Rejects Unsolicited Proposal Received to Merge with a Company
4/29/02
ITECH CAPITAL CORP ("ITE-T") - Rejects Unsolicited Proposal Received to Merge
with a Company - Controlled by a Significant Shareholder
iTech Capital Corp. announced that it has received an unsolicited proposal to merge
iTech with a private company (the "Private Company"). The Private Company is
controlled by a shareholder of iTech who has represented to iTech management that he,
together with his associates and accounts controlled by him, own just under 10% of the
outstanding iTech shares. The Term Sheet proposes that iTech issue 30,544,357 iTech
shares to the shareholders of the Private Company giving them a 50% interest in iTech
and diluting the interests of iTech's current shareholders. The control shareholder of the
Private Company (the "Control Shareholder") would be the major beneficiary of the
proposed transaction.
Management of iTech has undertaken preliminary due diligence on the operations and
prospects of the Private Company, visited the Private Company's facilities and has had
the opportunity to meet and discuss the opportunity with its management. iTech has
concluded that the proposal for a merger is not in the interest of iTech and its
shareholders.
REASONS FOR NOT MERGING WITH THE PRIVATE COMPANY:
The following analysis is based upon information provided to iTech's management by, or
on behalf of, the Private Company:
Value Is Not There
For the fiscal year ended June 30, 2002, the Private Company is projecting sales of less
that US$ 5 million and a loss before depreciation and taxes. In addition, the Private
Company's balance sheet is burdened with long-term debt.
Declining Gross Margin
For the eight months ended March 3, 2002, the Private Company's gross margin
declined by approximately 36% from the same period in the prior year.
Prior Historical Sales Record
Over the past five fiscal years, including this fiscal year, the Private Company's sales have
increased in three years and decreased in two years. For the fiscal year ended June 30,
2001, the Company experienced a surge in revenue and earnings due primarily to
products designed for and sold predominantly to a high tech industry participant. As the
speculative technology bubble burst and capital spending dramatically decreased, since
June 30, 2001 the Private Company has experienced a substantial decline in sales.
Doubtful Long-term Competitiveness within the Industry Sector
While the Private Company has some technical competitive advantages, the Private
Company is essentially producing a commodity product. As the industry grows
production is anticipated to move offshore, thus resulting in increased pricing pressure on
domestic producers.
Excess Production Capacity and Extensive Debt
To meet anticipated demand during the prosperous years, the Private Company incurred
substantial debt to significantly increase its plant and equipment. Today, the production
facilities are estimated by its management to be operating at less than 35% of capacity.
Unrealistic Acquisition Plans
The Control Shareholder has discussed with iTech's management plans to acquire
another company (the "Second Company") in a related business. Completion of this
acquisition would require the use of iTech's cash and leveraging of its other assets. iTech
has not been provided with current data on the Second Company in spite of repeated
requests. Furthermore, the Private Company's management has also indicated that the
Second Company is not prepared to engage in discussions at this time.
Questionable Projections
After the meeting between iTech's and the Private Company's managements, iTech
requested detailed financial projections. After a period of about two weeks, iTech
received a sketchy five-line summary income statement with no detailed assumptions or
back-up schedules. What was presented raised many questions, including: 1. For the
year ended June 30, 2003, the projection shows an EBITDA margin of 26%, a level that
has not historically been attained, based on the information presented to iTech. 2. The
Private Company's projections for fiscal year ending June 30, 2004 show two scenarios
(both assume the acquisition of the Second Company mentioned above): in scenario #1
the combined companies would generate revenues of US$13.7 million, a gross margin of
55%, operating expenses of US$1,400,000 and an EBITDA margin of 45%; in scenario
#2 revenues of US$19.3 million, a gross margin of 58%, operating expenses of
US$1,480,000 and an EBITDA margin of 50%, respectively. iTech's management is
skeptical of these projections for the following reasons: a. If the historic income
statements of the two companies were combined, the gross margin would be
approximately 36%. The basis for the projected gross margins of 55% and 58% is
unsubstantiated and unrealistic, particularly for a business that is anticipating increased
price competition. b. It is unrealistic to assume that incremental sales of US$5.6 million in
scenario #2 can be accomplished with an increase in operating expenses of only
US$40,000. Or expressed differently, a 41% increase in sales volume cannot be
supported by an attendant increase in operating expenses of only 2.8%. c. Finally, it
stretches credibility to project EBITDA margins of 45%-50% for a company that has not
yet demonstrated the ability to generate EBITDA margins at one half of this level, and in
an industry that probably will experience ever increasing pricing pressure.
The judgment of iTech's management is that neither the historical data presented to iTech
nor iTech's view of the future of the industry supports these projections. When iTech's
management expressed significant skepticism about these projections it received no
answers or supporting documentation. Requests for detailed line item projections with
attendant assumptions have also gone unheeded.
Additional Concerns - One customer represents approximately 40% of the Private
Company's business - The Private Company's president is currently working
approximately three days per week.
Details of the Unsolicited Proposal
On April 18, 2002, iTech received a Term Sheet from the Private Company. The
highlights of the Term Sheet were: 1. The shareholders of the Private Company would
receive 30,544,357 common shares of iTech (a 50% interest in iTech after the
transaction) in exchange for their Private Company shares. 2. Immediately following the
merger of the Private Company, iTech would be required to contribute all available cash
(and assets to serve as borrowing collateral) to the Private Company. 3. The 30,544,357
iTech shares to be issued to the Private Company shareholders are to be available for
sale at the earliest legally and practically possible date. 4. On the effective date of the
merger, iTech would be required to authorize stock options for an additional 6,738,362
shares for equity compensation for executives, officers and consultants. Approximately
3.4 million stock options would be issued to the Control Shareholder and an entity
controlled by an associate of his.
ITECH DOES NOT SUPPORT THE TRANSACTION AS OUTLINED IN THE
TERM SHEET
iTech Capital Corp. has its annual meeting on Thursday, April 25 in Toronto at the
offices of Cassels Brock & Blackwell LLP, 40 King Street West, Toronto, Canada
M5H 3C2 at 10:00AM.
All shareholders are invited and encouraged to attend. If you cannot attend please make
sure you vote by proxy. Voting is easy. See the instructions on your proxy and if you
have lost or misplaced your proxy please call John Fairchild at 1-800-626-7221. TEL:
(646) 742-0073 William Staudt, President
iTech Capital Corp. Email: itech@itechcapital.com Website: www.itechcapital.com TEL:
1-800-626-7221 John Fairchild, iTech Capital Corp.
______________________________
___________________________________________________________________
(c) Market News Publishing Inc. Tel:(604) 689-1101
All rights reserved.
Fax:(604) 689-1106
MarketbyFax(tm) - To get the NEWS as it happens, call (604) 689-3041. |
