Inscape: Directors’ Circular Recommending Acceptance of the Offer by HUK121 Limited to Purchase all of the shares of Inscape Corporation
Dear Inscape Shareholder:
I am writing to provide an update regarding your Shares in Inscape Corporation (“Inscape” or the “Company”). This update is the culmination of an in-depth and lengthy strategic review process conducted by a special committee (the “Special Committee”) of the board of directors of Inscape (the “Board” or “We”) to seek strategic alternatives for Inscape.
Inscape experienced significant declines in its business and financial performance over the past few years, largely due to the impacts of the COVID-19 pandemic. In early 2021, the Board established the Special Committee to consider strategic alternatives. Subsequent steps included securing a bridge debt facility in April 2021 in order to enable the Company to complete the sale and leaseback of its Holland Landing headquarters in February 2022. The sale allowed the Company to repay the bridge debt facility in full and replenish cash resources/working capital. The sale of an additional parcel of surplus property in April 2022 provided additional cash to the Company and was followed by the sale of surplus equipment, the rationalization of excess space, and further cost reduction measures. In spring of 2022, the Board determined that the Company’s financial recovery was proceeding more slowly than originally anticipated.
On February 28, 2022, Inscape entered into a letter agreement with Stump & Co. (“Stump”), a financial advisory firm based in North Carolina specializing in the furniture industry, with respect to an exploration of strategic alternatives, including a possible sale of Inscape. Stump commenced a process to further explore alternatives and to prepare a more formal offering memorandum as a component of that process, but based on the advice provided by Stump that a successful sale process would be unlikely, the process was suspended a short time thereafter with concurrence by Inscape. Given the challenging M&A market for companies engaged in the contract office furniture industry, Stump recommended the Company continue its effort to restore profitability before recommencing the sale process. Stump remained engaged pending a change in circumstances that might lead to a more successful outcome. Notwithstanding, Inscape continued to pursue strategic alternatives for the Company. The Company continued to struggle to meet its financial projections. At the end of the quarter ended July 31, 2022, the Company incurred a net loss of $6.2 million and had cash equivalents and restricted cash of $6.1 million.
Despite previous cost cutting measures, the Company’s financial position is not improving and the Company has declining cash resources. The Company expanded the nature of strategic alternatives under consideration to include corporate restructuring and insolvency proceedings. On August 9, 2022, Hilco entered into the Confidentiality Agreement with Inscape following an introduction by a Canadian investment bank. Throughout the month of August, Hilco met with management of Inscape and conducted high level due diligence of its business and assets. After Hilco conducted substantial financial due diligence on the Company, Hilco determined that the Company’s equity value was extremely low, and that the Company’s business would require significant financial investment to succeed.
On September 7, 2022, Hilco submitted an initial proposal to Inscape’s management and reached an agreement to conduct in depth due diligence of Inscape, including site visits to Inscape’s manufacturing facilities. The initial non- binding proposal included two potential acquisition structures, subject to continuing due diligence and Inscape’s working capital including cash balances remaining broadly in line with forecasts. The initial proposals contemplated Hilco or an associated entity making an offer to acquire all of the issued share capital of Inscape (i) for total upfront cash consideration of $1,500,000; or (ii) for total upfront cash consideration of $750,000 in addition to deferred consideration equal to 25% of any net proceeds from an onwards sale of Inscape or dividends/management fees received within 36 months of closing. It was subsequently determined that option (ii) was not viable under applicable securities laws.
On October 5, 2022, following completion of due diligence and consideration of (i) Inscape’s current working capital (including reduced cash balances); (ii) Inscape’s lower sales for the three months ending July 31, 2022 and resulting negative cash flows (which are expected to continue); and (iii) the projected costs associated with revitalizing Inscape’s business, Hilco submitted a revised non-binding proposal under which the Offeror agreed to make an offer to purchase all of the issued and outstanding Class B subordinated voting shares (the “Shares”) of Inscape for consideration of $0.007 (the “Offer Price”) in cash for each Share (the “Hilco Offer”) and for HUK 116 Ltd., an affiliate of Hilco (the “Lender”) to advance a $5.0 million revolving demand loan facility to the Company.
During September and October 2022, Inscape, the Special Committee, the Offeror and their respective legal advisors engaged in negotiations surrounding the transaction documents. Multiple drafts of the Support Agreement, loan agreement (including associated security and closing documents) and the form of Lock-Up Agreement were exchanged. The result of the continued extensive negotiations during the third and fourth week in October amongst Hilco, the Special Committee, Inscape and their respective legal, was the preparation of a fully negotiated draft of the Support Agreement, Interim Loan Agreement and related agreements.
On October 18, 2022, Inscape formally engaged Evans to act as Financial Advisor to provide advice and assistance in evaluating the Hilco Offer and the preparation and delivery to the Special Committee of the Evans Opinion as to the fairness of the consideration under the Hilco Offer from a financial point of view to the shareholders of Inscape (the “Shareholders”).
On October 28, 2022, the Company and the Offeror entered into a support agreement (the “Support Agreement”) under which the Offeror agreed to make the Hilco Offer. Concurrently with the execution of the Support Agreement, the Company and an affiliate of Hilco (the “Lender”) entered into a loan agreement under which the Lender made a $5.0 million revolving demand loan facility available to the Company, and shareholders
of Inscape that hold Shares
representing more than 80% of the Shares, entered into “hard” lock-up agreements with the Offeror (the “Lock-Up
Agreements”), pursuant to which they agreed to deposit all of their Shares under the Hilco Offer.
On October 29, 2022, the Company issued a press release announcing the Offer, the execution of the Support Agreement, the Interim Loan Agreement, and the Lock-Up Agreements. The press release stated that the Board had, after consultation with its advisors and the Special Committee, unanimously determined that the Offer is in the best interests of Inscape and the Shareholders, and that the Offer Price is fair, from a financial point of view, to the Shareholders. Accordingly, the press release stated that the Board was unanimously recommending that Shareholders
accept the Offer and deposit their Shares under the Offer.
On November 17, 2022, Inscape issued a joint news release with the Offeror, announcing the launch of the Offer and
that Inscape had agreed to reduce the initial deposit period to 35 days.
After exploring opportunities for Shareholders with financial and strategic parties in the U.S. and in Canada, and after careful consideration (including a thorough review by the Board), in consultation with financial and legal advisors, the Board has voted UNANIMOUSLY to recommend that Shareholders ACCEPT the Hilco Offer and DEPOSIT their Shares under the Hilco Offer.
The Board has concluded that there is no credible alternative to the Hilco Offer and that if the Hilco Offer does not proceed, the Company will, more than likely be required to commence insolvency proceedings. The attached Directors’ Circular provides additional detail about how the Board has reached this conclusion, and we strongly encourage you to read the Directors’ Circular in its entirety. As you will see, we considered many factors, including the opinion from Inscape’s Financial Advisor — Evans & Evans, Inc. — which opinion states that based upon such matters as were considered relevant, and subject to the limitations and qualifications set out in such opinion, as of the date of such opinion, the Offer Price is fair, from a financial point of view, to Shareholders, all as more fully described in the written opinion included in this Directors’ Circular.
As described in more detail in the enclosed Directors’ Circular, the reasons for the Board’s unanimous recommendation of the Hilco Offer, among others, include:
the Board has considered a wide range of strategic alternatives over the past few years and no expressions of interest were received as a result of these solicitations. The Hilco Offer is the only available alternative to provide liquidity and consideration to the Company’s Shareholders;
the Company’s financial position and business prospects and that the Company had and continues to face difficulties arising from the business slowdown caused by COVID 19;
in the event that the conditions of the Hilco Offer are satisfied or waived by Hilco, Shareholders will receive consideration under the Hilco Offer of $0.007 in cash for each Share that they deposit
under the Hilco Offer. To the extent the aggregate consideration to be paid for the Shares to each Shareholder is not a whole number, the amount shall be rounded to the nearest whole cent on a per Shareholder basis;
the total value of $0.007 for each Share represents a discount of approximately 99% to the volume weighted average trading price of the Shares on the TSX for the 52 weeks preceding the announcement of the Hilco Offer on October 28, 2022. Given the low trading volumes of the Shares over the past year, and in light of recent difficulties that Inscape has faced (as well as those commencing since the beginning of the COVID-19 pandemic), the Board believes considering the Hilco Offer in the context of the significant economic headwind faced by the Company is more meaningful than a reference to the 52-week volume weighted average trading price of the Shares;
the ALL CASH consideration under the Hilco Offer provides certainty and immediate value to Shareholders;
if the Hilco Offer does not proceed, the Company expects it will, more than likely, be required to commence insolvency proceedings (a process which may result in Shareholders realizing no proceeds at all). The Hilco Offer represents the only foreseeable liquidity event for Shareholders, particularly in light of the thinly-traded nature of the Shares (with the average daily trading volume being less than 0.7% of total issued shares in the 90-days preceding the date of the Support Agreement) and the Company’s financial position;
The Hilco Offer provides Inscape’s Shareholders with the added benefit of not having to pay brokerage fees or commissions for those who deposit their Shares directly with the depositary for the Hilco Offer;
Inscape’s Financial Advisor has provided a written opinion that, as of the date of such opinion, and based upon and subject to the assumptions, qualifications and limitations stated therein, the Offer Price offered to Shareholders pursuant to the Hilco Offer is fair, from a financial point of view, to Shareholders;
the Hilco Offer is not subject to any financing condition;
the Hilco Offer contains a two-thirds minimum Share tender condition that cannot be lowered
without Inscape’s consent;
holders of more than 80% of the Shares, including the three largest Shareholders and all of the directors and executive officers of Inscape holding Shares, have agreed to deposit their Shares under the Hilco Offer;
in order for Shareholders to be able to receive the Offer Price for their Shares, more than 66 2/3% of the outstanding Shares must be deposited under the Offer prior to the expiry of the initial deposit period. The Locked-Up Shareholders already represent sufficient shares to exceed the minimum tender condition and due to this overwhelming support, the transaction is expected to be completed shortly after the expiry of the initial deposit period; and
the terms and conditions of the Offer and the Support Agreement, are, in the judgment of the Company and its advisors, reasonable and were the product of extensive negotiations between the Company and its advisors and the Offeror and Hilco and their advisors.
In summary, taking into account all circumstances, the Board believes that the Offer Price offered to Shareholders pursuant to the Hilco Offer is fair, from a financial point of view, to Shareholders and that the Hilco Offer is in the best interests of Inscape.
For the above reasons, we urge you to ACCEPT the Hilco Offer and to DEPOSIT your Shares under the Hilco Offer. If you have any questions about the Hilco Offer, you can contact your investment advisor, stockbroker, bank manager, trust company manager, accountant, lawyer or other professional advisor.
On behalf of the Board, I would like to thank you for your continued support.
Sincerely,
(Signed) “Neil McDonnell”
Chairman of the Board