SCHEDULE 14A
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INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
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240.14a-12
IPI, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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IPI, INC.
8091 WALLACE ROAD, EDEN PRAIRIE, MINNESOTA 55344
January 15, 2002
Dear Shareholder:
I am pleased to invite you to attend the Special Meeting of Shareholders (the
"Special Meeting") of IPI, Inc. (the "Company") to be held Thursday, January 31,
2002 at 9:00 a.m. at the Company's office at 8091 Wallace Road, Eden Prairie,
Minnesota 55344.
At the Special Meeting, shareholders will be asked to consider two proposals:
first, to approve the sale of certain of the Company's assets to Allegra
Holdings LLC pursuant to an Asset Purchase Agreement dated November 15, 2001;
and second, to approve a Plan of Liquidation and Dissolution pursuant to which
the Company will sell its remaining assets and, after paying debts and
establishing certain reserves, distribute its assets to shareholders.
The Board has determined that each proposal is in the best interest of the
Company and its shareholders and has unanimously approved both the proposal
relating to the asset sale and the Plan of Liquidation and Dissolution.
Accordingly, the Board of Directors recommends a vote in favor of both
proposals.
Enclosed are the Notice of Special Meeting, the Summary Term Sheet, the Proxy
Statement and related proxy card. I hope you will be able to attend the Special
Meeting. Whether or not you are able to attend the Special Meeting in person, I
urge you to sign and date the enclosed proxy card and return it promptly in the
enclosed envelope. If you do attend the Special Meeting in person, you may
withdraw your proxy and vote personally on any matters properly brought before
the Special Meeting.
Very Truly Yours,
Robert J. Sutter
Chairman and Chief Executive Officer
of the Company
IPI, INC.
NOTICE OF THE SPECIAL MEETING OF SHAREHOLDERS
Minneapolis, Minnesota
January 15, 2002
TO THE SHAREHOLDERS OF IPI, INC.:
Notice is hereby given that the Special Meeting of the
Shareholders of IPI, Inc. will be held on Thursday, January 31, 2002, at 9:00
a.m. at the IPI, Inc. corporate offices located at 8091 Wallace Road, Eden
Prairie, Minnesota 55344, for the following purposes:
1. To approve and adopt that certain Asset Purchase Agreement
dated November 15, 2001, pursuant to which the Company will
sell the assets relating to its franchising of printing
centers under the Insty-Prints trade name to Allegra Holdings
LLC.
2. To approve and adopt a plan of liquidation and dissolution of
the Company that will authorize (a) the sale of the assets of
the Company and the distribution to shareholders pursuant to
the plan, (b) the deregistration of the Company's Common Stock
under the Securities Exchange Act of 1934 and (c) the
dissolution of the Company pursuant to the Minnesota Business
Corporation Act.
3. To transact such other business as may properly come before
the meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on December 19,
2001 as the record date for the determination of shareholders entitled to notice
of and to vote at the meeting.
By Order of the Board of Directors
David A. Mahler
SECRETARY
TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, PLEASE SIGN, DATE AND
RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE WHETHER OR NOT YOU EXPECT TO ATTEND
IN PERSON. SHAREHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE
IN PERSON IF THEY SO DESIRE. THIS PROXY IS SOLICITED ON BEHALF OF THE COMPANY.
SUMMARY TERM SHEET; QUESTIONS AND ANSWERS ABOUT EACH PROPOSAL
THIS SUMMARY TERM SHEET HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
FOR A MORE COMPLETE UNDERSTANDING OF THE EACH PROPOSAL AND THE OTHER INFORMATION
CONTAINED IN THIS PROXY STATEMENT, YOU SHOULD READ THIS ENTIRE PROXY STATEMENT
TOGETHER WITH THE APPENDIXES.
WHERE AND WHEN IS THE SPECIAL MEETING?
The Special Meeting will be held at 9:00 a.m. (Minneapolis, Minnesota
time), on January 31, 2002, at the Company's offices at 8091 Wallace Road, Eden
Prairie, Minnesota 55344.
WHAT MATTERS WILL BE VOTED UPON AT THE SPECIAL MEETING?
Shareholders of the Company are being asked to consider and vote on two
proposals: first, to approve the Company's sale of its assets relating to its
franchising of printing centers under the Insty-Prints trade name to Allegra
Holdings LLC pursuant to an Asset Purchase Agreement dated November 15, 2001
(the "Asset Sale"); and second, to approve a Plan of Liquidation and Dissolution
(the "Plan") pursuant to which the Company will sell its remaining assets and,
after paying debts and establishing certain reserves, distribute its assets to
shareholders.
WHO CAN VOTE AT THE SPECIAL MEETING?
Holders of the Company's Common Stock outstanding at the close of
business on the record date, December 19, 2001, are entitled to notice of and to
vote at the Special Meeting. Each share of the Company's Common Stock is
entitled to one vote. On December 19, 2001, there were 4,518,687 shares of IPI,
Inc. Common Stock outstanding.
WHAT QUORUM AND SHAREHOLDER VOTE ARE REQUIRED TO APPROVE THE PROPOSALS?
The presence, in person or by proxy, of a majority of the outstanding
shares of common stock of IPI, Inc. on December 19, 2001 is necessary to
constitute a quorum at the Special Meeting. Approval of the Asset Sale and the
Plan of Liquidation each will require the affirmative vote of the holders of at
least a majority of the outstanding shares of Common Stock of the Company as of
December 19, 2001. While there are no agreements which would compel them to do
so, it is expected that all shares of IPI, Inc. Common Stock beneficially owned
or controlled by the directors and officers of the Company will be voted in
favor of each of the proposals presented at this Special Meeting of
Shareholders. In the aggregate, officers and directors of the Company
beneficially own or control 3,207,195, or 71% of the 4,518,687 shares of the
Company's Common Stock outstanding as of December 19, 2001. Because officers and
directors hold a majority of the outstanding shares of Common Stock of the
Company, a vote in favor of any proposal by officers and directors would be
sufficient to approve such proposal. See Page 22, "Proposal 1: Approval of the
Asset Purchase Agreement--Vote Required"; Page 30, "Proposal 2:
Approval of Plan of Liquidation and Dissolution--Vote Required."
i
HAS THE BOARD OF DIRECTORS RECOMMENDED THAT I VOTE FOR APPROVAL OF THE
PROPOSALS?
Yes. Your Board of Directors believes that the Asset Sale and the Plan
are in the best interests of the Company and its shareholders, and unanimously
recommends that shareholders vote for approval of both the Asset Sale and the
Plan. See Page 22, "Proposal 1: Approval of the Asset Purchase
Agreement--Recommendation of the Company's Board of Directors"; Page 30,
"Proposal 2: Approval of Plan of Liquidation and Dissolution--Recommendation of
the Company's Board of Directors."
DO I HAVE DISSENTER'S RIGHTS WITH RESPECT TO THE ASSET SALE OR THE PLAN?
Shareholders who do not vote in favor of the Asset Sale and who do not
vote in favor of the Plan are entitled to dissenters' rights under the Minnesota
Business Corporation Act ("MBCA").
Pursuant to Sections 302A.471 and 302A.473 of the MBCA, holders of the
Company's Common Stock are entitled to assert appraisal rights in connection
with the Asset Sale only if the Company does not proceed to liquidate and
dissolve. Pursuant to Section 302A.471, Subd. 1(b), no shareholder will have
dissenters' rights if the Plan is approved. If the Asset Sale is approved and
the Plan is not approved, dissenting shareholders are entitled to obtain payment
of the "fair value" of their Common Stock, provided that such shareholders
comply with the requirements of the MBCA. In this context, the term "fair value"
means the value of the shares of the Common Stock immediately before the
effective date of the Asset Sale. See Page 21, "Proposal 1: Approval of the
Asset Purchase Agreement--Dissenter's Rights"; Page 28, "Proposal 2: Approval of
Plan of Liquidation and Dissolution-- Dissenter's Rights." See also Page 31,
"Summary of Rights of Dissenting Shareholders."
WHO IS IPI, INC.?
IPI, Inc. is a publicly held corporation with shares of its Common
Stock listed on the American Stock Exchange under the symbol "IDH." IPI, Inc. is
the parent company of Insty-Prints, Inc. and Change of Mind Learning Systems,
Inc. Insty-Prints, Inc. is a franchisor of approximately 200 fast turnaround
business printing operations. Change of Mind Learning Systems, Inc. is a
franchisor of learning centers and is in its early stage of development. See
Page 6, "Proposal 1: Approval of the Asset Purchase Agreement--The Parties to
the Asset Purchase Agreement."
The principal executive office of IPI, Inc. is located at 8091 Wallace
Road, Eden Prairie, Minnesota 55344. The Company's telephone number is (952)
975-6200.
WHO IS ALLEGRA HOLDINGS LLC?
Allegra Holdings LLC ("Allegra") is the parent company of Allegra
Network LLC. Allegra's predecessor, American Speedy Printing Centers, Inc., was
founded in 1976 and started franchising in 1977. Allegra operates through
Allegra Network LLC which is a franchisor of more than 350 printing and graphic
design centers in the United States, Canada, Japan and the Philippines. Allegra
Network LLC franchisees operate their business under the names "Allegra Print
and Imaging," "American Speedy Printing Centers," "Quik Print," "Instant Copy,"
"Speedy Printing Centers," or "Zippy Print." See Page 6, "Proposal 1: Approval
of the Asset Purchase Agreement--The Parties to the Asset Purchase Agreement."
The principal executive office of Allegra is located at 1800 West Maple
Road, Troy, Michigan 48084. Allegra's telephone number is (248) 614-3700.
ii
WHAT ARE THE REASONS FOR THE ASSET SALE?
The Company believes that its Insty-Print franchising business has
historically produced a declining return for the Company's shareholders. The
Company believes the revenues from its business of franchising printing centers
is below the level necessary for attracting investor and brokerage community
enthusiasm. While the Company has been striving to increase shareholder value
during the past years through acquisitions of other related businesses, the
market value of the Company's Common Stock has continued to decline and remains
at a level below the value of the Company's combined cash and investments. In
addition, the Company believes it has become impractical for the Company's
shareholders to realize the value of their shares in the open market. Further,
the historic prices for the Company's Common Stock have been low and the
transaction costs of a market sale are high relative to the value of the shares
held by many of the Company's shareholders. For these reasons, the Company
believes that the Company's shareholders could realize a higher rate of return
by the Asset Sale than has been historically experienced. See Page 7 "Proposal
1: Approval of the Asset Purchase Agreement--Reasons for the Asset Sale."
WHAT WILL BE RECEIVED IN EXCHANGE FOR THE IPI ASSETS?
The Company will receive $4,125,000 in cash in exchange for the sale of
the operating assets of the Company's Insty-Prints franchising business, less an
amount representing liabilities assumed by Allegra, plus an additional amount to
be calculated at closing for inventory, prepaid expenses and certain accounts
and notes receivable. Furthermore, if the Asset Sale closes after December 31,
2001, the purchase price will be adjusted for revenues received and expenses
incurred from January 1, 2001 to the closing date. The Company believes the
total consideration for the Asset Sale will be approximately $5.6 million after
all purchase price adjustments. While all of the purchase price will be paid in
cash, Allegra will make payments relating to certain accounts receivables over
the course of one year. The Company believes that the consideration it will
receive through the Asset Sale will allow the Company to pay all of its
remaining creditors in full. See Page 12, "Proposal 1: Approval of the Asset
Purchase Agreement--The Asset Sale" and Page 14, "Proposal 1: Approval of the
Asset Purchase Agreement--Description of Asset Purchase Agreement."
HOW WAS THE PURCHASE PRICE DETERMINED?
The purchase price was determined through arm's length negotiation
between officers of the Company, principally Mr. David Mahler, the Secretary of
the Company, and officers of Allegra, principally Mr. Jay Rosen, Executive Vice
President, Operations and Technology. The Board of Directors of the Company
reached agreement on the purchase price considering the value of the royalty
stream of the franchise agreements, as well as the value of other assets, the
liabilities to be assumed by Allegra and the overall financial status of the
Company and its operations. The Company did not hire a financial advisor in
connection with the Asset Sale, but the Board of Directors believes that the
Asset Sale is fair to the shareholders and in the best interests of the Company.
See Page 8, "Proposal 1: Approval of the Asset Purchase Agreement--Background of
the Asset Sale."
ARE THERE ANY CONDITIONS TO THE ASSET SALE?
Yes. The Asset Sale will be completed only if it is approved by the
holders of a majority of the outstanding shares of IPI, Inc. Common Stock. See
Page 19, "Proposal 1: Approval of the Asset Purchase Agreement--Description of
the Asset Purchase Agreement: Required Approvals."
iii
WHAT WILL HAPPEN TO IPI, INC. AFTER THE ASSET SALE?
After the Asset Sale, the Company will have assets consisting of $14.1
million of cash and short-term marketable securities and approximately $14.3
worth of assets not included in the Asset Sale, which primarily consists of the
Company's investment in 2,081,800 shares of Clarent Corporation common stock as
valued at cost, and assets relating to the Company's wholly-owned subsidiary
Change of Mind Learning Systems, Inc. If Proposal No. 2 is approved by
shareholders at this Special Meeting, the Company will liquidate its remaining
assets pursuant to the Plan of Liquidation and Dissolution. The Company will pay
or make provision for its debts and hold in trust, pending the initiation of
litigation by the Company or sale in the market of the 2,081,800 shares of
Clarent Corporation common stock owned by the Company as of December 19, 2001.
The Company will then distribute to shareholders, in one or more distributions
all of the assets of the Company (except for reserves established to pay debts).
See Page 19, "Proposal 1: Approval of the Asset Purchase Agreement--Proceeds of
the Sale; Company's Business Following the Asset Sale"; Page 23, "Proposal 2:
Approval of the Plan of Liquidation and Dissolution--Description of the Company
and Reasons for the Liquidation Proposal."
WHAT IS THE PROPOSED PLAN OF LIQUIDATION AND DISSOLUTION?
If the shareholders approve the Plan of Liquidation and Dissolution
(the "Plan"), the Company will cease to do business and will not engage in any
business activities except for the purpose of liquidating its assets, paying any
debts and obligations, distributing the remaining assets to shareholders, and
doing other acts required to liquidate and wind up its business and affairs. The
Company will liquidate the assets relating to its Change of Mind Learning
Systems, Inc. subsidiary and all other assets. However, the Company will not
liquidate the 2,081,800 shares of Clarent Corporation common stock it holds
pending a determination whether to pursue litigation against Clarent Corporation
as a shareholder or whether to sell all or a portion of such 2,081,800 shares in
the open market, if the stock resumes trading.
In the event the Clarent Corporation common stock held by the Company
is liquidated or the Company receives proceeds in litigation which are less than
the Company's cost per share (approximately $6.00 per share) certain of the
Company's majority shareholders, Messrs. Irwin L. Jacobs, Daniel T. Lindsay and
Dennis M. Mathisen, have guaranteed the other shareholders of the Company a
value in liquidation relating to the Clarent Corporation investment of
approximately $6.00 per Clarent share. The 2,081,800 shares of Clarent
Corporation common stock have an acquisition cost to the Company of $12,490,800
or approximately $2.76 per share of the Company's common stock outstanding on
December 19, 2001.
The Company will pay or make provision for payment of all known or
reasonably ascertainable liabilities of the Company that have been incurred or
are expected to be incurred prior to dissolution. After that, the Company will
distribute the remaining assets to the Company's shareholders in proportion to
their beneficial interest in the Company.
The Company expects that it will make one or more partial distributions
to shareholders during the period that assets are being sold. Including the
proceeds of the Asset Sale, the Company will have approximately $14.1 million in
cash and short-term marketable securities on hand, or $3.12 per share of the
Company's common stock outstanding on December 19, 2001, before the expenses of
the Asset Sale and Liquidation and Dissolution are paid or the other assets of
the Company, including the Clarent Corporation Common Stock, are liquidated and
all liabilities and close-down expenses are paid. The Company is not able at
this time, however, to determine the exact amount available for distribution to
shareholders or when distributions will be made. The Company will pay all
expenses of the liquidation and dissolution.
iv
Following approval of the Plan by the shareholders, the Company will
prepare and file a Notice of Intent to Dissolve with the Minnesota Secretary of
State. Once shareholders have received final distributions, the Company will
prepare and file Articles of Dissolution and the legal existence of the Company
will cease.
See Page 23, "Proposal 2: Approval of the Plan of Liquidation and
Dissolution--Summary of the Plan; Process for Liquidation and Dissolution."
WHAT ARE THE REASONS FOR THE PLAN?
After the Asset Sale, the operating assets of the Company will consist
of the assets relating to the Company's Change of Mind Learning Centers
franchise. The Company believes these assets would be insufficient to operate
the Company's business as a going concern. Furthermore, the Company believes its
shareholders would achieve a greater return on their investment if the Company
distributed its assets rather than the Company acquiring or operating another
business.
In light of these developments, the Board of Directors of the Company
believes that it is in the best interests of the Company and its shareholders to
liquidate the Company and distribute its remaining assets in accordance with the
terms of the Plan. See Page 23, "Proposal 2: Approval of the Plan of Liquidation
and Dissolution--Description of the Company and Reasons for Liquidation
Proposal."
WILL THE COMPANY'S COMMON STOCK CONTINUE TO TRADE?
No. If the shareholders approve the Plan, the Company will immediately
close its stock transfer books, and no further transfers of the Common Stock
will be permitted. A shareholder's interest in the Company will be converted
into the right to receive a pro rata share of the Company's distributable
assets. These rights will not be transferable other than by will, intestate
succession or operation of law. See Page 27, "Proposal 2: Approval of the Plan
of Liquidation and Dissolution--Description of the Plan of Liquidation and
Dissolution: Restrictions on Transfer."
WHAT WILL I RECEIVE PURSUANT TO THE PLAN?
The Company will make one or more liquidating distributions to the
shareholders, representing the net proceeds of the liquidation. The amount of
the liquidating distributions will depend on the amount received upon sale of
the Company's assets, the amount of the Company's liabilities (including taxes
resulting from the Asset Sale and liquidation of its other assets) and the
amount of liquidation expenses.
At this time, it is not possible to determine exactly what amount will
be available for distribution to shareholders or when distributions will be
made. The Company expects the sale of its Insty-Prints franchising business will
result in gross cash consideration of approximately $4.1 million as of the date
of closing. The Company expects total proceeds of $5.6 million over the course
of the following 12 months from the Asset Sale. Assuming receipt of
consideration of $4.1 million in the Asset Sale at closing, the Company will
have $14.1 million in cash and short-term marketable securities on hand or $3.12
per share of the Company's Common Stock outstanding as of December 19, 2001. In
addition, the Company would attempt to liquidate its other remaining assets,
including the Company's 2,081,800 shares of Clarent Corporation Common Stock,
with an estimated value of $14.3 million.
v
However, there is no assurance that the Company's assets can be sold at
the prices at which they are carried on the Company's balance sheet, and in view
of the specialized nature of the Company's Change of Mind Learning Center
franchise business, there is no assurance as to when these assets will be sold.
In addition, the Company will incur transaction costs, administrative costs and
income tax obligations in connection with the sale of its assets and the
liquidation and dissolution of the Company. These obligations are not included
in the calculation of net asset value. See Page 27, "Proposal 2: Approval of the
Plan of Liquidation and Dissolution--Description of the Plan of Liquidation and
Dissolution: Liquidating Distributions"; Page 28, "Proposal 2: Approval of the
Plan of Liquidation and Dissolution--Description of the Plan of Liquidation and
Dissolution: Distribution Amounts."
WHEN WILL THE LIQUIDATION BE COMPLETED?
The liquidation of the Company pursuant to the Plan will be completed
as soon as practicable. The exact period required for liquidation will depend on
the Company's ability to sell its assets remaining after the Asset Sale and on
market conditions generally. See Page 23, "Proposal 2: Approval of the Plan of
Liquidation and Dissolution--Summary of Plan; Process for Liquidation and
Dissolution."
WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE ASSET SALE AND LIQUIDATION?
The Company will be subject to income taxes on the sale of its assets.
Any gain from the Asset Sale and sale of other Company assets will be taxable
and will reduce the amount available for distribution to shareholders.
HOW WILL I BE TAXED ON THE ASSET SALE?
There should be no tax to individual shareholders in connection with
the Asset Sale. Regardless, all shareholders are urged to consult their tax
advisors to determine the effect of the Asset Sale under federal tax law (or
foreign tax law where applicable), and under their own state and local tax laws.
All distributions you receive upon liquidation will be treated for
federal income tax purposes as full payment in exchange for your shares.
Therefore, each shareholder will be taxed only to the extent the amounts such
shareholder receives exceed the shareholder's adjusted tax basis in the shares.
This gain or loss will be treated as a capital gain or loss if the shares have
been held for more than one year, or will be treated as short-term capital gain
or loss taxed at ordinary income tax rates if the shares have not been held for
more than one year. If a shareholder is a corporation, all of the shareholder's
income from liquidating distributions will be subject to tax at the same federal
income tax rate as the shareholder's other income. See Page 20, "Proposal 1:
Approval of the Asset Purchase Agreement--Federal Income Tax Consequences"; Page
29, "Proposal 2: Approval of the Plan of Liquidation and
Dissolution--Description of the Plan of Liquidation and Dissolution: Federal
Income Tax Consequences."
The material tax issues affecting dissenting shareholders are discussed
at Page 20, "Proposal 1: Approval of the Asset Purchase Agreement--Federal
Income Tax Consequences."
vi
IF I SEND IN MY PROXY CARD BUT DO NOT INDICATE MY VOTE, HOW WILL MY SHARES BE
VOTED?
If you sign and return your proxy card but do not indicate how to vote
your shares at the Special Meeting, the shares represented by your proxy will be
voted "FOR" each Proposal.
WHAT SHOULD I DO NOW TO VOTE AT THE SPECIAL MEETING?
Sign, mark and mail your proxy card indicating your vote on the Asset
Sale in the enclosed return envelope as soon as possible, so that your shares of
IPI, Inc. Common Stock can be voted at the Special Meeting.
MAY I CHANGE MY VOTE AFTER I MAIL MY PROXY CARD?
Yes. You may change your vote at any time before your proxy is voted at
the Special Meeting. You can do this in three ways:
* You can send a written statement to the Company stating that you revoke your
proxy, which to be effective must be received by the Company prior to the
vote at the Special Meeting; or
* You can submit a new proxy card to the Company prior to the vote at the
Special Meeting. The new proxy must be dated after your original proxy and
received by the Company prior to the vote at the Special Meeting; or
* You can attend the Special Meeting and vote in person. You must also provide
the Company with a written termination of your original proxy vote prior to
or at the Special Meeting. Your attendance at the Special Meeting alone will
not revoke your proxy.
You should send your revocation of a proxy or new proxy card to
Mr. David Mahler, Secretary, at the address on the cover of this Proxy
Statement.
WHOM SHOULD I CALL IF I HAVE QUESTIONS?
If you have questions about anything discussed in this Proxy Statement,
you may call David Mahler, Secretary of the Company, at 612-337-1864.
---------------
YOU SHOULD CAREFULLY READ THIS PROXY STATEMENT
(INCLUDING THE APPENDIXES) IN ITS ENTIRETY.
vii
TABLE OF CONTENTS
SUMMARY TERM SHEET; QUESTIONS AND ANSWERS ABOUT EACH PROPOSAL..............i-vii
PROXY STATEMENT............................................................1
General Information........................................................1
Revoking a Proxy...........................................................1
Dissenter's Rights.........................................................2
Vote Required..............................................................2
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............3
CHANGE IN CONTROL ARRANGEMENT..............................................4
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED ON......................4
PROPOSAL NO. 1 - APPROVAL OF ASSET PURCHASE AGREEMENT......................6
General....................................................................6
The Parties to the Asset Purchase Agreement................................6
Reasons for the Asset Sale.................................................7
Background of the Asset Sale...............................................8
The Asset Sale.............................................................12
Voting Information.........................................................13
DESCRIPTION OF THE ASSET PURCHASE AGREEMENT................................14
Purchase and Sale of Assets................................................14
Payment of Purchase Price..................................................15
Assumption of Liabilities..................................................15
Representations and Warranties of the Company and Insty....................16
Representations and Warranties of Allegra..................................16
Conduct and Transactions Prior to Closing..................................16
Conditions Precedent to Allegra's Obligations to Purchase Assets and
Assume the Liabilities....................................................17
Conditions Precedent to Sellers' Obligations to Sell the Assets............17
The Closing................................................................17
Survival of Representations and Warranties.................................18
Indemnification............................................................18
Arbitration................................................................18
Termination................................................................18
Required Approvals.........................................................19
Proceeds of the Asset Sale; Company's Business Following the Asset Sale....19
Securities Exchange Reporting and American Stock Exchange Listing..........20
Accounting Treatment.......................................................20
Federal Income Tax Consequences............................................20
Dissenter's Rights.........................................................21
Recommendation of the Company's Board of Directors.........................22
Vote Required..............................................................22
PROPOSAL NO. 2 - APPROVAL OF PLAN OF LIQUIDATION AND DISSOLUTION...........23
Description of the Company and Reasons for the Liquidation Proposal........23
Summary of Plan; Process for Liquidation and Dissolution...................23
Voting Information.........................................................25
DESCRIPTION OF PLAN OF LIQUIDATION AND DISSOLUTION.........................26
Effective Date of Plan.....................................................26
Cessation of Business......................................................26
Notice of Intent to Dissolve; Articles of Dissolution......................26
Liquidation of Assets......................................................26
Payments and Debts.........................................................26
Clarent Corporation Common Stock...........................................26
Restriction on Transfer....................................................27
Shareholders; Beneficial Interests.........................................27
Liquidating Distributions..................................................27
Expenses of the Liquidation and Distribution...............................27
Distribution Amounts.......................................................28
Amendment or Abandonment of Plan...........................................28
Dissenter's Rights.........................................................28
Impact of the Plan on the Company's Status Under the 1934 Act..............29
Federal Income Tax Consequences............................................29
Recommendation of the Company's Board of Directors.........................30
Vote Required..............................................................30
SUMMARY OF RIGHTS OF DISSENTING SHAREHOLDERS...............................31
Right to Exercise Dissenters' Rights.......................................31
Company's Notice of Meeting................................................31
Shareholder's Notice of Intent to Demand Fair Value of Shares; Vote
Against Proposals.........................................................31
Company's Notice of Procedures for Demanding Payment.......................32
Company's Payment; Return of Shares........................................32
Shareholder's Right to Demand Supplemental Payment.........................32
Company's Petition; Determination by Court.................................33
Costs and Expenses.........................................................33
Other Rights...............................................................33
FINANCIAL STATEMENTS AND DOCUMENTS INCORPORATED BY REFERENCE...............33
SHAREHOLDER PROPOSALS FOR 2002 ANNUAL MEETING..............................34
OTHER MATTERS..............................................................34
Appendix A Asset Purchase Agreement
Appendix B Plan of Liquidation and Dissolution
Appendix C Financial Statements and Pro Forma Financial Information
Appendix D Dissenter's Rights Statute
Appendix E Guarantee Agreement
ii
IPI, INC.
8091 WALLACE ROAD, EDEN PRAIRIE, MINNESOTA 55344
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, JANUARY 31, 2002
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is furnished to the holders of common stock of
IPI, Inc. (the "Company") in connection with the solicitation of proxies by the
Board of Directors of the Company for use in connection with the Special Meeting
of the Shareholders to be held at 9:00 a.m. January 31, 2002 at the Company's
headquarters at 8091 Wallace Road, Eden Prairie, Minnesota, and all adjournments
or postponements thereof, for the purposes set forth in the accompanying Notice
of Special Meeting of the Shareholders. The Company expects that the Notice of
Special Meeting, Proxy Statement and form of proxy will be mailed to the
Shareholders on or about January 15, 2002. The cost of this solicitation will be
borne by the Company.
Shareholders of record at the close of business on December 19, 2001
will be entitled to vote at the Special Meeting or any adjournment thereof. As
of December 19, 2001, the Company had 4,518,687 shares of its common stock, $.01
par value (the "Common Stock"), issued, outstanding and entitled to be voted at
the Special Meeting. The Common Stock is the only class of voting securities of
the Company. Each holder of outstanding shares of the Common Stock is entitled
to one vote per share on all matters being presented at the Special Meeting.
There is no cumulative voting.
The enclosed proxy, when properly signed and returned to the Company,
will be voted by the persons named therein at the Special Meeting as directed
therein. Proxies in which no designation is made with respect to the various
matters of business to be transacted at the Special Meeting will be voted FOR
Proposal No. 1 Approval of the Asset Purchase Agreement pursuant to which the
Company will sell the assets relating to its franchising of printing centers
under the Insty-Prints trade name; FOR Proposal No. 2 Approval of the Plan of
Liquidation and Dissolution; and in the best judgment of the persons named in
the proxy as to any other matters which may properly come before the Special
Meeting.
REVOKING A PROXY
A proxy may be revoked at any time prior to its being exercised at the
Special Meeting by (1) written notification to the Secretary of the Company
stating that you revoke your proxy (2) submitting a new proxy card prior to the
vote at the Special Meeting (3) providing the Company with a written notice of
proxy termination prior to or at the Special Meeting, attending the Special
Meeting and casting a vote in person at the Special Meeting. Personal attendance
at the Special Meeting is not sufficient to revoke a proxy unless a written
notice of proxy termination is filed with the Company prior to or at the Special
Meeting.
1
DISSENTER'S RIGHTS
Under Minnesota law, the holders of shares of common stock of the
Company have the right to dissent from the Asset Sale and the Plan of
Liquidation and Dissolution and receive payment of the fair value of their
shares upon compliance with the Minnesota Business Corporation Act (the "MBCA").
These rights are explained more fully in the section of this Proxy Statement
entitled "Rights of Dissenting Shareholders." Further, the dissenters' rights
provisions of the MBCA are attached to the Proxy Statement as Appendix D.
VOTE REQUIRED
Under Minnesota law, the affirmative vote of the holders of a majority of
the outstanding shares of the Company's Common Stock entitled to vote on the
proposal is required to approve the Asset Purchase Agreement and the Plan of
Liquidation and Dissolution. In the event that shareholders whose shares are
held in street name by brokers fail to provide specific instructions with
respect to their shares of common stock to their broker, or in the event that
such shareholders explicitly abstain from voting on either proposal, the effect
will be the same as a vote "AGAINST" such proposal. Executed but unmarked
proxies will be voted "FOR" approval of each proposal. Abstentions and broker
non-votes will be treated as shares that are present and entitled to vote for
purposes of determining the presence of a quorum, but as unvoted for purposes of
determining the approval of the matter submitted to the shareholders for a vote.
2
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Company as of December 19, 2001,
(i) by each person known by the Company to beneficially own more than five
percent (5%) of the outstanding Common Stock, (ii) by each director of the
Company and each of the Company's executive officers whose total annual salary
and bonus exceeded $100,000 in the last fiscal year and (iii) by all directors
and executive officers as a group. Unless otherwise noted, each person or group
identified has sole voting and investment power with respect to the shares
listed and may be reached at the Company's address at 8091 Wallace Road, Eden
Prairie, MN 55344.
SHARES BENEFICIALLY OWNED
------------------------------------------------------
SHARES ACQUIRABLE PERCENTAGE BENEFICIALLY
NAME OF BENEFICIAL OWNER SHARES WITHIN 60 DAYS TOTAL OWNED(1)
- ------------------------ ------ -------------- ----- -----------------------
Dennis M. Mathisen 1,601,044 (2) 0 1,601,044 35.43%
903 North Third Street
Minneapolis, MN 55401
Marshall Financial Group, Inc. 1,592,044 0 1,592,044 35.23%
903 North Third Street
Minneapolis, MN 55401
Irwin L. Jacobs 1,140,180 (3) 0 1,140,180 25.23%
2900 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Jacobs Industries, Inc. 1,115,180 0 1,115,180 24.68%
2900 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Daniel T. Lindsay 412,271 (4) 16,000 428,271 9.44%
2900 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Robert J. Sutter 20,000 116,000 136,000 2.93%
David C. Oswald 100 32,000 32,100 *
Howard E. Grodnick 8,600 (5) 20,000 28,600 *
901 Third Street North
Minneapolis, MN 55401
Rod Burwell 6,000 0 6,000 *
7901 Xerxes Ave. S., Suite 201
Minneapolis, MN 55431
Daniel Rohr 0 0 0 *
110 Groveland Terrace
Minneapolis, MN 55403
David M. Engel 3,000 24,000 27,000 *
All Officers and Directors as a 3,207,195 238,000 3,445,195 72.43%
Group (13 persons)
* Less than one percent.
3
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right to acquire them as of December 19, 2001 or within sixty days of
such date are treated as outstanding when determining the percentage
shown for a person or group, but are not treated as outstanding when
determining the percentages shown for any other person or group.
(2) Includes 1,592,044 shares held by Marshall Financial Group, Inc. which
is owned 100% by Mr. Mathisen.
(3) Includes 1,115,180 shares owned by Jacobs Industries, Inc. Jacobs
Industries, Inc. is owned 100% by Irwin L. Jacobs.
(4) Includes 49,271 shares held by Mr. Lindsay's wife, 30,000 shares held
by Mr. Lindsay's adult son, and 5,000 shares held by Mr. Lindsay's
minor son, all of which Mr. Lindsay disclaims beneficial interest.
(5) Includes 6,600 shares owned by Mr. Grodnick's wife, of which Mr.
Grodnick disclaims beneficial interest.
CHANGE IN CONTROL ARRANGEMENT
On January 5, 1998, Jacobs Industries, Inc. ("JII") sold 1,608,500
shares (approximately 34%) of Common Stock to Marshall Financial Group, Inc.
("Marshall"), and certain affiliates of Marshall, pursuant to an Option
Agreement, Security Agreement and Buy-Sell Agreement, dated May 28, 1997 for a
purchase price per share of $4.20.
Under the provisions of the Buy-Sell Agreement and upon specified
notice, either JII or Marshall has the right to purchase certain shares owned by
the other party, or to require the other party to purchase certain of its
shares. The Buy-Sell Agreement terminates upon mutual agreement of JII and
Marshall. JII owns 1,115,180 shares subject to the Buy-Sell Agreement, and
Marshall owns 1,592,044 shares subject to the Buy-Sell Agreement.
The Buy-Sell Agreement only governs the disposition of the shares of
the Company's Common Stock held by JII and Marshall; neither party may sell,
transfer, assign or dispose of its shares except pursuant to the Buy-Sell
Agreement. However, the Buy-Sell Agreement does not affect the voting rights of
either JII or Marshall. Consequently, the Buy-Sell Agreement does not affect the
voting of either of JII or Marshall on the proposals before shareholders at this
Special Meeting of Shareholders.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Messrs. Irwin L. Jacobs, Daniel T. Lindsay and Dennis M. Mathisen are
directors of the Company. On November 16, 2001, Messrs. Jacobs, Lindsay and
Mathisen entered into an Guaranty Agreement for the benefit of the Company's
shareholders other than Messrs. Jacobs, Lindsay and Mathisen and their
affiliates (the "Minority Shareholders"). Pursuant to the Guaranty Agreement
Messrs. Jacobs, Lindsay and Mathisen have, jointly and severally, guaranteed
that in the liquidation and distribution of the Company's Clarent Corporation
common stock, the Minority Shareholders will receive a value no less than the
Company's original acquisition cost of the Clarent common stock. The Company
currently holds 2,081,800 shares of Clarent Corporation ("Clarent") common
stock. The cost of acquisition by the Company of the Clarent common stock was
$6.00 per share. If the Company is unable to sell its Clarent common stock,
sells the Clarent common stock at a price below $6.00 per share, obtains a
settlement or judgement in litigation with a value of less than $6.00 per share
of Clarent common stock or, for some other reason, realizes a value upon
liquidation of the Clarent stock of less than $6.00 per Clarent share, Messrs.
Jacobs, Lindsay and Mathisen will pay to Minority Shareholders an amount equal
to that shareholder's pro rata participation in the minimum liquidated value of
$6.00 per share of the Clarent common stock.
4
The total number of shares of the Company's common stock beneficially
owned by Messrs. Jacobs, Lindsay and Mathisen as of December 19, 2001 is
3,169,495 or 70.1% of the Company's outstanding common stock as of December 19,
2001. Minority Holders hold approximately 1,349,192 shares. The value of the
Company's Clarent investment is approximately $12,490,800. That $12,490,800
value divided by the 4,518,687 total number of shares of common stock of the
Company outstanding as of December 19, 2001 means the Clarent investment has a
value per share of IPI common stock of $2.76. Pursuant to the Guarantee
Agreement and as described above, each Minority Shareholder is entitled to a
Clarent liquidated value of $2.76 per share of IPI common stock.
The Guarantee Agreement is attached to this Proxy Statement as Appendix
E.
The Company originally purchased the Clarent Corporation common stock
as both a short-term investment of the Company's excess cash and for further
evaluation as a possible acquisition candidate. At the time of the Company's
purchase, Clarent Corporation common stock was trading at $6.00 per share, or
less than book value. Of the 2,081,800 shares of Clarent Corporation owned by
the Company, 1,980,000 shares were purchased from Credit Suisse First Boston.
The remainder of the shares were purchased through a broker-dealer in open
market transactions. Credit Suisse First Boston owned the 1,980,000 shares of
Clarent to hedge an option exercisable by Mr. Irwin Jacobs, a director of the
Company. When this option was liquidated, Credit Suisse First Boston informed
Mr. Jacobs that it intended to sell the 1,980,000 Clarent shares hedging the
option. Mr. Jacobs identified the Company as a potential purchaser of the
1,980,000 Clarent shares. Mr. Jacobs did not receive any benefit from the
Company's purchase of the Clarent shares that he would not have received if the
shares had been purchased by an unaffiliated third party.
5
PROPOSAL NO. 1
APPROVAL OF THE ASSET SALE
(Asset Sale Proposal)
GENERAL
At the Special Meeting, the shareholders of IPI, Inc. (the "Company")
will be asked to consider and vote upon a proposal to approve the sale of the
assets of the Company relating to its franchising of printing centers under the
Insty-Prints trade name. The assets to be sold include assets of both the
Company and its wholly-owned subsidiary Insty-Prints, Inc. ("Insty") relating to
the franchise business, including agreements with franchisees, intellectual
property, warehouse equipment and fixtures, computer equipment and software,
certain accounts and notes receivable, inventory, prepaid expenses and the
assets of a trust established for national advertising on behalf of franchisees
(the "Asset Sale") on the terms and conditions set forth the Asset Purchase
Agreement, dated November 15, 2001 by and between the Company, Insty and Allegra
Holdings LLC (the "Asset Purchase Agreement") (collectively, the "Asset Sale
Proposal"). The material terms of the Asset Purchase Agreement are presented
below under the caption "Description of the Purchase Agreement." A copy of the
Asset Purchase Agreement is set forth on Appendix A to this Proxy Statement.
THE PARTIES TO THE ASSET PURCHASE AGREEMENT
IPI, INC. IPI, Inc. is a publicly held corporation with shares of its
Common Stock listed on the American Stock Exchange under the symbol "IDH." IPI,
Inc. is the parent company of Insty-Prints, Inc. and Change of Mind Learning
Systems, Inc. INSTY-PRINTS, INC. is a franchisor of approximately 200 fast
turnaround business printing operations. Change of Mind Learning Systems, Inc.
is a franchisor of learning centers and is in its early stage of development. In
the fiscal year ended November 30, 2000, the Company had revenue of $ 9,294,000
and net income of $350,000. In the nine months ended August 31, 2001 the Company
had revenue of $5,851,000 and net income of $9,618,000, which includes an
after-tax gain on securities sales of approximately $10,050,000.
The principal executive office of IPI, Inc. is located at 8091 Wallace
Road, Eden Prairie, Minnesota 55344. The Company's telephone number is
(952)975-6200.
ALLEGRA HOLDINGS LLC. Allegra Holdings LLC ("Allegra") is the parent
company of Allegra Network LLC. Allegra's predecessor, American Speedy Printing
Centers, Inc., was founded in 1976 and started franchising in 1977. Allegra
operates through Allegra Network LLC which is a franchisor of more than 350
printing and graphic design centers in the United States, Canada, Japan and the
Philippines. Allegra Network LLC franchisees operate their business under the
names "Allegra Print and Imaging," "American Speedy Printing Centers," "Quik
Print," "Instant Copy," "Speedy Printing Centers," or "Zippy Print."
The principal executive office of Allegra Holdings LLC is located at
1800 West Maple Road, Troy, Michigan 48084. Allegra's telephone number is (248)
614-3700.
6
REASONS FOR THE ASSET SALE
The Company has been striving to increase shareholder value during the
past year. Despite the acquisition of the Change of Mind Learning Centers
franchise (formerly known as Dreamcatcher Learning Centers), investment of the
Company's excess cash, reduction in costs and implementation of a stock
repurchase program, the market value of the Company's Common Stock has continued
to decline and remains at a level below the Company's combined cash and
investments. The Company's business has generated decreased operating revenues
over fiscal year 2001. The Company is unable to rely on substantial revenue
streams from franchising activity. The Company believes, in terms of revenues
and net income, it is below the level necessary for attracting investor and
brokerage community enthusiasm. Accordingly, as an effort to increase
shareholder value, the Company wishes to sell substantially all of the operating
assets associated with its rapid printing business. The Company intends to
distribute the proceeds, along with its current cash and investment holdings, to
shareholders after dissolution of the Company.
In arriving at its determination that the Asset Sale is in the best
interest of the Company and its shareholders, the Board of Directors carefully
considered a number of factors, without assigning any specific or relative
weight to the considerations of these factors. These factors included:
* The terms and conditions of the Asset Purchase Agreement;
* The lack of other offers superior to Allegra's offer, in light of all the
terms and conditions presented by Allegra;
* The financial terms of the Asset Sale as compared to the financial terms of
other recent asset sales within the rapid printing industry, such as the
purchase of Allegra by its management and the Company's purchase of the Copy
Boy, Printhouse and Regency Printing franchises;
* The Company's historical performance, including the general decline in
revenue and net income (excluding post tax gains on securities sales),
general financial condition and prospects, and recent and historical stock
and earnings performance;
* The difficulty justifying the expenses associated with operating the
Company's operating business as a public company, particularly given the
relatively small size of the business of franchising printing centers and the
significant costs imposed by public company reporting requirements;
* The competitive nature of the rapid printing business and the fact that the
Company faces competition from larger, well-financed businesses with many
locations and strong brand recognition;
* The fact that the consideration to be received by the Company in the Asset
Sale, in conjunction with the dissolution and distribution of assets to
shareholders, would generate a higher return on investment for shareholders
than maintaining the business as a going concern. Specifically, the Asset
Sale and distribution of the Company's assets after the Asset Sale will
result in a return to shareholders of approximately $5.65 per share of the
Company's common stock. If there were no distribution of the Company's
assets, the Asset Sale would result in proceeds of $1.24 per share of the
Company's common stock. The return to shareholders selling in the market for
the Company's common stock would not result in a sales price at or above
$5.65 per share; the Company's common stock has never reached a closing sales
price as high as $5.65 per share. In 1999, the range of closing sales prices
for the Company's common stock was $2.06 to $3.69 per share; in 2000, the
range of closing sales prices for the Company's common stock was $2.00 to
$3.89 per share; and in 2001, the range of closing sales prices for the
Company's common stock was $3.25 to $5.25 per share; and
* The Company's inability to grow by acquisition, despite efforts over the last
several years to do so.
7
The Company's Board of Directors also considered a variety of risks and
other potentially negative factors concerning the Asset Sale including:
* The potential for disruption of the Insty-Prints franchisor-franchisee
relationship;
* The Asset Sale would prevent the Company from realizing any growth which may
occur in the future in the rapid printing industry or in its franchising
business;
* The fact that the Asset Purchase Agreement requires that the Asset Sale be
approved by a majority of the Company's shareholders; and
* The risk that the Company could be exposed to future indemnification payments
for a breach of the representations and warranties contained in the Asset
Purchase Agreement.
In the view of the Company's Board of Directors, these considerations
were not sufficient either individually or in the aggregate to outweigh the
advantages of the Asset Sale. Considering all of the factors described above,
both positive and negative, individual members of the Company's Board may have
assigned different weights to different factors. The Company's Board of
Directors considered all these factors as a whole and found them to be
sufficient to support its determination that the Asset Sale is in the best
interests of the Company and its shareholders. Moreover, the foregoing
discussion of the factors considered by the Company's Board of Directors is not
intended to be exhaustive, but it does include the material factors considered
by the Board.
BACKGROUND FOR THE ASSET SALE
During the last year, the Board of Directors of the Company has
explored the following alternatives for maximizing shareholder value:
* Acquisition by the Company of rapid printing franchisors
* Acquisition by the Company of additional rapid printing franchise centers
* Acquisition by the Company of additional rapid printing locations to be
operated by the Company
* Acquisition by the Company of other franchise businesses
* Acquisition by the Company of non-franchise businesses
While the Company has actively identified and pursued acquisitions, it
has not been successful. Beginning in June 2000, the Company negotiated and
submitted bids to acquire a franchisor within the rapid printing franchise
industry. In October 2000, the Company's offers were rejected in favor of an
offer by the target company's management.
The Company has also sought to acquire additional rapid printing
franchise locations; however, since the acquisition of 40 Printhouse and Copy
Boy franchise operations locations in 1994 and 1995, respectively, it has not
identified any viable candidates for acquisition. In April 1999, the Company
initiated a strategy to acquire and directly operate company-owned Insty-Prints
locations through the purchase of Regency Printing in Dallas, Texas. The Company
had hoped this strategy of direct operation would result in increased revenues
over franchising. However, the operation of the Dallas location did not meet
management expectations and the Dallas location was closed in early 2001. A
charge to earnings of $840,000 was recorded as of November 30, 2000 to recognize
the associated costs of this store closing.
8
In January 2000, the Company acquired substantially all the assets of
Dreamcatcher Franchise Corporation and Dreamcatcher Learning Centers, Inc. (now
called Change of Mind Learning, Inc.). Change of Mind franchises the
establishment, development and operation of facilities providing supplemental
private education services to people of all ages using personalized assessments
with direct instruction in reading, writing, spelling, math, algebra, study
skills, G.E.D. preparation and college preparation. The acquisition included 10
operating franchise locations; 14 contracted, but unopened franchise locations;
and three operating learning centers. The Company's intent was to capitalize on
its expertise in franchising. However, the Change of Mind business performed
poorly and as of August 31, 2001, there were two Change of Mind locations, one
in Florida and one in Minnesota. The remainder of the locations were closed or
are no longer franchised operations because of the inability of the Change of
Mind centers to generate revenues to pay the required royalties. Based upon the
lack of success with the direct operation of Company-owned Insty-Prints
locations and the Change of Mind business, the Company determined that these
alternatives would not be pursued further.
The Company had also preliminarily began considering Clarent
Corporation as a non-franchisor acquistion candidate. To that end, it purchased
2,081,800 shares of Clarent Corporation common stock. Because Clarent
Corporation common stock is no longer trading and Clarent Corporation is under
review by the Securities and Exchange Commission, the Company does not consider
Clarent Corporation to be a viable acquisition candidate. The Company has also
determined that the acquisition of a non-franchisor company would not properly
utilize management's expertise in the franchise business or the Company's
existing franchisor infrastructure and therefore, would not be in the best
interests of the Company or its shareholders.
After the Company's offer for the purchase of the printing franchisor
was rejected in October 2000, the Company began considering:
* Sale of the Company's Insty-Prints business to management
* Sale of the Company's Insty-Prints business to a buyer within the printing
center franchise industry
* Sale of the Company's Insty-Prints business to a buyer not within the
Company's industry
In December 2000, the Company contacted management representatives of
Allegra to determine whether Allegra would have an interest in purchasing the
Insty-Prints business. However, as Allegra had recently gone through a
restructuring, it was not in a position to begin serious negotiations with the
Company. From June 2001 to August 2001, the Company discussed selling its
Insty-Prints business to a private company which serves as a management company
for a number of businesses. These discussions resulted in the issuance of a
letter of intent, but in the Company's opinion, the valuation of the business
was too low.
In June 2001, the Company began discussions with Robert J. Sutter, the
Company's President and a member of the Board of Directors, for the purchase of
the business. These discussions culminated in the execution of a letter of
intent dated September 14, 2001 described more fully below as the "Sutter
Letter." For the reasons also set forth below, the Company did not proceed with
a sale of the Insty-Prints business to Mr. Sutter. In July 2001, the Company
again contacted Allegra to solicit an offer for the purchase of the Insty-Print
business with resulted in the Asset Purchase Agreement presented for approval at
this Special Meeting.
The Company did not obtain the advice of any financial advisor in
either its exploration of alternatives to maximize shareholder value, the search
for an acquirer or in the evaluation of any offer by any party. The Board of
Directors believed that, with the assistance of the Company's management, it had
sufficient business and industry experience to conduct a thorough analysis of
the alternatives available to the Company and the merits of any offer. Further,
the Company believed the size of the transaction did not justify the substantial
expense of retaining a financial advisor, especially as the Company believes it
is familiar with acquisitions within the printing industry.
9
As mentioned above, in connection with its pursuit of the sale of the
Insty-Prints business, the Company executed a letter of intent with Robert J.
Sutter, the Company's President and a member of the Board of Directors.
Mr. Sutter planned to form a company for the purposes of the acquisition. This
letter of intent, dated September 14, 2001, provided that Mr. Sutter would
purchase the Insty-Prints related assets for a purchase price of $5.5 million
cash due at closing (the "Sutter Letter"). The Sutter Letter did not specify how
the liabilities associated with the Insty-Prints business were to be treated.
The Sutter Letter stated that the transaction subject to standard conditions
such as satisfactory due diligence investigation, approval of the transaction by
the Company's shareholders and operation of the business in the ordinary course
prior to the closing of the sale. In connection with the Sutter Letter, the
Company agreed that if it received an offer for the purchase of the Insty-Prints
assets which it believed was more attractive than the offer contained in the
Sutter Letter, the Company would give Mr. Sutter an opportunity to match the
more attractive offer. The Company also agreed that it would pay the transaction
expenses of Mr. Sutter if the Company refused to proceed with the transaction
after the execution of a definitive asset purchase agreement, other than a
refusal to proceed because of the breach of Mr. Sutter of the definitive asset
purchase agreement or a refusal to proceed after the satisfaction or waiver of
all conditions precedent to Mr. Sutter's obligations set forth in such
definitive purchase agreement. Only the provisions regarding the right of first
refusal, payment of transaction expenses and confidentiality were binding on the
Company or Mr. Sutter.
One of the conditions contained in the Sutter Letter was that Mr.
Sutter obtain commercially reasonable financing for the purchase of
approximately $5.0 million. Preliminary discussions between the Company and Mr.
Sutter suggested to the Company that it would be difficult for Mr. Sutter to
obtain a loan against the assets to be purchased in the amount of $5.0 million.
Because the Company wanted to obtain the highest value for the Insty-Prints
assets and wanted to solicit additional offers from third parties and because
the Company had concerns about the availability of commercial or private
financing to Mr. Sutter and the time necessary for Mr. Sutter to obtain such
financing, the Company continued to seek additional offers from companies within
printing center franchising industry. The Company again contacted Allegra's
management in July 2001, to determine whether it had an interest in making an
offer for the purchase of the Insty-Prints business.
In August 2001, representatives of Allegra and the Company had
preliminary discussions on the terms of the purchase. On September 5, 2001,
Allegra and the Company began exchanging drafts letters of intent for the sale
of the Company's Insty-Prints business. The Company and Allegra executed a
letter of intent dated October 26, 2001.
The Company's management compared the Allegra letter of intent to the
Sutter Letter in reference to a variety of factors. However, because the Sutter
Letter was less specific generally, a term by term comparison was not possible.
Both letters of intent provided for the purchase of nearly identical
Insty-Prints operating assets, with the exception of accounts and notes
receivable. The Allegra letter of intent specified that accounts and notes
receivable would be divided into categories and further specified that Allegra
would pay the Company 10%-100% of the accounts and notes receivable with
payments to be made at closing and over the course of on year after closing. The
Sutter Letter specified that Mr. Sutter would purchase all of the accounts
receivable with all payments in respect of accounts receivable due at closing.
The assumption of liabilities was not addressed in the Sutter Letter. The
Allegra letter of intent specifically set forth the liabilities Allegra would
not assume, including the obligations of Insty-Prints as a guarantor of
franchisee debt, liabilities arising prior to closing relating to the franchise
agreements, liabilities relating to certain equipment
10
leases and inventory. Both letters of intent provided for payment of the
purchase price in cash. The Allegra letter of intent specified $4.125 million
due in cash at the closing, minus liabilities to be assumed by Allegra, plus an
amount representing the Company's cost for inventory, an agreed upon net book
value for certain prepaids and an amount of the representing payments in respect
of accounts receivable, some payments to be made over the course of one year
after the closing. The Sutter Letter set forth a $5.5 million total purchase
price. However, while the Sutter Letter provided for greater cash payable at
closing, the Company determined that the Allegra letter of intent would provide
for a slightly higher overall purchase price, $5.6 million versus $5.5 million.
Because of the overall higher purchase price and the Company belief
that Allegra would be more likely than Mr. Sutter to finance the purchase price
and proceed to closing, the Company considered Allegra's offer more attractive.
Additionally, the Company believed that Allegra, unlike Mr. Sutter, had the
organizational infrastructure and management personnel necessary for the
Company's franchisees to grow their businesses. The synergy between the Company
and Allegra franchise businesses also made Allegra's offer more attractive to
the Company than Mr. Sutter's offer.
Allegra continued to pursue its due diligence investigation of the
Company and the Company's wholly-owned subsidiary, Insty-Prints, Inc. Thus,
based on a review of the terms and conditions provided for in a letter of intent
dated October 26, 2001, the Board of Directors unanimously approved the letter
of intent and authorized management to negotiate an asset purchase agreement
with Allegra.
All of the negotiations on the Allegra letter of intent were conducted
on behalf of the Company by David A. Mahler, the Company's Secretary.
Substantially all of the negotiations of the Company also were conducted by Mr.
Mahler. Mr. Sutter, the Company's President and Mr. Engel, the Company's Chief
Financial Officer also participated in certain portions of the negotiations.
Because Mr. Sutter was also being considered as a potential purchaser of the
Company's business, the evaluation and comparison of the offers of Mr. Sutter
and Allegra was performed by Mr. Mahler. However, as a member of the Company's
Board of Directors, Mr. Sutter approved both the Allegra letter of intent and
the sale of the Company's assets to Allegra.
The Company and its counsel received an initial draft of the asset
purchase agreement from Allegra's counsel on November 8, 2001. Over the course
of the next week, the Company and its counsel and Allegra and its counsel
exchanged numerous drafts of the asset purchase agreement and negotiated terms
orally via teleconference. No written offers or counter offers, other than the
drafts of the asset purchase agreement itself, were exchanged by the parties.
During the course of negotations, the purchase price and the nature and
timing of receipt of the asset sale consideration did not change from the Letter
of Intent. However, through the drafts of the asset purchase agreement, the
parties negotatied provisions not included in the Letter of Intent. Some of the
more significant issues negotiated were the representations and warranties of
the Sellers, the scope and length of indemnification obligations, the conditions
upon with the parties may terminate the agreement and the closing date of
January 31, 2002 and the conditions under which Allegra would continue its due
diligence investigation.
Negotiations between the parties resulted in an asset purchase
agreement which was then presented to the Board of Directors for approval. On
November 15, 2001, the Board of Directors reviewed and unanimously approved the
asset purchase agreement and the Asset Sale. Also on that date, the Board
authorized execution of the Asset Purchase Agreement. The Insty-Prints Board of
Directors also unanimously approved the Asset Purchase Agreement. The Asset
Purchase Agreement was executed by the Company, Insty-Prints and Allegra on
November 15, 2001.
11
THE ASSET SALE
Under terms of the Asset Purchase Agreement, the Company and Insty
Prints will sell to Allegra substantially all of the assets used by the Company
or Insty-Prints in the conduct of its business of franchising printing centers.
In the discussion of the Asset Purchase Agreement below, the Company and
Insty-Prints, Inc. are sometimes referred to collectively as "Sellers."
The assets to be acquired by Allegra include agreements with
franchisees and certain other parties, intellectual property, warehouse
equipment, certain computer software and hardware, certain accounts and notes
receivable, inventory, prepaid expenses and the assets of a trust established
for national advertising on behalf of franchisees. Assets excluded from the
transaction include cash investments, assets relating to the Company owned
Insty-Prints stores, furnishings, building improvements, phone systems,
furniture, general office equipment, certain accounts receivable, corporate
records, employee plan assets and employment agreements, the Company's
obligations as a guarantor of certain franchise debt and the Company's rights
and obligations under its building lease. The Company will retain responsibility
for liabilities not specifically assumed.
The Company has also agreed, subject to approval of its landlord, to
non-exclusively license a portion of its office space at 8091 Wallace Road, Eden
Prairie, Minnesota to Allegra for a term of up to one year. In exchange for the
license, Allegra will pay the Company $14,000 per month. The license may be
terminated after the first sixty days upon 60 days written notice by either
party. Additionally, the Company has agreed to provide certain employees to
Allegra for a period of 60 days after the closing. Allegra will reimburse the
Company for expenses associated with each employee made available to Allegra. At
the end of the 60 day period, Allegra may hire any employee, in its sole
discretion. The Company may terminate any employee for good cause during such
60-day period. Moreover, the Sellers have agreed not to compete with Allegra in
the business of franchising printing centers for a period of two years.
Allegra will pay Sellers total cash consideration on closing of
$4,125,000, subject to the following adjustments: (i) a decrease equal to the
trade credits and accrued liabilities assumed by Allegra; (ii) an increase equal
to the cost of inventory selected by Allegra prior to closing; (iii) an increase
for prepaid expenses; (iv) an increase for the value of receivables paid for or
collected on the Company's behalf by Allegra. Sellers will assign to Allegra
rights to the majority of its accounts and notes receivable and receive a cash
payment at closing, and will be reimbursed 10% to 100% of the amount collected
during the first year following closing, such amounts to be payable monthly.
With respect to accounts receivable to be retained by the Sellers, the Sellers
may pursue collection of such accounts and notes receivable in the ordinary
course. Furthermore, if the Asset Sale closes after December 31, 2001, the
purchase price will be adjusted for revenues received and expenses incurred from
January 1, 2001 to the closing date.
12
In the Asset Purchase Agreement, the Sellers make representations and
warranties customary for a transaction of this type. The Company agrees to
indemnify Allegra for any breach of such representations and warranties and for
any liabilities not assumed by Allegra. The closing of the transactions
contemplated by the Asset Purchase Agreement is subject to conditions customary
for a transaction of this type and subject to approval of the Company's
shareholders pursuant to the Minnesota Business Corporation Act.
VOTING INFORMATION
Approval of the Asset Sale Proposal requires the affirmative vote of
the holders of at least a majority of the outstanding shares of Common Stock of
the Company as of December 19, 2001, present and entitled to vote at the Special
Meeting. Unless a shareholder specifies to the contrary, each proxy that is
returned to the Company will be voted FOR approval of the Asset Sale Proposal.
While there are no agreements which would compel them to do so, it is
expected that all shares of IPI, Inc. Common Stock beneficially owned or
controlled by the directors and officers of the Company will be voted in favor
of each of the proposals presented at this Special Meeting of Shareholders. In
the aggregate, officers and directors of the Company beneficially own or control
3,207,195, or 71% of the 4,518,687 shares of the Company's Common Stock
outstanding as of December 19, 2001. Because officers and directors hold a
majority of the outstanding shares of Common Stock of the Company, a vote in
favor of Asset Sale Proposal by officers and directors would be sufficient to
approve such proposal.
----------------------------
THE BOARD OF DIRECTORS RECOMMENDS THE SHAREHOLDERS VOTE
FOR THE APPROVAL OF THE ASSET SALE PROPOSAL.
----------------------------
13
DESCRIPTION OF THE ASSET PURCHASE AGREEMENT
The following is a brief summary of certain key provisions of the Asset
Purchase Agreement. This description is qualified in its entirety by reference
to the Asset Purchase Agreement, a copy of which is attached to this Proxy
Statement as Appendix A. Shareholders are urged to read the Asset Purchase
Agreement in its entirety.
PURCHASE AND SALE OF ASSETS
The Company and the Company's wholly-owned subsidiary, Insty-Prints,
Inc. ("Insty") (collectively called the "Sellers") agree to sell and Allegra
agrees to purchase assets used in the conduct of the Insty-Prints franchise
business, including agreements with franchisees and certain other parties,
intellectual property, warehouse equipment, certain computer software and
hardware, certain accounts and notes receivable, inventory, prepaid expenses and
the assets of a trust established for national advertising on behalf of
franchisees.
The total purchase price for the Assets shall be: $4,125,000 in cash at
closing, less an amount representing liabilities assumed by Allegra, plus an
amount representing the cost of inventory and an amount for prepaid expenses and
certain accounts and notes receivable. While all of the purchase price is
payable in cash, certain amounts of the purchase price will be paid over the
first year following the closing of the Asset Sale representing future payments
with respect to accounts and notes receivable, as described below. Furthermore,
if the Asset Sale closes after December 31, 2001, the purchase price will be
adjusted for revenues received and expenses incurred from January 1, 2001 to the
closing date.
In addition, the parties have categorized the Sellers' accounts and
notes receivable into six categories. All categories of the accounts and notes
receivable will be assigned to Allegra, except those accounts and notes
receivable designated as "Turnback Accounts" in the Asset Purchase Agreement.
Turnback Accounts are those accounts and notes receivable which will not be sold
to Allegra and which will be collected by the Company. The Company has
established reserves against these Turnback Accounts as it has deemed
appropriate. On the accounts and notes receivable assigned, the Sellers will be
paid a certain accounts receivable at the closing. Further, Sellers will be
reimbursed for certain amounts collected by Allegra during the first year
following the closing. Reimbursement ranges from 10% of the amounts collected to
100%, depending on the category of the account receivable. With respect to the
category of accounts receivable to be retained by the Sellers, the Sellers may
pursue collection of such accounts and notes receivable in the ordinary course.
Moreover, Allegra will pay the Company $14,000 per month under the sublease
described above, plus utilities. The Company and Insty will also enter into a
restrictive covenant agreement that will prohibit either from competing with
Allegra in the franchising of printing centers.
While many of these amounts will be determined at closing or within one
year of closing, the Company estimates the total purchase price to be
approximately $5.6 million, including assumed liabilities and adjustments, or
$1.24 per share of the Company's Common Stock outstanding on December 19, 2001.
14
PAYMENT OF PURCHASE PRICE
At the closing, Allegra will pay the Sellers in cash $4,125,000,
subject to the following adjustments:
* less an amount for trade credits and accrued liabilities. These credits and
liabilities were identified in a schedule to the asset purchase agreement
with the amount of trade credits and accrued liabilities to be updated at
closing. As of the execution of the Asset Purchase Agreement, the total
amount of trade credits and liabilities was $179,600, which amount will be
updated at closing and paid per the updated schedule.
* plus an amount to be paid in cash and determined at closing representing the
original acquisition cost to the Company of certain inventory. The inventory
to be sold is a commercially reasonable amount to be agreed upon by the
parties as of closing of unopened and undamaged inventory. The inventory must
be purchased and owned by Sellers within 90 days prior to closing for
products Sellers have sold to franchisees or other customers within such 90
day period.
* plus an amount for prepaid expenses. At the execution of the Asset Purchase
Agreement, the parties created a schedule showing prepaid expenses which
totalled $4,051. This schedule will be updated five days prior to closing to
show changes to those expenses identified and this updated amount will be
paid at closing.
Additionally, there are certain payments to be made by Allegra to Sellers
after the closing. On the 10th day after the closing, Allegra will pay the
Sellers an amount in cash in exchange for certain accounts and notes receivable.
Sellers will receive 10% to 50% of such accounts or notes receivable. For the
first year after the closing, Allegra will make monthly cash payments to Sellers
for amounts collected by Allegra on accounts and notes receivable. Sellers will
receive 50% to 100% of such accounts or notes receivable collected. Allegra will
also pay Sellers $14,000 per month under the office space license for the
Company's headquarters at 8091 Wallace Road, Eden Prairie, Minnesota.
ASSUMPTION OF LIABILITIES
On the closing date, Allegra will assume selected liabilities of the
Company. Allegra shall have no liability for obligations of the Company to its
equity holders, to its attorneys or accountants, for obligations for goods and
services provided prior to the closing date, for any federal, state or local
income, sales, use and franchise taxes associated with the sale of the assets of
the Company's operations, or any other liability, whether known or unknown, and
whether actual or contingent, including all accrued expenses, payroll or
property taxes, trade payables, leases on real or personal property, or any
other liability not identified on an exhibit to the Asset Purchase Agreement.
All liabilities and obligations not assumed by Allegra shall be the sole
responsibility of, and shall be satisfied by, the Company, and the Company shall
indemnify Allegra in the event Allegra incurs any costs for any item not
specifically assumed by Allegra.
15
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND INSTY
The Company and Insty make customary representations and warranties to
Allegra regarding:
* organization, standing and power; and authority;
* financial statements;
* condition of acquired tangible assets; taxes; title to the purchased assets;
* various matters relating to contracts and the franchising business;
* lack of infringement of or by the Sellers' intellectual property;
* compliance with laws, licenses and permits,
* employee benefits and labor matters, environmental, guarantees, the Insty
National Advertising Trust Fund, franchise matters;
* absence of litigation; required consents; and broker's, finder's and
investment banking fees.
These representations and warranties may be subject to certain exceptions that
are set forth in exhibits to the Asset Purchase Agreement.
REPRESENTATIONS AND WARRANTIES OF ALLEGRA
Allegra makes customary representations and warranties to the Company
regarding: organization and standing; authority and authorization; and broker's,
finder's and investment banking fees. These representations and warranties may
be subject to certain exceptions that are set forth in schedules and exhibits to
the Asset Purchase Agreement.
CONDUCT AND TRANSACTIONS PRIOR TO CLOSING
Prior to closing, Allegra has the right to continue its due diligence
investigation of the Company and the Company shall endeavor to provide Allegra
with all documents it has not yet provided. From the signing of the agreement
until the closing date, the Sellers must cooperate with Allegra and obtain its
approval, which will not be unreasonably withheld, with respect to all decisions
relating to the franchisees, communications with franchisees and filings with
governmental agencies. Additionally, Sellers have committed to assisting Allegra
in converting some of Sellers' electronic files useful in the business and have
agreed to use their good faith best efforts to complete this process by November
21, 2001. While these files have not yet been converted, as of November 27, 2001
Allegra's performed testing on the electronic files to ensure that conversion
will be properly made after closing. Further, each party has submitted the Asset
Purchase Agreement to its board of directors and each of the parties' boards of
directors has approved the Asset Purchase Agreement. The Company must also
submit the Asset Purchase Agreement to its shareholders for approval as soon as
practicable to proceed with the closing of the transactions.
16
CONDITIONS PRECEDENT TO ALLEGRA'S OBLIGATION TO PURCHASE THE ASSETS AND ASSUME
THE LIABILITIES
The obligation of Allegra to purchase the assets and assume the
liabilities is subject to the satisfaction, at or before the closing, of the
following conditions:
* The Board of Directors and shareholders of the Company shall have approved
the transactions described in the Asset Purchase Agreement;
* The representations and warranties of the Sellers shall be true and correct
as of the closing date as though made at that time, and Allegra shall have
received a certificate signed by an authorized officer of each of Company and
Insty-Prints to that effect;
* The Company shall have obtained the consent of its landlord to enter into the
Temporary Space License Agreement with Allegra; and
* The Sellers shall have executed and delivered the documents sufficient to
transfer the assets being purchased and fulfill the transactions contemplated
by the Asset Purchase Agreement, including all pre-closing deliveries of the
schedules and documents called for in the Asset Purchase Agreement.
On November 15, 2001, the Board of Directors of the Company approved
the transactions described in the Asset Purchase Agreement. Other than the
fulfillment of this condition precedent, the Company has not yet satisfied any
of the conditions to closing. However, the Company expects to satisfy all
conditions at or before closing.
CONDITIONS PRECEDENT TO THE SELLERS' OBLIGATION TO SELL THE ASSETS
The obligation of the Company to sell the assets is subject to the
satisfaction, at the time of closing, of the following conditions:
* The representations and warranties of Allegra shall be true on the closing
date as though made at that time;
* Allegra shall have executed and delivered the documents sufficient to assume
the Assumed Liabilities identified in the Asset Purchase Agreement and
fulfill the transactions contemplated by the Asset Purchase Agreement; and
* The members of Allegra shall have approved the transactions described in the
Asset Purchase Agreement.
Allegra has not yet satisfied any of the conditions to closing.
However, Allegra has informed the Company that Allegra expects to satisfy all
conditions at or before closing.
THE CLOSING
The transfer of the assets and liabilities to Allegra by the Company
and Insty is expected to take place at 11:00 a.m. local time, on December 28,
2001 at the offices of Lindquist & Vennum, P.L.L.P., Minneapolis, Minnesota,
counsel to the Company, or at such time and place as the parties shall agree
upon, but in no event later than January 31, 2002. At the closing, all parties
will deliver a bill of sale and other agreements transferring the assets to be
sold, a license for the use of a portion of the Company's leased property, the
agreement pursuant to which the Sellers agree not to compete with Allegra in the
future. Sellers will also deliver any schedules which require updating as of the
closing. On the closing date, Allegra shall deliver a wire transfer for the
purchase price. Allegra shall also deliver an agreement to assume the
obligations identified in the Asset Purchase Agreement.
17
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Except for representations relating to title to the assets to be
acquired by Allegra which shall survive in perpetuity, all representations and
warranties made by the Company shall survive the closing but shall expire one
year after the closing date.
INDEMNIFICATION
Each party covenants and agrees to indemnify the other against any and
all losses, damages, costs and expenses, including reasonable attorneys' fees,
which the other incurs by reason of a breach of a representation, warranty
covenant or agreement of the Asset Purchase Agreement. Additionally, Sellers
agree to indemnify Allegra with respect to any claim relating to the business or
acquired assets or employees of Sellers arising on or before the closing date.
This indemnity does not require payment as a condition precedent to recovery.
Additionally, Allegra agrees to indemnify Sellers with respect to any claim
relating solely to the business or acquired assets after the closing date and
any of the assumed liabilities.
In the event of any third party claim against the Sellers, Sellers may
pursue that claim with counsel reasonably satisfactory to Allegra and cannot
settle any claim without Allegra's permission, which will not be unreasonably
withheld. Allegra shall be entitled to participate in the defense of the claim
at its own expense. Likewise, in the event of any third party claim against
Allegra, Sellers would have the option to participate in the defense of such
claim on the same basis.
To the extent Allegra is entitled to any payment for indemnification,
it may offset other amounts due to the Company by the amount of the
indemnification payment.
ARBITRATION
The parties have agreed to submit any disputes or claims arising under
the Asset Purchase Agreement to an arbitration proceeding. The arbitration would
be conducted by one arbitrator according to the rules of the American
Arbitration Association, with the arbitration held in Chicago, Illinois. The
decision of the arbitrator would be the final decision as between the parties.
TERMINATION
Under the Asset Purchase Agreement, the Asset Sale may be terminated by
either party if:
* the representations and warranties made by the other party are not
true as of the closing date
* the other party has failed to perform or comply with any covenant.
18
Further, Allegra may terminate the Asset Sale if:
* the Sellers fail to deliver any required executed consent (including
a consent from the Company's landlord for the non-exclusive license
of space to Allegra);
* there is a material adverse change in the Sellers' business, the
assets to be acquired, or the financial or other condition of the
Seller; or
* Allegra notifies the Sellers, on or before 5:00 p.m. Minneapolis, MN
time on November 27, 2001, that based on due diligence review of
documents provided after signing that there has been an uncured
breach of the representations, warranties or pre-closing covenants
or Allegra learns of any event or condition which could reasonably
be expected to have a material adverse effect on the acquired assets
or business.
Either party may waive in writing any event that gives the other party
the right to terminate. Additionally, a closing of the transaction must occur by
January 31, 2002 or the Asset Sale will be terminated. Allegra did not notify
the Sellers on or before 5:00 p.m. Minneapolis, MN time on November 27, 2001 of
any uncured breach or event or condition it believed could reasonably be
expected to have a material adverse effect on the acquired assets or business.
REQUIRED APPROVALS
The approval of a majority of all of the Company's outstanding Common
Stock is required to approve the Asset Sale under the Minnesota Business
Corporation Act (the "MBCA"). The Company must obtain the approval of its
landlord to grant a non-exclusive license a portion of its leased premises to
Allegra. With the exception of the approval required by the MBCA and the
approval of the landlord, neither party must comply with any federal or other
state regulatory requirements or obtain any other material approval in
connection with the proposed transaction.
PROCEEDS OF THE ASSET SALE; THE COMPANY'S BUSINESS FOLLOWING THE ASSET SALE
PROCEEDS OF THE ASSET SALE. The Company estimates that after deducting
expenses, it will have approximately $5.6 million of net cash proceeds from the
Asset Sale, including amounts to be paid to the Company for accounts and notes
receivable collected by Allegra. In addition, the Company will no longer be
obligated to pay approximately $180,000 accounts payable, which are being
assumed by Allegra. The proceeds of the Asset Sale will be used to pay any
applicable Asset Sale transaction costs, including taxes, severance benefits and
expenses associated with the Company's ongoing public company reporting
requirements. Any proceeds not so used shall be retained or invested in
investment-grade securities by the Company pending the distribution of all of
such sums to shareholders after dissolution.
COMPANY'S BUSINESS FOLLOWING THE ASSET SALE. After the Asset Sale, the
operating assets of the Company will consist of the assets relating to the
Company's Change of Mind Learning franchise and certain assets of the Company
excluded from the Asset Sale. After the Asset Sale, the Company will have assets
consisting of $14.1 million of cash and short-term marketable securities, assets
relating to its Change of Mind franchising operation worth approximately
$250,000, and 2,081,800 shares of Clarent Corporation common stock.
19
If Proposal No. 2 is approved by shareholders at this Special Meeting,
the Company will liquidate its remaining assets pursuant to the Plan of
Liquidation and Dissolution. The Company will pay or make provision for its
debts. The Company will then distribute to shareholders, in one or more
distributions, all of the assets of the Company (except for reserves established
to pay debts). In the event the Clarent Corporation common stock held by the
Company is liquidated or the Company receives proceeds in litigation which are
less than the Company's cost per share (approximately $6.00 per share) certain
of the Company's majority shareholders, Messrs. Irwin L. Jacobs, Daniel T.
Lindsay and Dennis M. Mathisen, have guaranteed the other shareholders of the
Company a value in liquidation relating to the Clarent Corporation investment of
the cost paid for the Clarent Corporation common stock. The 2,081,800 shares of
Clarent Corporation common stock have an acquisition cost to the Company of
$12,490,800, or approximately $2.76 per share of the Company's common stock
outstanding on December 19, 2001.
SECURITIES EXCHANGE REPORTING AND AMERICAN STOCK EXCHANGE LISTING
Following the Asset Sale, the Company does not intend to maintain its
status as a reporting company under the Securities Exchange Act of 1934. The
Company will seek to remove its Common Stock from trading on the American Stock
Exchange.
ACCOUNTING TREATMENT
Under generally accepted accounting principles, upon consummation of
the Asset Sale, the Company will remove the net assets sold from its
consolidated balance sheet and record the gain or loss on the sale, net of
transaction costs, severance and other related costs, including applicable state
and federal income taxes, in its consolidated statement of income.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated federal income tax
consequences to the Company of the Asset Sale is not intended as tax advice and
is not intended to be a complete description of the federal income tax
consequences of the Asset Sale. This summary is based upon the Internal Revenue
Code of 1986 (the "Code"), as presently in effect, the rules and regulations
promulgated thereunder, current administrative interpretations and court
decisions. No assurance can be given that future legislation, regulations,
administrative interpretations or court decisions will not significantly change
these authorities, possibly with retroactive effect. No rulings have been
requested or received from the Internal Revenue Service ("IRS") as to the
matters discussed and there is no intent to seek any such ruling. Accordingly,
no assurance can be given that the IRS will not challenge the tax treatment of
certain matters discussed or, if it does challenge the tax treatment, that it
will not be successful.
The proceeds from the Asset Sale will be a taxable sale by the Company
upon which gain or loss will be recognized by the Company. The amount of gain or
loss recognized by the Company with respect to the sale of a particular asset
will be measured by the difference between the amount realized by the Company on
the sale of that asset and the Company's tax basis in that asset. The amount
realized by the Company on the Asset Sale will include the amount of cash
received and the fair market value of any other property received. For purposes
of determining the amount realized by the Company with respect to specific
assets, the total amount realized by the Company will generally be allocated
among the assets according to the rules prescribed under Section 1060(a) of the
Code. The Company's basis in its assets is generally equal to their cost, as
adjusted for certain items, such as depreciation. The determination of whether
gain or loss is recognized by the Company will be made with respect to each of
the assets to be sold. Accordingly, the Company may recognize gain on the sale
of certain assets and loss on the sale of certain others, depending on the
amount of consideration allocated to an asset as compared with the basis of that
asset.
20
The proposed sale of substantially all of the operating assets of the
Company by itself will not produce any separate and independent federal income
tax consequences to the Company's shareholders, other than those who exercise
dissenters' rights under the MBCA. Cash payments made to a holder of Company
Common Stock who exercises dissenters' rights will be treated as distributions
in redemption of the shareholder's Company Common Stock. A holder of Company
Common Stock receiving cash in connection with the exercise of dissenters'
rights will recognize either: (i) gain or loss equal to the difference between
the cash received and the holder's basis the Company Common Stock; or (ii)
dividend income, depending upon whether the deemed redemption qualifies for sale
or exchange treatment under the tests set forth Section 302 of the Code. Gain or
loss will be capital gain or loss provided the Company Common Stock was a
capital asset the hands of the Company shareholder at the time of the asset
sale.
Pursuant to the rules promulgated under Section 302 of the Code, the
determination of whether the exchange of Common Stock for cash pursuant to the
exercise of dissenters' rights has the effect of a distribution of a dividend
will be made on a shareholder-by-shareholder basis, by comparing the
proportionate, percentage interest of a shareholder before and after the asset
sale. In making this comparison, there must be taken into account (i) any other
shares of Company Common Stock actually owned by the shareholder, and (ii) any
shares considered to be owned by the shareholder by reason of the constructive
ownership rules set forth Section 318 of the Code. These constructive ownership
rules apply certain specified circumstances to attribute ownership of shares of
a corporation from the shareholder actually owning the shares, whether an
individual, trust, partnership or corporation, to certain members of the
individual's family or to certain other individuals, trusts, partnerships or
corporations. Under these rules, a shareholder is also considered to own any
shares with respect to which the shareholder holds stock options.
Under applicable Internal Revenue Service guidelines, a redemption
involving a holder of a minority interest in the Company whose relative stock
interest in the Company is minimal, who exercises no control over the affairs of
the Company, and who experiences a reduction in the shareholder's proportionate
interest in the Company, both directly and by application of the foregoing
constructive ownership rules, generally should be deemed to result in sale or
exchange treatment, and accordingly, in most circumstances, capital gain or loss
treatment, under the rules set forth Section 302(b)(1)of the Code.
Each holder of the Company's Common Stock is urged to consult his or
her own tax advisor as to the federal income tax consequences of the Asset Sale,
and as to any state, local, foreign or other tax consequences based on his or
her own particular facts and circumstances.
DISSENTER'S RIGHTS
Under Minnesota law, the holders of shares of common stock of the
Company have the right to dissent from the Asset Sale and the Plan of
Liquidation and Dissolution and receive payment of the fair value of their
shares upon compliance with the Minnesota Business Corporation Act (the "MBCA").
These rights are explained more fully in the section of the attached Proxy
Statement entitled "Rights of Dissenting Shareholders." Further, the dissenters'
rights provisions of the MBCA are attached to the Proxy Statement as Appendix D.
21
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
The Board of Directors has determined that the Asset Sale is in the
best interests of the Company and the Company's shareholders. The Board of
Directors has unanimously approved the Asset Purchase Agreement and unanimously
recommends that shareholders vote in favor of the Asset Sale Proposal.
VOTE REQUIRED
Under Section 302A.661 of the MBCA, the sale by the Company of "all or
substantially all" of its assets requires approval by the affirmative vote of
the holders of a majority of the voting power of all outstanding shares of
Company Common Stock as of December 19, 2001. The Company has determined that
the Asset Sale may constitute a sale of "all or substantially all" of the
Company's assets based on current interpretations of that term. Thus, the Asset
Purchase Agreement provides that, as a condition to the Company's obligation to
consummate the transactions contemplated by the Asset Purchase Agreement, the
affirmative vote of the holders of a majority of the voting power of all
outstanding shares of Company Common Stock on December 19, 2001 must be
obtained.
While there are no agreements which would compel them to do so, it is
expected that all shares of IPI, Inc. Common Stock beneficially owned or
controlled by the directors and officers of the Company will be voted in favor
of each of the proposals presented at this Special Meeting of Shareholders. In
the aggregate, officers and directors of the Company beneficially own or control
3,207,195, or 71% of the 4,518,687 shares of the Company's Common Stock
outstanding as of December 19, 2001. Because officers and directors hold a
majority of the outstanding shares of Common Stock of the Company, a vote in
favor of the Asset Sale Proposal by officers and directors would be sufficient
to approve such proposal.
22
PROPOSAL NO. 2
APPROVAL OF PLAN OF LIQUIDATION AND DISSOLUTION
(Liquidation Proposal)
DESCRIPTION OF THE COMPANY AND REASONS FOR THE LIQUIDATION PROPOSAL
DESCRIPTION OF THE COMPANY. IPI, Inc. is a publicly held corporation
with shares of its Common Stock listed on the American Stock Exchange under the
symbol "IDH." IPI, Inc. is the parent company of Insty-Prints, Inc. and Change
of Mind Learning Systems, Inc. Insty-Prints is a franchisor of approximately 200
fast turnaround business printing operations. Change of Mind Learning Systems,
Inc. is a franchisor of learning centers and is in its early stage of
development. In the fiscal year ended November 30, 2000, the Company had revenue
of $9,294,000 and net income of $350,000 and in the nine months ended August 31,
2001, the Company had revenue of $5,851,000 and net income of $9,618,000,
including post tax gain on securities sales of approximately $10,050,000.
The last reported sale price on December 19, 2001 for the Company's
Common Stock was $4.62 per share. The principal executive office of IPI, Inc. is
located at 8091 Wallace Road, Eden Prairie, Minnesota 55344. The Company's
telephone number is (952)975-6200.
REASONS FOR LIQUIDATION PROPOSAL. After the Asset Sale, the operating
assets of the Company will consist of the assets relating to the Company's
Change of Mind Learning Centers franchise. The Company believes these assets
would be insufficient to operate the Company's business as a going concern.
Furthermore, the Company believes its shareholders would achieve a greater
return on their investment if the Company distributed its assets rather than the
Company acquiring or operating another business.
In light of these developments, the Board of Directors of the Company
believes that it is in the best interests of the Company and its shareholders to
liquidate the Company and distribute its remaining assets in accordance with the
terms of the Plan.
SUMMARY OF PLAN; PROCESS FOR LIQUIDATION AND DISSOLUTION
The proposed Plan of Liquidation and Dissolution of the Company will
authorize (a) the sale of all of the assets of the Company and the distribution
to shareholders of assets remaining after payment of the Company's debts and
obligations, (b) the deregistration of the Company under the Securities Exchange
Act of 1934 and (c) the dissolution of the Company's common stock pursuant to
the Minnesota Business Corporation Act. If the Liquidation Proposal is approved
by the shareholders:
* The Company will file a Notice of Intent to Dissolve with the Minnesota
Secretary of State evidencing its intent to dissolve after the liquidation is
complete.
* The Company will liquidate its property and assets in an orderly manner and
will distribute to the Company's shareholders the net proceeds from such
assets, after paying or making provision for payment of the debts,
obligations and liabilities of the Company. The Company expects that the
orderly liquidation of its assets will take place over a period of time.
23
* The Company may establish reserves for future or contingent liabilities. The
Company intends to set aside its 2,081,800 shares of Clarent Corporation
common stock pending the determination to pursue litigation or sell this
asset in the market. However, in the event the Clarent Corporation common
stock held by the Company is liquidated or the Company receives proceeds in
litigation which are less than the Company's cost per share (approximately
$6.00 per share) certain of the Company's majority shareholders, Messrs.
Irwin L. Jacobs, Daniel T. Lindsay and Dennis M. Mathisen, have guaranteed
the other shareholders of the Company a value in liquidation relating to the
Clarent Corporation investment of the cost paid for the Clarent Corporation
common stock. The 2,081,800 shares of Clarent Corporation common stock have
an acquisition cost to the Company of $12,490,800, or approximately $2.76 per
share of the Company's common stock outstanding on December 19, 2001.
* All expenses of the liquidation and dissolution will be paid by the Company.
* The Company will close its stock transfer books as of the date of the Plan is
approved, and no further transfers of the Common Stock will be permitted.
Each shareholder of the Company will receive a proportionate beneficial
interest in each distribution of Company property. This beneficial interest
may not be transferred except by will, intestate succession or operation of
law. Each shareholder will receive one or more cash distributions.
* The Company will make one or more liquidating distributions to the
shareholders, representing the net proceeds of the liquidation. The amount of
the liquidating distributions will depend on the amount received upon sale of
the Company's assets, the amount of the Company's liabilities (including
taxes resulting from the Asset Sale and liquidation of its other assets) and
the amount of liquidation expenses. The proceeds of such a liquidation will
be paid first toward all known or reasonably ascertainable liabilities of the
Company incurred or expected to be incurred prior to dissolution, then paid
to the shareholders in proportion to their beneficial interests in the
Company in one or more liquidating distributions.
* At this time, it is not possible to determine exactly what amount will be
available for distribution to shareholders or when distributions will be
made. The Company expects the sale of its Insty-Prints franchising business
will result in gross cash consideration of approximately $4.1 million as of
the date of closing. The Company expects total proceeds of $5.6 million over
the course of the following 12 months from the Asset Sale, or $1.24 per share
of the Company's Common Stock outstanding on December 19, 2001.
* Assuming receipt of total consideration of $4.1 million in the Asset Sale at
Closing and excluding the shares of Clarent Corporation common stock owned by
the Company, at closing the Company will have $14.1 million in cash and
short-term marketable securities on hand or $3.12 per share of the Company's
Common Stock outstanding as of December 19, 2001. In addition, the Company
would attempt to liquidate its other remaining assets with an estimated value
of $250,000. These calculations do not assume liquidation of any the
Company's 2,081,800 of the Clarent Corporation common stock which has an
acquisition value of $12,490,800 or approximately $2.76 per share of the
Company's common stock, excluding shares beneficially owned by Messrs.
Jacobs, Lindsay and Mathisen.
24
* There is no assurance that the Company's assets can be sold at the prices at
which they are carried on the Company's balance sheet, and in view of the
specialized nature of the Company's Change of Mind Learning Center franchise
business, there is no assurance as to when the assets will be sold. In
addition, the Company will incur transaction costs, administrative costs and
income tax obligations in connection with the sale of its assets and the
liquidation and dissolution of the Company. These obligations are not
included in the calculation of per share liquidation value.
* The Company will seek to deregister as a 1934 Act reporting company. The
Company will also seek to remove its common stock from trading on the
American Stock Exchange.
* Once all of liabilities of the Company have been satisfied, and all of the
remaining assets of the Company have been distributed to shareholders, the
Company will dissolve and will cease to legally exist.
VOTING INFORMATION
Under Section 302A.721 of the MBCA, the voluntary dissolution of the
Company by its shareholders pursuant to the Liquidation Proposal requires
approval by the affirmative vote of the holders of a majority of the voting
power of all outstanding shares of Company Common Stock as of December 19, 2001.
While there are no agreements which would compel them to do so, it is
expected that all shares of IPI, Inc. Common Stock beneficially owned or
controlled by the directors and officers of the Company will be voted in favor
of each of the proposals presented at this Special Meeting of Shareholders. In
the aggregate, officers and directors of the Company beneficially own or control
3,207,195, or 71% of the 4,518,687 shares of the Company's Common Stock
outstanding as of December 19, 2001. Because officers and directors hold a
majority of the outstanding shares of Common Stock of the Company, a vote in
favor of the Liquidation Proposal by officers and directors would be sufficient
to approve such proposal.
----------------------------
THE BOARD OF DIRECTORS RECOMMENDS THE SHAREHOLDERS VOTE
FOR THE APPROVAL OF THE LIQUIDATION PROPOSAL.
----------------------------
25
DESCRIPTION OF PLAN OF LIQUIDATION AND DISSOLUTION
The following summary does not purport to be a complete description of
the Plan, which is attached to this Proxy Statement as Appendix B. Shareholders
are urged to read the Plan in its entirety.
EFFECTIVE DATE OF PLAN. The Plan will become effective only upon the
approval of the Plan by the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock of the Company (the date of such approval is
referred to as the "Effective Date").
CESSATION OF BUSINESS. After the Effective Date of the Plan, the
Company will cease its business and will not engage in any business activities
except for the purposes of collecting and distributing its assets, paying,
satisfying, and discharging any existing debts and obligations, and doing all
other acts required to liquidate and wind up its business and affairs.
NOTICE OF INTENT TO DISSOLVE; ARTICLES OF DISSOLUTION. The Company will
be dissolved in accordance with the Minnesota Business Corporation Act ("MBCA")
and the Company's Articles of Incorporation. As soon as practicable after the
Effective Date of the Plan, the Company will prepare and file a Notice of Intent
to Dissolve with the Minnesota Secretary of State. Upon final distribution to
the shareholders of the Company's assets, the Company will prepare and file
Articles of Dissolution and upon such filing the legal existence of the Company
will cease.
LIQUIDATION OF ASSETS. As soon as practicable after the Effective Date
of the Plan, and soon as is reasonably practicable depending on market
conditions and consistent with the terms of the Plan, all portfolio securities
of the Company not already converted to cash or cash equivalents will be
converted to cash or cash equivalents. The Company will be responsible for the
liquidation of its assets.
PAYMENT OF DEBTS. As soon as practicable after the Effective Date of
the Plan, the Company will determine and will pay, or set aside in cash or cash
equivalents, the amount of all known or reasonably ascertainable liabilities of
the Company incurred or expected to be incurred prior to the date of the final
liquidating distribution.
CLARENT CORPORATION COMMON STOCK. As of December 19, 2001, the Company
held 2,081,800 shares of Clarent Corporation common stock. Clarent Corporation
is currently subject to several lawsuits by its shareholders for violations of
state and federal securities laws relating in part to Clarent Corporation's
announcement on September 4, 2001 that it had discovered material overstatements
of its revenue for the first half of 2001. Trading in Clarent Corporation common
stock has been suspended as of September 5, 2001 and as of the date of this
Proxy Statement has not renewed. As a shareholder of Clarent Corporation, the
Company is considering whether it wishes to participate as a plaintiff in these
suits and evaluating the basis upon which to institute claims.
To maintain an action against Clarent Corporation, the Company must
continue to be a shareholder during the pendency of the action. In light of
these alternatives, the Company's current intent is to hold and not liquidate
for distribution to shareholders its 2,081,800 shares of Clarent Corporation
common stock. However, whether the Company's Board of Directors determines it is
in the best interests of the Company's shareholders to pursue litigation or sell
the Clarent Corporation common stock, any money realized by court judgment,
settlement, sale or otherwise would eventually be distributed to the Company's
shareholders after payment of expenses, costs and taxes.
26
In the event the Clarent Corporation common stock held by the Company
is liquidated or the Company receives proceeds in litigation which are less than
the Company's cost per share (approximately $6.00 per share) certain of the
Company's majority shareholders, Messrs. Irwin L. Jacobs, Daniel T. Lindsay and
Dennis M. Mathisen, have guaranteed the other shareholders of the Company a
value in liquidation relating to the Clarent Corporation investment of the cost
paid by the Company for the Clarent Corporation common stock. The 2,081,800
shares of Clarent Corporation common stock have an acquisition cost to the
Company of $12,490,800, or approximately $2.76 per share of the Company's common
stock outstanding on December 19, 2001.
RESTRICTION ON TRANSFER. The proportionate interests of shareholders in
the assets of the Company will be fixed on the basis of their respective
shareholdings at the close of business on the Effective Date. On the Effective
Date, the stock transfer books of the Company will be closed, and no further
transfers of the Common Stock will be permitted. Thereafter, unless the stock
transfer books of the Company are reopened because the Plan cannot be carried
into effect under the Minnesota Business Corporation Act (the "MBCA") or
otherwise, the shareholders' respective interests in the Company's liquidating
distributions will not be transferable except by will, intestate succession or
operation of law.
SHAREHOLDERS; BENEFICIAL INTERESTS. The Company will close its stock
transfer books, and each shareholder of the Company as of the Effective Date
will have a proportionate "Beneficial Interest" in each distribution of Company
property. The term "Beneficial Interest" will mean, for each shareholder, the
percentage determined by dividing the number of shares of Common Stock held by
the shareholder on the Effective Date by the total number of shares of Common
Stock of the Company outstanding on such date. Each distribution of Company
assets to the shareholders will be made to the shareholders, or their authorized
legal representatives or successors in interest, pro rata, according to their
relative Beneficial Interests. These Beneficial Interests cannot be sold or
otherwise transferred except by will, intestate succession or operation of law.
LIQUIDATING DISTRIBUTIONS. In accordance with Section 331 of the
Internal Revenue Code of 1986, as amended (the "Code"), the Company's assets are
expected to be distributed in one or more cash payments in complete cancellation
of all the outstanding shares of Common Stock of the Company. The Company will
from time to time pay over to the shareholders any cash which is received as the
result of any disposition of the Company's property; provided, however, that no
distribution will be made to shareholders without first satisfying or adequately
providing for (x) all known or contingent claims of creditors of the Company,
(y) a reserve for the reasonable expenses incurred or to be incurred by the
Company or the Agent, and (z) a reasonable reserve for amounts required to be
distributed to unlocated shareholders. The final distribution of assets to the
shareholders will be made as soon as practicable after all of the Company's
property has been sold or otherwise disposed of. Each shareholder will be
required to return such shareholder's stock certificate(s) to the Company as a
condition to receiving such liquidating distributions. Shareholders who are
unable to locate their stock certificates will be entitled to receive
liquidating distributions by following the "lost certificate" procedures
provided by the Company. The Company will provide instructions regarding the
surrender of stock certificates after the Liquidation Proposal is approved.
EXPENSES OF THE LIQUIDATION AND DISSOLUTION. The Company will bear all
of the expenses incurred by it in carrying out the Plan, including, but not
limited to, legal, accounting and administrative expenses, transaction costs and
tax obligations.
27
DISTRIBUTION AMOUNTS. The Company expects the sale of its Insty-Prints
franchising business results in gross cash consideration of approximately $4.1
million as of the date of closing. The Company expects total proceeds of $5.6
million over the course of the 12 months following the Asset Sale. Assuming
receipt of consideration of $4.1 million in the Asset Sale at the closing and
excluding the shares of Clarent Corporation common stock owned by the Company,
the Company will have $14.1 million in cash and short-term marketable securities
on hand or $3.12 per share of the Company's Common Stock outstanding as of
December 19, 2001. In addition, the Company would attempt to liquidate its other
remaining assets with an estimated value of $250,000, and its investment in
Clarent Corporation common stock with a cost basis of $12,490,000. The amounts
to be distributed to shareholders of the Company upon liquidation will be
reduced by taxes payable by the Company as well as any remaining expenses
incurred by the Company, including the expenses of the Company in connection
with the liquidation and transaction costs. Additionally, the amounts to be
distributed to shareholders would be reduced if any claims or liabilities that
are not known to the Company subsequently arise. Based on the $5.6 million in
consideration to receive by the Asset Sale, taxes associated with the Asset Sale
are $840,000. Expenses associated with the Asset Sale and liquidation of the
Company is estimated to be $3.12 million, before related tax benefits. If the
Company were able to liquidate its assets (and received full value for the
Clarent Corporation common stock) at the values set forth above, the Company
estimates that, after deducting taxes and liquidation expenses, shareholders of
the Company would receive approximately $5.65 per share of the Company's Common
Stock.
The distribution amounts set forth in the preceding paragraph are
provided only as an illustration. There can be no assurance that shareholders
will receive liquidation distributions in an amount equal to or greater than the
illustration set forth above, and the Plan does not provide for a minimum
distribution. The net asset value of the Company's assets may decline. The
Company may incur or discover presently unknown claims, liabilities or expenses
in addition to the liabilities and expenses set forth in the preceding
paragraph. Additionally, the actual liquidation costs may vary from the
estimates provided above. Any diminution of the net asset value of the Company's
assets or any increase in liabilities or liquidation costs will reduce the
amount of cash available for distribution to shareholders.
AMENDMENT OR ABANDONMENT OF PLAN. Shareholders of the Company may amend
or abandon the Plan prior to the filing of Articles of Dissolution. To amend or
abandon the Plan prior to the filing of the Articles of Dissolution,
shareholders holding a majority of the voting power of the Company must approve
a proposal amending or revoking the Plan at a properly convened meeting of
shareholders. Under the By-laws of the Company, a special meeting may be called
for the purpose of considering a proposal to amend or abandon the Plan by any
officer, director or shareholder holding 10% or more of the voting power of the
Company. The written notice of the Special Meeting must state the purpose of the
meeting. If abandonment of the Plan were properly approved by a majority of the
voting power of the Company, the dissolution of the Company would cease and the
Plan would be revoked. The Company would then continue its existence as a going
concern. If the Plan were amended by proper approval of the majority of the
voting power of the Company, the dissolution of the Company would continue
pursuant to the amended plan of dissolution.
DISSENTER'S RIGHTS. Under Minnesota law, the holders of shares of
common stock of the Company have the right to dissent from the Asset Sale only
if the Company does not proceed to liquidate and dissolve according to the Plan
of Liquidation and Dissolution. Pursuant to Section 302A.471, Subd. 1(b), no
shareholder will have dissenters' rights if the Plan is approved. If the Asset
Sale is approved and the Plan is not approved, dissenting shareholders are
entitled to obtain payment of the "fair value" of their Common Stock, provided
that such shareholders comply with the requirements of the MBCA. In this
context, the term "fair value" means the value of the shares of the Common Stock
immediately before the effective date of the Asset Sale. These rights are
explained more fully in the section of the attached Proxy Statement entitled
"Rights of Dissenting Shareholders." Further, the dissenters' rights provisions
of the MBCA are attached to the Proxy Statement as Appendix D.
28
IMPACT OF THE PLAN ON THE COMPANY'S STATUS UNDER THE 1934 ACT. The
Company will seek to deregister as a reporting company under the 1934 Act. Upon
the effectiveness of the deregistration, the Company will no longer be subject
to the provisions of the 1934 Act. If the Liquidation Proposal is approved, the
Company will no longer be involved in any on-going business activities and the
Company's only activity will be the liquidation and distributions contemplated
by the Plan. The Company's deregistration under the 1934 Act will have no direct
effect on the Company's Articles of Incorporation or Bylaws, nor will it affect
the status of the Company under the MBCA; however, certain other transactions
included in the Liquidation Proposal (including the dissolution of the Company
under the MBCA) will have such effect.
FEDERAL INCOME TAX CONSEQUENCES. The following is only a general
summary of the federal income tax consequences of the liquidation and
distribution of the Company's assets under the Internal Revenue Code of 1986, as
amended (the "Code") and is limited in scope. This summary is based on the tax
laws and regulations in effect on the date of this Proxy Statement, all of which
are subject to change by legislative or administrative action, possibly with
retroactive effect. Additionally, while this summary addresses some of the
United States federal income tax consequences of the liquidation and
distribution, neither state nor local tax consequences of the liquidation and
distribution are discussed. The liquidation and distribution of the Company's
assets may impose unanticipated tax consequences on shareholders and affect
shareholders differently, depending on their particular tax situations.
Shareholders are strong encouraged to consult their own tax advisers regarding
the application of current United States federal income tax law to their
particular situation and with respect to state, local and other tax consequences
of the Plan.
All amounts received by shareholders upon liquidation will be treated
for federal income tax purposes as full payment in exchange for the
shareholder's shares and will thus be treated as a taxable sale. Thus, a
shareholder who is a United States resident or otherwise subject to United
States income taxes will be taxed only to the extent the amount of the balance
of the distribution exceeds his or her adjusted tax basis in such shares; if the
amount received is less than his or her adjusted tax basis, the shareholder will
realize a loss. The shareholder's gain or loss will generally be a capital gain
or capital loss if such shares are held as capital assets. If shares that are
held as a capital asset have been held for more than one year, then any gain or
loss will generally constitute a long-term capital gain or long-term capital
loss, as the case may be, taxable to individual shareholders at a maximum rate
of 20%. If the shareholder will have held the shares for not more than one year,
any gain or loss will be a short-term capital gain or loss and will be taxed at
ordinary income tax rates.
Corporate shareholders should note that there is no preferential
federal income tax rate applicable to capital gains for corporations under the
Code. Accordingly, all income recognized by a corporate shareholder pursuant to
the liquidation of the Company, regardless of its character as capital gains or
ordinary income, will be subject to tax at the same federal income tax rate.
Under certain provisions of the Code, some shareholders may be subject
to a 31% withholding tax ("backup withholding") on the liquidating
distributions. Generally, shareholders subject to backup withholding will be
those for whom no taxpayer identification number is on file with the Company,
those who, to the Company's knowledge, have furnished an incorrect number, and
those who underreport their tax liability. An individual's taxpayer
identification number is his or her social security number. Certain shareholders
specified in the Code may be exempt from backup withholding. The backup
withholding tax is not an additional tax and may be credited against a
taxpayer's federal income tax liability.
29
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
The Board of Directors has determined that the Liquidation Proposal is
in the best interests of the Company and the Company's shareholders. The Board
of Directors has unanimously approved the Liquidation Proposal and unanimously
recommends that shareholders vote in favor of the Liquidation Proposal.
VOTE REQUIRED
Under Section 302A.721 of the MBCA, the voluntary dissolution of the
Company by its shareholders pursuant to the Liquidation Proposal requires
approval by the affirmative vote of the holders of a majority of the voting
power of all outstanding shares of Company Common Stock as of December 19, 2001.
While there are no agreements which would compel them to do so, it is
expected that all shares of IPI, Inc. Common Stock beneficially owned or
controlled by the directors and officers of the Company will be voted in favor
of each of the proposals presented at this Special Meeting of Shareholders. In
the aggregate, officers and directors of the Company beneficially own or control
3,207,195, or 71% of the 4,518,687 shares of the Company's Common Stock
outstanding as of December 19, 2001. Because officers and directors hold a
majority of the outstanding shares of Common Stock of the Company, a vote in
favor of the Liquidation Proposal by officers and directors would be sufficient
to approve such proposal.
30
SUMMARY OF RIGHTS OF DISSENTING SHAREHOLDERS
RIGHT TO EXERCISE DISSENTERS' RIGHTS
Pursuant to Sections 302A.471 and 302A.473 of the MBCA, holders of the
Company's Common Stock are entitled to assert appraisal rights in connection
with the Asset Sale only if the Company does not proceed to liquidate and
dissolve. Pursuant to Section 302A.471, Subd. 1(b), no shareholder will have
dissenters' rights if the Plan is approved. If the Asset Sale is approved and
the Plan is not approved, dissenting shareholders are entitled to obtain payment
of the "fair value" of their Common Stock, provided that such shareholders
comply with the requirements of the MBCA. In this context, the term "fair value"
means the value of the shares of the Common Stock immediately before the
effective date of the Asset Sale. These rights are explained more fully below.
Further, the dissenters' rights provisions of the MBCA are attached to this
Proxy Statement as Appendix D.
COMPANY'S NOTICE OF MEETING
Under Section 302A.473, if a corporation calls a shareholders meeting
at which a proposal to sell, lease, transfer or otherwise dispose of all or
substantially all of the property and assets of the corporation is to be voted
upon, the notice of the meeting must inform each shareholder of the right to
dissent, and must include a copy of Sections 302A.471 and 302A.473 and a brief
description of the procedures to be followed under these sections. This Notice
of Special Meeting of Shareholders constitutes such notice to the Company's
shareholders, and the following discussion describes the procedures to be
followed by a dissenting shareholder. The applicable statutory provisions are
attached hereto as Appendix D.
The following discussion is not a complete statement of the law
pertaining to a dissenting shareholder's rights under Minnesota law and is
qualified in its entirety by the full text of Sections 302A.471 and 302A.473 of
the MBCA attached to this Proxy Statement as Appendix D. Any holder of the
Company's Common Stock who wishes to exercise the right to dissent and demand
the fair value of his or her shares, or who wishes to preserve the right to do
so, should carefully review the following discussion and Appendix D. Failure to
timely and properly comply with the procedures will result in the loss of a
shareholder's right to dissent under Minnesota law.
SHAREHOLDER'S NOTICE OF INTENT TO DEMAND FAIR VALUE OF SHARES; VOTE AGAINST
PROPOSALS
If a holder of the Company's Common Stock wishes to exercise the right
to demand the fair value of his or her shares, the shareholder must file with
the Company, before the vote is taken on the Asset Sale Proposal and the
Liquidation Proposal, a written notice of intent to demand the fair value of his
or her shares and, addition, he or she must not vote in favor of approval of
either the Asset Sale Proposal or the Liquidation Proposal. A vote against the
Asset Sale Proposal or the Liquidation Proposal will not in and of itself
constitute a written notice of intent to demand the fair value of a
shareholder's shares of the Company's Common Stock satisfying the requirements
of the MBCA.
A shareholder may not assert dissenters' rights as to less than all of
the shares of the Company's Common Stock registered in the name of such
shareholder.
31
COMPANY'S NOTICE OF PROCEDURES FOR DEMANDING PAYMENT
After the Asset Sale Proposal and Liquidation Proposal have been
approved by the holders of the Company's Common Stock, the Company must cause to
be mailed to each shareholder who has properly asserted dissenters' rights a
notice that contains:
(a) The address to which the shareholder must send a demand for payment
and his or her stock certificate in order to receive payment, and the date by
which they must be received;
(b) A form to be used by the shareholder to certify the date on which
he or she acquired his or her shares of Common Stock and to demand payment; and
(c) Another copy of Sections 302A.471 and 302A.473 of the MBCA,
together with a brief description of the procedures to be followed under those
sections.
To receive the fair value of his or her shares of Common Stock, a
dissenting shareholder must demand payment and deposit his or her certificates
within 30 days after the notice described above is given, but the dissenter
retains all other rights of a shareholder until the Asset Sale takes effect.
COMPANY'S PAYMENT; RETURN OF SHARES
After the consummation of the Asset Sale, or after the Company receives
a valid demand for payment, whichever is later, the Company must remit to each
dissenting shareholder who has complied with the dissenters' rights provisions
the amount the Company estimates to be the fair value of the shares, plus
interest, accompanied by:
(a) The Company's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective time, together
with the latest available interim financial statement;
(b) An estimate by the Company of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(c) Another copy of Sections 302A.471 and 302A.473 of the MBCA and a
brief description of the procedure to be followed in demanding supplemental
payment.
If the Company fails to remit payment within 60 days of the deposit of
certificates, the Company must return all deposited certificates. However, the
Company may again give notice and require deposit of the certificates at a later
time.
SHAREHOLDER'S RIGHT TO DEMAND SUPPLEMENTAL PAYMENT
If a dissenting shareholder believes that the amount remitted by the
Company is less than the fair value of his or her shares plus interest, such
dissenting shareholder may give written notice to the Company of his or her own
estimate of the fair value for the shares plus interest and demand a
supplemental payment for the difference. Any written demand for supplemental
payment must be made within 30 days after the Company mailed its original
remittance. Otherwise, a dissenter is entitled only to the amount remitted by
the Company.
32
COMPANY'S PETITION; DETERMINATION BY COURT
Within 60 days after receiving a demand for supplemental payment, the
Company must either pay the amount of the supplemental payment demanded (or
agreed to between the dissenting shareholder and the Company) or file a petition
in the state courts of Minnesota requesting that the court determine the fair
value of the shares plus interest. Any petition so filed must name as parties
all dissenting shareholders who have demanded supplemental payments and who have
been unable to reach an agreement with the Company concerning the fair value of
their shares. The court may appoint appraisers, with such power and authority as
the court deems proper, to receive evidence on and recommend the amount of fair
value of the shares. The jurisdiction of the court is plenary and exclusive, and
the fair value as determined by the court is binding on all shareholders,
wherever located. A dissenting shareholder, if successful, is entitled to a
judgment for the amount by which the fair value of his shares as determined by
the court exceeds the amount originally remitted by the Company.
COSTS AND EXPENSES
Generally, the costs and expenses associated with a court proceeding to
determine the fair value of the shares of the Company's Common Stock will be
borne by the Company, unless the court finds that a dissenting shareholder has
demanded supplemental payment in a manner that is arbitrary, vexatious or not in
good faith. Similar costs and expenses may also be assessed in instances where
the Company has failed to comply with the procedures specified in Section
302A.473 of the MBCA discussed above. The court may, in its discretion, award
attorneys' fees to an attorney representing dissenting shareholders out of any
amount awarded to such dissenters.
OTHER RIGHTS
Under Subdivision 4 of Section 302A.471 of the MBCA, a shareholder has
no right, at law or equity, to set aside the approval of the Asset Sale or the
consummation of the Asset Sale except if such approval or consummation was
fraudulent with respect to such shareholder or the Company.
Failure to follow the steps required by Section 302A.473 for asserting
dissenters' rights will result in the loss of a shareholder's rights to demand
the fair value of his or her shares of the Company's Common Stock.
FINANCIAL STATEMENTS AND DOCUMENTS INCORPORATED BY REFERENCE
Attached to this Proxy Statement as Appendix C are the following
financial statements and pro forma financial results:
(i) Pro forma Financial Statements
(ii) Consolidated Financial Statements
In addition, we incorporate by reference the information contained in
the Company's Annual Report on Form 10-KSB for the year ended November 30, 2000,
as amended.
33
SHAREHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
The proxy rules of the Securities and Exchange Commission permit
shareholders of the Company, after timely notice to the Company, to present
proposals for shareholder action in the Company's proxy statement where such
proposals are consistent with applicable law, pertain to matters appropriate for
shareholder action and are not properly omitted by Company action in accordance
with the Commission's proxy rules. The next annual meeting of the shareholders
of IPI, Inc. is expected to be held on or about April 30, 2002 and proxy
materials in connection with that meeting are expected to be mailed on or about
March 17, 2002.
Shareholder proposals prepared in accordance with the Commission's
proxy rules must be received at the Company's corporate office on or before
November 17, 2001, in order to be considered for inclusion in the Board of
Directors' Proxy Statement and proxy card for the 2002 Annual Meeting of
Shareholders. Any such proposals must be in writing and signed by the
shareholder. A shareholder who wishes to make a proposal for consideration at
the 2002 Annual Meeting, but does not seek to include the proposal in the
Company's proxy material, must notify the Secretary of the Company. The notice
must be received no later than January 31, 2002. If the notice is not timely,
then the persons named on the Company's proxy card for the 2002 Annual Meeting
may use their discretionary voting authority when the proposal is raised at the
meeting.
OTHER MATTERS
The Board of Directors does not know of any matters to be presented at the
Special Meeting other than those listed in the Notice of Special Meeting of
Shareholders. However, if other matters properly come before the Special
Meeting, it is the intention of the persons named in the accompanying proxy to
vote in accordance with their best judgment on such matters insofar as the
proxies are not limited to the contrary.
To the extent that information contained in the Proxy Statement is
peculiarly within the knowledge of persons other than the management of the
Company, it has relied on such persons for the accuracy and completeness
thereof.
PLEASE SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE.
By Order of the Board of Directors,
David A. Mahler, SECRETARY
34
TABLE OF APPENDIXES
Appendix A Asset Purchase Agreement
The following Schedules and Exhibits to the Asset Purchase Agreement
are omitted pursuant to Item 601(b)(2) of Regulation S-B:
Schedules
---------
Schedule 1.2(c) Receivables
Schedule 1.2(d) Assumed Contracts
Schedule 1.3(c) Turnback Accounts
Schedule 1.4 Trade Credits and Accrued Liabilities
Schedule 2.1(c) Prepaids
Schedule 3.1 Officers & Directors
Schedule 3.2 Foreign Qualifications
Schedule 3.7 Enumerated Contracts
Schedule 3.8 Consents
Schedule 3.9 Litigation
Schedule 3.11 Licenses and Permits
Schedule 3.12 Employee Benefits
Schedule 3.13 Labor
Schedule 3.18 Intellectual Property
Schedule 3.19(a) Franchise Agreements
Schedule 3.19(d) Pending Franchise Applications
Schedule 3.19(f) Compliance with Applicable Laws
Schedule 3.19(g) Reduction of Royalty Payments
Schedule 3.19(h) Franchise Registration
Schedule 3.19(j) UFOC
Schedule 3.19(k) National Advertising Trust Fund
Schedule 3.19(l) Regulatory Proceedings
Schedule 3.19(m) Claims
Schedule 3.19(o) Suppliers
Schedule 3.19(p) Terminated Franchisees
Schedule 3.19(q) Franchisee Notes
Schedule 3.20(a) National Advertising Trust Fund Accounts
Schedule 3.20(d) Trustees
Schedule 3.21 Guarantees
Schedule 6.1(e) Due Diligence Materials
Exhibits
--------
Exhibit 3.20(e) National Advertising Trust Fund
Exhibit 7.1(a) Assumption Agreement
Exhibit 7.1(b) Intellectual Property Assignment
Exhibit 7.1(e) Bill of Sale
Exhibit 7.1(f) Restrictive Covenant Agreement
Exhibit 7.1(g) Temporary Space License Agreement
Exhibit 7.2(e) Opinion of Sellers' Counsel
Exhibit 7.3(b) Opinion of Buyer's Counsel
35
Appendix B Plan of Liquidation and Dissolution
Appendix C Financial Statements and Pro Forma Financial Information
Appendix D Dissenter's Rights Statute
Appendix E Guarantee Agreement
36
Appendix A
================================================================================
ASSET PURCHASE AGREEMENT
DATED AS OF NOVEMBER 15, 2001
AMONG
ALLEGRA HOLDINGS LLC,
A MICHIGAN LIMITED LIABILITY COMPANY,
INSTY-PRINTS, INC.,
A MINNESOTA CORPORATION
AND
IPI, INC.,
A MINNESOTA CORPORATION
================================================================================
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "AGREEMENT"), dated as of November
15, 2001 (the "SIGNING DATE"), is made by and among INSTY-PRINTS, INC., a
Minnesota corporation ("INSTY"), IPI, INC., a Minnesota corporation ("IPI"), and
ALLEGRA HOLDINGS LLC, a Michigan limited liability company ("BUYER"). (Insty and
IPI are sometimes referred to herein individually as a "SELLER" and together as
"SELLERS".)
R E C I T A L S:
- - - - - - - -
WHEREAS, Insty, a wholly-owned subsidiary of IPI, is engaged in the
business of franchising printing centers under the trade name of
"Insty-Prints(R)" (the "BUSINESS");
WHEREAS, IPI is the sole shareholder of Insty and owns certain assets
in connection with the Business; and
WHEREAS, Sellers desire to sell to Buyer, and Buyer desires to purchase
from Sellers, certain assets associated with the operation of the Business, on
the terms and conditions contained in this Agreement; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS
1.1. PURCHASE AND SALE. Subject to the terms and conditions of this
Agreement, at the Closing (as defined in Section 1.6), each Seller shall sell,
transfer, convey and deliver to Buyer, and Buyer shall purchase from each
Seller, all of such Seller's right and title to and interest in the Acquired
Assets (as defined in Section 1.2), free and clear of all claims, liens,
mortgages, pledges, charges, security interests, equities and encumbrances of
any nature whatsoever (collectively "ENCUMBRANCES").
1.2. ACQUIRED ASSETS. As used herein, as to each Seller, the term
"ACQUIRED ASSETS" shall mean all of such Seller's right, title and interest in
and to the following:
(a) all rights, title and interest of Seller in and to all
franchise agreements, including any and all amendments, modifications
or extensions thereto, entered into by and between Seller and its
franchisees, or assigned to Seller;
(b) a commercially reasonable amount of unopened and undamaged
inventory relating to the Business purchased and owned by Seller within
ninety (90) days immediately prior to the Closing for products Seller
has sold to franchisees or other customers within such ninety (90) day
period (collectively, the "INVENTORY");
(c) all accounts receivable and notes receivable, including,
without limitation, all trade accounts receivables, notes receivables
from customers, franchisees and all other obligations of customers
and/or franchisees with respect to sale of goods or services, or
amounts due under a franchise agreement or any other contract, whether
or not evidenced by a note, including, without limitation, those listed
on Schedule 1.2(c), as adjusted by the Final Receivables Schedule as
hereinafter provided (all of the foregoing collectively referred to
herein as "RECEIVABLES"); provided, however, Receivables shall exclude
the Turnback Accounts identified on Schedule 1.3(c);
(d) all rights of Seller under the Enumerated Contracts (as
defined in Section 3.7) identified on Schedule 1.2(d) (the "ASSUMED
CONTRACTS");
(e) the signs, off-the-shelf office computer software and
computer hardware for employees hired by Buyer pursuant to Section 5.4;
(f) all Intellectual Property (as defined in Section 3.18) and
all rights of Seller to any Licensed Intellectual Property (as defined
in Section 3.18);
(g) any claim (contractual or otherwise), recovery, refund,
counterclaim, right to offset or other right such Seller may have with
respect to, or which arise out of, any of the Assumed Liabilities (as
defined in Section 1.4) or any of the Acquired Assets or the Business;
(h) all advertising and marketing materials and brochures
(including all artwork related thereto), and other materials and data
relating to the Business; and
(i) all warehouse equipment, racks and related movable items
located at 8091 Wallace Road, Eden Prairie, Minnesota (the "PREMISES");
(j) all claims, deposits, warranties, guarantees, refunds
primarily related to the Acquired Assets, causes of action, right of
recovery, rights of set-off and rights of recoupement of every kind and
nature (except relating to the payment of taxes), other than those
relating primarily to the Excluded Assets;
(k) all authorization, approvals, permits, licenses, orders,
registration, certificate, and similar rights obtained from federal,
state, or local government or governmental agencies or other similar
rights (collectively, "GOVERNMENT LICENSES"), but excluding any such
permits or license that are not transferable, and all data and records
pertaining thereto;
(l) all franchisee, developer and supplier and prospective
franchisee and supplier lists, leads, sales records, and files
(including, without limitation, all original franchise agreements,
Uniform Franchise Offering Circular receipts and other documents
whether in possession of Seller or Seller's attorney, brokers or other
agents); records and files regarding Intellectual Property and all
other books and records (including electronic records), specifications,
designs, layouts, renderings, equipment lists, manuals, training
materials videos, brochures, photographs, negatives, and schedules and
other materials relating primarily to the operation of the Business;
and
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(m) all interests in the Insty-Prints website
(www.instyprints.com) and any other websites of Sellers relating to the
Business, including, without limitation, all of Seller's rights, title
and interest in the domain name of such website(s), all links thereto
(to the extent transferable), the contents of the website, and the
right of ownership in such website, and all interests of a Seller in
any other domain name registration for the Business;
(n) all customer deposits and prepaid items relating to the
Business;
(o) all assets distributed to Insty upon dissolution of the
National Advertising Trust Fund pursuant to the terms of the Trust
Agreement Establishing the Insty-Prints National Advertising Trust Fund
dated December 20, 1996 (the "TRUST AGREEMENT"); and
(p) the telephone numbers 952-975-6200 and 1-800-799-1000 and
the fax number 952-975-6262, to the extent same are assignable.
1.3. EXCLUDED ASSETS. The Acquired Assets shall not include the
following assets of each Seller (collectively, the "EXCLUDED ASSETS"), which
such Seller shall specifically retain:
(a) All corporate minute book, stock records and corporate
seal of Seller;
(b) All cash, checks, and other marketable securities, all
utility deposits and all negotiable instruments of Seller;
(c) The accounts and notes receivable listed on Schedule
1.3(c) (the "TURNBACK ACCOUNTS");
(d) All of Seller's rights relating to any insurance policy or
insurance contract maintained by Seller;
(e) All Employee Plans (as defined in Section 3.12);
(f) The sublease between IPI and Intranet Solutions, Inc.
dated June 29, 2000 respecting the Premises;
(g) All tangible assets relating to the company-owned
Insty-Print store(s) owned by Seller (the "CORPORATE STORES") and the
rights of Sellers under that certain Purchase Agreement dated October
5, 2001 by Insty and Rob Gathings;
(h) All furnishings, building improvements, phone system,
furniture, and general office equipment, except for the items listed on
Schedule 1.2(e);
(i) All employment agreements;
(j) Any claims for dividends or other distributions, in cash,
property, securities or otherwise in respect of the capital stock of
Sellers;
3
(k) Any claims (including benefits arising therefrom) which
are related solely to liabilities of Sellers which are not Assumed
Liabilities or which are related solely to Excluded Assets;
(l) Sellers' rights under this Agreement and any documents
required to be delivered pursuant hereto;
(m) Income tax returns and other original income tax records
of Sellers and all claims for refunds; and
(n) All of IPI's assets relating solely to its Change of Mind
Learning Centers, Inc. franchise business.
1.4. ASSUMPTION OF CERTAIN LIABILITIES. As partial consideration for
Sellers' sale of the Acquired Assets to Buyer and subject to the provisions of
Section 1.5 below, Buyer hereby assumes those liabilities and obligations of
each Seller that relate solely to events or conditions arising after the Closing
and arising under the Franchise Agreements (as defined in Section 3.19(a)), the
Assumed Contracts, and the trade credits and the accrued liabilities listed on
Schedule 1.4, as modified by the Final Trade Credits and Accrued Liabilities
Schedule (the "TRADE CREDITS AND ACCRUED LIABILITIES") (collectively, the
"ASSUMED LIABILITIES").
1.5. NO ASSUMPTION OF EXCLUDED LIABILITIES. Buyer does not assume or
take subject to any liabilities or obligations of Seller whatsoever which are
not expressly provided in Section 1.4 above (the "EXCLUDED LIABILITIES").
Without limiting the generality of the foregoing, "EXCLUDED LIABILITIES"
include: (a) all liabilities and obligations of Seller relating to any of the
Excluded Assets; (b) all Taxes (defined in Section 3.5), including, without
limitation, those sales taxes, use taxes and other taxes arising in connection
with the purchase and sale of the Acquired Assets; (c) those accrued expenses
related to the operation of the Business covering the period up to the Closing
Date, except for those listed on Schedule 1.4; (d) obligations of a Seller under
any guarantees by such Seller of third-party obligations; and (e) subject to
Section 5.7, obligations of Insty or the trustees under the Trust Agreement.
1.6. CLOSING. Consummation of the transactions this Agreement
contemplates (the "CLOSING") shall take place at the offices of Lindquist &
Vennum, P.L.L.P. in Minneapolis, Minnesota, at 11:00 a.m. Central Time on
December 28, 2001 or another date mutually agreed upon by the parties hereto,
but in no event later than January 31, 2001 (the "CLOSING DATE").
ARTICLE 2
CONSIDERATION AND PAYMENT TERMS
2.1. PURCHASE PRICE. The aggregate consideration to be paid to Sellers
by Buyer for the Acquired Assets and the agreement by Sellers to enter into the
Restrictive Covenant Agreement attached as EXHIBIT 7.1(f) hereto (the
"RESTRICTIVE COVENANT AGREEMENT") shall be the Purchase Price plus the Assumed
Liabilities. The Purchase Price shall equal the aggregate of the following
amounts (the "PURCHASE PRICE"):
4
(a) Four Million One Hundred Twenty-Five Thousand Dollars
($4,125,000), minus the aggregate amount of Trade Credits and Accrued
Liabilities as set forth on the Final Trade Credits and Accrued
Liability Schedule and assumed by Buyer pursuant to Section 1.4;
(b) An amount equal to Sellers' original acquisition cost for
the Inventory, which shall be paid within thirty (30) days after the
Closing Date;
(c) An amount equal to the "net book value" of prepaids as set
forth on Schedule 2.1(c) hereto, as modified by the Final Prepaids
Schedule, which shall be agreed upon by the parties at least five (5)
days prior to the Closing and payable in immediately available funds at
the Closing; and
(d) An amount determined pursuant to Section 2.2 below for the
Receivables, which shall be payable in the manner set forth in Section
2.2.
2.2. RECEIVABLES. With respect to the Receivables, as set forth in
Schedule 1.2(c), as modified by the Final Receivables Schedule, Buyer and
Sellers have agreed to the following categorizations: "Current," "Settlement,"
"Special Settlements," "Workout," and "Undetermined." With respect to each
category of Receivables, Buyer will pay Sellers the following amounts for the
Receivables, less any reasonable out-of-pocket expenses incurred by Buyer in the
collection of such Receivables, in the manner set forth below:
(a) Current: During the one (1) year period immediately after
the Closing, Buyer will pay Sellers, on or before the tenth (10th) day
of each calendar month, one hundred percent (100%) of the amounts
received by Buyer during the immediately preceding calendar month. All
payments received by Buyer for a "Current" account will be applied to
the most dated Receivable for such account.
(b) Settlements: On the tenth (10th) day after the Closing
Date, Buyer will pay Sellers fifty percent (50%) of the "Net" amount
agreed upon by the parties on the Schedule 1.2(c). In addition, during
the one (1) year period immediately after the Closing, Buyer will pay
Sellers, on or before the tenth (10th) day of each calendar month,
seventy percent (70%) of any amounts received by Buyer in excess of the
"Net" amount set forth in Schedule 1.2(c) during the immediately
preceding calendar month. However, payments received by Buyer with
respect to any account will not be applied to the "Settlement"
Receivables of such account unless there are no outstanding invoices
for such account at the time of payment. Any increase in the Receivable
balance from the amount indicated on Schedule 1.2(c) will be fully
reserved so that the "Net" will not be in excess of the amount
indicated on the Final Receivables Schedule.
(c) Special Settlements: During the one (1) year period
immediately after the Closing, Buyer will pay Sellers on or before the
tenth (10th) day of each calendar month, one hundred percent (100%) of
any amounts received by Buyers during the immediately preceding
calendar month. However, payments received by Buyer with respect to any
account will not be applied to the "Special Settlement" Receivables of
such account unless there are no outstanding invoices for such account
at the time of payment.
5
(d) Workouts: On the tenth (10th) day following the Closing
Date, Buyer will pay Sellers ten percent (10%) of the "Net" amount
agreed upon by the parties and set forth on Schedule 1.2(c) in
immediately available funds. In addition, during the one (1) year
period immediately after the Closing, Buyer will pay Sellers, on or
before the fifth (5th) day of each calendar month, fifty percent (50%)
of any amounts received by Buyer in excess of the "Net" amount set
forth on the Schedule 1.2(c) during the immediately preceding calendar
month. However, payments received by Buyer with respect to any account
will not be applied to the "Workout" Receivables of such account unless
there are no outstanding invoices for such account at the time of
payment. Any increase in the Receivable balance from the amount
indicated on Schedule 1.2(c) will be fully reserved so that the "Net"
amount will not be in excess of the amount indicated on the Final
Receivables Schedule.
(e) Undetermined: Buyer and Sellers will agree upon a purchase
price for such Receivables at least five (5) days prior to the Closing.
If the parties cannot agree upon a purchase price, these Receivables
will be deemed Turnback Accounts.
(f) Accruals. Buyer acknowledges that Sellers may not know the
amount of royalties due from each franchisee for the thirty (30) day
period immediately preceding the Closing Date (the "Accrued Amount").
Sellers have the right to estimate a reasonable Accrued Amount due from
each franchisee and include it on the Final Receivables Schedule. Buyer
will treat the Accrued Amount as a valid account receivable, subject to
a further adjustment based on the franchisee's actual reported results,
and will pay the Accrued Amount in accordance with the terms of
2.2(a)-(d).
Notwithstanding anything to the contrary contained herein, Sellers
acknowledge that (i) except for Current Receivables, the "Net" amount for each
Receivable on the Final Receivables Schedule shall not exceed the "Net" amount
for such Receivable on Schedule 1.2(c) attached hereto; (ii) the categorization
of each Receivable on the Final Receivables Schedule shall be the same as the
categorization indicated on Schedule 1.2(c) hereto; and (iii) any amounts
collected by Sellers prior to the Closing from any franchisee or creditor will
reduce the amount payable by Buyer to Sellers on the tenth (10th) day following
the Closing Date under subsections 2.2(b) and 2.2(d) above for such franchisee
or creditor.
2.3. POST DECEMBER 31, 2001 CLOSING. In the event the Closing occurs
after December 31, 2001, the Purchase Price will be reduced by the amount of
revenues received by either Seller in connection with the Business during the
period commencing January 1, 2002 until the Closing Date, less the amount of
reasonable employee salaries and benefits (excluding the salaries and benefits
of any officers other than Robert Warmka) and reasonable out-of-pocket operating
expenses incurred by Sellers relating solely to the Business during such period
(provided that gross rent for the Premises will be $14,000 per month). Operating
expenses exclude interest and finance charges, income taxes, and non-cash items,
including, without limitation, amortization and depreciation. Any reduction in
Purchase Price under this Section will be determined by Buyer and Sellers within
fifteen (15) days after the Closing Date and such amount will offset amounts
payable by Buyer to Sellers under Section 2.2. Further, the parties agree that
in the event the Closing does not occur by December 31, 2001, all decisions made
after such date relating to all Franchise Agreements, other contracts,
commitments and communications with Franchisees, must be approved by Buyer,
which approval will not be unreasonably withheld.
6
2.4. PAYMENT OF PURCHASE PRICE. Except as otherwise specified in this
Article 2, the Purchase Price shall be paid to Seller by wire transfer of same
day funds to the account set forth on Schedule 2.4 and shall be paid on the
Closing Date.
2.5. PURCHASE PRICE ALLOCATION. The parties acknowledge and agree that
the Purchase Price shall be allocated among the Acquired Assets and the
Restrictive Covenant Agreement. Buyers will provide Sellers with the allocation
prior to the Closing Date. The Buyer and Sellers will each file, in accordance
with the Internal Revenue Code of 1986, as amended, an asset allocation
statement on Form 8594 with its federal income tax return for the tax year in
which the Closing occurs that is consistent with the allocation, and neither the
Buyers nor Sellers will file or permit the filing of any tax return on which it
takes a position that is inconsistent with the allocation without the prior
written approval of the other party.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers, jointly and severally, represent and warrant the following to
Buyer as of the Signing Date and as of the Closing Date:
3.1. ORGANIZATION AND STANDING. Each Seller is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Minnesota. Each Seller has all necessary corporate powers and authority to
engage in the business in which it is presently engaged (as it is presently
being conducted), to own all property now owned by it, and to lease all of the
property used by it under lease. Each Seller conducts its Business directly and
not through any subsidiary, association, joint venture, partnership or other
business entity (other than the other Seller). Schedule 3.1 contains a complete
and accurate list of the officers and directors of each Seller
3.2. QUALIFICATION. Except as set forth on Schedule 3.2, neither Seller
has failed to qualify in any jurisdiction where such failure to so qualify would
have a material adverse effect on the Business. Schedule 3.2 identifies each
jurisdiction where each Seller is duly qualified to do business as a foreign
corporation, and such Seller is in good standing in each such jurisdiction.
3.3. NO RESTRICTIONS; AUTHORIZATIONS; BINDING EFFECT. Neither Seller is
subject to any restriction, agreement, law, rule, regulation, ordinance, code,
writ, injunction, award, judgment or decree which would prohibit or be
materially violated by the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby. Provided that IPI's
shareholders approve of the transactions contemplated by this Agreement pursuant
to the Minnesota Business Corporation Act, each Seller has all necessary power
and authority and has taken all action necessary to execute and deliver this
Agreement and the instruments, documents and agreements to be executed and
delivered by such Seller pursuant hereto (collectively, the "SELLER'S
DOCUMENTS"), to consummate the transactions contemplated by this Agreement and
the Seller's Documents and to perform such Seller's obligations under this
Agreement and the
7
Seller's Documents. This Agreement and each of the Seller's Documents has been
duly executed and delivered by the applicable Seller, and constitutes a legal,
valid and binding obligation of such Seller, enforceable against such Seller in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or similar laws of
general applicability relating to or limiting creditors' rights generally, now
or hereafter in effect and subject to the application of equitable principles
and the availability of equitable remedies.
3.4. CONDITION OF ACQUIRED ASSETS. All tangible assets are being
transferred "as is," "where is," without any other warranty of any other kind or
nature, whether express or implied, including any warranty as to suitability,
durability, merchantability or fitness for a particular purpose.
3.5. TAXES. Seller has filed with the appropriate authorities all
returns (collectively, the "TAX RETURNS") concerning income, sales, payroll, and
any other kind of taxes, including any interest, penalty or addition thereto
("TAXES"), required to be filed through the Closing Date and will timely file
any Tax Returns for all Taxes required to be filed after the Signing Date which
relate to the operation of the Business prior to the Closing Date. Seller has
paid all Taxes shown to be due by Tax Returns filed prior to the Signing Date.
Each Tax Return is true, correct and complete and prepared in accordance with
the Internal Revenue Code of 1986 and all subsequent amendments thereto or
substitutions therefor.
3.6. TITLE. Seller has good and marketable title to all Acquired
Assets, free and clear of all Encumbrances. No items included in the Inventory
are held on consignment from others.
3.7. CONTRACTS. Except as set forth in Schedule 3.7 hereto, and except
for the Franchise Agreements (as defined in Section 3.19(a)), there is no
contract, agreement, commitment or arrangement ("CONTRACT"), or any outstanding
unaccepted offer ("OFFER"), whether written or oral, to which a Seller is or may
be a party or by which it or any property or asset of a Seller is or may become
bound:
(a) which is or relates to any personal property leased or
otherwise occupied or used by Seller in connection with the Business;
(b) which is or relates to an independent contractor,
distribution, marketing, sales representative or similar agreement with
any individual or entity providing services to Seller relating to the
Business;
(c) involving any remaining or unsatisfied obligation of
Seller under any purchase order or other agreement or commitment to
purchase materials, supplies or goods in the nature of inventory for
the Business ("PURCHASE ORDERS");
(d) evidencing supplier arrangements or agreements to purchase
goods or services; and
(e) any other contracts or commitments not made in the
ordinary course of the business in connection with the Business.
8
Sellers have delivered to Buyer true and correct copies of all written Contracts
and Offers set forth in Schedule 3.7 and a written summary setting forth all
material terms and conditions of each oral agreement set forth in Schedule 3.7,
all as presently in effect (collectively the "ENUMERATED CONTRACTS"). Except as
set forth on Schedule 3.7 hereto, all Enumerated Contracts are valid and binding
obligations of a Seller and the other parties thereto, and are in full force and
effect, enforceable in accordance with their respective terms, except as may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or similar laws of general applicability relating to or
limiting creditors' rights generally, now or hereafter in effect and subject to
the application of equitable principles and the availability of equitable
remedies. Except as set forth in Schedule 3.7, neither Seller nor, to Sellers'
knowledge, any other party is in default in the payment of any obligation under,
or in the performance of any material covenant or material obligation to be
performed by it pursuant to, any Enumerated Contract. The execution and delivery
of this Agreement and any documents to be delivered pursuant hereto, and
Sellers' performance of their obligations under this Agreement and such other
documents, will not conflict with or breach any of the provisions of, or
constitute a default (with or without notice or lapse of time, or both) under,
or accelerate any indebtedness due under, or give rise to any other rights or
obligations under, any Enumerated Contract.
3.8. CONSENTS. Except as set forth on Schedule 3.8, neither Seller is
required to obtain any consents or other approvals from any governmental agency
or other person (including any lessor, customer, supplier or lender) as a result
of the transactions contemplated by this Agreement, and no such consent or other
approval is necessary or desirable in order that Buyer can conduct the Business
after the Closing Date in substantially the same manner as Seller conducted the
Business before the Closing Date (any such consent or approval is called a
"CONSENT").
3.9. LITIGATION. Except as set forth on Schedule 3.9, neither Seller is
(a) subject to any outstanding injunction, judgment, order, decree or ruling
relating directly or indirectly to the Business, or (b) a party to or, to the
knowledge of Sellers, threatened to be made a party to, any action, suit,
proceeding, hearing, audit or investigation before any court, quasi-judicial
agency, administrative agency or arbitrator relating directly or indirectly to
the Business.
3.10. COMPLIANCE WITH LAWS. Each Seller has materially complied with
all laws, rules, regulations, ordinances and codes applicable to the Business,
including, without limitation, those governing each Employee Plan (as defined in
Section 3.12), whether federal, state, local or foreign, and neither Seller has
received any notice alleging non-compliance with respect thereto which remains
uncured as of the date hereof.
3.11. LICENSES AND PERMITS. Seller has obtained, and Schedule 3.11
lists, all licenses, permits and other governmental authorizations required to
conduct the Business as presently conducted. Except as disclosed on Schedule
3.11 hereto, all such licenses and permits are transferable to Buyer and will
continue to be in full force and effect in the name of Buyer from and after the
Closing. No proceeding is pending or, to the knowledge of Sellers, threatened,
to revoke or limit any such license or permit.
3.12. EMPLOYEE BENEFITS. Except as set forth on Schedule 3.12 hereto,
Sellers do not maintain and have not established any Employee Plan or similar
arrangement which provides for
9
continuing benefits or coverage for any participant or any beneficiary of a
participant after such participant's termination of employment, except as may be
required by the Internal Revenue Code (the "CODE") Section 4980B or Section 601
ET SEQ. of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or under any applicable state law, and at the expense of the
participant or the beneficiary of the participant. Sellers are in material
compliance in form, administration and operation with ERISA, the Code and all
applicable laws and regulations governing each Employee Plan, and all
instruments constituting each Employee Plan. For purposes of this Agreement,
"Employee Plans" shall include any pension, retirement, savings, disability,
medical, dental, health, life, death benefit, group insurance, profit sharing,
deferred compensation, stock option, bonus, incentive, vacation pay, tuition
reimbursement, severance pay, or other employee benefit plan, trust, agreement,
contract, policy or commitment, whether any of the foregoing is funded, insured
or self-funded, written or oral, sponsored or maintained by either Seller.
3.13. LABOR. Neither Seller is a party to or bound by any collective
bargaining agreement. Neither Seller has experienced any attempt of its
employees to organize into a labor union, association or similar organization.
Except as set forth on Schedule 3.9, no allegation, charge or complaint of age,
disability, sex, religious or race discrimination or similar charge has been
made or threatened to be made by or on behalf of any employee against either
Seller and, to Sellers' knowledge, there is no reasonable basis upon which any
such allegation, charge or complaint could be made. Schedule 3.13 contains a
complete and accurate list of the names, titles, annual compensation, commission
structure, all bonus and similar payments made or that will be made with respect
to such individual for the current fiscal year for all directors, officers and
employees of each Seller and all persons engaged by a Seller to offer and sell
franchises as an independent contractor, if any.
3.14. ENVIRONMENTAL. Seller has no ownership interest in any real
property. As of the Closing Date: (a) To Sellers' knowledge, no hazardous
materials exist on, under or about the Premises; (b) the operation of the
Business is and has been in material compliance with all hazardous materials
laws; and (c) there are no existing or, to Sellers' knowledge, threatened,
claims, demands or actions instituted or pending in connection with the
presence, release or discharge of hazardous materials. For purposes of this
Section, "hazardous materials laws" means all federal, state and local laws
regulating the environmental condition of air, water or real property,
pollution, contamination or clean-up, and "hazardous materials" means any toxic,
radioactive or otherwise hazardous substance, any substance or material defined,
listed or identified as, or meeting the criteria for, "hazardous waste" under
the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901 et seq. or any
similar local, state or federal law or any substance or material defined as a
"hazardous substance" under CERCLA.
3.15. FINANCIAL INFORMATION. Sellers have delivered to Buyer a true and
correct copy of: (i) the audited financial statements of each Seller as at
November 30, 2000, November 30, 1999, and November 30, 1998 (including balance
sheets, profit and loss statements and statements of cash flow, together with
the notes thereto, if any); and (ii) unaudited consolidated financial statements
of IPI for the ten (10) months ended September 30, 2001 (collectively, the
"FINANCIAL STATEMENTS"). Each of the Financial Statements has been prepared in
accordance with the United States generally accepted accounting principles
applied on a consistent basis throughout the periods covered thereby and fairly
presents the financial condition (including
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contingent liabilities) and results of operation of such Seller for the periods
reflected therein and any unaudited financial statements reflect all adjustments
of a normal and recurring nature, necessary for a fair statement, on a basis
consistent with the auditee's audited financial statements.
3.16. BROKERS. Neither Seller has dealt with any broker, finder or
other person entitled to any broker's or finder's fee, commission or other
similar compensation in connection with the transactions contemplated hereby.
3.17. BUSINESS RECORDS. No material records of accounts, franchise
records, or other business records related to the Business have been destroyed
within the last five (5) years, and there exists no such record other than those
records delivered by Sellers to Buyer at the Closing on the Closing Date (other
than the Excluded Assets).
3.18. INTELLECTUAL PROPERTY.
(a) Schedule 3.18(a) correctly identifies (where applicable,
by owner, place of registration, application number and registration or
application dates) all issued domestic and foreign patents, patent
applications, patent applications in process, trademarks, trademark
registrations, trademark registrations applications, service marks,
service mark registration applications, service mark registrations,
copyrights, copyright registrations, copyright registration
applications, license agreements, logos, trade names and slogans owned
by each Seller and which are presently used in and/or necessary to
conduct the Business, including, without limitation, the mark
"Insty-Prints" (the foregoing, along with know-how, proprietary
information and trade secrets owned by Sellers presently used in and/or
necessary to conduct the Business are hereinafter referred to as the
"INTELLECTUAL PROPERTY"). Schedule 3.18 correctly identifies all issued
patents, patent applications pending, patent applications in process,
trademarks, trademark registrations, trademark registration
applications, service marks, service mark registrations, service mark
registration applications, copyrights, copyright registrations,
copyright registration applications, licenses, rights, logos, trade
names, slogans, know-how and trade secrets that are currently expressly
licensed to a Seller ("LICENSED INTELLECTUAL PROPERTY"). Except
pursuant to the Franchise Agreements, neither Seller has granted any
license to any person with respect to any Intellectual Property or
Licensed Intellectual Property. Except as set forth in Schedule 3.18,
the agreements and/or arrangements for the Licensed Intellectual
Property are in full force and effect and are free and clear of all
encumbrances and no material default by Seller exists thereunder.
(b) There are no interference, opposition or cancellation
proceedings or infringement suits pending, or to Sellers' knowledge,
threatened, with respect to any Intellectual Property or Licensed
Intellectual Property. Neither Seller has received any notice of any
infringement, misappropriation or violation by any Seller of any
intellectual property rights of any third party. To Sellers' knowledge,
neither Seller has infringed, misappropriated or otherwise violated any
such intellectual property rights. Neither Seller has received any
notice of any claim by any third party contesting the validity of any
Intellectual Property or Licensed Intellectual Property. To Sellers'
knowledge, no claims by any third party contesting the validity of any
Intellectual Property or Licensed Intellectual Property is threatened.
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3.19. FRANCHISE MATTERS.
(a) Attached as Schedule 3.19(a) is a true, correct and
complete list of the only franchise agreements, master agreements and
development agreements, to which either Seller is a party in connection
with the Business (collectively, the "FRANCHISE AGREEMENTS"). True,
correct and complete copies of the Franchise Agreements have been made
available to Buyer. Schedule 3.19(a) includes with respect to each of
Insty-Prints business (the "FRANCHISED BUSINESS"): (i) the date and or
agreement number or other identifier of the Franchise Agreement
governing the Franchised Business; (ii) the name of the franchisee, the
address of the Franchised Business; the term commencement and
termination date of each Franchise Agreement; and (iii) the names of
each individual or entity that has an ownership or beneficial interest
in or to each of the Franchised Businesses or the franchises.
(b) Neither Seller has directly or indirectly offered or sold
any franchises or business opportunities other than for (a) the
Insty-Prints franchise system and (b) the Change of Mind Learning
franchise system.
(c) Schedule 3.19(a) also contains a list of rights of first
refusal, development rights or similar rights granted to franchisees.
(d) Except as attached as Schedule 3.19(d), there are no
outstanding, pending, or promised applications to enter into any
Franchise Agreements.
(e) Seller has entered into, or acquired rights, title and
interest in, written Franchise Agreements relating to the franchising
of the Franchised Business with all of its Franchisees (as defined in
3.19(f)), and each of the Franchise Agreements is valid, binding and
enforceable in accordance with its terms except as enforcement may be
limited by applicable franchise relationship laws, bankruptcy,
insolvency, reorganization, moratorium and other laws affecting
enforcement of creditors rights generally and, except as the
availability of equitable remedies, may be limited by applicable law;
provided that for the purposes of this subsection 3.19(e), Sellers
assume due execution and delivery of a Franchise Agreement by any
franchisee which is a business entity.
(f) Except as set forth on Schedule 3.19(f), all franchise
agreements which have been entered into by Insty with its current
franchisees or acquired by Insty (the "FRANCHISEES") have been legally
and validly offered and sold in compliance with all applicable laws and
regulations in effect at the time of offer, sale, execution of such
Franchise Agreements. Schedule 3.19(f) includes a description of the
facts that relate to the cause of any invalid or non-compliant offer or
sale. Except as set forth on Schedule 3.19(f), all franchise agreements
which have been terminated by Insty since January 1, 1996 have been
legally and validly terminated in compliance with all applicable laws
and regulations in effect at the time of the termination of such
franchise agreement. The consummation of the transactions contemplated
by this Agreement should not cause the termination of any Franchise
Agreement, nor should it affect the binding nature or enforceability of
any Franchise Agreement.
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(g) Neither Seller has entered into any Franchise Agreements
other than those which are reflected in written and signed documents.
Unless otherwise set forth on a Schedule pursuant to this Section 3.19,
there are no promises, understandings, commitments or other forms of
undertakings which are contrary or in addition to such written
Franchise Agreements. Except as provided in Schedule 3.19(g), neither
Seller has entered into or endeavored to enter into any agreements,
promises or undertakings with Franchisees to reduce royalty payments or
other fees under the Franchise Agreement.
(h) Except as set forth on Schedule 3.19(h), Insty currently
has valid registrations for offering and selling franchises in effect
in each state requiring such registrations, and has valid exemptions
where required in each state having business opportunities laws.
Schedule 3.19(h) includes a chart of all jurisdictions in which Insty
has valid registrations or exemptions, and indicates all lapse periods,
if any.
(i) Except as set forth on Schedule 3.19(h) and Schedule
3.19(f), Insty is in material compliance with, and has been at all
times in material compliance with, all laws, regulations, rules,
consents, decrees or orders of all state, federal or foreign
governmental authorities or regulatory agencies applicable to the
offer, sale or regulation of franchises or its franchising activities.
(j) Except as set forth on Schedule 3.19(j), Seller has
delivered to Buyer, or made available for Buyer's review a true,
correct and complete copy of each form of Uniform Franchise Offering
Circular ("UFOC") used or currently being used by Insty. All UFOC's
used by Insty in the offer or sale of its franchises comply in all
material respects with all applicable federal and state laws and
regulations pertaining to the offer or sale of franchises, including,
without limitation, the Federal Trade Commission's Disclosure Rule
entitled "Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures," 16 C.F.R.ss.436, ET
SEQ., and do not contain any untrue statement of fact or omit - to
state a material fact required to be stated in the UFOC or which would
be necessary to make any statement in the UFOC, in light of the
circumstances under which they were made, not misleading.
(k) Except as set forth on Schedule 3.19(k), all agreements
and understandings between Insty and the Franchisees with regard to the
Insty Prints National Advertising Trust Fund are set forth in the
Franchise Agreements.
(l) Except as set forth on Schedule 3.19(l), neither Seller
has received notice of any proceeding, investigation or inquiry by any
state or federal regulatory agency in which the franchising activities
of Insty is or may be involved, other than comment letters, requests
for information and other routine inquiries, and there are no facts
which are likely to lead to any such proceeding, investigation or
inquiry. Sellers have provided Buyer access to all such comment
letters, requests for information and routine inquiries.
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(m) Except as set forth on Schedule 3.19(m), neither Seller
has received notice of any pending claims, and there are no threatened
claims, by any Franchisees or prospective franchisee against either
Seller relating to any Franchise Agreement or Insty's franchising
activities. Except as set forth in Schedule 3.19(m), to the knowledge
of Sellers, there are no facts relating to the Franchise Agreements or
the franchising activities of Insty which are reasonably likely to lead
to any claim against Sellers or its affiliates.
(n) Sellers do not own, lease, operate or manage any of the
Franchised Businesses.
(o) Schedule 3.19(o) includes a true, correct and complete
list identifying each of Seller's "recommended" or designated suppliers
of goods or services to the Franchised Business.
(p) To the knowledge of Sellers, all Franchised Businesses
that have had their franchise agreements terminated by reason of the
expiration of the term thereof or otherwise (the "TERMINATED STORES")
are no longer operated as Insty-Prints businesses (unless sold to other
Franchisees). Except as set forth on Schedule 3.19(p), to the knowledge
of Sellers, the operators of the Terminated Stores (i) have ceased to
use any Intellectual Property and (ii) have made all changes,
modifications or alternations necessary to eliminate any interior and
exterior design features, decor items, signage and other trade dress
items associated with the Franchised Business.
(q) Schedule 3.19(q) contains a correct and complete list of
all outstanding promissory notes made by a Franchisee to a Seller, as
modified by the Final Promissory Notes Schedule (as defined in Section
7.2(c)). Schedule 3.19(q) also contains a correct and complete list of
all Uniform Commercial Code financing statements filed by a Seller
evidencing such Seller's security interest in the assets of a
Franchisee or a Franchised Business (the "FINANCING STATEMENTS").
3.20. NATIONAL ADVERTISING TRUST FUND.
(a) Schedule 3.20(a) contains a true, correct and complete
list of all accounts used by or in connection with the National
Advertising Trust Fund, as referenced in the Franchise Agreements and
governed by the Trust Agreement (collectively, the "TRUST FUND
ACCOUNT"), in which funds have been deposited. All assets of the
National Advertising Trust Fund are, as of the date of this Agreement,
and will be, as of the Closing Date, deposited in the Trust Fund
Accounts. No monies, other than Franchisees' contributions to the
National Advertising Trust Fund and supplier rebates, marketing and
advertising allowances, if any, have been deposited in the Trust Fund
Account.
(b) All contributions to the National Advertising Trust Fund
made by Franchisees, suppliers or any other person or entity have been
deposited in the Trust Fund Account and used solely for purposes of
marketing and advertising the Franchised Businesses, the Corporate
Stores, or the Insty-Prints system, on behalf of, and for the benefit
of, all of the Franchised Business and the Corporate Stores, or as
otherwise provided in the Franchise Agreement or governing documents of
the National Advertising Trust Fund.
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(c) Sellers have neither possession of, nor control over, any
other funds contributed by Franchisees, suppliers or any other person
or entity for advertising purposes (national or regional), except for
the trustees' control over the funds in the Trust Fund Account. Except
as provided in Schedule 3.20(a), Sellers have not collected and are not
currently holding any fees designated for use in any advertising
program whether related to the National Advertising Trust Fund or
otherwise.
(d) Insty and the trustees of the National Advertising Trust
Fund who are listed on Schedule 3.20 (d) (the "TRUSTEES") have operated
and administered the National Advertising Trust Fund in material
compliance with laws, rules and regulations applicable to the operation
of the National Advertising Trust Fund and in accordance with the
Franchise Agreements, trust fund governing documents, and their
fiduciary and legal responsibilities, if any, established in any
governing documents of the National Advertising Trust Fund and in any
other agreements or understandings entered into with Franchisees,
suppliers, vendors or others in connection with the National
Advertising Trust Fund. As of the Closing Date, the National
Advertising Trust Fund has no material liabilities or obligations
(other than trade payables and subject to Section 5.7, obligations to
franchisees) of any nature, whether accrued, absolute, contingent or
otherwise, including, without limitation, tax liabilities. To Sellers'
knowledge, there exists no basis for the assertion against the National
Advertising Trust Fund, as of the Signing Date or as of the Closing
Date, of any material liability of any nature or in any amount.
(e) Attached as EXHIBIT 3.20(e) are true, correct and complete
copies of the governing documents of the National Advertising Trust
Fund.
3.21. GUARANTEES. Except as disclosed in Schedule 3.21 hereto, neither
Seller is a guarantor or indemnitor or otherwise liable for or in respect of any
indebtedness of any person except as an endorser of checks received by it and
deposited in the ordinary course of business.
3.22. DISCLOSURE. No representation or warranty of Sellers made
hereunder or in the Schedules or in any certificate, statement or other document
delivered by or on behalf of either Seller contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein not misleading. Except as expressly set
forth in this Agreement and the Schedules and, except as may be a matter of
general public knowledge, neither Seller has any knowledge of any facts which
will or may reasonably be expected to have any material adverse effect on the
Business or any of the Acquired Assets.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants the following to Sellers as of the
Signing Date and as of the Closing Date:
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4.1. ORGANIZATION AND STANDING. Buyer is a limited liability company
duly organized, validly existing and in good standing under the laws of the
State of Michigan.
4.2. NO RESTRICTIONS; AUTHORIZATIONS; BINDING EFFECT. Buyer is not
subject to any restriction, agreement, law, rule, regulation, ordinance, code,
writ, injunction, award, judgment or decree which would prohibit or be
materially violated by the execution and delivery hereof or the consummation of
the transactions contemplated hereby. Buyer has all necessary power and
authority and has taken all action necessary to execute and deliver this
Agreement and the instruments, documents and agreements to be executed and
delivered by Buyer pursuant hereto (collectively, the "BUYER'S DOCUMENTS"), to
consummate the transactions contemplated by this Agreement and the Buyer's
Documents and to perform Buyer's obligations under this Agreement and the
Buyer's Documents. This Agreement and each of the Buyer's Documents has been
duly executed and delivered by Buyer and constitutes a legal, valid and binding
obligation of Buyer, enforceable against Buyer in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or similar laws of general applicability
relating to or limiting creditors' rights generally, now or hereafter in effect
and subject to the application of equitable principles and the availability of
equitable remedies.
4.3. BROKERS. Buyer has not dealt with any broker, finder or other
person entitled to any broker's or finder's fee, commission or other similar
compensation in connection with the transactions contemplated hereby.
4.4. DISCLOSURE. No representation or warranty of Buyer made hereunder
or in the Schedules or in any certificate, statement or other document delivered
by or on behalf of Buyer contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading.
ARTICLE 5
COVENANTS OF SELLERS AND BUYER
5.1. OPERATION OF THE BUSINESS. Between the Signing Date and the
Closing Date, Sellers will conduct the Business only in the ordinary course of
business and operate the Business in strict compliance with the Franchise
Agreements, including, without limitation, by: (i) implementing and committing
to implement all marketing, advertising and promotional programs for the
Business consistent with past practice; (ii) principal officers and employees
continuing to work the same or substantially the same number of hours in
operating the Business as such officer or employee has worked in the past while
conducting business in the ordinary course; and (iii) maintaining the same level
of employees; provided, however, Sellers will not implement any new policies,
training programs, or marketing programs respecting the Business without prior
written consent of Buyer. As used herein actions taken in the "ordinary course
of business" shall mean that such action is consistent with the past practices
of Sellers and is taken in the ordinary course of the normal day-to-day
operations of the Business.
5.2. LIABILITIES. From and after the Closing Date, Buyer shall pay and
discharge when due all of the Assumed Liabilities. Sellers, prior to and after
the Closing, shall be solely responsible for the payment and performance, when
due, of any liability or obligation of Sellers for any debt, obligation or
liability of either Seller, whenever arising, which is not an Assumed Liability.
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5.3. CONSENTS. Prior to the Closing, Sellers shall have obtained (and
shall have delivered to Buyer copies of) all Consents as set forth on Schedule
3.8.
5.4. EMPLOYEES.
(a) Sellers shall solely be responsible for all severance,
retirement, welfare, vacation, bonus programs or other benefits, if
any, payable to employees of Sellers under all Employee Plans of either
Seller, any oral or written agreement entered into by either Seller on
or before or after the Closing Date and any promise made by either
Seller to any of its employees on, before or after the Closing Date.
(b) Sellers agree not to terminate, without prior written
consent of Buyer, any of Sellers' employees for a period of sixty (60)
days following the Closing Date (the "Employee Period"); provided that
Sellers may terminate any employee for good cause.
(c) Sellers will make available to Buyer the services of any
employees of Sellers that Buyer, in its sole discretion, determines to
be necessary for the Business, unless (i) the employee terminates his
or her employment with Seller prior to the expiration of the Employee
Period, (ii) Buyer hires any such employee as its employee, (iii) Buyer
determines that any such employee is no longer necessary for its
operations, or (iv) Sellers terminate such employee for good cause, but
with prior written notice to Buyer.
(d) In consideration for the services provided by Sellers'
employees, Buyer will pay Sellers for each employee who performs
services for Buyer, such employee's Employment Rate, as adjusted to
reflect the proportion of such employee's working hours spent in the
service of Buyer. "Employment Rate" shall mean an amount equal to such
employee's base salary and the cost of such employee's benefits under
the Sellers' Employee Plans as set forth on Schedule 3.13. Nothing
contained herein shall restrict Sellers in any way with respect to
those employees whose services are not requested by Buyer or with
respect to employees not hired by Buyer upon the expiration of the
Employee Period. Buyer and Sellers acknowledge and agree that, unless
Buyer expressly makes an offer in writing to an employee for such
employee to become an employee of Buyer, and such employee accepts
Buyer's offer of employment, no employee of a Seller will be deemed an
employee of Buyer for any reason.
5.5. RECEIVABLES.
(a) Within five (5) business days after the Closing, Sellers
will deliver to Buyer an updated schedule of the Receivables which
shall be dated as of the Closing Date (the "Final Receivables
Schedule").
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(b) From the Signing Date until the Closing, Sellers may agree
to any settlement on any Receivables or other amounts owed by
franchisees without prior written consent of Buyer; provided that
Sellers give Buyer written notice of such settlement within five (5)
business days. Buyer will abide by and enforce in a commercially
reasonable manner all written settlement agreements Seller enters into
prior to the Closing with respect to the Receivables and will not
modify any such agreements without Sellers' prior written consent
during the one(1) year period immediately after the Closing Date.
During such one (1) year period, Buyer will use its reasonable efforts
to collect the Receivables in the same manner that Buyer pursues
receivables from its current franchisees, provided that Buyer shall not
be required to institute a lawsuit with respect to any Receivables.
Sellers agree that they will have no rights to the Receivables after
the Closing (except rights to receive payment from Buyer under Section
2.2) and will not contact any Franchisee directly or indirectly with
respect to the Receivables.
(c) Buyer shall provide to Seller on the tenth (10th) day of
each month for a period of eighteen (18) months immediately after the
Closing Date a statement of any Receivables collected during the
immediately preceding calendar month and a statement of the reasonable
out-of-pocket expenses incurred by Buyer in collection of such
Receivables. Seller shall have the right to audit such statement by
reviewing correspondence, records, receipts, financial statements,
accounting work papers and any other Receivables related documents of
Buyer, such audit to be performed at Sellers' expense.
5.6. TAX FILINGS. Prior to the Closing, Seller shall pay all fees,
taxes, penalties and other amounts required by any governmental authority or
applicable law (including, without limitation, with respect to Taxes) in
connection with the purchase and sale of the Acquired Assets or any of the
transactions contemplated by this Agreement. Seller agrees to timely file, and
Buyer agrees to assist and cooperate with Seller in timely filing, any notices
or other documents relating to any Taxes that are required to be filed by Seller
or Buyer with any state or local government agency due to the transactions that
this Agreement contemplates.
5.7. NATIONAL ADVERTISING TRUST FUND.
(a) Set forth on Schedule 5.7 hereto is a statement of (i) all
advertising plans, programs or benefits available to franchisees
relating to the National Advertising Trust Fund (the "Fund") existing
as of the Closing Date (the "Fund Programs") (ii) a description of, and
estimated or actual budget for, Fund Programs approved for calendar
years 2001 and 2002. Sellers shall prepare and deliver to Buyer on the
Closing Date a statement of all accounts payable of the Fund as of the
Closing Date (the "Closing Fund Payables").
(b) Sellers will cause the Fund to be dissolved effective as
of the Closing Date. As of Closing Date, Seller shall cause all Fund
Assets to be transferred to an account designated by Buyer for the
benefit of the Franchisees, the Franchised Businesses and the
Insty-Prints system and Buyer shall assume all Closing Fund Payables
and pay the same when due, pursuant to an Assignment and Assumption of
National Advertising Trust Fund Assets in a form mutually agreed upon
by Sellers and Buyer ("ASSIGNMENT AND ASSUMPTION OF FUND ASSETS").
"Fund Assets" shall mean amounts remaining in the Trust Fund Account,
together with all rights of Sellers in and to any and
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all assets of the Fund held for the benefit of the Franchisees or any
other party having a beneficial interest therein, including, without
limitation, cash, accounts receivables, deposits, advertising
materials, and rights to rebates, marketing and advertising allowances.
As of the Closing, the Fund Assets will be free and clear of any
Encumbrances whatsoever.
(c) Sellers will indemnify and hold harmless Buyer from and
against any and all issues, damages, expenses or claims of any nature
made by any party with respect to the Fund arising on or before the
Closing Date; provided that Buyers will be responsible for
reimbursement obligations pursuant to the Fund Programs set forth in
Schedule 5.7. Buyer will indemnify and hold harmless Sellers from and
against any and all issues, damages, expenses or claims that relate (i)
solely to Buyer's administration of the Fund after the Closing Date or
(ii) provided Seller dissolves the Fund pursuant to the terms of the
Trust Agreement and applicable laws, the dissolution of the Fund by
Seller and transfer of Fund Assets to the Buyer.
(d) On and after the Closing Date, Buyer covenants and agrees,
for a period of one (1) year after the Closing Date, to continue,
maintain and administer Fund Programs as described on Schedule 5.7 and
as such Fund Programs have been established and historically
administered under the Trust Agreement.
5.8. TRANSITION ASSISTANCE. From and after the Signing Date, Sellers
will cooperate with and obtain the approval of Buyer, which approval will not be
unreasonably withheld, with respect to all decisions made after such date
relating to all Franchise Agreements, other contracts, commitments and
communications with Franchisees, communications with Franchisees regarding the
transactions which are the subject of this Agreement and filing with
governmental agencies. From and after the Signing Date, Sellers will assist
Buyer, at Buyer's reasonable out-of-pocket expense, if any, in converting
Sellers' electronic data files relating to billing, accounts receivable, payment
processing, adjustments and credit memos, accounts payable, inventory and sales
history for royalties, National Advertising Trust Fund, matching funds, sales of
supplies, advertising cooperatives and notes to Buyer's electronic accounting
and franchise information systems. Sellers will in good faith assist and
cooperate with Buyer to make all reasonable efforts to complete such conversion
process by November 21, 2001. Such assistance will include, but not be limited
to, providing the foregoing information in a comma delimited file with
descriptions of each field.
5.9. TRADE NAMES.
(a) From and after the Closing Date, neither Seller shall have
any rights to or interest in the name "Insty-Prints" or any variation
thereof. At the Closing, Sellers shall deliver to Buyer a certified
copy of duly adopted joint resolutions of the Board of Directors and
the sole shareholder of Insty authorizing an amendment to the Articles
of Incorporation of Insty to change the corporate name of Insty to
comply with the provisions of this Section 5.9, as well as a copy of
the Articles of Amendment for Insty to be filed with both the
Department of Revenue of the State of Minnesota and the Secretary of
State of Minnesota. Sellers also shall cease using all Intellectual
Property in connection with the Corporate Stores and remove all signs
identifying such stores as Insty-Prints stores.
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(b) Sellers shall grant Buyer and its affiliates a
non-exclusive license to use the "IPI" name and mark in connection with
the Business, but only to the extent currently used by Sellers. Buyer
acknowledges the importance to Sellers of the reputation and goodwill
of the "IPI" name and mark. Buyer, therefore, agrees to maintain the
reasonable standards of quality as may be set by Sellers from time to
time.
5.10. DUE DILIGENCE. Prior to the Closing Date, Buyer shall have the
right to conduct such due diligence, and Sellers shall provide such due
diligence or access to requested information, as Buyer reasonably requires in
order to satisfy itself with respect to the Business, the Acquired Assets and
the Assumed Liabilities. Sellers will provide Buyer full access to, and
authorize Buyer to make copies of all of the contents of all files maintained by
Sellers' attorneys, brokers or other agents relating to the Franchisees, the
Acquired Assets, the Insty-Prints system, the Franchised Businesses and the
conduct of the Business prior to the Closing.
5.11. PRE-CLOSING DELIVERIES. Not less than five (5) business days
before the Closing Date, Sellers shall deliver to Buyer:
(a) a list of all Trade Credits and Accrued Liabilities to be
assumed by Buyer at the Closing (the "Final Trade Credits and Accrued
Liabilities Schedule");
(b) a true and correct list of all Uniform Commercial Code
financing statements filed by a Seller evidencing such Seller's
security interest in the assets of a Franchisee or a Franchised
Business (the "Financing Statements");
(c) a substantially complete list of all Purchase Orders;
(d) a list of all Inventory which will be delivered to Buyer
at the Closing;
(e) all signed Consents;
(f) a schedule of royalties paid by each Franchisee to Sellers
each month since December 1, 2000; and
(g) of a list of and a description of the variations in
insurance coverage Insty requires the Franchisees to maintain. Sellers
also agree to deliver to Buyer a list of Franchisees who, to Sellers'
knowledge, do not have the required policies in full force and effect
and/or have not named Sellers as additional insureds under their
respective policies; and
(h) a statement of the "net book value" of the prepaids as of
the Closing Date (the "Final Prepaids Schedule") as agreed upon by the
parties;
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(i) an updated Schedule 3.19(o) amended to include a true,
correct and complete list of every agreement then in effect entered
into by either Seller for, and any of Seller's "recommended" or
designated suppliers of, goods or services to the Franchise Business;
and
(j) a statement of Closing Fund Payables pursuant to Section
5.7.
5.12. CONFIDENTIALITY. Sellers shall at all times (including after the
Closing) maintain the absolute confidentiality of the Confidential Information
(defined below) and shall not use or disclose the Confidential Information in
any manner whatsoever, other than in connection with the consummation of the
transactions that this Agreement contemplates. As used in this Section 5.12,
"CONFIDENTIAL INFORMATION" means all information acquired by Sellers relating to
any financial, strategic or business plans, data or analyses of Buyer, or any of
their licensees or franchisees. Notwithstanding the foregoing, nothing contained
herein shall prohibit Seller, from (a) disclosure of Confidential Information
which are generally known to the public and (b) disclosure of Confidential
Information in legal proceedings when Sellers are legally required to disclose
it, provided that Sellers give Buyer an opportunity to obtain an appropriate
legal protective order or other assurance satisfactory to Buyer that the
information required to be disclosed will be treated confidentially.
ARTICLE 6
TERMINATION
6.1. TERMINATION BY BUYER. This Agreement and the transactions
contemplated hereby may be terminated by Buyer at any time prior to the Closing
if:
(a) Sellers' representations and warranties are not true and
correct as of the Closing Date; or
(b) either Seller has failed in any manner to timely perform
or comply with any covenant to be performed by it hereunder; or
(c) Seller fails to deliver any executed Consent (including
from the landlord under the sublease for the Premises); or
(d) at any time between the Signing Date and the Closing Date
there occurs a material adverse change in any Acquired Asset, the
Business, the condition (financial or other), results of operations or
prospects of Sellers, or any information disclosed to Buyer in the
Schedules delivered to Buyer on the Signing Date; or
(e) Seller shall have received a written statement by Buyer on
or before 5:00 p.m. Minneapolis, Minnesota time on November 27, 2001
notifying Seller that based upon its review of materials (described on
Schedule 6.1(e)) provided by Sellers to Buyer after the Signing Date,
Buyer in its reasonable judgement concludes that either (i) there has
been an uncured breach of any of the representations, warranties or
pre-closing covenants of Sellers hereunder; or (ii) Buyer has learned
from its review of Schedule 6.1(e) materials, of any event or condition
which could reasonably be expected to have a material adverse effect on
any Acquired Asset or the Business. Provided however, that any written
statement to be provided under this Section 6.1(e) which is received by
Seller
21
after 5:00 p.m. Minneapolis, Minnesota time on November 27, 2001 shall
be ineffective to terminate the transactions contemplated by this
Agreement. Provided further, that Buyer's review under this Section
6.1(e) shall have no effect on the liability of Sellers to Buyer under
this Agreement for breach of any representations, warranties or
covenants of Sellers hereunder.
Nothing herein shall be construed to prevent Buyer, in its sole and
absolute discretion, from waiving in writing any of the above conditions, in
whole or in part, at any time up to the Closing.
6.2. TERMINATION BY SELLER. This Agreement and the transactions
contemplated hereby may be terminated by Seller at any time prior to the Closing
if:
(a) Buyer's representations and warranties are not true and
correct as of the Closing Date; or
(b) Buyer has failed in any manner to timely perform or comply
with any covenant to be performed by it hereunder.
(c) IPI does not obtain approval of the transaction
contemplated by this Agreement by the affirmative vote of the holders
of a majority of the outstanding shares of IPI's Common Stock entitled
to vote at a meeting of shareholders called for that purpose, other
than failure of IPI to obtain approval as a result of actions of
shareholders who are also officers, directors or who benficially own in
excess of 10% of the outstanding shares of IPI's Common Stock. Nothing
herein shall be construed to prevent either Seller, in such Seller's
sole and absolute discretion, from waiving in writing any of the above
conditions, in whole or in part, at any time up to the Closing.
ARTICLE 7
CLOSING DELIVERIES
7.1. CLOSING DOCUMENTS. At the Closing, the parties hereto shall
execute and deliver the following agreements and documents:
(a) Buyer and each Seller shall execute and deliver the
assumption agreement substantially in the form of EXHIBIT 7.1(a)
attached hereto;
(b) Insty shall execute and deliver to Buyer an intellectual
property substantially in the form of EXHIBIT 7.1(b) attached hereto;
(c) Insty shall execute and deliver to Buyer executed
assignments, in form for filing with applicable governmental agencies,
of all Intellectual Property;
(d) Sellers shall execute and deliver to Buyer executed
assignments (with consents, if required) of each agreement constituting
Licensed Intellectual Property;
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(e) Sellers shall execute and deliver a Bill of Sale,
substantially in the form of EXHIBIT 7.1(e) attached hereto, conveying
good and marketable title to all Acquired Assets not otherwise
transferred or conveyed pursuant to this Section;
(f) Buyer and Sellers shall execute and deliver the
Restrictive Covenant Agreement substantially in the form of EXHIBIT
7.1(f) attached hereto;
(g) Buyer and IPI shall execute and deliver the Temporary
Space License Agreement substantially in the form of EXHIBIT 7.1(g)
attached hereto;
(h) Sellers shall execute all amendments and/or assignment
necessary to assign all of Sellers' interest in the Financing
Statements to Buyer;
(i) Sellers shall cause the Trustees and Insty to execute the
Assignment of Fund Assets and any other documents reasonably required
for the purposes of Section 5.8; and
(j) Buyer and Sellers shall execute and deliver such other
instruments and documents as are reasonably required in order to
consummate the transactions contemplated hereby.
7.2. ADDITIONAL DELIVERIES BY SELLERS. Sellers, at their sole expense,
shall deliver to Buyer at the Closing:
(a) certified copies of joint resolutions duly adopted by the
shareholders and the Board of Directors of each Seller authorizing the
execution of this Agreement and the consummation of the transactions
contemplated hereby;
(b) Certificates of Good Standing of Insty and IPI, dated
within fifteen (15) days prior to the Closing Date, from the state of
incorporation and any other state or foreign jurisdiction within which
such Seller is qualified to do business as a foreign corporation;
(c) A correct and complete list of all outstanding promissory
notes made by a Franchisee to a Seller as of the day immediately prior
to the Closing Date (the "Final Promissory Note Schedule");
(d) certificate from each Seller, signed by an officer of such
Seller, dated as of the Closing Date, certifying, without
qualifications or exceptions, (i) all pre-closing covenants set forth
in Article 5 have been fully satisfied and (ii) all representations and
warranties of such Seller contained herein or in any certificate or
other writing delivered pursuant hereto or in connections herewith are
accurate as of the Closing date. Each such certificate shall be deemed
a representation and warranty by such Seller.
(e) an opinion of Lindquist & Vennum, P.L.L.P., counsel to
Sellers, dated the Closing Date, in the form of EXHIBIT 7.2(e) attached
hereto.
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7.3. ADDITIONAL DELIVERIES BY BUYER. Buyer, at its expense, shall
deliver to Sellers at the Closing:
(a) certified copy of resolutions duly adopted by members of
Buyer authorizing the execution of this Agreement and the consummation
of the transactions contemplated hereby; and
(b) opinion of Piper Marbury Rudnick & Wolfe, counsel to
Buyer, dated the Closing Date, in the form of EXHIBIT 7.3(b) attached
hereto.
ARTICLE 8
INDEMNIFICATION
8.1. INDEMNIFICATION BY SELLERS. Sellers, jointly and severally, shall
indemnify, defend and hold harmless Buyer and its affiliates and each of their
respective shareholders, officers, directors, agents, representatives,
employees, successors and assigns (collectively, the "BUYER INDEMNIFIED
PARTIES") against all costs, expenses, losses, direct or indirect damages
(including incidental, consequential and punitive damages), fines, penalties or
liabilities (including, without limitation, attorneys' fees, arbitrators' fees,
expert witness fees, costs of investigation and proof of facts and other costs
of litigation or arbitration, whether or not such litigation or arbitration is
commenced) (collectively, "DAMAGES") incurred by any of the Buyer Indemnified
Parties and arising directly or indirectly from, with respect to or in
connection with:
(a) the existence of any fact, circumstance or condition
constituting a breach or violation of any of the representations and
warranties of a Seller contained in this Agreement or any other
document delivered by a Seller to Buyer in connection herewith;
(b) the breach by a Seller of any covenant or agreement
contained in this Agreement or any other document delivered by a Seller
to Buyer in connection herewith;
(c) any threatened or instituted claim, suit, action or cause
of action, investigation or proceeding of any kind whatsoever, whether
instituted or commenced prior to or after the Closing Date, which
relates to, or arises directly or indirectly from, the Business or the
Acquired Assets on or before the Closing Date; and
(d) any threatened or instituted claim, suit, action or cause
of action, investigation or proceeding of any kind whatsoever, whether
instituted or commenced prior to or after the Closing Date, which
relates to, or arises directly or indirectly from, the employees of a
Seller before, on or after the Closing Date.
If any indemnification obligation under this Section 8.1 might arise from the
claim, action or allegation of a third party or any litigation or alternate
dispute resolution resulting therefrom (a "CLAIM"), Sellers shall assume the
defense of any such Claim and any investigation, defense and settlement
resulting from such Claim, provided that Sellers shall use counsel reasonably
satisfactory to Buyer to defend against such Claim and may not settle any such
Claim without the prior written consent of Buyer, which shall not be
unreasonably withheld. Notwithstanding the
24
above, Buyer may, at its option, participate in the investigation, defense and
settlement of any Claim and engage counsel of its choice to participate in the
defense of any Claim at Buyer's risk and expense, provided that Buyer and its
counsel shall proceed diligently and in good faith with respect thereto.
8.2. INDEMNIFICATION BY BUYER. Buyer shall indemnify, defend and hold
harmless Sellers, their affiliates and each of their respective shareholders,
officers, directors, agents, representatives, employees, successors and assigns
(collectively, the "SELLER INDEMNIFIED PARTIES") against all Damages incurred by
any of the Seller Indemnified Parties and arising directly or indirectly from,
with respect to or in connection with:
(a) the existence of any fact, circumstance or condition
constituting a breach or violation of any of the representations and
warranties of Buyer contained in this Agreement or any other document
delivered by Buyer to Sellers in connection herewith;
(b) a breach by Buyer of any covenant or agreement contained
in this Agreement or any other document delivered by Buyer to Sellers
in connection herewith;
(c) any threatened or instituted claim, suit, action or cause
of action, investigation or proceeding of any kind whatsoever which
relates solely to or arises solely from the Business or the Acquired
Assets after the Closing Date;
(d) any of the Assumed Liabilities.
If any indemnification obligation under this Section 8.2 might arise
from a Claim, Buyer shall assume the defense of such Claim and any
investigation, defense and settlement resulting from such Claim, provided that
Buyer shall use counsel reasonably satisfactory to Sellers to defend against
such Claim and may not settle any such Claim without the prior written consent
of Sellers, which shall not be unreasonably withheld. Notwithstanding the above,
Sellers may, at their option, participate in the investigation, defense and
settlement of any Claim and engage counsel of their choice to participate in the
defense of any Claim at Sellers' expense, provided that Sellers and their
counsel shall proceed diligently and in good faith with respect thereto.
8.3. SURVIVAL. All covenants and agreements of any party hereto shall
survive the Closing. Except as is otherwise expressly provided in this Section
8.3, all representations and warranties of any party hereto set forth herein
shall survive the Closing for a period of one (1) year following the Closing
Date, at which time they shall be deemed terminated. Any representation and
warranty in Section 3.6 or any representation or warranty which was known by
Sellers to be untrue when made shall survive the Closing without limitation. Any
claim which Buyer makes against Sellers in writing prior to the expiration of
the applicable cut-off period set forth in this Section 8.3 shall survive the
expiration of such period and Buyer shall have the right to pursue the same in
accordance with the applicable indemnification provisions set forth in this
Agreement. Any representation and warranty in this Agreement shall be deemed to
be material and to have been relied upon by the party to which made,
notwithstanding any investigation or inspection made by or on behalf of such
party, and shall not be affected in any respect by any such investigation or
inspection.
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8.4. RIGHT TO OFFSET. To the extent Buyer is entitled to any payment
for indemnification under Section 8.1 hereof or any payment under Section 5.5(a)
(an "INDEMNIFICATION PAYMENT"), Buyer may (but is not obligated to) offset any
part or the full amount of any such Indemnification Payment against any payment
or payments, if any, coming due from Buyer to Sellers under this Agreement or
otherwise until such Indemnification Payment is fully satisfied; provided,
however, that nothing herein shall be deemed to prohibit or restrict Buyer's
right or ability to collect any Indemnification Payment.
ARTICLE 9
MISCELLANEOUS
9.1. ARBITRATION. ALL CONTROVERSIES, DISPUTES OR CLAIMS BETWEEN BUYER,
ITS OFFICERS, DIRECTORS, AGENTS, EMPLOYEES AND ATTORNEYS (IN THEIR
REPRESENTATIVE CAPACITY) AND SELLER ARISING OUT OF OR RELATING TO: (1) THIS
AGREEMENT OR ANY PROVISION HEREOF OR ANY RELATED AGREEMENT; (2) THE RELATIONSHIP
OF THE PARTIES HERETO; OR (3) THE VALIDITY OF THIS AGREEMENT OR ANY RELATED
AGREEMENT, OR ANY PROVISION HEREOF; SHALL BE SUBMITTED FOR ARBITRATION TO BE
ADMINISTERED BY THE AMERICAN ARBITRATION ASSOCIATION. SUCH ARBITRATION
PROCEEDINGS SHALL BE CONDUCTED IN CHICAGO, ILLINOIS AND, EXCEPT AS OTHERWISE
PROVIDED IN THIS AGREEMENT, SHALL BE CONDUCTED BY ONE ARBITRATOR IN ACCORDANCE
WITH THE THEN CURRENT COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION
ASSOCIATION. THE ARBITRATOR SHALL HAVE THE RIGHT TO AWARD OR INCLUDE IN HIS OR
HER AWARD ANY RELIEF WHICH HE OR SHE DEEMS PROPER IN THE CIRCUMSTANCES,
INCLUDING, WITHOUT LIMITATION, MONEY DAMAGES (WITH INTEREST ON UNPAID AMOUNTS
FROM DATE DUE), SPECIFIC PERFORMANCE, INJUNCTIVE RELIEF, ATTORNEYS' FEES AND
COSTS. THE AWARD AND DECISION OF THE ARBITRATOR SHALL BE CONCLUSIVE AND BINDING
UPON ALL PARTIES HERETO AND JUDGMENT UPON THE AWARD MAY BE ENTERED IN ANY COURT
OF COMPETENT JURISDICTION. ALL MATTERS WITHIN THE SCOPE OF THE FEDERAL
ARBITRATION ACT (9 U.S.C. SECTIONS 1 ET SEQ.) SHALL BE GOVERNED BY IT AND NOT BY
ANY STATE ARBITRATION LAW. THE PARTIES FURTHER AGREE THAT IN CONNECTION WITH ANY
SUCH ARBITRATION PROCEEDING EACH SHALL FILE ANY COMPULSORY COUNTERCLAIM (AS
DEFINED BY RULE 13 OF THE FEDERAL RULES OF CIVIL PROCEDURE) WITHIN THIRTY (30)
DAYS OF THE DATE OF THE FILING OF THE CLAIM TO WHICH IT RELATES; OTHERWISE, SUCH
COUNTERCLAIM SHALL BE FOREVER BARRED. THE PARTIES FURTHER AGREE THAT ARBITRATION
WILL BE CONDUCTED ON AN INDIVIDUAL, NOT A CLASS-WIDE BASIS AND THAT AN
ARBITRATION PROCEEDING BETWEEN THE PARTIES, AND/OR THEIR AFFILIATES' RESPECTIVE
SHAREHOLDERS, OFFICERS, DIRECTORS, AGENTS AND/OR EMPLOYEES, MAY NOT BE
CONSOLIDATED WITH ANY OR OTHER ARBITRATION PROCEEDING. DESPITE THE PARTIES'
AGREEMENT TO ARBITRATE, BUYER AND SELLERS EACH HAVE THE RIGHT IN A PROPER CASE
26
TO SEEK TEMPORARY RESTRAINING ORDERS AND TEMPORARY OR PRELIMINARY INJUNCTIVE
RELIEF FROM A COURT OF COMPETENT JURISDICTION; PROVIDED, HOWEVER, THAT SELLERS
AND BUYER MUST CONTEMPORANEOUSLY SUBMIT THEIR DISPUTE FOR ARBITRATION ON THE
MERITS AS PROVIDED IN THIS SUBSECTION.
9.2. CONSENT TO JURISDICTION. Subject to the parties' obligations under
Section 9.1, Buyer and Sellers agree that all actions arising under this
Agreement, any related agreement, the relationship of the parties hereto, or the
validity of this Agreement or any related agreement must be commenced in the
state or federal court of general jurisdiction in or nearest to Troy, Michigan.
Sellers and Buyer irrevocably submit to the jurisdiction of those courts and
waive any objection of jurisdiction or venue in those courts.
9.3. TRANSACTION EXPENSES. Each party will bear all of its own
respective expenses incurred in the negotiations and consummation of the
transactions contemplated hereby, including all legal, accounting and other
advisors' fees.
9.4. NOTICES. All notices, requests, demands and other communications
required or permitted under this Agreement are sufficient if in writing and
delivered personally, delivered by a nationally recognized overnight courier
service, mailed first-class, postage prepaid, registered or certified mail, or
facsimile and in any event addressed as follows:
If to Buyer to: Allegra Holdings LLC
1800 West Maple Road
Troy, MI 48084
Attention: Mr. William McIntire
Fax: (248) 614-3719
with a copy to: Piper Marbury Rudnick & Wolfe
203 North LaSalle Street, Suite 1800
Chicago, IL 60601
Attention: Fredric A. Cohen, Esq.
Fax: (312) 236-7516
If to Sellers to: Jacobs Management Corporation
2900 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Attention: David Mahler
Fax: (612) 338-8188
with a copy to: Lindquist & Vennum, P.L.L.P.
4200 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Attention: John H. Strothman
Fax: (612) 371-3207
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Notice is effective (a) when delivered personally, (b) on the business
day after being sent by nationally recognized courier service or transmittal by
facsimile, or (c) three (3) business days after being sent by registered or
certified mail. Either party may designate, by notice in writing, a new address
to which any notice, demand or communication may hereafter be so given or sent.
9.5. WRITTEN AGREEMENT TO GOVERN. This Agreement (along with all
documents and instruments to be delivered pursuant hereto, including all
Exhibits and Schedules) sets forth the entire understanding, and supersedes all
prior and contemporaneous discussions, negotiations, understandings and oral and
written agreements, among the parties relating to the subject matter it contains
and merges all prior and contemporaneous discussions among them. No party shall
be bound by any definition, condition, representation, warranty, covenant or
provision other than as expressly stated in this Agreement or in the other
documents referred to in this Agreement which form a part of this Agreement.
9.6. CONSTRUCTION. The parties expressly agree that it is not any
party's intention to violate any public policy, statutory or common laws, rules,
regulations, treaties or decisions of any government. If any provision of this
Agreement is judicially or administratively interpreted or construed as being
unenforceable, such provision shall be inoperative, and the remainder of this
Agreement shall remain binding upon the parties. If any provision of this
Agreement is determined by a court of competent jurisdiction to be invalid as
written by reason of its scope, the parties intend that such provision be
enforced to the maximum extent permitted under applicable laws.
9.7. WAIVER OF PROVISIONS. The headings in this Agreement are inserted
for convenience of reference only and are not a part of and will not control or
affect the meaning of this Agreement. The terms, covenants, representations,
warranties and conditions of this Agreement may be waived only by a written
instrument executed by the party waiving compliance. The failure of any party at
any time to require performance of any obligation under this Agreement or any
other instrument or document to be delivered pursuant hereto shall in no manner
affect the right at a later date to enforce the same. No waiver by any party of
any condition, or any breach of any provision, term, covenant, representation or
warranty contained in this Agreement, whether by conduct or otherwise in any one
or more instances, shall be deemed to be or construed as a further or continuing
waiver of any such condition or the breach of any other provision, term,
covenant, representation or warranty of this Agreement.
9.8. LAW TO GOVERN. All matters relating to arbitration shall be
governed exclusively by the Federal Arbitration Act (9 U.S.C. Sections 1 ET
SEQ.). Except to the extent governed by the Federal Arbitration Act or other
federal law, all matters arising from or relating to the validity, construction
or enforceability of this Agreement shall be governed in all respects by the
laws of the State of Michigan, without regard to its conflicts of laws rules.
9.9. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, personal
representatives, administrators successors and assigns; however, neither this
Agreement nor the rights or obligations of either Seller arising hereunder or in
connection herewith may be assigned by such Seller except with the written
consent of Buyer, which consent shall not be unreasonably withheld.
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9.10. THIRD PARTY BENEFICIARIES. Nothing in this Agreement shall confer
any rights upon any person or entity other than the parties hereto and their
respective heirs, successors and permitted assigns.
9.11. FURTHER ASSURANCES. From the Signing Date until the Closing Date,
and continuing after the Closing, the parties agree (a) to use all reasonable
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable to consummate and effectuate the
transaction contemplated by this Agreement; (b) to execute and deliver to the
others any documents, instruments or conveyances of any kind which may be
reasonably necessary or advisable to consummate and effectuate the transactions
contemplated by this Agreement, including, without limitation, any documents
requested by the telephone company or other service provider in connection with
the transfer of the telephone number or any service used in the Business'
operation to Buyer; and (c) to cooperate with each other in connection with the
foregoing.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on the day and year first written above.
BUYER: SELLERS:
ALLEGRA HOLDINGS LLC, IPI, INC., a Minnesota corporation
a Michigan limited liability company
By: /s/ Mark A. Crowley By: /s/ Robert J. Sutter
--------------------------------- ---------------------------------
Mark A. Crowley Robert J. Sutter
Its: Vice President of Finance Its: President
INSTY-PRINTS, INC., a Minnesota
corporation:
By: /s/ David C. Oswald
---------------------------------
David C. Oswald
Its: President
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Appendix B
PLAN OF
LIQUIDATION AND DISSOLUTION
OF IPI, INC.
1. Plan of Dissolution. This Plan of Liquidation and Dissolution (the
"Plan") is intended to accomplish the complete liquidation and dissolution of
IPI, Inc., a Minnesota corporation (the "Company'") through the distribution by
it of all of its assets in accordance with the laws of the State of Minnesota.
Said liquidation and dissolution shall be accomplished in the manner stated in
this Plan. Subject to any rights of third parties, the Board of Directors may,
notwithstanding shareholder authorization of the Plan and of the dissolution of
the Company, amend this Plan from time to time.
2. Approval of Plan. This Plan shall become effective immediately after
all of the following have occurred (a) the Board of Directors has called a
Special Meeting of the Shareholders of the Company for the purpose of allowing
the shareholders to consider and act on the liquidation of the Company and its
dissolution pursuant to Section 302A.721 of the Minnesota Business Corporation
Act, or has otherwise submitted such matter to a vote of the shareholders of the
Company and (b) the shareholders of the Company have approved such liquidation
and dissolution and have adopted this Plan by an affirmative vote of at least a
majority of the outstanding shares of Common Stock of the Company at the Special
Meeting to which due notice is given.
3. Time Period. The sale, exchange, transfer or other disposition of
the assets, properties and rights of the Company shall be initiated and
completed as expeditiously as practicable after the approval and adoption of the
Plan by the shareholders of the corporation.
4. Distribution of Assets. After approval and adoption of the Plan by
the Company's shareholders, the Company, by its duly authorized officers, shall:
(a) Collect the proceeds of that certain Asset Purchase Agreement
dated November 15, 2001 by and among Allegra Holdings, LLC,
IPI, Inc. and Insty-Prints, Inc. (the "Asset Purchase
Agreement");
(b) Collect all monies owed to the Company and convert, to the
extent practicable, all other assets of the Company, if any,
to cash;
(c) Pay or make adequate provision for payment, of all debts and
liabilities of the Company, including all expenses of the sale
of its assets and of the liquidation and dissolution provided
for in this Plan;
(d) To the extent deemed necessary by the Board of Directors,
establish and set aside a reasonable amount (the "Contingency
Reserve") to meet claims against the Company, including
ascertained or contingent liabilities and expenses;
(e) To the extent deemed necessary or appropriate by the Board of
Directors, hold in trust for the benefit of the Company's
shareholders (a) those shares of Clarent Corporation common
stock, $.001 par value, held by the Company as of the date of
approval by the shareholders of this Plan (the "Clarent
Stock") (b) any and all claims, actions, suits, proceedings,
causes of action relating to the Company's ownership of the
Clarent Stock and (c) judgments, damages, penalties, fines,
settlements or any monies received by the Company in
connection with any of the preceeding (the "Clarent Assets");
(f) To the extent deemend necessary of appropriate by the Board of
Directors, maintain any suit, proceeding or action relating to
the Clarent Stock and pay expenses and costs relating to the
same;
(g) Give notice to known and unknown creditors by publication and
mail;
(h) Distribute to the shareholders pro rata by ownership of the
outstanding common stock of the Company all of the Company's
assets (other than the Contingency Reserve and Clarent Assets)
in complete cancellation and redemption of the outstanding
stock of the Company in one or more distributions;
(i) At the later of (a) expiration of the statutory period for
claims by creditors or (b) resolution of all matters provided
for by the Contingency Reserve or (c) the sale of the Clarent
Stock or liquidation of Clarent Assets, and after payment of
the costs of the establishment and maintenance associated the
Contingency Reserve and Clarent Assets, distribute to
shareholders pro rata by ownership of the outstanding common
stock of the Company the remainder of the Company's assets;
(j) Be formally dissolved in accordance with the applicable
provisions of the laws of the State of Minnesota and the
Federal Government, including, but not limited to, the filing
of a Notice of Intent to Dissolve and Articles of Dissolution
with the Minnesota Secretary of State and the filing of Form
966 with the Internal Revenue service.
5. Authority of Board and Officers. The adoption of the Plan by its
shareholders shall constitute full and complete authority for the Board of
Directors and the proper officers of the Company, without further shareholder
action, to do and perform any and all acts and to make, execute and deliver any
and all agreements, conveyances, assignments, transfers, certificates and other
documents of any kind and character which such officers deem necessary or
appropriate: (i) to sell, dispose, convey, transfer and deliver the assets of
the Company, (ii) to satisfy or provide for the satisfaction of the obligations
of the Company; (iii) to distribute any remaining assets of the Company to its
shareholders or for their benefit to the extent provided above and (iv) to
dissolve the Company in accordance with the laws of the State of Minnesota and
cause its withdrawal from all jurisdictions in which it is authorized to do
business.
APPENDIX C
FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
IPI, INC. AND SUBSIDIARIES
PRO FORMA FINANCIAL STATEMENTS
Pro Forma Unaudited Condensed Consolidated Statement of Operations
For the Twelve Months Ended November 30, 2000
Pro Forma Unaudited Condensed Consolidated Statement of Operations
For the Nine Months Ended August 31, 2001
Pro Forma Unaudited Condensed Balance Sheet as of August 31, 2001
Notes to Pro Forma Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Balance Sheets as of November 30, 2000 and 1999
Consolidated Statements of Operations for Each of the Three Years
in the Period Ended November 30, 2000
Consolidated Statements of Shareholders' Equity for Each of the Three Years
in the Period Ended November 30, 2000
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended November 30, 2000
Notes to Consolidated Financial Statements
IPI, INC. & SUBSIDIARIES
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED NOVEMBER 30, 2000
HISTORICAL PRO FORMA IPI
ADJUSTMENTS PRO FORMA
(1)
REVENUES:
Insty-Prints royalty and franchise fees $ 4,463,000 ($4,463,000) $ 0
Printing supplies and services 2,590,000 (2,590,000) --
Company-owned print locations 1,680,000 -- 1,680,000
Change of Mind Learning royalty fees
and other income 116,000 -- 116,000
Other income 445,000 (445,000) --
----------- ----------- -----------
Total Revenues 9,294,000 (7,498,000) 1,796,000
----------- ----------- -----------
COSTS AND EXPENSES:
Insty-Prints franchise and printing operations:
Cost of sales-supplies and services 1,935,000 (1,935,000) --
Cost of sales-print locations 504,000 -- 504,000
Selling, general and administrative 5,092,000 (3,082,000)(4) 2,010,000
Charge for closing store 840,000 -- 840,000
Amortization of Goodwill 230,000 (214,000) 16,000
----------- ----------- -----------
Total Costs and Expenses 8,601,000 (5,231,000) 3,370,000
----------- ----------- -----------
Change of Mind Learning franchsie operations:
Selling, general and administrative 855,000 -- 855,000
Amortization of Goodwill 42,000 -- 42,000
Write-off of Goodwill -- -- --
----------- ----------- -----------
Total Costs and Expenses 897,000 -- 897,000
----------- ----------- -----------
OPERATING INCOME (204,000) (2,267,000) (2,471,000)
-----------
Interest and dividens on investments 424,000 120,000 (2) 544,000
Interest expense on margin loans (117,000) -- (117,000)
Net gain on disposal of securities & other 480,000 -- 480,000
----------- ----------- -----------
787,000 120,000 907,000
Income Before Income Taxes 583,000 (2,147,000) (1,564,000)
Income Tax Expense 233,000 (907,000) (674,000)
----------- ----------- -----------
NET INCOME $ 350,000 ($1,240,000) ($ 890,000)
=========== =========== ===========
BASIC AND DILUTED EARNINGS PER
COMMON SHARE $ 0.07 $ (0.18)
=========== ===========
C-1
IPI, INC. & SUBSIDIARIES
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED AUGUST 31, 2001
HISTORICAL PRO FORMA IPI
ADJUSTMENTS PRO FORMA
(1)
REVENUES:
Insty-Prints royalty and franchise fees $ 3,153,000 ($ 3,153,000) $ 0
Printing supplies and services 1,495,000 (1,495,000) --
Company-owned print locations 821,000 -- 821,000
Change of Mind Learning royalty fees
and other income 68,000 -- 68,000
Other income 314,000 (314,000) --
------------ ------------ ------------
Total Revenues 5,851,000 (4,962,000) 889,000
------------ ------------ ------------
COSTS AND EXPENSES:
Insty-Prints franchise and printing operations:
Cost of sales-supplies and services 1,119,000 (1,119,000) --
Cost of sales-print locations 230,000 -- 230,000
Selling, general and administrative 3,271,000 (2,241,000)(4) 1,030,000
Provision for bad debts 235,000 (235,000) --
Amortization of Goodwill 144,000 (144,000) --
------------ ------------ ------------
Total Costs and Expenses 4,999,000 (3,739,000) 1,260,000
------------ ------------ ------------
Change of Mind Learning franchsie operations:
Selling, general and administrative 1,036,000 -- 1,036,000
Amortization of Goodwill 23,000 -- 23,000
Write-off of Goodwill 602,000 -- 602,000
------------ ------------ ------------
Total Costs and Expenses 1,661,000 -- 1,661,000
------------ ------------ ------------
OPERATING INCOME (809,000) (1,223,000) (2,032,000)
Interest and dividends on investments 163,000 90,000 (2) 253,000
Interest expense on margin loans (74,000) -- (74,000)
Net gain on disposal of securities & other 16,750,000 -- 16,750,000
------------ ------------ ------------
16,839,000 90,000 16,929,000
Income Before Income Taxes 16,030,000 (1,133,000) 14,897,000
Income Tax Expense 6,412,000 (489,000) 5,923,000
------------ ------------ ------------
NET INCOME $ 9,618,000 ($ 644,000) $ 8,974,000
============ ============ ============
BASIC AND DILUTED EARNINGS PER
COMMON SHARE $ 1.98 $ 1.85
============ ============
C-2
IPI, INC. & SUBSIDIARIES
PRO FORMA UNAUDITED CONDENSED BALANCE SHEET
AS OF AUGUST 31, 2001
HISTORICAL PRO FORMA IPI
ADJUSTMENTS PRO FORMA
ASSETS (1)
CURRENT ASSETS
Cash and cash equivalents $ 8,370,000 $ 4,000,000 $ 12,370,000
Short-term investments 6,680,000 -- 6,680,000
Marketable equity securities 11,179,000 -- 11,179,000
Trade accounts receivable, net 1,089,000 (871,000) 218,000
Current maturities of notes receivables, net of
allowance of $157,000 and $182,000 637,000 963,000 1,600,000
Inventories 187,000 (145,000) 42,000
Prepaid expenses 114,000 (50,000) 64,000
Deferred Income Taxes 1,449,000 -- 1,449,000
------------ ------------ ------------
TOTAL CURRENT ASSETS 29,705,000 3,897,000 33,602,000
------------ ------------ ------------
PROPERTY AND EQUIPMENT
Original costs 1,862,000 (625,000) 1,237,000
Accumulated depreciation (1,202,000) 497,000 (705,000)
------------ ------------ ------------
PROPERTY AND EQUIPMENT, NET 660,000 (128,000) 532,000
NOTES RECEIVABLE, net of current maturities and
allowance of $539,000 and $523,000 605,000 (605,000) 0
GOODWILL AND OTHER INTANTGIBLES, net 2,624,000 (2,624,000) 0
------------ ------------ ------------
TOTAL ASSETS $ 33,594,000 $ 540,000 $ 34,134,000
============ ============ ============
LIABILITIES & EQUITY
CURRENT LIABILITIES
Accounts payable $ 281,000 ($ 232,000) $ 49,000
Accrued compensation 127,000 (116,000) 11,000
Accrued financing liabilities 50,000 -- 50,000
Deferred revenue 108,000 (90,000) 18,000
Income tax payable 4,721,000 189,000 4,910,000
Other accrued liablities 576,000 (229,000) 347,000
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 5,863,000 (478,000) 5,385,000
------------ ------------ ------------
LONG-TERM CAPITAL LEASE OBLIGATIONS 49,000 -- 49,000
EQUITY
Common Stock 49,000 0 49,000
Additional paid-in capital 15,769,000 0 15,769,000
Retained earnings 12,650,000 1,018,000 (3) 13,668,000
Unrealized gain (loss) on securities, net of taxes (786,000) 0 (786,000)
------------ ------------ ------------
TOTAL EQUITY 27,682,000 1,018,000 28,700,000
------------ ------------ ------------
TOTAL LIABILITIES AND EQUITY $ 33,594,000 $ 540,000 $ 34,134,000
============ ============ ============
C-3
NOTES TO PRO FORMA FINANCIAL STATEMENTS
On November 16, 2001, IPI, Inc. announced the sale of its Insty-Prints business
to Allegra Holdings LLC. The sale of this business is subject to the approval of
the stockholders of IPI, Inc. The following unaudited pro forma balance sheet as
of August 31, 2001, the unaudited pro forma statement of operations for the year
ended November 30, 2000 and unaudited pro forma statement of operations for the
nine-month period ended August 31, 2001 give effect to the sale of the
Insty-Prints business as if it had occurred on August 31, 2001 for purposes of
the balance sheet, as of December 1, 1999 for purposes of the statement of
operations for the year ended November 30, 2000, and as of December 1, 1999 for
purposes of the statement of operations for the nine months ended August 31,
2001. The unaudited pro forma information is based on the historical financial
statements of IPI, Inc., giving effect to the transaction under the purchase
method of accounting and the adjustments as described in the accompanying notes
to the unaudited pro forma financial statements.
The pro forma financial information has been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. The pro forma
financial information is intended for informational purposes only and is not
necessarily indicative of the future financial position or future results of
operations of the company after the sale transaction.
Pro Forma Adjustments
(1) Amount represents (a) the components of the purchase consideration
received by IPI, Inc. consisting of approximately $4,000,000 in cash
($4,125,000 purchase price less $125,000 liabilities assumed) plus
$1,600,000 relating to specified amounts of trade and note receivables
to be collected after closing, net of allowances for uncollectable
accounts, and inventory and prepaids and (b) the elimination of assets,
liabilities, revenues and expenses attributable to the Insty-Prints
business.
(2) Adjustments represent interest income presumed earned on the cash
proceeds received in the transaction. The interest income on the cash
proceeds was computed assuming an interest rate of 3%.
(3) Amount represents the assumed gain, net of tax, recognized on the sale
of the Insty-Prints business, calculated as follows:
Cash and note receivable received $5,600,000
Net assets of Insty-Prints business 3,904,000
----------
Pretax gain on sale of business 1,696,000
Income tax on gain on sale of business 678,000
----------
Gain on sale of business, net of tax $1,018,000
(4) Adjustments represent selling, general and administrative expenses based
on the separation of the Insty-Prints franchise business functions from
the consolidated operations of IPI. The expenses eliminated represent
payroll expenses and related facilities expenses that would be related
to the business sold to Allegra. Remaining IPI expenses include
corporate store overhead and payroll, Change of Mind expenses and
certain officers salaries that would not be part of an Allegra
transaction.
C-4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To IPI, Inc.:
We have audited the accompanying consolidated balance sheets of IPI, Inc. (a
Minnesota corporation) and Subsidiaries as of November 30, 2000 and 1999, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended November 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IPI, Inc. and Subsidiaries as
of November 30, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended November 30, 2000, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 23, 2001
C-5
IPI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30
-----------------------------
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 643,000 $ 2,022,000
Short-term investments 81,000 2,590,000
Marketable equity securities 15,638,000 6,504,000
Trade accounts receivable, net 1,370,000 1,371,000
Current maturities of notes receivable, net of allowance
of $182,000 and $145,000 (Note 4) 707,000 964,000
Inventories 242,000 271,000
Prepaid expenses and other 142,000 107,000
Deferred income taxes (Note 6) 1,173,000 930,000
------------ ------------
Total current assets 19,996,000 14,759,000
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment 1,924,000 2,226,000
Less - Accumulated depreciation (1,148,000) (980,000)
------------ ------------
Property and equipment, net 776,000 1,246,000
NOTES RECEIVABLE, net of allowances of $523,000 and
$656,000 (Note 4) 753,000 860,000
GOODWILL AND OTHER INTANGIBLES, net (Note 1) 3,393,000 3,151,000
------------ ------------
$ 24,918,000 $ 20,016,000
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
C-6
IPI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
November 30
-----------------------------
2000 1999
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 676,000 $ 485,000
Margin loans 4,438,000 --
Accrued compensation 189,000 296,000
Accrued financing liabilities (Note 9) 145,000 150,000
Deferred revenues 200,000 264,000
Income taxes payable -- 126,000
Other accrued liabilities 689,000 432,000
------------ ------------
Total current liabilities 6,337,000 1,753,000
------------ ------------
LONG-TERM CAPITAL LEASE OBLIGATIONS 105,000 319,000
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 15,000,000 shares authorized,
4,859,000 and 4,734,000 shares issued and outstanding 49,000 47,000
Additional paid-in capital 15,769,000 15,584,000
Retained earnings 3,032,000 2,682,000
Unrealized loss on marketable securities available for sale, net
of income tax effects (374,000) (369,000)
------------ ------------
Total shareholders' equity 18,476,000 17,944,000
------------ ------------
$ 24,918,000 $ 20,016,000
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
C-7
IPI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended November 30
------------------------------------------
2000 1999 1998
----------- ----------- -----------
REVENUES:
Insty-Prints royalty and franchise fees $ 4,463,000 $ 4,626,000 $ 4,545,000
Printing equipment, supplies and services 2,590,000 3,269,000 3,982,000
Company-owned print locations 1,680,000 1,822,000 1,694,000
Change of Mind Learning royalty fees and other
income 116,000 -- --
Note interest and other income 445,000 561,000 665,000
----------- ----------- -----------
Total revenues 9,294,000 10,278,000 10,886,000
----------- ----------- -----------
COSTS AND EXPENSES:
Insty-Prints franchise operations:
Cost of sales 1,935,000 2,458,000 3,134,000
Selling, general and administrative expenses 3,244,000 3,330,000 3,308,000
Amortization of goodwill and other intangibles 214,000 231,000 231,000
----------- ----------- -----------
5,393,000 6,019,000 6,673,000
Company-owned print locations:
Cost of sales 504,000 568,000 550,000
Selling, general and administrative expenses 1,848,000 1,523,000 1,048,000
Charge for store closing 840,000 -- --
Amortization of goodwill and other intangibles 16,000 9,000 --
----------- ----------- -----------
3,208,000 2,100,000 1,598,000
Change of Mind Learning franchise operations:
Cost of sales 27,000 -- --
Selling, general and administrative expenses 828,000 -- --
Amortization of goodwill and other intangibles 42,000 -- --
----------- ----------- -----------
897,000 -- --
----------- ----------- -----------
OPERATING INCOME (LOSS) (204,000) 2,159,000 2,615,000
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest and dividends on investments 424,000 785,000 611,000
Interest expense on margin loans (117,000) -- --
Net gain on disposal of securities & other assets 480,000 26,000 --
----------- ----------- -----------
787,000 811,000 611,000
----------- ----------- -----------
INCOME BEFORE INCOME TAX 583,000 2,970,000 3,226,000
INCOME TAX EXPENSE 233,000 1,188,000 1,194,000
----------- ----------- -----------
NET INCOME $ 350,000 $ 1,782,000 $ 2,032,000
=========== =========== ===========
BASIC & DILUTED EARNINGS PER COMMON SHARE $ .07 $ .38 $ .43
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated statements.
C-8
IPI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING
- BASIC 4,847,000 4,734,000 4,734,000
=========== =========== ===========
- DILUTED 4,847,000 4,734,000 4,745,000
=========== =========== ===========
OTHER COMPREHENSIVE INCOME, NET OF TAX
(NOTE 1)
Net income $ 350,000 $ 1,782,000 $ 2,032,000
Unrealized loss on marketable securities available for
sale, net of income tax effects (374,000) (80,000) (242,000)
Reclassification adjustment for prior period loss upon
sale in current year at a gain 369,000 -- --
----------- ----------- -----------
Total comprehensive income $ 345,000 $ 1,702,000 $ 1,790,000
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated statements.
C-9
IPI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Retained Unrealized
-------------------------- Paid-In Earnings Loss on
Shares Amount Capital (Deficit) Securities Total
------ ------ ------------ ------------ ------------ ------------
BALANCE, November 30, 1997 4,734,000 $ 47,000 $ 15,584,000 $ (1,132,000) $ (47,000) $ 14,452,000
------------ ------------ ------------ ------------ ------------ ------------
Net income -- -- -- 2,032,000 -- 2,032,000
Unrealized loss on marketable
securities available for
sale, net of income tax
effects -- -- -- -- (242,000) (242,000)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, November 30, 1998 4,734,000 47,000 15,584,000 900,000 (289,000) 16,242,000
------------ ------------ ------------ ------------ ------------ ------------
Net income -- -- -- 1,782,000 -- 1,782,000
Unrealized loss on marketable
securities available for
sale, net of income tax
effects -- -- -- -- (80,000) (80,000)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, November 30, 1999 4,734,000 47,000 15,584,000 2,682,000 (369,000) 17,944,000
------------ ------------ ------------ ------------ ------------ ------------
Net income -- -- -- 350,000 -- 350,000
Unrealized loss on marketable
securities available for
sale, -- -- -- -- (374,000) (374,000)
Reclassification adjustment
for prior period loss upon
sale in current year at a
gain -- -- -- -- 369,000 369,000
Stock issued in acquisition 125,000 2,000 185,000 -- -- 187,000
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, November 30, 2000 4,859,000 $ 49,000 $ 15,769,000 $ 3,032,000 $ (374,000) $ 18,476,000
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated statements.
C-10
IPI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended November 30
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income $ 350,000 $ 1,782,000 $ 2,032,000
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 534,000 440,000 418,000
Charge for store closing 840,000 -- --
Deferred income taxes (243,000) (65,000) (54,000)
Purchase of short-term investments (81,000) (1,350,000) (640,000)
Sale of short-term investments 2,590,000 100,000 100,000
Realized gain on sale of marketable equity securities (461,000) -- --
Net change in other operating items:
Trade accounts receivable (3,000) (146,000) 49,000
Inventories 29,000 135,000 (78,000)
Prepaid expenses and other 1,000 (6,000) 27,000
Accounts payable, deferred revenues and other accrued
liabilities (286,000) 74,000 (35,000)
------------ ------------ ------------
Net cash provided by operating activities 3,270,000 964,000 1,819,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (209,000) (371,000) (238,000)
Purchase of marketable equity securities (16,261,000) (2,029,000) --
Sale of marketable equity securities 7,579,000 -- --
Change in notes receivable, net 364,000 61,000 953,000
Purchase of Regency Printing -- (431,000) --
Purchase of Dreamcatcher (560,000) -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities (9,087,000) (2,770,000) 715,000
------------ ------------ ------------
FINANCING ACTIVITIES:
Margin loans 4,438,000 -- --
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (1,379,000) (1,806,000) 2,534,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, beginning of year 2,022,000 3,828,000 1,294,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 643,000 $ 2,022,000 $ 3,828,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 592,000 $ 1,430,000 $ 1,141,000
============ ============ ============
Equipment acquired under capital leases $ -- $ 545,000 $ --
============ ============ ============
Assets acquired through issuance of common stock $ 187,000 $ -- $ --
============ ============ ============
The accompanying notes are an integral part of these
consolidated statements.
C-11
IPI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION:
BUSINESS
IPI, Inc. (the Company), a Minnesota corporation, operates two wholly owned
subsidiaries, Insty-Prints, Inc. (Insty-Prints) and Change of Mind Learning
Systems, Inc. (Change of Mind Learning) formerly Dreamcatcher Franchise
Corporation. Insty-Prints, Inc. (Insty-Prints) is a franchisor of business
printing centers and provides ongoing support to its franchisees through
business and technical training as well as research and evaluation of new
products and services. Insty-Prints has 221 franchised and corporate-owned
locations in the United States with heavier concentrations in the Midwest and
Eastern Coast states. The Company operates two corporate-owned Insty-Prints
centers, one of which was acquired in 1999 (Note 2). In 1999, the Company
initiated an expansion strategy to grow through acquiring print businesses and
operating them directly. Continuation of this strategy will depend on the future
results. In fiscal year 2000, the Company made the decision to close the Dallas
corporate-owned print business and has recorded a charge of $840,000 for related
costs as of November 30, 2000.
Change of Mind Learning is a start-up business with nine franchised locations
and one corporate-owned location that currently operate under the Dreamcatcher
Learning Center mark. The learning centers located in Colorado and Florida
provide supplemental education services, primarily to learners in kindergarten
through the twelfth grade (Note 2).
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of financial instruments that are highly liquid and
mature within 90 days.
SHORT-TERM INVESTMENTS AND MARKETABLE EQUITY SECURITIES
Management determines the appropriate classification of its investments at the
time of purchase and re-evaluates such determination at each balance sheet date.
Short-term investments consist principally of variable rate demand notes and are
stated at fair value, which approximates cost. All short-term investments are
classified as trading securities. These securities are bought and held
principally for the purpose of selling them in the near term.
As of November 30, 2000, marketable equity securities consisted of common stock
of Conseco, Inc., a publicly traded insurance and financial services company,
and as of November 30, 1999 such securities consisted of common stock of
Cornerstone Realty Income Trust, Inc. (Cornerstone) a publicly traded real
estate investment trust. These securities are classified as available for sale
and, accordingly, are stated at fair value with unrealized gains or losses
reported as a separate component of shareholders' equity, net of tax effects. In
the first quarter of fiscal 2000, the stock of Cornerstone was sold and a
pre-tax gain of $461,000 was realized.
C-12
At November 30, the cost, fair value and gross unrealized loss on marketable
equity securities was as follows:
2000 1999
---- ----
Fair value $15,638,000 $ 6,504,000
Cost 16,261,000 7,118,000
----------- -----------
Gross unrealized loss $ 623,000 $ 614,000
=========== ===========
The gross unrealized loss on marketable equity securities and the related income
tax effect have been excluded from the statement of cash flows due to their
non-cash nature. Dividend distributions received on marketable equity securities
were $223,000, $614,000 and $435,000 for the years ended November 30, 2000, 1999
and 1998, respectively.
INVENTORIES
Inventories consist of printing supplies and used equipment held for resale
which are valued using the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Maintenance and repairs are
expensed as incurred. Depreciation is computed using the straight-line method
over the estimated useful lives of three to eight years. Accelerated methods are
used for income tax reporting.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles included the following as of November 30:
Amortization
2000 1999 Period (Years)
----------- ----------- --------------
Goodwill $ 4,968,000 $ 4,536,000 15-40
Non-competition agreement and
other intangibles 306,000 250,000 5
Accumulated amortization (1,881,000) (1,635,000)
----------- -----------
$ 3,393,000 $ 3,151,000
=========== ===========
Goodwill consists of the excess of cost over the fair market value of the
acquired net assets and is being amortized on a straight-line basis. The Company
periodically evaluates whether events or circumstances have occurred which may
indicate that the remaining estimated useful lives may warrant revision or that
the remaining intangible asset balance may not be recoverable. In the event that
factors indicate that the intangible assets in question should be evaluated for
possible impairment, a determination of the overall recoverability of such
intangible assets would be made. As of November 30, 2000, the Company wrote off
the remaining balance of goodwill related to the Regency acquisition, as the
Company has determined it will close that business.
C-13
ALLOWANCE FOR LOSSES
Management periodically evaluates the collectibility of trade accounts and notes
receivable. Allowances for losses on trade accounts receivable are established
for estimated uncollectable amounts. Allowance for losses on notes receivable
are recorded for differences between the unpaid principal balances of each note
and the present value of expected future payments to be received.
CHARGE FOR STORE CLOSING
Due to continued operating losses, which in the year 2000 totaled over $500,000,
and managements judgment that a turnaround of this business was highly unlikely
within a reasonable period of time the Company made a decision to close its
Dallas Insty-Prints business that was established in April of 1999 through the
acquisition of Regency Printing. A charge of $840,000 for estimated expenses to
close the store was recorded as of November 30, 2000. The expenses related to
the losses expected in the sale of equipment and furniture, the write-off of
goodwill, cost to settle lease obligations and employee terminations. As the
business was operating at substantial losses, its closing should result in a
positive impact on earnings in future periods estimated at $50,000 per month.
However, cash flow related to this transaction will likely be negative for the
next 6-12 months as lease obligations and other expenses are paid. The following
table details the restructuring costs as of November 30, 2000:
RESTRUCTURING COSTS:
Equipment lease exit fees $293,000
Building lease exit fees 86,000
Severance and other costs 84,000
--------
TOTAL: $463,000
========
In addition to the $463,000 of restructuring costs, unamortized goodwill of
$209,000 and $168,000 of book value of fixed assets were written off to arrive
at the total charge for store closing of $840,000.
REVENUE RECOGNITION
Franchise fee revenue related to the sale of new franchises is recognized when
earned, which occurs in two parts: training fees are recognized at the
completion of new owners training and the second part of revenue recognition
occurs after the opening of new locations. As the Company expects no new
location openings in future periods, franchise fee revenue from this activity
should be insignificant in the future. Insty-Prints franchisees are required to
pay monthly royalty fees of 2% to 4.5% of gross revenues over the term of the
franchise agreement of up to 20 years. Change of Mind Learning franchisees are
required to pay royalties weekly, which range from 5-8 % of gross revenues over
the term of franchise agreements of up to 10 years. Royalty fees are recognized
as revenue on the accrual method while revenue from printing equipment, supply
sales, educational materials and print sales is recognized upon shipment.
DEFERRED REVENUE
Deferred revenue on the balance sheets as of November 30, 2000 and 1999
represent prepaid royalty fees and franchise non-compete buy-out fees paid at
the expiration of a franchise agreement. Prepaid royalties are amortized into
income as earned, based on monthly sales reported by a franchisee. Franchise
non-compete buy-out fees are paid at the expiration of a franchise in exchange
for non-enforcement of non-compete provisions of the franchise agreement and
normally are equal to approximately three years royalties and are amortized into
income over a three-year period.
C-14
INCOME TAXES
Deferred income taxes are determined based on the estimated future tax effects
of differences between the financial statement and tax basis of assets and
liabilities.
BUSINESS SEGMENT INFORMATION
The Company is engaged in two business segments -- the franchising and operating
of business printing centers under the trade name of Insty-Prints(R) and
franchising and operating supplemental private learning centers under the trade
name Change of Mind Learning Systems(R) (formerly Dreamcatcher Franchise
Corporation).
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Ultimate results could differ
from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133 -- "Accounting for
Derivative Instruments and Hedging Activities" was issued during June 1998 and,
as amended by SFAS No. 137, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires the recognition of all
derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. SFAS No. 133 is
effective for the Company beginning December 1, 2000. The adoption of SFAS No.
133 will not have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 141
requires that the purchase method of accounting be used for all business
combinations subsequent to June 30, 2001 and specifies criteria for recognizing
intangible assets acquired in a business combination. Statement No. 142 requires
that goodwill and intangible assets with indefinate useful lives no longer be
amortized but instead be tested for impairment at least annually. Intangible
assets with definate useful lives will continue to be amortized over their
respective estimated useful lives. Statement No. 142 is effective for the
Company beginning in fiscal year 2003. The Company does not expect the
implementation of these statements to have a material impact on its consolidated
financial position or results of operations.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 requires an entity to recognize the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. Upon initial recognition of a liability for an asset retirement
obligation, an entity shall capitalize an asset retirement cost by increasing
the carrying amount of the related long-lived asset by the same amount as the
liability. SFAS No. 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company does not expect the impact or
adoption to be significant.
C-15
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
retains and expands upon the fundamental provisions of existing guidance related
to the recognition and measurement of the impairment of long-lived assets to be
held and used and the measurement of long-lived assets to be disposed of by
sale. Generally, the provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. Earlier
application is encouraged. The Company does not expect the impact or adoption to
be significant.
2. ACQUISITIONS:
In April 1999, Texas IPI, L.P. purchased the printing related assets and assumed
the facility and printing equipment leases of Regency Plaza Printing and Office
Supplies, Inc. (Regency), located in Dallas, Texas. The consideration paid of
$431,000 exceeded the fair value of assets received by $234,000 was recorded as
goodwill that is being amortized on a straight-line basis over fifteen (15)
years. The assets purchased include furniture, computers, leasehold
improvements, customer list and various printing equipment items. Leases assumed
were primarily for presses, copiers and related printing equipment and the
business facility. The operations of Texas IPI, L.P. are included in the
Company's statement of operations from the date of acquisition and were not
material to prior periods. As noted in Note 1, this business is being closed and
a charge of $840,000 has been recognized as of November 30, 2000 for related
expenses.
In January 2000, the Company acquired substantially all the assets of
Dreamcatcher Franchise Corporation and Dreamcatcher Learning Centers, Inc.
(together, Dreamcatcher). The acquisition costs included the assumption of
$395,000 in obligations, legal and other related costs of $40,000, a cash
payment of $125,000, the issuance of 125,000 shares of the Company's stock with
a valuation of $187,000 and a future maximum earn-out provision of $375,000,
based on the achievement of certain levels of operational franchised learning
centers. For the year 2000, no earnout provisions were earned or paid. The
acquisition price and costs exceeded the fair value of assets received by
$666,000, which has been recorded as goodwill that is being amortized on a
straight-line basis over 15 years. The assets purchased include furniture,
computers, leasehold improvements and receivables.
Subsequently, the name of the company was changed to Change of Mind Learning
Systems, Inc. Change of Mind Learning franchises the establishment, development
and operation of facilities providing supplemental private education services to
people of all ages using personalized assessments with direct instruction in
reading, writing, spelling, math, algebra, study skills, G.E.D. preparation and
college preparation. As of November 30, 2000, there were nine operating
franchise locations and one corporate-owned learning center.
3. SIGNIFICANT INVESTMENTS:
Through a series of purchases during the period from April 24, 2000 to September
25, 2000, the Company acquired 2,175,500 shares of common stock of Conseco, Inc.
(NYSE: CNC), an Indiana based insurance and financial services company. The
Company paid approximately $16,261,000 in total consideration for the 2,175,500
shares, all but $4,438,000 of which was financed from the working capital of the
Company. The Company's total holdings in Conseco, Inc. constitute less than 1%
of the approximately 325,264,000 outstanding shares of common stock of Conseco,
Inc. The shares were purchased for investment purposes only and the Company has
no relationship to Conseco, Inc. other than that of shareholder. All shares were
purchased in open market transactions.
C-16
From time to time, the Company has invested and may invest in other businesses
or companies other than its core businesses of franchising and operating fast
turnaround business printing operations and franchising learning centers.
Although the Company has invested in other businesses or companies, the Company
does not intend to become an investment company and intends to remain primarily
an operating company.
4. NOTES RECEIVABLE:
Notes receivable consists primarily of notes from franchisees. Notes receivable
of $1,903,000 at November 30, 2000 are subject to security agreements with
franchisees and are collateralized by printing equipment, furniture and
fixtures. The majority of the notes receivable are also personally guaranteed by
the respective franchisees. The franchisees generally pay principal and interest
in monthly installments over a period not to exceed 120 months. The majority of
notes written are for a period of 60 to 84 months.
5. MARGIN LOANS:
As of November 30, 2000, the Company had margin loans of $4,438,000 to support
the purchase of Conseco, Inc. common stock. The margin loans are collateralized
by the underlying securities. The loans have no maturity dates, but are subject
to specific collateral requirements. Interest on the margin loans is variable
and ranged from 7.125% to 8.5% during fiscal year 2000. The rate as of November
30, 2000 was 8.3%. The loans were paid subsequent to year end (see Note 10).
6. INCOME TAXES:
The Company files a consolidated federal income tax return and a combined state
return with affiliated companies.
The provision for income taxes consists of the following:
For the Years Ended November 30
-------------------------------------
2000 1999 1998
--------- ---------- ----------
Current:
Federal $ 427,000 $1,045,000 $1,057,000
State 49,000 208,000 191,000
--------- ---------- ----------
473,000 1,253,000 1,248,000
Deferred (243,000) (65,000) (54,000)
--------- ---------- ----------
$ 233,000 $1,188,000 $1,194,000
========= ========== ==========
The differences between income taxes computed using the federal statutory rate
and the effective tax rate were as follows:
C-17
For the Years Ended
November 30
---------------------
2000 1999 1998
---- ---- ----
Federal statutory rate 34% 34% 34%
State income taxes, net of federal tax benefit 2 4 1
Nondeductible amortization 4 2 2
---- ---- ----
40% 40% 37%
==== ==== ====
The tax effect of significant temporary differences representing deferred tax
assets, as of November 30, are as follows:
2000 1999
---------- --------
Allowance for losses $ 274,000 $313,000
Accrued financing liabilities 57,000 59,000
Accrued compensation 27,000 27,000
Accrued franchise incentives 64,000 66,000
Accrued expenses-store closing 328,000 --
Other 423,000 465,000
---------- --------
$1,173,000 $930,000
========== ========
No valuation allowance was required as of November 30, 2000 or 1999.
7. STOCK OPTION PLANS:
The Company has long-term incentive and stock option plans that allow for the
granting of stock options and other incentive awards to key employees, officers
and directors of the Company. The employee stock option plan was amended in
April 2000 increasing the stock options available by 200,000 and both plans
together now provide for a maximum of 600,000 shares to be granted. The options
are generally granted at prices equal to the fair market value of the shares at
the date of grant and are exercisable in cumulative annual increments of 20%
each, commencing one year after the date of grant.
C-18
The following is a summary of activity of the plans for the years ended November
30, 2000, 1999 and 1998:
Number
of Price
Options Per Share
-------- ---------
Outstanding, November 30, 1997 300,000 $4.00
-------- --------
Granted 22,000 4.45
Cancelled (55,000) 4.00
-------- --------
Outstanding, November 30, 1998 267,000 4.04
-------- --------
Granted 69,000 4.00
Cancelled (8,000) 4.25
-------- --------
Outstanding, November 30, 1999 328,000 4.02
-------- --------
Granted 87,000 4.00
Cancelled (28,000) 4.07
-------- --------
Outstanding, November 30, 2000 387,000 $4.01
======== ========
The number of options exercisable at November 30, 2000, 1999 and 1998 are
218,800, 180,200 and 129,600, respectively, and all are at the exercise price of
$4.00 per share, except 1,600 options at November 30, 2000 that are exercisable
at $5.00 per share. As of November 30, 2000, there were options for 213,000
shares available for future grant.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issues to Employees," and related interpretations in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized in the
accompanying consolidated statements of operations. Had compensation cost been
recognized based on the fair values of options at the grant dates consistent
with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and net income per common share would have been
decreased to the following pro forma amounts:
2000 1999 1998
-------- ---------- ----------
Net Income
As reported $350,000 $1,782,000 $2,032,000
Pro forma 258,000 1,702,000 1,960,000
Income Per Share-as reported:
Basic and diluted $.07 $.38 $.43
Income Per Share-pro forma:
Basic and diluted $.05 $.36 $.41
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used: risk-free interest rates of 5.94% to 6.92% for 2000 and 5.66%
to 5.85% for 1999 and 5.56% to 5.72% for 1998; no expected dividends; expected
lives of 10 years for 2000, 1999 and 1998; and expected volatility of 37% to
40.7% for 2000 and 38.5% to 40.5% for 1999 grants and 34.52% to 35.29% for 1998
grants. The weighted average fair values of options granted in 2000, 1999 and
1998 were $1.15, $1.67 and $2.57, respectively.
C-19
8. RELATED-PARTY TRANSACTIONS:
The Company paid management fees of $75,000 in 2000, 1999 and 1998 to an
affiliated company.
9. COMMITMENTS AND CONTINGENCIES:
GUARANTEES
The Company is a guarantor of equipment financing by certain franchisees in
amounts that aggregated $1,046,000 at November 30, 2000 and $1,665,000 at
November 30, 1999. Under the terms of the guarantees, the maximum annual
liability of the Company is the lesser of the outstanding balance or $2,400,000.
The Company has recorded reserves for estimated losses on these guarantees as
accrued financing liabilities in the accompanying consolidated balance sheets.
As guarantor, the Company is subject to restrictive covenants which, among other
matters, require that the Company maintain a minimum net worth and a debt to net
worth ratio, as defined. As of November 30, 2000 and 1999, the Company was in
compliance with such covenants. In April 2000 this financing program was
terminated relative to adding any new transactions.
OPERATING LEASES
At November 30, 2000, the Company's minimum annual rental commitments for leased
equipment and facilities under operating leases with lease terms in excess of
one year, were as follows:
For the Years Ending November 30 Amount
-------------------------------- ------
2001 $ 355,000
2002 357,000
2003 330,000
2004 306,000
2005 156,000
----------
Total minimum payments required $1,504,000
==========
Rent expense was $500,000, $362,000 and $305,000 in 2000, 1999 and 1998,
respectively.
PROFIT SHARING PLAN
The Company offers a 401(k) plan (the Plan). Employees who meet certain criteria
are eligible to join the Plan. Plan participants elect a percentage of their
salary to be contributed to the Plan. The Company makes a matching contribution
of 25% on the first 6% of salary contributed. The expense for the Plan was
$28,700, $24,200 and $20,100 in 2000, 1999 and 1998, respectively. The Company's
contributions vest at the rate of 20% per year of service and after five years
of service are fully vested.
LEGAL PROCEEDINGS
The Company is a party to certain claims arising in the ordinary course of
business. The Company has filed counteractions in certain cases, and discovery
proceedings are in process. The ultimate outcome of the litigation cannot
presently be determined; however, based on discussions with legal counsel, it is
the opinion of management, the outcome of such claims are not expected to be
material to the financial positions or the results of operations of the Company.
C-20
10. SUBSEQUENT EVENT
In January 2001, the Company sold 814,800 shares of its holdings in Conseco,
Inc. common stock and realized proceeds of $13,319,000 for a pre-tax gain of
approximately $7,229,000. The after-tax gain would be approximately $4,337,000
or $0.89 per share. Approximately $4,500,000 of the proceeds from the sale were
used to re-pay all margin loans incurred when shares were purchased. The Company
continues to hold a total of 1,360,700 shares of Conseco, Inc. common stock at a
cost of approximately $10,171,000.
C-21
Appendix D
MINNESOTA BUSINESS CORPORATION ACT,
Sec. 302A.471 AND Sec. 302A.473
(Rights of Dissenting Shareholders)
Set forth below are Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act, which provide that shareholders may dissent from, and obtain
payment for, the fair value of their shares in the event of certain corporate
actions, and establish procedures for the exercise of such dissenters' rights.
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS.
A shareholder of a corporation may dissent from, and obtain payment for the fair
value of the shareholder's shares in the event of any of the following corporate
actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder that it:
(1) Alters or abolishes a preferential right of the shares;
(2) Creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking fund for
the redemption or repurchase of the shares;
(3) Alters or abolishes a preemptive right of the holder of
the shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) Excludes or limits the right of a shareholder to vote on a
matter, or to accumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing or new class
or series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition and does not give rise to
the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval Section 302A.661,
Subdivision 1, or a disposition dissolution described in Section 302A.725,
Subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under Chapter 322B,
to which the corporation is a party, except as provided Subdivision 3;
(d) A plan of exchange, whether under this chapter or under Chapter
322B, to which the corporation is a party as the corporation whose shares will
be acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their shares.
SUBD. 2. BENEFICIAL OWNERS.
(a) A shareholder shall not assert dissenters' rights as to less than
all of the shares registered in the name of the shareholder, unless the
shareholder dissents with respect to all the shares that are beneficially owned
by another person but registered in the name of the shareholder and discloses
the name and address of each beneficial owner on whose behalf the shareholder
dissents. In that event, the rights of the dissenter shall be determined as if
the shares as to which the shareholder has dissented and the other shares were
registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may
assert dissenters' rights with respect to shares held on behalf of the
beneficial owner, and shall be treated as a dissenting shareholder under the
terms of this section and section 302A.473, if the beneficial owner submits to
the corporation at the time of or before the assertion of the rights in a
written consent of the shareholder.
SUBD. 3. RIGHTS NOT TO APPLY.
Unless the articles, bylaws, or a resolution approved by the board otherwise
provide, the right to obtain payment under this section does not apply to a
shareholder of the surviving corporation in a merger, if the shares of the
shareholder are not entitled to be voted on the merger.
SUBD. 4. OTHER RIGHTS.
The shareholders of a corporation who have a right under this section to obtain
payment for their shares do not have a right at law or equity to have a
corporate action described in Subdivision 1 set aside or rescinded, except when
the corporate action is fraudulent with regard to the complaining shareholder or
the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS.
SUBDIVISION 1. DEFINITIONS.
(a) For purposes of this section, the terms defined in this Subdivision
have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in Section 302A.471, Subdivision 1 or
the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in Section 302A.471, Subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in Section 302A.471, Subdivision 1, up
to and including the date of payment, calculated at the rate provided in Section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION.
If a corporation calls a shareholder meeting at which any action described in
Section 302A.471, Subdivision 1 is to be voted upon, the notice of the meeting
shall inform each shareholder of the right to dissent and shall include a copy
of Section 302A.471 and this section and a brief description of the procedure to
be followed under these sections.
SUBD. 3. NOTICE OF DISSENT.
If the proposed action must be approved by the shareholders, a shareholder who
wishes to exercise dissenters' rights must file with the corporation before the
vote on the proposed action in a written notice of intent to demand the fair
value of the shares owned by the shareholder and must not vote the shares in
favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES.
(a) After the proposed action has been approved by the board and, if
necessary, the shareholders, the corporation shall send to all shareholders who
have complied with Subdivision 3 and to all shareholders entitled to dissent if
no shareholder vote was required, a notice that contains:
(1) The address to which a demand for payment and certificates
of certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that
will apply after the demand for payment is received;
(3) A form to be used to certify the date on which the
shareholder, or the beneficial owner on whose behalf the shareholder dissents,
acquired the shares or an interest in them and to demand payment; and
(4) A copy of Section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES.
(a) After the corporate action takes effect, or after the corporation
receives a valid demand for payment, whichever is later, the corporation shall
remit to each dissenting shareholder who has complied with Subdivisions 3 and 4
the amount the corporation estimates to be the fair value of the shares, plus
interest, accompanied by:
(1) The corporation's closing balance sheet and statement of
income for a fiscal year ending not more than 16 months before the effective
date of the corporate action, together with the latest available interim
financial statements;
(2) An estimate by the corporation of the fair value of the
shares and a brief description of the method used to reach the estimate; and
(3) A copy of Section 302A.471 and this section, and a brief
description of the procedure to be followed demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action dissented
from was first announced to the public or who is dissenting on behalf of a
person who was not a beneficial owner on that date. If the dissenter has
complied with Subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement of the reason
for withholding the remittance, and an offer to pay to the dissenter the amount
listed in the materials if the dissenter agrees to accept that amount in full
satisfaction. The dissenter may decline the offer and demand payment under
Subdivision 6. Failure to do so entitles the dissenter only to the amount
offered. If the dissenter makes demand, Subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel all
transfer restrictions. However, the corporation may again give notice under
Subdivision 4 and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND.
If a dissenter believes that the amount remitted under Subdivision 5 is less
than the fair value of the shares plus interest, the dissenter may give written
notice to the corporation of the dissenter's own estimate of the fair value of
the shares, plus interest, within 30 days after the corporation mails the
remittance under Subdivision 5, and demand payment of the difference. Otherwise,
a dissenter is entitled only to the amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION.
If the corporation receives a demand under Subdivision 6, it shall, within 60
days after receiving the demand, either pay to the dissenter the amount demanded
or agreed to by the dissenter after discussion with the corporation or file
court a petition requesting that the court determine the fair value of the
shares, plus interest. The petition shall be filed in the county in which the
registered office of the corporation is located, except that a surviving foreign
corporation that receives a demand relating to the shares of a constituent
domestic corporation shall file the petition in the county in this state in
which the last registered office of the constituent corporation was located. The
petition shall name as parties all dissenters who have demanded payment under
Subdivision 6 and who have not reached agreement with the corporation. The
corporation shall, after filing the petition, serve all parties with a summons
and copy of the petition under the rules of civil procedure. Nonresidents of
this state may be served by registered or certified mail or by publication as
provided by law. Except as otherwise provided, the rules of civil procedure
apply to this proceeding. The jurisdiction of the court is plenary and
exclusive. The court may appoint appraisers, with powers and authorities the
court deems proper, to receive evidence on and recommend the amount of the fair
value of the shares. The court shall determine whether the shareholder or
shareholders in question have fully complied with the requirements of this
section, and shall determine the fair value of the shares, taking into account
any and all factors the court finds relevant, computed by any method or
combination of methods that the court, in its discretion, sees fit to use,
whether or not used by the corporation or by a dissenter. The fair value of the
shares as determined by the court is binding on all shareholders, wherever
located. A dissenter is entitled to judgment cash for the amount by which the
fair value of the shares as determined by the court, plus interest, exceeds the
amount, if any, remitted under Subdivision 5, but shall not be liable to the
corporation for the amount, if any, by which the amount, if any, remitted to the
dissenter under Subdivision 5 exceeds the fair value of the shares as determined
by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES.
(a) The court shall determine the costs and expenses of a proceeding
under Subdivision 7, including the reasonable expenses and compensation of any
appraisers appointed by the court, and shall assess those costs and expenses
against the corporation, except that the court may assess part or all of those
costs and expenses against a dissenter whose action demanding payment under
Subdivision 6 is found to be arbitrary, vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
Appendix E
GUARANTEE AGREEMENT
This GUARANTEE AGREEMENT is made this 16th day of November by Irwin L.
Jacobs, Daniel T. Lindsay and Dennis M. Mathisen.
WHEREAS, on November 15, 2001, IPI, Inc. adopted a Plan of Dissolution
and Liquidation (the "Plan") which provides for the liquidation of the Company's
asset and the distribution of assets to the Company's shareholders;
WHEREAS, the Company owns 2,081,800 shares of Clarent Corporation
Common Stock (the "Clarent Shares") the disposition of which assets of the
Company are subject to the Plan;
WHEREAS, the undersigned are beneficial owners of Common Stock of the
Company (the "Majority Shareholders");
The undersigned hereby jointly and severally unconditionally guaranty
that the amount distributed by the Company pursuant to the Plan to shareholders
other than the undersigned and affiliates of the undersigned (the "Minority
Shareholders") in respect of the Clarent Shares shall in no event be less than
IPI's cost basis in such shars (a value equal to $6 per Clarent Share), whether
such distribution or distributions result from sale of the Clarent Shares by the
Company or settlement of any Company claim in respect of Clarent Shares or
otherwise.
The undersigned also agree that the Company, consistent with its obligations to
the Minority Shareholders, may do or refrain from doing any of the following
without notice to, or the consent of, the undersigned, and without reducing or
discharging the undersigned's liability under this Agreement: (a) settle,
modify, release, compromise or subordinate any claim, demand, suit or proceeding
in respect of the Clarent Shares; (b) sell the Clarent Shares to any person, at
any time and at any price, in the market or in any privately negotiated
transaction.
This agreement shall continue and the obligations hereunder remain in full force
and effect with respect to the undersigned until receipt by each Minority
Shareholder of at least $6 per Clarent Share in respect of a distribution of the
value of Clarent Shares.
/s/ Irwin L. Jacobs
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Irwin L. Jacobs
/s/ Dennis M. Mathisen
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Dennis M. Mathisen
/s/ Daniel T. Lindsay
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Daniel T. Lindsay
IPI, INC.
SPECIAL MEETING OF STOCKHOLDERS
IPI, Inc. Corporate Offices
8091 Wallace Road
Eden Prairie, Minnesota 55344
THURSDAY, JANUARY 31, 2002
9:00 A.M.
IPI, Inc.
8091 Wallace Road
Eden Prairie, MN 55344 PROXY
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The undersigned, revoking all prior proxies given by the undersigned for the
Special Meeting of the Shareholders of IPI, Inc. to be held on Thursday, January
31, 2002 at 9:00 a.m., at the principal offices of IPI, Inc. located at 8091
Wallace Road, Eden Prairie, Minnesota 55344, hereby appoints Robert J. Sutter
and David A. Mahler, or either of them as proxies, with full power of
substitution and revocation, to represent and to vote for the undersigned and in
the name of the undersigned all shares of common stock of IPI, Inc. of the
undersigned held as of December 19, 2001, as if the undersigned were personally
present and voting at said Special Meeting, and any adjournment or adjournments
or postponements thereof, upon the matters set forth below.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. It will be voted on
the matters set forth on the reverse side of this form as directed by the
stockholder, but if no direction is made in the space provided, it will be voted
FOR each proposal.
SEE REVERSE FOR VOTING INSTRUCTIONS.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided.
PLEASE DETACH HERE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS NO. 1 AND 2.
1. To approve and adopt that certain Asset Purchase Agreement dated November
15, 2001, pursuant to which the Company will sell the assets relating to
its franchising of printing centers under the Insty-Prints trade name to
Allegra Holdings LLC.
|_| FOR |_| AGAINST |_| ABSTAIN
2. To approve and adopt a plan of liquidation and dissolution of the Company
which will authorize (a) the sale of the assets of the Company and the
distribution to shareholders pursuant to the plan (b) the deregistration of
the Company's Common Stock under the Securities Exchange Act of 1934 and
(c) the dissolution of the Company pursuant to the Minnesota Business
Corporation Act.
|_| FOR |_| AGAINST |_| ABSTAIN
3. In their discretion, the proxies are authorized to transact such other
business as may properly come before the meeting and any adjournments or
postponements thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL
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Address Change? Mark Box |_| Indicate changes below:
Date ___________________________
______________________________
| |
|______________________________|
Signature(s) in Box
Shareholder must sign exactly as
the name appears at left. When
signed as a corporate officer,
executor, administrator,
trustee, guardian, etc. please
give full title as such. Both
joint tenants must sign