualified and in good standing that have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Buyer.
SECTION 5.2 Corporate Authorization; Enforceability; Board Action. Buyer has the requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, including the Merger. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Buyer and no other corporate proceedings on the part of Buyer are necessary to authorize the execution and delivery of this Agreement or to consummate the Merger and the other transactions contemplated hereby. This Agreement has been duly executed and delivered by Buyer and, assuming due authorization, execution and delivery of this Agreement by the Company, constitutes a valid and binding agreement of Buyer enforceable against each such party in accordance with its terms, except to the extent that such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar Laws, now or hereafter in effect, affecting creditors’ rights generally, and to general equity principles.
SECTION 5.3 Consents and Approvals; No Violations.
(a) The execution, delivery and performance by Buyer of this Agreement and the consummation by Buyer of the transactions contemplated hereby, including the Merger, require no consent, approval or action by or in respect of, or notice to or filing with, any Governmental Authority other than (i) the filing of articles of merger in connection with the Merger in accordance with the PBCL and the certificate of merger with the Secretary of State of the State of Delaware in accordance with the DGCL, and (ii) any other approvals the absence of which would not reasonably be expected to, individually or in the aggregate, (A) prevent or delay consummation of the Merger in any material respect or (B) have a Material Adverse Effect on the Surviving Company, Buyer.
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(b) Except as set forth in the Buyer Disclosure Letter, neither the execution, delivery or performance by Buyer of this Agreement nor the consummation by Buyer of the transactions contemplated hereby, including the Merger, nor compliance by Buyer with any of the provisions hereof will (i) conflict with or result in any breach of any provisions of the articles of incorporation or bylaws of Buyer or the similar organizational and governing documents of Buyer or any of its Subsidiaries, (ii) conflict with or result in any violation of any provision of any Law binding upon or applicable to Buyer or any of its Subsidiaries or applicable to the consummation by Buyer of the Merger and the transactions contemplated hereby, (iii) require the consent, approval or authorization of, or notice to or filing with, any Third Party with respect to, result in any violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, amendment, or acceleration of any right or obligation of Buyer, or any of its Subsidiaries or to a loss of any benefit to which Buyer, or any of its Subsidiaries is entitled) under any provision of Contract by or which any of Buyer, or any of its Subsidiaries is bound or subject or any of Buyer’s Permits, except in the case of (ii) and (iii) for such conflicts, violations, breaches, defaults, rights or losses, or the failure to obtain any such consents or approvals or to provide such notices or make such filings, that would not reasonably be expected to (A) materially impair or delay consummation of the Merger, or (B) have a Material Adverse Effect on Buyer or the Surviving Company.
SECTION 5.4 Finders’ or Advisors’ Fees. There is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of Buyer who might be entitled to any fee or commission in connection with the transactions contemplated by this Agreement.
SECTION 5.5 [INTENTIONALLY OMITTED].
SECTION 5.6 Capital Resources. Buyer now has, or has provided to the Company copies of executed binding and enforceable commitment letters which are subject to no contingencies for, sufficient resources (and Buyer hereby agrees that it shall continue to have such resources through the Effective Time) to provide equity and debt in an aggregate amount sufficient to fulfill its obligations to pay all cash amounts required to be paid by it under this Agreement.
ARTICLE VI
SECTION 6.1 Conduct of the Company. Except as set forth in Section 6.1 of the Company Disclosure Letter, the Company covenants and agrees that, except as required to comply with applicable Law, from and after the date of this Agreement and until the Effective Time:
(a) the Company will not, and will not permit any of its Subsidiaries to (without the prior written consent of Buyer):
(i) amend or propose to amend its articles of incorporation, bylaws or similar organizational documents;
(ii) issue, sell, grant, transfer, pledge, dispose of, encumber or authorize the issuance of any shares of, or securities convertible into or exchangeable for, or options, warrants, calls, commitments, appreciation rights, performance guarantees or, any other rights, or rights of any kind to acquire, any securities of the Company or any of its Subsidiaries except for the issuance and delivery of shares of Company Common Stock pursuant to the exercise of outstanding Company Options;
(iii) (A) directly or indirectly, split; combine or reclassify the outstanding shares of capital stock; or (B) redeem, purchase or otherwise acquire directly or indirectly any of the capital stock of the Company or any of its Subsidiaries;
(iv) declare, set aside, make or pay (A) any dividend or other distribution payable in cash, securities or property; or (B) any contribution, loan or other payment or any combination thereof, with respect to its capital stock;
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(v) adopt a plan of complete or partial liquidation, dissolution, merger or consolidation or adopt resolutions providing for or authorizing such liquidation, dissolution, merger or consolidation or adoption of any liquidation or dissolution, merger or consolidation;
(vi) (A) increase the compensation or benefits payable to any director or officer, other employee or consultant of the Company or any of its Subsidiaries except in the ordinary course of business consistent with past practice; (B) enter into any new severance or termination pay agreement with (or amend any such existing arrangement with) any director or officer, other employee or consultant of the Company or any of its Subsidiaries; (C) enter into any new employment, deferred compensation or other similar agreement (or amend any such existing agreement) with any director or officer, other employee or contractor of the Company or any of its Subsidiaries; or (D) increase any benefits payable under any existing severance or termination pay policies or agreements or employment agreements;
(vii) adopt any Employee Plan;
(viii) authorize any capital expenditure payable by the Company or any of its Subsidiaries in excess of One Hundred Thousand Dollars ($100,000) individually or in the aggregate;
(ix) (A) incur or assume any indebtedness for borrowed money or issue debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible or liable for (whether directly or indirectly), the obligations of any Person for borrowed money, except for indebtedness incurred under the Company’s existing credit facilities in the ordinary course of business and consistent with past practice; (B) make any loans, advances or capital contributions to, or investments in, any other Person (other than to the Company from its Subsidiaries or to a Subsidiary from the Company); or (C) enter into any material commitment or transaction (including any borrowing, capital expenditure or purchase, sale or lease of assets) requiring a capital expenditure (including any leases) by the Company or any of its Subsidiaries, other than capital expenditures that do not exceed one hundred thousand dollars ($100,000), individually;
(x) (A) make, revoke or change a material Tax election with respect to the Company or any of its Subsidiaries (unless required by applicable Law); (B) change a material method of accounting for Tax purposes with respect to the Company or any of its Subsidiaries; (C) consent to extend the period of limitations for the payment or assessment of any material Tax with respect to the Company or any of its Subsidiaries; or (D) settle or compromise any material Tax liability or refund of the Company or any of its Subsidiaries;
(xi) waive any material defenses with respect to, or, other than in the ordinary course of business, make any payment of any material Liability of the Company or any of its Subsidiaries;
(xii) (A) acquire (by merger, consolidation, or acquisition of stock or assets) any Person or division thereof or make any investment in another Person (other than an existing Subsidiary of the Company and other than incorporation of a wholly-owned subsidiary of the Company) or, except in the ordinary course of business and consistent with past practice, acquire assets; or (B) sell, transfer, lease, license, pledge, dispose of, or encumber or authorize or propose the sale, pledge, disposition or Lien of any of the properties or assets of the Company or any of its Subsidiaries, except in the case of clause (B) above, for sales, transfers, leases, licenses, pledges, dispositions or Liens (1) pursuant to existing Contracts (the terms of which have been previously disclosed to Buyer); or (2) in the ordinary course of business and consistent with past practice;
(xiii) take any action, or fail to take any action, to cause the Company Common Stock to cease to be listed on the AMEX prior to the Closing Date;
(xiv) except as otherwise provided in this Agreement, take any action, or fail to take any action, that could materially impair, prevent or impose a delay in consummating the transactions contemplated hereby, including the Merger;
(xv) take any action to cause the Company or any of its Subsidiaries to enter any line of business unrelated to the business conducted by them as of the date of this Agreement;
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(xvi) fail to maintain insurance at presently existing levels;
(xvii) waive any benefits, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which the Company is a party;
(xviii) take or suffer any action that would result in the creation, or consent to the imposition, of any Lien on any of its assets other than pursuant to existing credit facilities;
(xix) change any method, estimate or practice or any of the accounting principles used by it unless required by GAAP or applicable Law;
(xx) except in the ordinary course of business and consistent with past practice, enter into, modify, amend or terminate any of any Material Contract described in Section 4.14, or waive, release, assign or compromise any material rights or claims with respect thereto;
(xxi) take any action that could reasonably be expected to result in a failure of any of the conditions set forth in Section 7.1 or Section 7.3 hereof;
(xxii) enter into a Contract to do any of the foregoing, or authorize, recommend, propose or announce an intention to do any of the foregoing; or
(xxiii) agree or commit to do any of the foregoing; and
(b) The Company shall (except to the extent that Buyer shall otherwise consent in writing):
(i) conduct its and each of its Subsidiaries’ business in accordance with applicable Law and consistent with past practice;
(ii) conduct its and each of its Subsidiaries’ business only in the ordinary course of business consistent with past practice and in accordance with the transactions contemplated by this Agreement; and
(iii) use commercially reasonable efforts to preserve intact its and each of its Subsidiaries’ assets.
SECTION 6.2 Preparation of Proxy Statement, Shareholder Meeting.
(a) The Company, acting through the Company Board and the Company Special Committee, shall, in accordance with applicable law duly call, give notice of, convene and hold a special meeting of its shareholders (the “Special Meeting”) as soon as practicable following the execution of this Agreement for the purpose of considering and taking action upon this Agreement and the Merger.
(b) The Company shall together with Buyer prepare and file with the SEC a preliminary proxy statement (the “Preliminary Proxy”) relating to this Agreement and the Merger, which shall be filed no later than sixty (60) days following the date hereof, and subsequently file and furnish to the shareholders of the Company a definitive proxy statement (the “Definitive Proxy” and collectively with the Preliminary Proxy, the “Proxy Statement”) and use its best efforts to (i) obtain and furnish the information required to be included by the SEC in the Proxy Statement and, after consultation with Buyer, respond promptly to any comments made by the SEC with respect to the Preliminary Proxy; (ii) obtain the necessary approval and adoption of this Agreement and the Merger by its shareholders; and (iii) subject to the other provisions of this Agreement, include in the Proxy Statement the recommendation of the Company Board and the Company Special Committee that shareholders of the Company vote in favor of the approval and adoption of this Agreement and the Merger (the “Company Recommendation”). The parties hereto shall also prepare a Schedule 13E-3 (the “Schedule 13E-3”) of the Company relating to the Merger which shall be filed with the SEC concurrently with the filing of the Preliminary Proxy.
(c) Buyer shall furnish all information about itself, its business and operations and its owners and all financial information to the Company as may be reasonably necessary in connection with the preparation of the Proxy Statement. The Company shall give Buyer and its counsel the opportunity to review, prior to their
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being filed with, or sent to the SEC, (i) the Proxy Statement and (ii) all amendments and supplements to the Proxy Statement and all responses to requests for additional information and replies to comments. Each of the Company and Buyer, agrees to correct promptly any information provided by it for use in the Proxy Statement if and to the extent that such information shall have become false or misleading in any material respect, and the Company further agrees to take all necessary steps to cause the Proxy Statement as so corrected to be filed with the SEC and to be disseminated to the shareholders of the Company, in each case, to the extent required by applicable Securities Laws. The Company shall notify Buyer of the receipt of any comments of the SEC with respect to the Preliminary Proxy. Any other provision of this Section 6.2 notwithstanding, the Company, in connection with a Company Change of Recommendation, may amend or supplement the Proxy Statement (including by incorporation by reference).
(d) None of the information supplied by the Company specifically for inclusion or incorporation by reference in the Proxy Statement or the Schedule 13E-3 will, at the time filed with the SEC and as of the date it or any amendment or supplement thereto is mailed to shareholders of the Company and at the time of the Special 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 Proxy Statement will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder. The Company makes no representation, warranty or covenant with respect to information supplied by Buyer or its Affiliates specifically for inclusion in the Proxy Statement or Schedule 13E-3.
(e) None of the information supplied by Buyer or its Affiliates specifically for inclusion or incorporation by reference in the Proxy Statement or Schedule 13E-3 will, at the time filed with the SEC and as of the date it or any amendment or supplement thereto is mailed to shareholders and at the time of the Special 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. Buyer makes no representations, warranties or covenants with respect to information concerning the Company included in the Proxy Statement or information supplied by the Company specifically for inclusion in the Proxy Statement or Schedule 13E-3.
(f) In the event that subsequent to the date hereof, the Company Board or the Company Special Committee determines in accordance with Section 6.4 that the Merger Consideration is no longer fair to, or in the best interests of, the shareholders of the Company or that this Agreement is no longer advisable and either withdraws its recommendation in favor of the Merger and this Agreement, makes no recommendation or recommends to the shareholders that they reject the Merger and this Agreement, the Company may at its option cancel the Special Meeting and withdraw the Proxy Statement.
SECTION 6.3 Access to Information. The Company shall, and shall cause each of its Subsidiaries to the extent in the possession of the Company or its Subsidiaries to, give Buyer and its Representatives access to books, records, Contracts, commitments, personnel and officers of the Company and each of its Subsidiaries during normal business hours, furnish such financial and operating data and all other information as such Persons may reasonably request and shall instruct its own Representatives to cooperate in the other party’s investigation of the business of such party. The Company shall (i) at the request of Buyer confer on a regular basis with one or more Representatives of Buyer to discuss material operational matters and the general status of its ongoing operations, (ii) advise Buyer of any change or event that has had or would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company or any of its Subsidiaries, and (iii) furnish to Buyer promptly all other information concerning its business, properties and personnel, in each case as Buyer may reasonably request. Notwithstanding the foregoing, neither the Company nor its Subsidiaries shall be required to provide access to or to disclose any information (i) where such access or disclosure could jeopardize the attorney-client privilege or work product privilege of such Company or any of its Subsidiaries or contravene any Law or binding agreement entered into prior to the date of this Agreement, or (ii) to the extent that outside counsel to the Company advises that such access or disclosure should not be disclosed in order to ensure compliance with any other applicable Law.
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SECTION 6.4 No Solicitation; Unsolicited Proposals; Change of Company Recommendation.
(a) Except as otherwise expressly provided in this Section 6.4(a), from the date of this Agreement until the Effective Time or, if earlier, the termination of this Agreement in accordance with its terms, neither the Company nor any of its Subsidiaries shall permit or cause any of its or their respective Affiliates, or its or their Representatives, to, and the Company shall direct its Representatives not to, directly or indirectly, (i) solicit, initiate, or knowingly encourage or knowingly take any action designed to facilitate any inquiries or the making of any proposal that constitutes an Acquisition Proposal (as defined in Section 6.4(e)(i)), (ii) participate in any discussions or negotiations with any Third Party relating to an Acquisition Proposal, or (iii) enter into any Contract (including any agreement in principle, letter of intent, or understanding) with respect to or contemplating any Acquisition Proposal or enter into any Contract requiring the Company to abandon, terminate or fail to consummate the Merger or causing the Company Board or the Company Special Committee to not endorse or recommend the Merger or this Agreement or change its or their recommendation; provided, however that if (A) at any time prior to the Effective Time, the Company Board and the Company Special Committee determine in good faith, after consultation with their legal and financial advisors that an unsolicited written Acquisition Proposal is, or is reasonably likely to result in, a Superior Proposal, (B) neither the Company nor its Representatives shall have materially violated any of the restrictions set forth in this Section 6.4(a) in connection with the Acquisition Proposal in question and (C) the Company shall have, at least one (1) business day prior to taking any of the following actions, provided to Buyer prior written notice of its decision to take such action as provided in Section 6.4(d) and in compliance with Section 6.4(c), the Company may (x) furnish information with respect to the Company to the Person making such proposal (and its Representatives) pursuant to a customary confidentiality agreement (provided, that such confidentiality agreement shall not in any way restrict the Company from complying with its disclosure obligations under this Agreement, including with respect to such proposal; provided further, that any such confidentiality agreement need not contain a standstill or similar provision) and (y) participate in discussions or negotiations regarding such proposal with respect to such acquisition. The Company agrees to provide Buyer with any information provided in writing or a reasonable summary of oral information provided to the Person making such Acquisition Proposal and its Representatives substantially simultaneously with the provision thereof to such other person. The Company shall, and shall cause any of its respective Affiliates or any Persons acting on their behalf to, immediately cease and cause to be terminated any activities, discussions or negotiations with any parties existing or taking place on the date hereof with respect to any Acquisition Proposal.
(b) Except as contemplated by Section 6.4(c), neither the Company Board nor the Company Special Committee, nor any other committee of the Company Board shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse to Buyer, the approval or recommendation by such Company Board or Company Special Committee of this Agreement or the Merger, (ii) approve or recommend, or propose publicly to approve or recommend, any Acquisition Proposal, or (iii) cause the Company to enter into any letter of intent, agreement in principle or acquisition agreement or other similar agreement related to any Acquisition Proposal (each, an “Acquisition Agreement”).
(c) Nothing in this Agreement shall prevent the Company Board or Company Special Committee from withdrawing or modifying in any manner, or recommending, or proposing publicly to withdraw or modify in any manner, the Company Recommendation (a “Company Change of Recommendation”) or approving or recommending, or proposing to approve or recommend, any Superior Proposal, if all of the following conditions are met: (i) if the Change of Recommendation is precipitated by the submission of an Acquisition Proposal that has not been withdrawn, the Company Board (or the Company Special Committee) determines that such Acquisition Proposal constitutes or is reasonably likely to lead to a Superior Offer; (ii) neither the Company nor any of its subsidiaries nor any of their respective Representatives shall have materially violated any of its covenants or any of the restrictions on soliciting Acquisition Proposals set forth in Section 6.4(a) hereof; (iii) the Company shall have delivered to Buyer written notice (a “Change of Recommendation Notice”) at least three (3) business days prior to effecting such Change of Recommendation, which shall (A) state expressly that the Company Board (or the Company Special
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Committee) intends to effect a Change of Recommendation, and set forth in reasonable detail the facts and circumstances giving rise to the Company Board’s (or the Company Special Committee’s) decision to effect a Change of Recommendation and that the Company Board (or the Company Special Committee) has determined in good faith (after consultation with legal counsel) that the failure to take such action would be inconsistent with the fiduciary duties of the Company Board (or the Company Special Committee) to the shareholders of the Company under applicable Law, and (B) if the Change of Recommendation is precipitated by the submission of an Acquisition Proposal that has not been withdrawn, such notice shall also disclose the identity of the person or group making such Acquisition Proposal and include a copy of any definitive documentation relating to such Acquisition Proposal and such other documentation reflecting the final terms and conditions of such Acquisition Proposal as are being considered by the Company Board (or the Company Special Committee); (iv) after delivering the Change of Recommendation Notice, the Company shall provide Buyer with a reasonable opportunity to propose adjustments in the terms and conditions of this Agreement during such three (3) business day period, and negotiate in good faith with Buyer with respect thereto during such three (3) business day period; and (v) the Company Board (or the Company Special Committee) must have concluded in good faith, after consultation with its outside legal counsel, that in light of the facts and circumstances giving rise to the Company Board’s (or the Company Special Committee’s) decision to effect or consider effecting a Change of Recommendation as set forth in the Change of Recommendation Notice, and after considering any adjustments or negotiations pursuant to the preceding clause (iv), if applicable, that failing to make such Change of Recommendation would be inconsistent with the fiduciary duties of the Company Board (or the Company Special Committee) to the Company’s shareholders under applicable Law.
(d) In addition to the obligations of the Company set forth in paragraphs (a), (b) and (c) of this Section 6.4, the Company shall as promptly as practicable advise Buyer, orally and in writing, of any request for information or of any Acquisition Proposal (and in any case within 24 hours of such request or the receipt of such Acquisition Proposal), the principal terms and conditions of such request or Acquisition Proposal and the identity of the person making such request or Acquisition Proposal. The Company shall keep Buyer informed of the status and material details (including amendments or proposed amendments) of any such request or Acquisition Proposal as promptly as practicable.
(e) For purposes of this Agreement:
(i) “Acquisition Proposal” means any inquiry, offer, proposal, indication of interest, signed agreement or completed action, as the case may be, by any Third Party that relates to (A) a merger or consolidation involving the Company or any of its Subsidiaries, (B) the issuance, sale or other disposition by the Company or any of its Subsidiaries to a Third Party (including by way of merger, consolidation, share exchange or otherwise) of shares of capital stock or options, warrants, calls, subscriptions or securities convertible into capital stock of the Company or any of its Subsidiaries representing twenty percent (20%) of the votes associated with the outstanding capital stock of the Company or any of its Subsidiaries, as applicable, (C) any tender or exchange offer that if consummated would result in any Third Party, together with all Affiliates thereof, beneficially owning shares of capital stock or other equity securities of the Company or any of its Subsidiaries representing twenty percent (20%) (by voting power) of the outstanding capital stock of the Company or any of its Subsidiaries, as applicable, or (D) the acquisition, lease, license, purchase or other disposition of assets of the Company or any of its Subsidiaries, representing twenty percent (20%) or more of the consolidated assets of the Company and any of its Subsidiaries; and
(ii) “Superior Proposal” means any bona fide written Acquisition Proposal, that the Company Special Committee determines in its good faith judgment (with the advice of its financial and legal advisers) is more favorable to the shareholders of the Company than the Merger (taking into account (A) all the terms and conditions of such Acquisition Proposal, as well as the payment of a Termination Fee under this Agreement, and the Merger, including without limitation the price and any conditions to consummation and (B) the likelihood of such Acquisition Proposal and the Merger being consummated). For purposes of determining whether an Acquisition Proposal is a Superior
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Proposal, references to 20% in the definition of Acquisition Proposal shall be deemed to be a reference to one hundred percent (100%).
SECTION 6.5 Regulatory Filings.
(a) As promptly as practicable, each of the Company and Buyer shall prepare and file, or cause to be prepared and filed, any filings required under the Exchange Act or any other federal or state law relating to the Merger, including filings, if any, required by Buyer. Each of the Company and Buyer shall promptly notify the other of the receipt of any comments on, or any request for amendments or supplements to, any such filings by any Governmental Authority, and each of the Company and Buyer shall supply the other with copies of all correspondence between it and each of its Subsidiaries and Representatives, on the one hand, and such Governmental Authority, on the other hand, with respect to any such filings. Each of the Company and Buyer shall use its reasonable efforts to obtain and furnish the information required to be included in any such filings.
(b) Subject to the terms and conditions of this Agreement, each of the parties agrees to use its reasonable efforts (i) to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the Merger and the other transactions contemplated hereby and to cooperate with each other in connection with the foregoing, including the taking of such actions as are necessary to obtain any necessary consents, approvals, orders, exemptions or authorizations by or from any Governmental Authority or other Person, or consents, approvals, orders exemptions or authorizations that are required to be obtained under any federal, state or local law or regulation or any contract, agreement or instrument to which Buyer or the Company is a party or by which any of their respective properties or assets are bound, (ii) to defend all lawsuits or other legal proceedings challenging this Agreement or the consummation of the Merger or the other transactions contemplated hereby, (iii) to cause to be lifted or rescinded any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the Merger or the other transactions contemplated hereby, (iv) to effect all necessary registrations and filings, and submissions of information requested by any Governmental Authority and (v) to execute and deliver any additional instruments necessary to consummate the Merger and the other transactions contemplated hereby.
SECTION 6.6 Announcements. The initial press release with respect to the Merger shall be a joint press release, which has previously been agreed upon by Buyer and the Company. Thereafter, except as required by Law or stock exchange rules and regulations, each party hereto (a) shall consult with the other party before issuing any press release or making any public statement with respect to this Agreement and the transactions contemplated hereby (to the extent not previously issued or made in substance), and (b) shall not issue any press release or make any public statement concerning the Merger without the prior consent of the other party, which consent shall not be unreasonably withheld or delayed.
SECTION 6.7 Further Assurances. At and after the Effective Time, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of the Company any deeds, bills of sale, assignments, assurances or other documents, or instruments, and to take any other actions and do any other things, in the name and on behalf of the Company, reasonably necessary to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets of the Company acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger and to otherwise accomplish the purpose and intent of this Agreement and the transactions contemplated hereby.
SECTION 6.8 Notification of Certain Matters.
(a) The Company shall give prompt notice to Buyer, and Buyer shall give prompt notice to the Company, of: (i) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement, and
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(ii) any material notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement.
(b) Subject to compliance with applicable Law (including, without limitation, antitrust Laws and privacy Laws), from the date hereof until the Effective Time, at Buyer’s request, the Company shall confer on a regular basis with one or more Representatives of each other party to report on the general status of ongoing operations of the Company. Buyer and the Company shall promptly notify each other in writing of, and will use commercially reasonable efforts to cure before the Effective Time, any event, transaction or circumstance, as soon as practical after it becomes known to such party, that (i) causes or will cause any covenant or agreement of Buyer or the Company under this Agreement to be breached in any material respect, (ii) renders or will render untrue in any material respect any representation or warranty of the respective parties contained in this Agreement or (iii) of any fact, circumstance, event or action which will result in, or would reasonably be expected to result in, the failure of such party to timely satisfy any of the closing conditions specified in ARTICLE VII of this Agreement, as applicable.
SECTION 6.9 Director and Officer Liability.
(a) The Surviving Corporation shall, and Buyer shall cause the Surviving Corporation to, for a period of six (6) years after the Effective Time, indemnify and hold harmless all Persons who as of this date are current or former directors and officers of the Company and its Subsidiaries, determined as of immediately prior to the date hereof (the “Indemnified Parties”), to the maximum extent permitted by law for acts or omissions occurring at or prior to the Effective Time, against any and all costs or expenses (including reasonable attorney’s fees as incurred), judgments, fines, losses, claims, damages or liabilities (collectively, “Costs”) arising from, relating to or otherwise in respect of, any actual or threatened claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time (including with respect to the transactions contemplated by this Agreement), to the fullest extent permitted under applicable Law; provided, that the Surviving Corporation shall not be required to indemnify any Indemnified Party pursuant to this Section 6.9 if it is determined that the Indemnified Party acted in bad faith and not in a manner such Indemnified Party reasonably believed to be in, or not opposed to, the best interests of the Company;
(b) Any Indemnified Party wishing to claim indemnification under Section 6.9(a), upon learning of any such claim, action, suit, proceeding or investigation, must promptly notify the Surviving Corporation thereof, but the failure to so notify shall not relieve the Surviving Corporation of any liability it may have to such Indemnified Party to the extent such failure does not materially prejudice the Surviving Corporation. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), after the Effective Time (i) the Surviving Corporation shall have the right to assume the defense thereof and the Surviving Corporation shall not be liable to such Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof, except that if the Surviving Corporation elects not to assume such defense or counsel for the Indemnified Parties advises that there are issues which raise conflicts of interest between the Surviving Corporation and the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to them, and the Surviving Corporation shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided, however, that the Surviving Corporation shall be obligated pursuant to this Section 6.9 to pay only one firm of counsel (unless the use of one counsel for such Indemnified Parties would present such counsel with a conflict of interest) for all Indemnified Parties in any jurisdiction, (ii) the Indemnified Parties will cooperate in the defense of any such matter and (iii) the Surviving Corporation shall not be liable for any settlement effected without its prior written consent; and provided, further, that the Surviving Corporation shall not have any obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law or that the Indemnified Party acted in bad faith and not in a manner such Indemnified Party reasonably believed to be in, or not opposed to, the best interests of the Company;
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(c) For a period of six (6) years after the Effective Time, the Surviving Corporation shall, and Buyer shall cause the Surviving Corporation to provide, a policy of directors’ and officers’ liability insurance of at least the same coverage and amounts containing terms and conditions that are no less advantageous in any material respect to the insured than the coverage currently provided to directors and officers of the Company with respect to claims arising from facts or events that occurred on or before the Effective Time.
(d) The provisions of Section 6.9(a) and Section 6.9(c) shall be deemed to have been satisfied if the Company before the Effective Time, or the Surviving Corporation after the Effective Time, obtains prepaid policies from Great American Insurance Group, or such other insurance company reasonably satisfactory to a majority of the independent directors of the Company, which policies provide directors and officers of the Company with coverage no less advantageous to the insured than the terms currently provided to directors and officers of the Company for an aggregate period of six (6) years after the Effective Time with respect to claims arising from facts or events that occurred on or before the Effective Time.
(e) Notwithstanding anything herein to the contrary, if any claim, action, suit, proceeding or investigation is made against any Indemnified Party, on or prior to the sixth anniversary of the Effective Time, the provisions of this Section 6.9 shall continue in effect until the final disposition of such claim, action, suit, proceeding or investigation.
(f) If Buyer, the Surviving Corporation, or any of their respective successors or assigns (i) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) shall transfer all or substantially all of its properties and assets to any individual, corporation or other entity, then, and in each such case, to the extent necessary to effect such assumption, proper provisions shall be made so that such successors and assigns shall assume all of the applicable obligations set forth in this Section 6.9.
(g) The provisions of this Section 6.9 are (i) intended to be for the benefit of, and shall be enforceable by, each Indemnified Party, his or her heirs and representatives, and (ii) 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 6.10 Opinion of Financial Advisor. The Company Special Committee has received the written opinion of Oppenheimer, dated the date hereof, to the effect that, as of such date, the consideration to be received by the shareholders of the Company pursuant to the Merger is fair to such shareholders (other than Buyer) from a financial point of view. The Company has provided a true, correct and complete signed copy of such opinion to Buyer.
SECTION 6.11 Employee Benefit Matters.
(a) Until the first anniversary of the Effective Time, the Surviving Corporation shall provide employees of the Company and the Company Subsidiaries who are located in the United States and retained by the Surviving Corporation with employee benefits (excluding equity-based compensation and change in control plans, programs, agreements or arrangements) that are substantially comparable in the aggregate to those benefits provided to such employees immediately prior to the Effective Time pursuant to the Company Benefit Plans, which comparable benefits shall specifically include the compensation and employee benefits set forth in the Company Disclosure Letter; provided, however, that the Surviving Corporation (or any of its affiliates) shall be under no obligation to retain any employee or group of employees of the Company or any of its Subsidiaries other than as required by applicable Law, or pursuant to the terms of an employment agreement listed in the Company Disclosure Letter as in effect on the date hereof.
(b) The Company and Buyer acknowledge and agree that all provisions contained in this Section 6.11 and in Section 4.10 with respect to Company employees are included for the sole benefit of the Company, and that nothing in this Agreement, whether express or implied, shall create any third party beneficiary or other rights (i) in any other Person, including, without limitation, any Company employees, former Company employees, any participant in any Company Benefit Plan, or any dependent or beneficiary thereof,
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or (ii) to continued employment with the Surviving Corporation or any Company Subsidiary. No provision of this Section 6.11 or Section 4.10 will constitute an amendment to any Company Benefit Plan or any employee benefit or compensation plan, policy agreement or arrangement of the Company or any Company Subsidiary.
SECTION 6.12 Section 16 Matters. Prior to the Effective Time, the Company Board, or an appropriate committee of non-employee directors thereof, shall adopt a resolution consistent with the interpretive guidance of the SEC so that the disposition by any officer or director of the Company who is a covered Person of the Company for purposes of Section 16 of the Exchange Act and the rules and regulations thereunder (“Section 16”) of shares of Company Common Stock or Company Options pursuant to this Agreement, and the Merger shall be an exempt transaction for purposes of Section 16.
SECTION 6.13 Reasonable Efforts. The Company will use its reasonable good faith efforts to ensure that the conditions set forth in Sections 7.1 and 7.2 hereof are satisfied, insofar as such matters are within the control of the Company and Buyer will use its reasonable good faith efforts to ensure that the conditions set forth in Sections 7.1 and 7.3 hereof are satisfied, insofar as such matters are within the control of Buyer; provided, however, that no Party shall be obligated to take any action that would alter in a material adverse manner the benefits to such Party of this Agreement, the Merger or the other transactions contemplated hereby.
SECTION 6.14 Shareholder Vote. At the Special Meeting, or if any action is taken by written consent with respect to the Merger, Buyer shall, and shall cause any Affiliate of Buyer owning any Company Common Stock to, vote all Company Common Stock owned or held by Buyer and any such Affiliate in favor of the Merger and the Merger Agreement.
ARTICLE VII
CONDITIONS TO THE MERGER; CERTAIN EXCEPTIONS TO CONDITIONS,
REPRESENTATIONS, WARRANTIES & COVENANTS
SECTION 7.1 Conditions to the Obligations of Each Party. The obligations of the Company and Buyer to consummate the Merger are subject to the satisfaction (or, to the extent legally permissible, waiver) of the following conditions:
(a) Company Shareholder Approval. The Company shall have obtained the Company Shareholder Approval;
(b) No Injunctions or Restraints. No provision of any applicable Law and no judgment, injunction, order or decree that makes illegal or otherwise prohibits the consummation of the Merger or any of the other transactions contemplated by this Agreement shall be in effect; provided, however, that prior to invoking this condition, each party shall comply with its obligations under Article VI and; provided, further, that none of the initiation, threat or existence of any legal action of any kind with respect to this Agreement or the Merger, including without limitation any action initiated, threatened, or maintained by any shareholder of the Company, whether alleging claims under any Securities Laws or state securities laws, contract or tort claims, claims for breach of fiduciary duty, or otherwise, will constitute a failure of the conditions set forth in Sections 7.1, 7.2 or 7.3 of this Agreement unless that action has resulted in the granting of an injunction (whether temporary, preliminary or permanent) which is in effect and prevents or prohibits the consummation of the Merger, and such injunction has not expired or been dissolved or vacated;
(c) Regulatory Matters. Any authorizations, consents, orders, permits or approvals of, or declarations or filings with, and all expirations of waiting periods imposed by, any Governmental Authority that are identified in the Company Disclosure Letter or the Buyer Disclosure Letter (“Requisite Regulatory Approvals”), shall have been filed, have occurred or have been obtained and all such Requisite Regulatory Approvals shall be in full force and effect; and
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(d) Opinion of Financial Advisor. The Company Special Committee shall have received the opinion of Oppenheimer, dated the date hereof, to the effect that, based on, and subject to the various assumptions and qualifications set forth in such opinion, as of the date of such opinion, the consideration to be received by the shareholders of the Company pursuant to the Merger is fair to such shareholders (other than Buyer) from a financial point of view.
SECTION 7.2 Conditions to the Obligations of Buyer. The obligations of Buyer to consummate the Merger are subject to the satisfaction (or, to the extent legally permissible, waiver, in whole or in part) of the following further conditions:
(a) Representations and Warranties. As of the Effective Time there shall exist no misrepresentation, breach or inaccuracy of any of the Company’s representations or warranties in this Agreement, the effect of which, individually, or in the aggregate constitutes, or could reasonably be expected to constitute, a Material Adverse Effect with respect to the Company, except that the representations and warranties set forth in Section 4.2 shall be true and correct in all material respects.
(b) Performance of Obligations.
(i) The Company shall have performed in all material respects all of its covenants, agreements and obligations pursuant to this Agreement required to be performed by it prior to the Effective Time, excluding however, its obligations in Section 6.1; and
(ii) There shall not have been a material failure to perform the Company’s obligations under Section 6.1 that has been a result of action by the Company Board.
(c) Material Adverse Effect. No Material Adverse Effect with respect to the Company shall have occurred since the date of this Agreement.
SECTION 7.3 Conditions to the Obligations of the Company. The obligations of the Company to consummate the merger are subject to the satisfaction (or, to the extent legally permissible) of the following further conditions:
(a) Representations and Warranties. As of the Effective Time there shall exist no misrepresentation, breach or inaccuracy of any of the representatives or warranties of Buyer in this Agreement, the effect of which, individually, or in the aggregate constitutes a Material Adverse Effect with respect to Buyer;
(b) Performance of Obligations. Buyer shall have performed in all material respects all of its covenants, agreements and obligations hereunder required to be performed by it at or prior to the Effective Time.
ARTICLE VIII
SECTION 8.1 Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after Company Shareholder Approval:
(a) by the mutual written consent of Buyer and the Company at any time prior to the Effective Time, whether before or after Company Shareholder Approval;
(b) by either of the Company or Buyer:
(i) if the shareholders of the Company shall have voted on this Agreement and the Merger and the votes shall not have been sufficient to constitute Company Shareholder Approval; provided, however, that the right to terminate this Agreement under this Section 8.1(b)(i) shall not be available to either party where the failure to obtain the Company Shareholder Approval shall have been caused by the action or failure to act of such party and such action or failure to act constitutes a breach by such party of this Agreement;
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(ii) if any judgment, injunction, order or decree enjoining Buyer or the Company from consummating the Merger is entered and such judgment, injunction, order or decree shall become final and nonappealable; or
(iii) if, without any material breach by the terminating party of its obligations under this Agreement, the Merger shall not have occurred on or before February 28, 2010 (as such date may be extended by the mutual agreement of the parties, the “Termination Date”).
(c) by the Company:
(i) in connection with entering into a definitive agreement to effect a Superior Proposal in accordance with Section 6.4(c); provided, however, that prior to terminating this Agreement pursuant to this Section 8.1(c)(i), the Company shall have complied with, and not otherwise violated, the provisions of Section 6.4; or
(ii) if Buyer shall have breached any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach (A) constitutes a failure of one or more of the conditions set forth in Sections 7.1 or 7.3 or constitutes a breach of Section 5.6 of this Agreement and (B) has not been cured within 30 days after the giving of written notice to Buyer; provided, however, that the Company’s right to terminate this Agreement under this Section 8.1(c)(ii) shall not be available if, at the time of such intended termination, any material covenant of the Company contained in this Agreement shall have been breached in any material respect and such breach shall not have been cured, or there exists a breach of or inaccuracy in any representation or warranty of the Company contained in this Agreement, the effect of which, individually, or in the aggregate constitutes, or could reasonably be expected to constitute, a Material Adverse Effect with respect to the Company, except that the representations and warranties set forth in Section 4.2 shall be true and correct in all material respects.
(d) by Buyer:
(i) if the Company shall have breached any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach (A) constitutes a failure in one or more of the conditions set forth in Section 7.1 or 7.2 and (B) has not been cured within 30 days after the giving of written notice to the Company; provided, further, that Buyer’s right to terminate this Agreement under this Section 8.1(d)(i) shall not be available if, at the time of such intended termination, any material covenant of Buyer contained in this Agreement shall have been breached in any material respect and such breach shall not have been cured, or there exists a breach or inaccuracy, in any representation or warranty of Buyer contained in this Agreement, the effect of which, individually, or in the aggregate constitutes a Material Adverse Effect with respect to Buyer;
(ii) if a Material Adverse Effect with respect to the Company shall have occurred since the date of this Agreement; or
(iii) if (A) the Company enters into a definitive agreement to effect a Superior Proposal, or (B) the Company Board makes a Company Change of Recommendation; or
(iv) in the event of a material breach of Section 6.4.
SECTION 8.2 Effect of Termination. Subject to Section 8.4, if this Agreement is terminated pursuant to Section 8.1, this Agreement shall become void and of no effect with no liability on the part of any party hereto, except that Sections 8.2, 8.3 and 8.4 and Article IX shall survive the termination hereof.
SECTION 8.3 Fees and Expenses. Other than as specifically provided in Section 8.4 or otherwise agreed to in writing by the parties, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs or expenses, whether or not the Merger is consummated.
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SECTION 8.4 Termination Fee and Reverse Termination Fee.
(a) If this Agreement is terminated pursuant to:
(i) Section 8.1(b)(i) and (A) at the time of said termination there shall have been outstanding, there shall have been under consideration by the Company Board or the Company Special Committee or there shall have been publicly announced, a plan, intention or proposal (whether or not conditional) with respect to an Acquisition Proposal, which plan, intention or proposal has not been irrevocably withdrawn, (B) within eighteen (18) months after termination of this Agreement, the Company shall enter into any Contract with respect to such Acquisition Proposal (whether such Acquisition Proposal is consummated at any time thereafter) and (C) the aggregate purchase price for the Company (or its assets) pursuant to such Acquisition Proposal equals or exceeds the Aggregate Merger Consideration under this Agreement; or
(ii) Section 8.1(b)(i) following a Company Change of Recommendation pursuant to Section 6.4(c), or pursuant to Section 8.1(c)(i), 8.1(d)(iii) or 8.1(d)(iv);
then Buyer would suffer direct and substantial damages, which damages cannot be determined with reasonable certainty and, in order to compensate Buyer for such damages, the Company shall pay to Buyer as liquidated damages $650,000 by wire transfer in immediately available funds to an account designated by Buyer (the “Termination Fee”). The Termination Fee or any other amounts payable by the Company to the Buyer pursuant to this Section 8.4 shall be due and payable upon termination of this Agreement, except that in the case of a Termination Fee payable pursuant to Section 8.4(a)(i), such Termination Fee will be due upon the execution of the Contract with respect to the relevant Acquisition Proposal. It is specifically agreed that the amount to be paid pursuant to this Section 8.4(a) represents liquidated damages and not a penalty.
(b) If this Agreement is terminated pursuant to Section 8.1(d)(i) based on a breach of Section 6.1 as a result of action taken by the Company Board, the Company shall pay to Buyer the actual costs and expenses incurred by Buyer and its Representatives in connection with this Agreement prior to the termination of this Agreement by wire transfer in immediately available funds to an account designated by Buyer (the “Expense Reimbursement”); provided, however, that in no event shall the Company be required to pay both the Termination Fee and the Expense Reimbursement.
(c) If this Agreement is terminated pursuant to Section 8.1(c)(ii), then the Company would suffer direct and substantial damages, which damages cannot be determined with reasonable certainty and, in order to compensate the Company for such damages, Buyer shall pay to the Company as liquidated damages $650,000 by wire transfer in immediately available funds to an account designated by the Company (the “Reverse Termination Fee”).
(d) Company and Buyer each hereby acknowledge that the agreements contained in this Section 8.4 are an integral part of the transactions contemplated by this Agreement, and that without these agreements, neither the Company nor Buyer would enter into this Agreement. The payment of the Termination Fee, the Reverse Termination Fee or the Expense Reimbursement pursuant to this Section 8.4 shall be in lieu of any other liabilities or damages with respect to this Agreement and the transactions contemplated hereby.
ARTICLE IX
SECTION 9.1 Non-Survival of Representations and Warranties. The representations and warranties contained herein and in any certificate or other writing delivered pursuant hereto shall not survive the Effective Time. This Section 9.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time.
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SECTION 9.2 Amendments; No Waivers.
(a) Any provision of this Agreement (including the Company Disclosure Letter and the Buyer Disclosure Letter) may be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Company and Buyer, or in the case of a waiver, by the party against whom the waiver is to be effective and, in the case of an amendment, approved by the board of directors of each of the Company and Buyer; provided, however, that after the receipt of the Company Shareholder Approval, if any such amendment or waiver shall by Law or in accordance with the rules and regulations of any relevant securities exchange or market require further approval of the shareholders of the Company or Buyer, the effectiveness of such amendment or waiver shall be subject to the necessary shareholder approval.
(b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Law.
SECTION 9.3 Notices. All notices, requests and other communications to any party hereunder shall be in writing (including facsimile or similar writing) and shall be deemed to have been duly given upon receipt when delivered in person, by facsimile (receipt confirmed) or by overnight courier or registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified by like notice):
If to the Company:
Edward H. Cohen, Esq.
Chairman of the Special Committee of the Board
c/o Robert L. Kohl, Esq.
Katten Muchin Rosenman LLP
575 Madison Avenue
New York, NY 10022-2585
Fax No.: 212-940-6557
with a copy (which shall not constitute notice) to:
Katten Muchin Rosenman LLP
575 Madison Avenue
New York, NY 10022
Attn.: Robert L. Kohl, Esq.
Fax No.: 212-940-6557
If to Buyer:
Saunders Acquisition Corporation
2 Briarwood Ct.
Princeton Junction, New Jersey 08550
Attn.: Barry J. Lipsky, President
Fax No.:
with further copies (which shall not constitute notice) to:
Reitler Kailas & Rosenblatt LLC
800 Third Avenue 21st Floor
New York, New York 10022
Attn: David A. Boillot
Fax No.: 212-371-5500
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SECTION 9.4 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, that no party may assign, delegate or otherwise transfer any of its or their rights or obligations under this Agreement without the consent of the other parties hereto; provided, however, that Buyer may assign, delegate or otherwise transfer any of its or their rights or obligations under this agreement to an Affiliate without the consent of the other parties hereto; further provided, that, any assignment by Buyer to one of its Affiliates shall not be valid under this Agreement unless such Affiliate assumes all of Buyer’s obligations hereunder and such assignment shall not relieve Buyer of its obligations hereunder.
SECTION 9.5 Governing Law. This Agreement, including all matters of construction, validity and performance, shall be construed in accordance with and governed by the law of the Commonwealth of Pennsylvania (without regard to principles of conflicts or choice of laws) as to all matters, including but not limited to, matters of validity, construction, effect, performance and remedies.
SECTION 9.6 Jurisdiction. Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may be brought in any federal or state court located in the County of Philadelphia in the Commonwealth of Pennsylvania, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by Law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 9.3 shall be deemed effective service of process on such party.
SECTION 9.7 Waiver of Jury Trial. Each of the parties hereto hereby irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or related to this agreement or the transactions contemplated hereby.
SECTION 9.8 Counterparts; Effectiveness. This Agreement may be executed in one or more counterparts, each of which together shall be deemed an original, but all of which together shall constitute one and the same instrument. The exchange of executed copies of this Agreement by facsimile transmission shall constitute effective execution and delivery of this Agreement and signatures of the parties transmitted by facsimile shall be deemed to be originals for all purposes.
SECTION 9.9 Agreement. This Agreement (including the Company Disclosure Letter and the Buyer Disclosure Letter) and the Guarantee provided in Section 8.4(b) constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede and cancel all prior agreements, negotiations, correspondence, undertakings, understandings and communications of the parties, oral and written, with respect to the subject matter hereof and thereof.
SECTION 9.10 Third Party Beneficiaries. Nothing contained in this Agreement or in any instrument or document executed by any party in connection with the transactions contemplated hereby shall create any rights in, or be deemed to have been executed for the benefit of, any Person that is not a party hereto or thereto or a permitted successor or assign of such a party; provided, however, that the parties hereto specifically acknowledge that the provisions of Section 6.9 hereof are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives, affected thereby.
SECTION 9.11 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way
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be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.
SECTION 9.12 Specific Performance. The parties hereby acknowledge and agree that the failure of any party to perform its agreements and covenants hereunder, including its failure to take all actions as are necessary on its part to the consummation of the Merger, will cause irreparable injury to the other parties, for which damages, even if available, will not be an adequate remedy. Accordingly, each party hereby consents to the issuance of injunctive relief by any court of competent jurisdiction to compel performance of such party’s obligations and to the granting by any court of the remedy of specific performance of its obligations hereunder without proof of actual damages and without any requirement for the securing or posting of any bond. Such remedy shall not be deemed to be the exclusive remedy for a party’s breach of its obligations but shall be in addition to all other remedies available at law or equity.
SECTION 9.13 Construction; Interpretation; Disclosure Letters.
(a) The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. As used in this Agreement, (i) the term “including” shall mean “including, without limitation”, (ii) words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires, (iii) 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 (including the Company Disclosure Letter and the Buyer Disclosure Letter) 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, and (iv) Buyer and the Company will be referred to herein individually as a “party” and collectively as “parties” (except where the context otherwise requires). 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.
(b) The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or 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.
(c) Any reference to any federal, state, local or non-United States statute or Law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context otherwise requires.
[The remainder of this page is intentionally blank; the next page is the signature page.]
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In witness whereof the undersigned have executed this Agreement and Plan of Merger effective as of the date first set forth above.
| FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED |
SAUNDERS ACQUISITION CORPORATION | |||||||
| By: | /s/ TOSHIHIDE HOKARI | By: | /s/ BARRY J. LIPSKY | |||||
| Name: | Toshihide Hokari | Name: | Barry J. Lipsky | |||||
| Title: | Senior Vice President and Chief Operating Officer |
Title: | President | |||||
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PLAN OF MERGER
of
SAUNDERS ACQUISITION CORPORATION
(a Delaware Corporation)
with and into
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
(a Pennsylvania corporation)
RECITALS
A. FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED (the “Company”) is a Pennsylvania business corporation.
B. SAUNDERS ACQUISITION CORPORATION (the “Buyer”) is a Delaware corporation.
C. The Company and Buyer desire to merge, with the Company being the surviving corporation in the merger (the “Merger”).
ARTICLE I
THE MERGER
SECTION 1.1 The Merger.
(a) Upon the terms and subject to the conditions set forth in the Agreement and Plan of Merger, dated as of September 30, 2009 (the “Merger Agreement”; capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Merger Agreement), between the Company and Buyer, at the Effective Time Buyer shall be merged with and into the Company in accordance with the requirements of the Pennsylvania Business Corporation Law of 1988 (the “PBCL”) and the General Corporation Law of the State of Delaware (the “DGCL”), whereupon the separate existence of Buyer shall cease, and the Company shall be the corporation surviving the Merger (the “Surviving Corporation”). The Merger will have the effects set forth in Section 1929 of the PBCL and Section 259 of the DGCL. Without limiting the generality of the foregoing, and subject thereto, from and after the Effective Time, the Surviving Corporation shall be a Pennsylvania domestic business corporation and shall possess all the rights, privileges, franchises, property, immunities, powers and purposes and assume and be liable for all the debts, liabilities, obligations and penalties of the Company and Buyer.
(b) Articles of merger shall be executed and filed with the Department of State of the Commonwealth of Pennsylvania and a certificate of merger shall be executed and filed with the Secretary of State of the State of Delaware. The Merger shall become effective at such time as articles of merger are duly filed with the Department of State of the Commonwealth of Pennsylvania and a certificate of merger is duly filed with the Secretary of State of the State of Delaware or, if agreed to by the Company and the Buyer, at such later time as is specified in the articles of merger (such time, the “Effective Time”).
SECTION 1.2 Conversion of Shares.
(a) At the Effective Time, by virtue of the Merger and without any action on the part of the holder thereof:
(i) each share of Company Common Stock outstanding immediately prior to the Effective Time shall, except as otherwise provided in Section 1.2(a)(vii), be converted into the right to receive an
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amount in cash equal to the Merger Consideration, payable in cash upon surrender of the certificate that formerly evidenced such share of Company Common Stock (a “Certificate”) in the manner provided in Section 1.3;
(ii) each outstanding and unexercised option to purchase shares of Company Common Stock (the “Company Options”) under any stock option plan of the Company, including, without limitation, the Company’s 1998 and 2005 Stock Option Plans or any other similar plan, agreement or arrangement outstanding immediately prior to the Effective Time, shall be cancelled and, in exchange therefore, each former holder of any such Company Option shall be entitled to receive a payment in cash (subject to any applicable withholding of Taxes) of an amount equal to the product of (i) the total number of shares of Company Common Stock previously subject to such Company Option which have vested as of the Effective Time, and (ii) the excess, if any, of the Merger Consideration over the exercise price per share previously subject to such Company Option (such amounts payable hereunder being referred to as the “Option Payments”). From and after the Effective Time, any such Company Option shall no longer be exercisable by the holder thereof but shall only entitle such holder to the payment of the Option Payment. If the exercise price per share with respect to any Company Option is equal to or greater than the Merger Consideration or any Company Option, such Company Option will be cancelled pursuant to this Section 1.2(a)(ii) without consideration, as will that portion of any Company Option that has not vested as of the Effective Time;
(iii) each share of common stock, par value $.01 per share, of Buyer (“Buyer Common Stock”) outstanding immediately prior to the Effective Time shall be converted into and become one share of common stock of the Surviving Corporation with the same rights, powers and privileges as the share so converted;
(iv) each share of Series A Preferred Stock, par value $0.01 per share, of Buyer (“Buyer Series A Preferred Stock”) outstanding immediately prior to the Effective Time shall be converted into and become one share of Series A Preferred Stock of the Surviving Corporation with the same rights, powers and privileges as the share so converted;
(v) each share of Series B Preferred Stock, par value $0.01 per share, of Buyer (“Buyer Series B Preferred Stock”) outstanding immediately prior to the Effective Time shall be converted into and become one share of Series B Preferred Stock of the Surviving Corporation with the same rights, powers and privileges as the share so converted;
(vi) each share of Buyer Common Stock, Buyer Series A Preferred Stock and Buyer Series B Preferred Stock converted pursuant to Sections 1.2(a)(iii), 1.2(a)(iv) and 1.2(a)(v), as applicable, shall constitute the only outstanding shares of capital stock of the Surviving Corporation; and
(vii) each share of Company Common Stock held by the Company as treasury stock immediately prior to the Effective Time and each of the Rollover Shares shall be canceled, and no payment shall be made with respect thereto; provided, that shares of Company Common Stock held by the Company or its Subsidiaries in trust accounts, managed accounts, investment accounts and the like shall not be cancelled and shall be treated in accordance with Section 1.2(a)(i).
(b) From and after the Effective Time, all shares of Company Common Stock converted pursuant to Section 1.2(a)(i), all shares of Company Common Stock cancelled in accordance with Section 1.2(a)(vii) and all Company Options shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a Certificate shall cease to have any rights with respect thereto, except, in the case of shares of Company Common Stock canceled pursuant to Section 1.2(a)(i), the right to receive the Merger Consideration to which such holder is entitled with respect to the shares of Company Common Stock represented by the Certificate(s) surrendered by such holder pursuant to Section 1.3(b), or in the case of a cancelled Company Option the right to receive the Option Payments. From and after the Effective Time, all certificates representing Buyer Common Stock, Buyer Series A Preferred Stock or Buyer Series B Preferred Stock, as the case may be, shall be deemed for all purposes to represent only the number
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of shares of capital stock of the Surviving Corporation into which such shares were converted in accordance with Sections 1.2(a)(iii), 1.2(a)(iv) or 1.2(a)(v), as applicable.
SECTION 1.3 Surrender and Payment.
(a) Prior to the Effective Time, Buyer shall appoint an exchange agent (the “Exchange Agent”) reasonably acceptable to a majority of the independent directors of the Company for the purpose of exchanging Certificates for the Merger Consideration. At the Effective Time, Buyer shall deposit, or cause to be deposited, with the Exchange Agent cash sufficient to make the cash payments payable pursuant to Section 1.2(a)(i). Promptly after the Effective Time, Buyer will send, or cause the Exchange Agent to send, to each holder of record of shares of Company Common Stock as of the Effective Time, a letter of transmittal for use in such exchange (which shall specify that the delivery shall be effected, and risk of loss and title shall pass, only upon proper delivery of the Certificates to the Exchange Agent), which letter shall be in such form as the Company and Buyer may reasonably agree to use in effecting delivery of shares of Company Common Stock to the Exchange Agent.
(b) Each holder of shares of Company Common Stock that have been converted into the right to receive the Merger Consideration as provided herein will be entitled to receive the Merger Consideration in respect of the shares of Company Common Stock represented by such Certificate only upon surrender to the Exchange Agent of such Certificate. Until so surrendered, each such Certificate so converted shall, after the Effective Time, represent for all purposes only the right to receive such Merger Consideration. No interest will be paid or accrued on any cash payable as part of the Merger Consideration or in lieu of fractional shares pursuant to Section 1.6.
(c) If any Merger Consideration is to be paid to the name of a Person other than the Person in whose name the applicable surrendered Certificate is registered, it shall be a condition to the registration or payment of such Merger Consideration that the surrendered Certificate shall be properly endorsed or otherwise be in proper form for transfer.
(d) After the Effective Time, there shall be no further registration of transfers of shares of capital stock of the Company on the stock records of, or relating to, the Company. If, after the Effective Time, Certificates are presented to the Exchange Agent, the Surviving Corporation or Buyer, they shall be canceled and, if applicable, exchanged for the Merger Consideration payable in exchange therefor in accordance with the procedures and limitations set forth, in this Article I.
(e) Any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 1.3(a) that remains unclaimed by the holders of shares of Company Common Stock twelve (12) months after the Effective Time shall be returned to Buyer and any such holder who has not exchanged such holder’s shares of Company Common Stock for the Merger Consideration payable in exchange therefor in accordance with this Section 1.3 prior to that time shall thereafter look only to Buyer for delivery of the Merger Consideration in respect of such holder’s shares without any interest thereon. Notwithstanding the foregoing, Buyer shall not be liable to any Person for any Merger Consideration delivered to a public official pursuant to applicable abandoned property, escheat or similar Laws.
(f) The Exchange Agent shall invest any cash made available to the Exchange Agent pursuant to Section 1.3(a) as directed by Buyer on a daily basis in Treasury bills, Treasury notes, Treasury bonds or other short-term instruments guaranteed by the full faith and credit of the United States. Any interest and other income resulting from such investments shall promptly be paid to Buyer.
SECTION 1.4 Adjustments. If, at any time during the period between the date of this Agreement and the Effective Time, any change in the outstanding shares of capital stock of Buyer or the Company shall occur by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any similar transaction; or any stock dividend thereon with a record date during such period, the Merger Consideration shall be appropriately adjusted to provide the holders of shares of Company Common Stock the same economic effect, in the aggregate, as contemplated by this Agreement prior to such event.
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SECTION 1.5 Withholding Rights. Each of the Surviving Corporation, Buyer and Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise payable to any Person pursuant to this Article I such amounts as it is required to deduct and withhold with respect to the making of such payment under any provision of federal, state, local or foreign Tax Law including any withholding from any payment that is treated as wages or compensation for the performance of services. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which such deduction and withholding was made.
SECTION 1.6 Lost Certificates. 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 the providing of such security or indemnity as the Exchange Agent deems necessary to save and hold the Company and Buyer harmless, the Exchange Agent shall pay in exchange for such lost, stolen or destroyed Certificate the Merger Consideration payable in exchange for the shares of Company Common Stock represented thereby.
SECTION 1.7 Treatment of Restricted Stock. As of the Effective Time, the holder of each vested share of restricted stock awarded under the 2005 Restricted Stock Plan or any other similar plan, agreement or arrangement shall be entitled to receive the Merger Consideration, without interest, and subject to any withholding of Taxes. All unvested shares of restricted stock will be cancelled without consideration.
ARTICLE II
CERTAIN GOVERNANCE MATTERS
SECTION 2.1 Articles of Incorporation of the Surviving Corporation. At the Effective Time, the articles of incorporation of the Company shall be amended and restated so that the articles of incorporation of the Surviving Corporation (until amended in accordance with applicable Law) read in full as set forth in Exhibit A.
SECTION 2.2 Bylaws of the Surviving Corporation. At the Effective Time, the bylaws of the Company shall be amended and restated so that the bylaws of the Surviving Corporation (until amended in accordance with applicable Law) read in full as set forth in Exhibit B.
SECTION 2.3 Directors and Officers of the Surviving Corporation. From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with the bylaws and applicable Law, (a) the directors of Buyer immediately prior to the Effective Time shall become the directors of the Surviving Corporation, and (b) the officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation.
B-4
September 30, 2009
The Special Committee of the Board of Directors
Franklin Electronic Publishers, Incorporated
One Franklin Plaza
Burlington, NJ 08016-4907
Members of the Special Committee of the Board:
You have requested Oppenheimer & Co. Inc. (“Oppenheimer”) to render a written opinion (“Opinion”) to the Special Committee of the Board of Directors of Franklin Electronic Publishers, Incorporated, a Pennsylvania corporation (“Franklin”), as to the fairness, from a financial point of view, to the Franklin Shareholders (as defined below) of the Merger Consideration (as defined below) provided for in the Agreement and Plan of Merger, dated as of September 30, 2009 (the “Merger Agreement”), between Franklin and Saunders Acquisition Corporation, a Delaware corporation (“Buyer”). The Merger Agreement provides for, among other things, the merger of Buyer with and into Franklin in a going-private transaction (the “Transaction”) pursuant to which each outstanding share of the common stock, par value $0.01 per share, of Franklin (“Franklin Common Stock”), other than the Rollover Shares (as that term is defined in the Merger Agreement), will be converted into the right to receive $2.50 in cash (the “Merger Consideration”). This opinion does not address the amount, nature or fairness of the Merger Consideration to be received by holders of shares of Franklin Common Stock referred to as the Rollover Shares in the Merger Agreement (such holders, the “Rollover Shareholders”). In addition, in rendering this Opinion, we express no opinion with respect to the amount or nature of any compensation to any officer, director, or employee of Franklin, or any class of such persons relative to the consideration to be received by the holders of Franklin Common Stock other than the Rollover Shares (such holders, the “Franklin Shareholders”).
In arriving at our Opinion, we:
| (a) | reviewed the Merger Agreement; |
| (b) | reviewed audited financial statements of Franklin for fiscal years ended March 31, 2009, March 31, 2008, and March 31, 2007 and unaudited financial statements of Franklin for the four months ended July 31, 2009; |
| (c) | reviewed financial forecasts and estimates relating to Franklin prepared by the management of Franklin; |
| (d) | held discussions with the senior management of Franklin with respect to the historical and current business, operations, financial condition, and future prospects of Franklin; |
| (e) | reviewed historical market prices and trading volume for Franklin Common Stock; |
| (f) | reviewed and analyzed certain publicly available financial data and stock market performance data for companies that we deemed relevant in evaluating Franklin; |
| (h) | analyzed and estimated the present value of the future cash flows of Franklin based on financial forecasts and estimates prepared by the management of Franklin; |
| (i) | reviewed and analyzed the premiums paid, based on publicly available information, in merger and acquisition transactions that we deemed relevant in evaluating the Transaction; |
| (j) | reviewed other public information concerning Franklin; and |
| (k) | performed such other analyses, reviewed such other information and considered such other factors as we deemed appropriate. |
We have, with your consent, relied and assumed, without independent verification or investigation, upon the accuracy and completeness of all financial and other information (including, without limitation, the representations and warranties of Franklin stated in the Merger Agreement) that is publicly available or was
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provided to us by Franklin or its employees, representatives and affiliates. With respect to forecasts of future financial condition and operating results of Franklin provided to us, we have assumed, at the direction of Franklin’s management, without independent verification or investigation, that such forecasts were reasonably prepared on bases reflecting the best currently available information, estimates, assumptions and good faith judgments of Franklin’s management team.
We have not assumed any responsibility for the independent verification of any such information or of such forecasts (or the information, estimates, assumptions or judgments contained in such forecasts) provided to us, and we have further relied upon the representations of the senior management of Franklin that they are unaware of any facts that would make the information and forecasts incomplete or misleading. In addition, we have assumed that Franklin will perform, in all material respects, in accordance with such forecasts and projections for all periods specified therein. We have relied upon and assumed, with your consent and without independent verification, that there has been no material change in the assets, liabilities, financial condition, results of operations, business or prospects of Franklin since the date of the most recent financial statements provided to us, and that there is no information or facts that would make the information reviewed by us materially incomplete or misleading. We have also assumed that Franklin is not party to any material pending transaction, including, without limitation, any external financing, recapitalization, acquisition or merger, divestiture or spin-off (other than the Transaction).
We have assumed, with the consent of Franklin, that the Transaction will be consummated in accordance with the Merger Agreement without waiver, modification or amendment of any material term, condition or agreement and in compliance with all applicable laws and other requirements and that, in the course of obtaining the necessary regulatory or third party approvals and consents with respect to the Transaction, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on Franklin or the Transaction.
We have neither made nor obtained any independent evaluations or appraisals of the assets or the liabilities (including, without limitation, any contingent, derivative or off-balance sheet assets and liabilities) of Franklin or affiliated entities, nor have we been furnished with any such evaluations or appraisals. We are not expressing any opinion as to the underlying valuation, future performance or long-term viability of Franklin. We express no view as to, and our Opinion does not address, any terms or other aspects of the Transaction (other than the Merger Consideration to the extent expressly specified herein) or any aspect or implication of any other agreement, arrangement or understanding entered into in connection with the Transaction or otherwise. In addition, we express no view as to, and our Opinion does not address, (i) the underlying business decision of Franklin to proceed with or effect the Transaction, (ii) the relative merits of the Transaction as compared to any alternative business strategies that might exist for Franklin, (iii) the effect of any other transaction in which Franklin might engage, (iv) the tax or legal consequences of the Transaction to any of Franklin, its shareholders or any other party, or (v) the solvency of Franklin or any other participant in the Transaction under any applicable laws relating to bankruptcy, insolvency or similar matters. Our Opinion is necessarily based upon information currently available to us, and the general economic, financial and stock market conditions and circumstances as they exist and can be evaluated by us on the date hereof. It should be understood that, although subsequent developments may affect our Opinion, we do not have any obligation to update, revise or reaffirm our Opinion, and we expressly disclaim any responsibility to do so.
The issuance of this Opinion was approved by an authorized committee of Oppenheimer. As part of our investment banking business, we are regularly engaged in valuations of businesses and securities in connection with acquisitions and mergers, underwritings, secondary distributions of securities, private placements and valuations for other purposes.
As part of our investment banking business, we are continually engaged in performing valuations of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes.
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In the ordinary course of our business, we and our affiliates may actively trade the securities (or related derivative securities) of Franklin for our own account and for the accounts of customers and, accordingly, may at any time hold long or short positions in such securities.
We have acted as financial advisor to the Special Committee of the Board of Directors of Franklin in connection with the Transaction and will receive a fee for our services, a portion of which was payable in connection with the original execution of our engagement agreement, a portion of which will be payable upon delivery of this Opinion (and is not contingent upon consummation of the Transaction), and a significant portion of which is contingent upon consummation of the Transaction. In addition, Franklin has agreed to indemnify us for certain liabilities arising from our engagement.
Based upon and subject to the foregoing and such other factors as we have deemed relevant, it is our opinion that, as of the date hereof, the Merger Consideration to be paid to the Franklin Shareholders pursuant to the terms of the Merger Agreement is fair, from a financial point of view, to the Franklin Shareholders.
It is understood that this Opinion has been prepared for the benefit of the Special Committee of the Board of Directors of Franklin solely for use in evaluation of the Transaction and does not constitute a recommendation to the Special Committee of the Board of Directors of Franklin or any shareholder as to how to vote or act with respect to the Transaction. Accordingly, this Opinion is not to be used for any other purpose, or be reproduced, disseminated, quoted from, publicly disclosed or referred to at any time, in whole or in part, without the prior written consent of Oppenheimer; provided, that this Opinion may be included in its entirety in (i) any prospectus, proxy statement or solicitation/recommendation statement, as the case may be, required to be distributed to Franklin’s shareholders in connection with the Transaction and (ii) any disclosure document required to be filed by Franklin with the Securities and Exchange Commission in connection with the Transaction. Any other description or reference to Oppenheimer or its affiliates or summary of this Opinion in any such document or filing must be in form and substance reasonably acceptable to Oppenheimer and its counsel. Our Opinion is not a recommendation as to any matter to be presented to the shareholders of Franklin.
Sincerely,
/s/ Oppenheimer & Co. Inc.
Oppenheimer & Co. Inc.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: March 31, 2009
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-13198
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
| Pennsylvania | 22-2476703 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
| One Franklin Plaza, Burlington, New Jersey | 08016-4907 | |
| (Address of principal executive offices) | (Zip Code) | |
(609) 386-2500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Name of Each Exchange on Which Registered | |
| Common Stock, par value $.01 | NYSE AMEX Equities |
Securities registered pursuant Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
The aggregate market value of the registrant’s voting shares of common stock held by non-affiliates of the registrant on September 30, 2008 was approximately $8,612,750.
As of June 15, 2009 approximately 8,278,083 shares of common stock of the registrant were outstanding.
FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
FISCAL YEAR ENDED MARCH 31, 2009
ITEMS IN FORM 10-K
This 2009 Annual Report on Form 10-K contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the intent and belief or current expectations of Franklin and its management team. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among other things the affects of the deepening economic slow-down both in the United States and Europe, the timely availability and acceptance of new electronic books and other electronic products, changes in technology, the successful integration of acquisitions, the impact of competitive electronic products, the dependence on a small number of manufacturers for purchases of inventory, the management of inventories, dependence on key licenses, titles and products, dependence on sales to a small group of customers, dependence on third party component suppliers, including those that provide Franklin-specific parts, credit risk and other risks and uncertainties that may be detailed herein, and from time-to-time, in Franklin’s reports filed with the Securities and Exchange Commission. Franklin undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
| ITEM 1. | BUSINESS |
Franklin Electronic Publishers, Incorporated (“Franklin”, the “Company”, “we”, “us”, or “our”) designs, develops, publishes and distributes electronic information on handheld devices, memory media cards, and via internet downloads. We also design, develop, and license to third parties, linguistic technology, such as spelling error detection software in thirty-six languages, for use in application software, electronic products and on the internet.
We believe we are one of the world’s largest designers, developers and publishers of electronic reference books, having sold approximately forty-one million handheld devices since 1986. Our handheld devices are battery-powered platforms with monochrome or color liquid crystal displays (LCD) that incorporate the text of a reference work, such as a dictionary. We own or have licenses to publish in electronic format more than one hundred reference titles, including monolingual and bilingual dictionaries such as Merriam-Webster’s Collegiate® Dictionary, the Holy Bible, entertainment-oriented publications (such as The Official Scrabble® Dictionary), and our own multi-language speaking and non-speaking translators. In addition, we own or have licenses to distribute in electronic format, either directly or through third parties, more than 116,000 titles in sixteen languages, including reference works and general literature, via internet download.
We marketed our first handheld reference device, the Spelling Ace® spelling corrector, in 1986. We believe that the Spelling Ace device was one of the first electronic books marketed in the United States. Beginning in 1987, we began marketing increasingly sophisticated electronic versions of thesauruses and dictionaries and, in 1989, the first handheld electronic version of the Holy Bible. In 1992, we introduced a line of updateable handhelds through a proprietary memory card system; in 2003 we introduced a Pagemark series as a companion to printed material; in 2005 we introduced our Pocket Prep for the new SAT; in 2007 we introduced our 12 language speaking translator; in 2008 we introduced the Speaking Spelling Bee; and in 2009 we introduced the new MG series, English Learning Suites, which are the first Franklin products to have full language learning curricula in a handheld.
The Company was incorporated in 1983 in the Commonwealth of Pennsylvania as the successor to a business commenced in 1981. The Company’s principal executive offices are located at One Franklin Plaza, Burlington, New Jersey 08016-4907, and its telephone number is (609) 386-2500.
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COMPETITIVE ADVANTAGES
We believe that we have the following competitive advantages:
| • | Efficient and Cost-Effective Manufacturing Process. We control the entire manufacturing process of our products, from design to shipping, but do not own actual manufacturing facilities. This “virtual manufacturing” model enables us to produce our products in the most cost-effective manner by allowing us to outsource the manufacturing and assembly functions to third parties which meet our cost and quality standards. In this way, we maintain a high degree of flexibility and adaptability in our product sourcing operations with minimal capital invested and, due to the use of multiple factories in various Asian countries, we are able to maintain competitive manufacturing costs. |
| • | Strong Share in Electronic Reference Books. We believe that we are the pre-eminent company in the handheld electronic reference market in North America, Europe and certain other international markets such as Australia and the Middle East where we have significant market share. Over the past twenty-three years, we have sold approximately forty-one million handheld devices worldwide. |
| • | Breadth and Strength of Distribution. We distribute our products through approximately forty-nine thousand retail outlets in approximately fifty countries and through the internet including our web site (www.franklin.com) and catalog mailings direct to customers. We also use direct channels to serve specialty markets, such as the professional, educational and customized application markets. In the educational market, our electronic books are used in tens of thousands of schools throughout the United States. With the success of our electronic Holy Bible, we have achieved substantial sales in the religious market, with our products currently distributed through Christian-affiliated bookstores. |
| • | Technological Leadership in Electronic Books. We have significant expertise in providing high quality content and functionality through cost-effective hardware designs of electronic information products. We have designed and manufactured for our use proprietary microprocessors. Our products combine speech and sophisticated technology with a user-friendly interface designed for convenient and rapid retrieval of data. Our ability to compress data and to design systems that permit quick and intelligent information retrieval enables us to offer compact products with high functionality. For example, we store the Merriam-Webster’s Collegiate Dictionary, 11th Edition , which fills up thirty-seven megabytes of memory space, into the memory space of only nine megabytes, which also includes sophisticated search and retrieval functionality. We have been able to manufacture higher performance products at competitive costs due in part to declining prices of memory chips and LCD display technologies. Our vertically integrated research and development effort, devoted to developing both the hardware and software for our products, also enables us to utilize cost-minimizing technologies such as custom chips which combine the functions of many components into a single chip. As a result, the cost of our products to consumers has decreased over the years to prices approaching those of print versions of reference publications, offering consumers added functional value at attractive price points. |
| • | Long-standing Relationships and Licenses with Many Top Publishers. We have electronic rights to over 100 reference titles, including several versions of English and bilingual dictionaries, Bibles, test preparation, entertainment-oriented publications, children’s language learning and encyclopedias. We obtain our licenses from a variety of well-established publishers such as Merriam-Webster, Oxford University Press, Harper Collins, Lagardére SCA (Larousse), Langenscheidt KG and Ernst Klett International (PONS). These licenses are supported by long-standing relationships with the publishers, providing us with a significant competitive advantage. We have also increased the scope of our licenses to publish and/or distribute eBooks to cover more than 116,000 titles in sixteen languages, including titles from well known trade publishers such as St. Martin’s Press, McGraw Hill, Time Warner, Random House, Harper Collins and others. |
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BUSINESS STRATEGIES
We were the first, and strive to be the best, in electronic books focusing on linguistic solutions. Our strategy to fulfill that mission is to leverage our leading market position by exploiting the following opportunities:
| • | Diversify into Adjacent Growing Markets. In an effort to expand retail and consumer relevance and expand into growing larger categories, management has completed sufficient evaluation and validation to begin to leverage Franklin’s strong brand, retail distribution and procurement expertise and to enter adjacent growth markets such as Reading Enhancement (e.g., Book Accessories) and Language Expansion (e.g., Travel Accessories) products. Our goal is to provide readers of print material with products and solutions that enhance their overall reading experience and to enhance the travelers experience by removing communication barriers through portable technology solutions. We believe providing reading enhancement products and accessories will further leverage our book channel relationships which will help fuel organic growth. Additionally, we believe we can leverage our language expertise in portable travel technology by providing market relevant offerings. |
| • | Consumer Driven Product Development and Marketing. While we have built strong distribution for our major products, we continue to believe that further opportunities lie in our ability to take a more solution driven approach to product development. We believe a better understanding of our customers’ language learning challenges will allow us to provide better solutions and increase sales, accelerate sell through at retail and lead to successful new product introductions. We have initiated a solution driven product category management process to further exploit additional opportunities in our core markets including language learning, bible, and entertainment-oriented publications. For example, our PageMark Dictionary™ was well-received in the marketplace and won top honors in Personal Electronic Design at the Design and Engineering Showcase at the 2004 Consumer Electronics Show (CES). Our Pocket Prep for the new SAT won the Best of Innovations award in Personal Electronic Design at the 2005 CES, our 12 language speaking translator won the Cherry Picks award for new technology at the 2007 CES, and Speaking Spelling Bee won the Cherry Picks award at the 2008 CES. During fiscal 2008, we also won the following awards for several of our products: National Parenting Center Seal of Approval for the Merriam Webster Dictionary (MWD-1490) and the Speaking Spanish English Children’s Dictionary (BES-1240), the Speaking Merriam Webster Collegiate Dictionary (SCD-1890) received awards from IParenting Media Awards-Outstanding Products, Teacher’s Choice Award for the Family Sponsored by Learning Magazine and TNPC Seal of Approval Holiday Award; the Speaking Spanish-English Dictionary received awards from IParenting Media Awards Greatest Product for 2007 and the TNPC Seal of Approval Holiday Award; the Talking Children Dictionary was awarded the Teachers’ Choice Award sponsored by Learning Magazine; the Spelling Ace Thesaurus and the SAT/ACT Standard Testing (TSA-2400) was awarded the Technology & Learning Awards of Excellence; and the 12 Language Speaking Global Translator (TGA-490) was awarded Popular Science Best of What’s New Award. We regularly conduct consumer research to better understand our customers’ needs to be able to expand our solution-based product offerings in these markets. |
| • | Continuing Upgrade of Core Products. Our core product line continues to represent the major portion of our revenue. Dictionaries, spell correctors, translators, entertainment-oriented publications, and Bibles have been our mainstream consumer electronics products. We intend to continue to upgrade and enhance our core products and to develop improved language learning solutions. |
| • | Investment in Marketing. To date, we rely heavily on cooperative advertising with our key retailers and on advertising in targeted or local markets. We have engaged in only limited advertising on the national level. |
| • | Growth in Selected International Markets. We have had success in selling our products directly through wholly-owned local subsidiaries in selected international markets, and through distributors in other markets. We began sale of our products in Asia during fiscal 2006. We anticipate that our international sales will continue to provide a growing portion of our revenue as the “English Learning” market continues to expand on a global basis. |
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| • | Exploitation of OEM and Licensing Opportunities. Original Equipment Manufacturer (“OEM”) opportunities are business agreements pursuant to which we develop products, software, and technology for resale or use by specific customers. We have such agreements in certain markets and will seek to broaden our activities to other domestic and international markets. We believe our OEM business can be expanded as we upgrade existing and develop new solutions for open system platforms. We also license, through our Proximity Technology Division, linguistic solutions software, such as spelling error detection and correction, hyphenation correction and thesaurus functions in connection with databases of words in thirty-six languages, to pre-eminent companies such as Adobe Systems Incorporated, Sun Microsystems, Inc., and HCA Information Technology & Services, Inc. |
| • | Use of the Internet to Distribute Handheld Reference Devices and Content. We distribute and develop our handheld devices and e-Books on our website (franklin.com) and other third party websites. |
| • | Suitable Acquisitions to Grow our Business. Based on our strong balance sheet and our available cash on hand, we believe we are well positioned to continue our search for suitable accretive acquisitions to grow our business. We are targeting companies that fit well with our core business units today, financially, strategically and culturally, that can increase our channel relevance and that can provide technology to fuel organic growth. |
PRODUCTS
Electronic Books
Dictionaries
Our electronic spelling products (the “Spelling Ace®” line) operate as phonetic spelling error detectors and correctors, puzzle solvers, word list builders and word finders. These products permit the user to obtain the correct spelling of a word that the user does not know how to spell correctly. For example, if the user phonetically types in “krokodyl,” the book will display a list of seven words including, as the first choice, “crocodile.” We market various versions in the Spelling Ace line incorporating different databases such as both American and British English and foreign language correctors.
Our top-of-the-line monolingual electronic dictionary in the U.S. market is Merriam-Webster’s Speaking Collegiate Dictionary, 11th Edition which contains more than 200,000 words with clear and concise definitions, as well as parts of speech, hyphenation points and different word forms (inflections). All of our electronic dictionaries provide phonetic spelling correction and many provide thesaurus features as well. For example, if a user enters the word “baffled,” the thesaurus will display eleven different synonyms, including “frustrated,” “disappointed” and “foiled.”
We market versions of our dictionaries that use digitally recorded and compressed speech, which provides for a more natural sounding voice and dictionaries that use speech synthesis circuitry (based on text to speech technology in which algorithms are used to convert text into sound) which allow our products to pronounce, in computer generated speech, relevant words contained in the various databases.
Our line of products also includes bilingual dictionaries, most of which contain more than 200,000 words in both English and either Spanish, French, German, Korean, Portuguese, Italian, Arabic, Japanese, or Hebrew. Each provides complete translations, definitions, verb conjugations and a gender guide, and plays a variety of language learning games to help engage users while learning the language. Our Spanish/English dictionaries are marketed in versions with and without speech compression or synthesis for both Spanish and English words. Many of the other bilingual dictionaries are equipped with speech compression or synthesis for the English or even foreign language words. We currently market a French/German dictionary and bilingual dictionaries for several other languages, including other language pairs that do not include English, such as German/Italian and French/Spanish.
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We have a speaking dictionary designed to facilitate use by blind, visually impaired or learning disabled individuals, as well as others with special needs. This dictionary incorporates speech technology which pronounces every word at user adjustable volumes and speeds. In addition, this dictionary is equipped with full audio feedback, which allows every key on the keyboard to speak its letter or function. Other features include a keyboard with high-contrast lettering and raised locator dots, a large high-contrast screen with adjustable fonts and headphones.
Children’s Products
Since 1990, we have successfully sold children’s versions of our reference products. In 1997, we introduced a new line of children’s products which includes the Homework Wiz electronic dictionary with a text-to-speech voice synthesizer enabling the product to speak both words and definitions. In 2005, we introduced a speaking Spanish-English dictionary, and in 2007 we introduced the first of a series of children’s products for the Korean market. In 2008, we introduced the Speaking Spelling Bee, a virtual spelling bee game and tutor designed to improve spelling skills for students’ ages 8 and up and all aspiring spelling bee participants.
Test Preparation
In April 2005, we began shipping an all new Scholastic Aptitude Test (SAT) Prep device to coincide with a significant revision of the SAT. Our Princeton Review Pocket Prep™ device features test taking techniques, full-length practice exams with complete answers and explanations, a test timer to improve time management, personal diagnostic reports to identify score improvement opportunities, and practice drills and flash cards for efficient studying. The product was specifically designed to allow high school students to take the product anywhere for convenient study and is based on The Princeton Review’s “Cracking the SAT” printed book. This product marks our entry into the standardized test preparation market. In May 2006, we updated the SAT prep device to also include the American College Testing (ACT). In June 2006, we began to ship into the Japanese market a reference suite of Japanese-English bilingual dictionaries which includes Test of English for International Communication (TOEIC) based on the Princeton Review’s “Cracking the TOEIC” printed book. In 2009, we introduced the new MG series, English Learning Suites, which are the first Franklin products to have full language learning curricula in a hand held device.
The Holy Bible
Our electronic Holy Bible is a handheld edition of the entire text of the Holy Bible, which allows for retrieval of text by searches based on single words, word groups or synonyms. For example, a search for the words “valley” and “shadow” will retrieve the Twenty-third Psalm. Because of its built-in ability to conduct full-text word searches, the Franklin Bible is a fully automated concordance. We sell the Bible on our BOOKMAN platform and on cards designed for use with our BOOKMAN platform as well as other formats. We sell both the King James and the New International versions of the Bible as well as a Bible Dictionary and Bible Concordance. In 2009, we introduced a new “Parallel” Bible containing the works of both the King James and New International versions plus the Holman Bible Dictionary in a book-like screen in lid-attractive platform.
Entertainment Titles
We sell a variety of crossword puzzle solvers in both U.S and British English, which provide correct spelling for over 250,000 words and phrases from Merriam-Webster’s Official Crossword Puzzle Dictionary and Chambers Concise Crossword Dictionary for use by word puzzle enthusiasts. In fiscal 2006, we added a new handheld version of the Official Scrabble® Players Dictionary, a handheld version of Sudoku, the new numerical logic puzzle, and a sale to a third party OEM customer of backgammon, and some casino style games. We also sell versions of the Scrabble Players Dictionary in the French market and launched a revised edition in February 2008. We continue to pursue opportunities to sell games and puzzles through our existing brands and distribution channels or to new OEM customers. In February 2009, we launched the electronic handheld version of the classic game: SET®, under The New York Times® brand.
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