<PAGE>
EXHIBIT (a)(1)(J)
Supplement to
Offer to Purchase for Cash
All Outstanding Shares of Common Stock
(Including the Associated Common Stock Purchase Rights)
of
BI Incorporated
at
$8.25 Net Per Share
by
KBII Acquisition Company, Inc.
A Direct Wholly Owned Subsidiary of
KBII Holdings, Inc.
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON TUESDAY, OCTOBER 3, 2000, UNLESS THE OFFER IS EXTENDED.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY
AUTHORITY OF ANY STATE PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION
NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS OFFER
TO PURCHASE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
September 19, 2000
To the Holders of Common Stock of
BI Incorporated:
This Supplement (the "Supplement") to the Offer to Purchase dated August
18, 2000 (the "Offer to Purchase") amends, updates and/or supplements certain
information contained therein. Capitalized terms used but not otherwise
defined herein shall have the meanings set forth in the Offer to Purchase.
SUMMARY TERM SHEET. The section entitled "SUMMARY TERM SHEET" in the Offer
to Purchase is hereby amended by inserting after the first paragraph under the
caption "Who is Offering to Buy My Securities?" on page 1 of the Offer to
Purchase the following paragraph:
The Company's senior management consisting of David J. Hunter, Mckinley C.
Edwards Jr., Jacqueline A. Chamberlin, Steven P. Merrefield and Jonathan M.
Hinebauch, who in the aggregate own approximately 3.2% of the common stock,
have agreed to tender their shares in the offer and to vote their shares in
favor of the merger. We expect that following the merger, senior management
will own on a fully diluted basis approximately 0.31%, in the aggregate, of
the outstanding capital stock of KBII Holdings, Inc. In addition, we expect
senior management to receive (i) vested options to purchase approximately
1.44%, in the aggregate, of the outstanding capital stock, and (ii) options,
which are subject to performance-based vesting requirements, to purchase
approximately 8.19%, in the aggregate, of the outstanding capital stock of
KBII Holdings, Inc. See the "Introduction."
The section entitled "SUMMARY TERM SHEET" in the Offer to Purchase is
hereby further amended by amending and restating the paragraph under the
caption "How Will I be Notified if the Offer is Extended or if There is a
Subsequent Offering Period?" on page 2 of the Offer to Purchase in its
entirety as follows:
If we further extend the offer, we will inform Computershare Investor
Services LLC (the Depositary for the offer) and Innisfree M&A Incorporated
(the Information Agent for the offer) of that fact and will make a public
announcement of the extension not later than 9:00 a.m., New York City time, on
the next business day after the day on which the offer was scheduled to
expire. If we elect to provide for a subsequent offering period, we will file
an amendment to the Schedule TO and Offer to Purchase and will make a public
announcement to disseminate the information to you at least five business days
before expiration of the offer. See Section 1, "Terms of the Offer; Expiration
Date."
<PAGE>
INTRODUCTION. The section entitled "INTRODUCTION" in the Offer to Purchase
is hereby amended by amending and restating the seventh paragraph thereunder on
page 6 of the Offer to Purchase in its entirety as follows:
The Company has represented to Parent and Offeror that, as of September 15,
2000, there were 7,972,905 Shares issued and outstanding, no preferred shares
outstanding, and outstanding options to purchase 1,640,268 Shares. Based on the
foregoing and assuming no options are exercised, Offeror believes that
approximately 7,175,615 Shares must be validly tendered and not withdrawn prior
to the expiration of the Offer in order for the Minimum Condition to be
satisfied. See Section 1, "Terms of the Offer; Expiration Date."
The section entitled "INTRODUCTION" in the Offer to Purchase is hereby
further amended by amending and restating the tenth paragraph thereunder on
page 6 of the Offer to Purchase in its entirety as follows:
In connection with the Merger Agreement, it is expected that Jacqueline A.
Chamberlin and Steven P. Merrefield, members of the Company's senior
management, will become beneficial owners of approximately 0.31% on a fully
diluted basis of the outstanding equity capital of Parent by investing cash
that they receive in the Offer in exchange for shares of common stock of Parent
as part of the Merger. In addition, David J. Hunter, Mckinley C. Edwards Jr.,
Jacqueline A. Chamberlin, Steven P. Merrefield and Jonathan M. Hinebauch, who
are all members of senior management of the Company (the "Management
Shareholders"), will rollover existing stock options to acquire capital stock
of the Company into options to acquire, in the aggregate, approximately 1.44%
of the outstanding capital stock of Parent on a fully diluted basis. Following
the Merger, the Management Shareholders will beneficially own 1.75% (including
shares subject to options that may be acquired within 60 days) of the
outstanding capital stock of Parent on a fully diluted basis. Also, Parent will
grant the Management Shareholders additional compensatory options to purchase
up to 8.19% of the capital stock of Parent on a fully diluted basis, which
options will vest ratably over three years based on the Company attaining
certain performance goals. As a result, the Management Shareholders ownership
interest in Parent, including shares issuable pursuant to options, will be
approximately 9.94%, in the aggregate, of the outstanding capital stock of
Parent on a fully diluted basis. Parent anticipates that following the Merger,
it will expand its Board of Directors to consist of seven persons, one of whom
will be a Management Shareholder. See Section 9, "Certain Information
Concerning Offeror and Parent--Management Shareholders."
The section entitled "INTRODUCTION" in the Offer to Purchase is hereby
further amended by inserting after the thirteenth paragraph thereunder on page
7 of the Offer to Purchase the following paragraph:
The Offer to Purchase includes information required to be disclosed pursuant
to Rule 13e-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which Rule governs so-called "going private" transactions by
certain issuers or their affiliates.
SPECIAL FACTORS. The Offer to Purchase is hereby amended by inserting a new
section entitled "SPECIAL FACTORS" immediately following the section entitled
"INTRODUCTION" on page 5 of the Offer to Purchase:
Background of the Offer.
See the discussion under Section 11, "Background of the Offer" on page 22 of
the Offer to Purchase.
Recommendation of the Special Committee and the Board of Directors; Fairness of
the Offer and the Merger.
Board of Directors and Special Committee of the Company.
Recommendation of the Special Committee. At a meeting held on August 9,
2000, the Special Committee unanimously recommended (i) that the Board of
Directors find that the Merger Agreement, the Offer and the
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Merger are fair to and in the best interests of the Company's shareholders
(other than the Management Shareholders) and (ii) that the form, terms and
conditions of the Merger Agreement be approved by the Board of Directors and
that the Board of Directors recommend to the shareholders of the Company that
they tender their shares pursuant to the Offer.
Recommendation of the Company's Board Of Directors. At a meeting held on
August 10, 2000, after hearing the Special Committee's recommendation, the
Company's Board of Directors, by unanimous vote of those present, and based
on, among other things, the recommendation of the Special Committee, (i)
determined that the Offer and the Merger are fair to and in the best interests
of the Company's shareholders (other than the Management Shareholders), (ii)
approved the form, terms and conditions of the Merger Agreement; and (iii)
recommended that the Company's shareholders tender their shares in the Offer.
ACCORDINGLY, THE BOARD OF DIRECTORS HAS RECOMMENDED THAT THE SHAREHOLDERS OF
THE COMPANY TENDER THEIR SHARES IN THE OFFER.
Reasons for Recommendation.
The Board of Directors, in approving the Merger Agreement, the Offer, the
Merger, and the other transactions contemplated by the Merger Agreement, is
recommending that the Company's shareholders tender their shares pursuant to
the Offer. The Special Committee, in its recommendation to the Board of
Directors, and the Board of Directors in its recommendation to the Company's
shareholders considered a variety of factors including, but not limited to,
the following:
1. The opinion of the Company's financial advisor, SunTrust Equitable
Securities, that based upon and subject to the assumptions and qualifications
stated in its opinion, the $8.25 per share to be paid to the shareholders of
the Company in the Offer and the Merger is fair, from a financial point of
view, to the shareholders of the Company other than the Management
Shareholders, and the report and analysis presented to the Board of Directors
in connection with the SunTrust Equitable Securities' opinion. The full text
of SunTrust Equitable Securities' written opinion, dated August 9, 2000, which
sets forth the assumptions made, matters considered and limitations on the
review undertaken by SunTrust Equitable Securities attached to the Schedule
14D-9 as Annex A and is incorporated herein by reference. Shareholders are
urged to read the opinion of SunTrust Equitable Securities in its entirety.
2. The presentation of SunTrust Equitable Securities that included various
valuation analyses of the Company, described below under "Opinion of Financial
Advisor."
3. The fact that the $8.25 per share price represents a premium of 91% over
the closing sale price of $4.313 on July 31, 2000, the day Offeror, Parent and
the Company agreed to the $8.25 Offer price, and a multiple of 1.37X the
Company's net book value per share as of June 30, 2000, and a multiple of
1.79X the Company's net tangible book value per share as of June 30, 2000.
4. The Board of Directors' and Special Committee's familiarity with the
Company's business, financial condition, results of operations, current
business strategy and prospects.
5. The fact that since initiation of the efforts by the Company to seek a
transaction in January 2000, no party other than Kohlberg has made a bona fide
offer for a business combination with the Company.
6. The Company's prospects if it were to remain independent, and the risks
and benefits inherent in remaining independent.
7. The possible alternatives to the Offer and the Merger (including the
possibility of continuing to operate the Company as an independent entity),
the range of possible benefits to the Company's shareholders other than the
Management Shareholders, of such alternatives and the timing and likelihood of
accomplishing the goal of any of such alternatives.
8. The fact that the consideration and other terms of the Merger Agreement
resulted from arms-length negotiations among Offeror, Parent and the Company,
and the Special Committee's and the Board of Directors'
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belief that $8.25 per share represented the highest per share consideration
that could be negotiated with Offeror and Parent.
9. The possibility that if a transaction with the Management Shareholders,
Parent and the Offeror were not negotiated and the Company remained a publicly
owned corporation, a decline in the market price of the shares or the stock
market in general could occur and the price ultimately received by the holders
of the shares in the open market or in the future transaction might be less
than the $8.25 per share included in the Offer and the Merger.
10. The fact that the Offer is for 100% of the Company's Common Stock and
is conditioned upon there being validly tendered and not withdrawn prior to
the expiration date of the Offer, at least 90% of the outstanding shares.
11. The fact that the Offer and the Merger provide for a prompt tender
offer for all shares to be followed by a second-step merger at the same
consideration, thereby enabling the Company's shareholders to obtain the
benefits of the transaction at the earliest possible time.
12. The financial ability of Offeror and Parent to consummate the Offer
and the Merger. In this regard, the Board of Directors noted that Offeror and
Parent had received executed commitment letters from financial institutions
providing for all financing necessary to purchase the shares and to pay all
transaction fees in connection with the Offer and the Merger.
13. The fact that the Merger Agreement permits the Company to furnish
information to and participate in negotiations with third parties in response
to an unsolicited acquisition proposal if a majority of the Board of Directors
(a) reasonably determines in good faith, after consultation with an
independent, nationally recognized investment bank, that taking such action
would be reasonably likely to lead to the delivery to the Company of a
superior proposal and (b) determines in good faith, after receiving the advice
of outside legal counsel, that it is necessary to take such actions in order
to comply with its fiduciary duties under applicable law.
14. The fact that the Board of Directors is permitted to terminate the
Merger Agreement if prior to the purchase of shares pursuant to the Offer, a
superior proposal is received by the Company and the Board of Directors
reasonably determines in good faith, after receiving the advice of outside
legal counsel, that it is necessary to terminate the Merger Agreement and
enter into a new agreement to effect the superior proposal in order to comply
with its fiduciary duties under applicable law.
15. The terms of the Merger Agreement, including the parties'
representations, warranties and covenants and the conditions to their
respective obligations.
The foregoing discussion of the information and factors considered by the
Special Committee and the Board of Directors is not intended to be exhaustive,
but includes the material factors considered by the Special Committee and the
Board of Directors.
As part of its analysis the Special Committee also considered the
alternative of causing the Company to remain as a public company. The Special
Committee considered the Company's limitations as a public company as
discussed above, including its limited financial resources. The Special
Committee believed that an improvement in these factors affecting the
Company's prospects was not likely in the immediate future. Although the
Merger will allow only the Management Shareholders to participate in the
Company's future growth, if any, the Special Committee concluded that this
potential benefit of remaining public was outweighed by the risks and
uncertainties associated with the Company's future prospects. The Special
Committee also concluded that obtaining a substantial cash premium for the
Shares now was preferable to preserving for the shareholders (other than the
Management Shareholders) of such Shares an opportunity to have a speculative
future return.
The Special Committee and the Board of Directors also considered the actual
and potential conflicts of interest described in Item 3 of the Schedule 14D-9.
In view of the wide variety of factors considered in
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<PAGE>
connection with their review of the Offer, the Special Committee and the Board
found it impractical to, and therefore did not, quantify or otherwise assign
relative weights to the specific factors it considered in reaching its
conclusion and recommendation. Rather, the Special Committee and the Board of
Directors viewed their positions and recommendations as being based on the
totality of the information presented to and considered by it. In addition, it
is possible that different members of the Special Committee and the Board of
Directors assigned different weights to the various factors described above.
Offeror, Parent and Management Shareholders.
None of Parent, Offeror or Kohlberg & Co., L.L.C. ("Kohlberg") participated
in the deliberations of the Special Committee or the Board of Directors
regarding the fairness of the Offer and the Merger to the shareholders of the
Company (other than the Management Shareholders). The rules of the Commission
require each of Parent, Offeror, Kohlberg and the Management Shareholders to
express their belief as to the fairness of the Offer and the Merger to the
unaffiliated shareholders of the Company. Each of Parent, Offeror and Kohlberg
regards the acquisition of the Company as an attractive investment opportunity
because the Company's future business prospects, with the Company's new
capital structure, appear strong with significant growth
opportunities. Although the investment will involve a substantial risk to
continuing shareholders of the Company, each of Parent, Offeror and Kohlberg
believes that the long-term value of the equity investment could appreciate
significantly. Each of Parent, Offeror and Kohlberg have considered the
factors considered by the Special Committee and the Company's Board of
Directors referred to above, based only on the more limited information
available to it pursuant to the sale process described above. Additionally,
each of Parent, Offeror and Kohlberg considered the following material factors
with regard to the shareholders of the Company (other than the Management
Shareholders):
. recent and historical trading prices for the Common Stock, particularly,
the fact that the $8.25 Offer Price represents a 78% premium to the
closing sale price of the Common Stock ($4.63 per share) on the last
trading day prior to public announcement of the Offer;
. the arm's length nature of the negotiations with the Company's Special
Committee with respect to the Merger Agreement;
. the conclusion of the Board of Directors and the Special Committee that
the Offer and the Merger are fair to and in the best interests of the
shareholders of the Company (other than the Management Shareholders);
. the historical financial performance of the Company;
. the Offer is not subject to a financing condition;
. the Offer provides the shareholders of the Company who are considering
selling their Shares with the opportunity to sell their Shares at the
Offer Price without incurring the transaction costs typically associated
with market sales;
. the ability of shareholders of the Company who object to the Merger to
obtain "fair value" for their Shares if they exercise and perfect their
dissenters' rights under Colorado law;
. the terms and conditions of the Merger Agreement, including the amount
and form of consideration to be paid, the parties' mutual
representations, warranties and covenants and the conditions to their
respective obligations and the absence of any future obligations on the
unaffiliated shareholders of the Company; and
. the opinion of SunTrust Equitable Securities that the consideration to
be paid to the shareholders of the Company in the Offer and the Merger
is fair to the shareholders of the Company from a financial point of
view.
After considering the foregoing, each of Parent, Offeror and Kohlberg has
determined that it reasonably believes the consideration to be paid in the
Offer and the Merger to the shareholders of the Company (other than
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the Management Shareholders) is fair to such shareholders of the Company from
a financial point of view. In reaching this determination as to fairness, none
of Parent, Offeror or Kohlberg assigned specific weights to particular
factors, but rather considered all factors as a whole. Their conclusion as to
the fairness of the Offer and the Merger to the unaffiliated shareholders of
the Company also is supported by the fact that the terms of the transactions
were negotiated with the Special Committee and its advisors at a time when
each of Parent, Offeror and Kohlberg did not own any shares of Common Stock.
None of Parent, Offeror or Kohlberg undertook a liquidation valuation or going
concern valuation of the Company. None of Parent, Offeror or Kohlberg relied
on any report, opinion or appraisal in determining the fairness of the
transaction to shareholders of the Company, but they agree with the
conclusions expressed by Suntrust Equitable Securities in its opinion to the
Board of Directors of the Company.
Parent, Offeror and Kohlberg believe that the Offer and the Merger are
procedurally fair because, among other things: (i) the Board of Directors
appointed the Special Committee consisting only of directors that are not
officers or employees of the Company; (ii) the Special Committee retained on
behalf of the Company was advised by outside legal counsel who negotiated the
Merger Agreement on an arm's length basis on behalf of the Special Committee;
(iii) the Special Committee retained on behalf of the Company was advised by
its own independent financial advisor to assist in evaluating the proposal and
provide a fairness opinion with respect to the fairness, from a financial
point of view, of the consideration to the shareholders of the Company, other
than the Management Shareholders; and (iv) the $8.25 Offer Price and the other
terms and conditions of the Merger Agreement resulted from active, arm's
length bargaining between the Special Committee and Kohlberg and their
respective advisors. In addition, the Special Committee's financial advisor
reported directly to the Special Committee and took direction from the Special
Committee and not the Management Shareholders. The Management Shareholders
engaged their own separate legal and financial advisors. The Board of
Directors of the Company acted upon the recommendation of the Special
Committee, the entire Board of Directors was comprised of a majority of
persons not interested in the Offer and the Merger, the Management
Shareholders include only two of the eight members of the Board of Directors
of the Company, and at all relevant times the Special Committee was aware of
the interests of the Management Shareholders in the proposed transaction. In
addition, Parent, Offeror and Kohlberg noted that the Management Shareholders'
ownership interest in the Company will not increase significantly as a result
of the transaction. The Management Shareholders currently own approximately
8.86% (including Shares subject to options that may be acquired within 60
days) of the issued and outstanding Common Stock, and will own approximately
9.94% of the outstanding capital stock of Parent on a fully diluted basis.
Each of the Management Shareholders adopts the analysis and findings of the
Special Committee and the Board of Directors and of Parent, Offeror and
Kohlberg with respect to the fairness of the Offer and the Merger and believes
the Offer and the Merger are procedurally and substantively fair to, and in
the best interests of, the unaffiliated shareholders of the Company.
Parent, Offeror, Kohlberg and the Management Shareholders recognize the
Offer and the Merger are not structured specifically to require the approval
of a majority of disinterested shareholders of the Company, although in order
to satisfy the Minimum Condition almost 90% of all Shares would have to be
tendered into the Offer (and the Management Shareholders own only 3.2% of the
issued and outstanding Shares). Additionally, Parent, Offeror, Kohlberg and
the Management Shareholders recognize that if Offeror purchases all shares of
Common Stock tendered in the Offer, Offeror will be able to approve the Merger
even if all remaining shareholders of the Company vote against the Merger.
Consummation of the Offer, however, is conditioned upon, among other things,
satisfaction of the Minimum Condition. Pursuant to the Merger Agreement,
consummation of the Offer is a condition to the Merger. In the event that less
than 90%, but greater than 75%, of the issued and outstanding Shares are
tendered, the Offeror will terminate the Offer and attempt to merge with the
Company pursuant to a long-form Merger. In that event, the Merger would need
to be approved by shareholders owning a majority of the issued and outstanding
shares of Common Stock.
None of the Company, Parent, Offeror, Kohlberg or any of the Management
Shareholders has made any provisions in connection with the Offer and the
Merger to grant unaffiliated shareholders of the Company access
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to the Company's corporate records, or to obtain counsel or appraisal services
at the expense of the Company, Parent, Offeror, Kohlberg or any of the
Management Shareholders.
Opinion of Financial Advisor.
In connection with the Offer, the Company engaged SunTrust Equitable
Securities to provide an opinion as to the fairness, from a financial point of
view, of the Offer Price to the Board of Directors. SunTrust Equitable
Securities is a nationally recognized firm and, as part of its investment
banking activities, is regularly engaged in the valuation of businesses and
their securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. The Company selected SunTrust Equitable Securities to render a
fairness opinion on the basis of its experience and expertise in transactions
similar to the Merger and its reputation and experience in the corrections
industry.
Pursuant to the Company's engagement with SunTrust Equitable Securities,
SunTrust Equitable Securities assisted in locating a buyer for the Company's
Correctional Information Systems business, which was sold in April 1999.
SunTrust Equitable Securities received a fee of $250,000 plus expenses of
$39,000 for this transaction.
SunTrust Equitable Securities has no material relationships with the
Company, Parent, Offeror, Kohlberg or their respective affiliates, except as
described herein. SunTrust Banks, Inc., SunTrust Equitable Securities' parent
company, may have lending relationships with companies in which Parent and
Offeror have investments. In the ordinary course of business, SunTrust
Equitable Securities or SunTrust Banks, Inc., may solicit companies in which
Parent, Offeror or Kohlberg have investments and may provide advisory or other
services to those companies.
At the August 9, 2000 meeting of the Board of Directors, SunTrust Equitable
Securities delivered its oral opinion (as subsequently confirmed in writing as
of that date) that, as of that date, and based upon and subject to the
limitations, assumptions and qualifications stated in the opinion, the Offer
Price to be paid in the Offer and the Merger to the holders of the Company
Common Stock is fair, from a financial point of view, to such holders of the
Company Common Stock. SunTrust Equitable Securities has orally confirmed to
the Company that its opinion applies to, and it performed its analysis with
respect to, the shareholders of the Company other than the Management
Shareholders. No limitations were imposed by the Board of Directors upon
SunTrust Equitable Securities related to the investigations made or the
procedures followed by it in rendering its opinion (the "SunTrust Equitable
Securities Opinion").
The full text of the SunTrust Equitable Securities Opinion, which states
the assumptions made, matters considered and limitations of review by SunTrust
Equitable Securities, is attached to the Schedule 14D-9 as Annex A and is
incorporated herein by reference. The opinion should be read carefully and in
its entirety in connection with this Offer to Purchase. A copy of the
materials presented to the Board at its meeting on August 9 and 10, 2000 is
filed as Exhibit (c)(2) to the Schedule 13E-3 filed with the Commission by the
Company and the Management Shareholders on September 19, 2000. The following
summary of the SunTrust Equitable Securities Opinion is qualified by the full
text of the SunTrust Equitable Securities Opinion. The SunTrust Equitable
Securities Opinion is not a recommendation to any shareholder of the Company
as to whether any shareholder should tender his or her Shares.
In connection with its opinion, SunTrust Equitable Securities, among other
things:
. reviewed publicly available financial and other financial information,
reports, forecasts and other internal information that were provided to
SunTrust Equitable Securities by or on behalf of the Company;
. reviewed the Merger Agreement;
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. compared financial positions and operating results of the Company to
other companies in the corrections industry;
. considered, to the extent available, the financial terms of other
similar transactions recently effected which it believed to be
comparable to the Offer;
. reviewed and discussed the historical and current operations of the
Company, its financial condition and prospects with management and
representatives of the Company; and
. conducted other financial studies, analyses and investigations and
reviewed other information and factors as it found appropriate for
purposes of the SunTrust Equitable Securities Opinion.
In connection with its review, SunTrust Equitable Securities did not
independently verify and relied on the accuracy and completeness in all
material respects of all of the financial and other information and data
publicly available or furnished to or otherwise reviewed by it. SunTrust
Equitable Securities assumed for purposes of the SunTrust Equitable Securities
Opinion that the Company's financial forecasts were reasonably prepared on
bases reflecting the best available estimates at the time of preparation as to
the future financial performance of the Company and good faith judgments of
the management of the Company. SunTrust Equitable Securities did not express
an opinion related to the forecasts or the assumptions on which they were
based. SunTrust Equitable Securities also assumed that there were no material
changes in the Company's assets, financial condition, results of operations,
business or prospects since the date of the last financial statements made
available to SunTrust Equitable Securities. SunTrust Equitable Securities
relied on advice of counsel to the Company as to all legal matters related to
the Company, the Offer, the Merger and the Merger Agreement. SunTrust
Equitable Securities has assumed that the Offer and the Merger will be
completed in a manner that complies in all respects with the applicable
provisions of the Securities Exchange Act of 1934 and all other applicable
federal and state statutes, rules and regulations. In addition, SunTrust
Equitable Securities did not assume responsibility for making an independent
evaluation, appraisal or physical inspection of the assets or liabilities
(contingent or otherwise) of the Company and was not furnished with any
appraisals. Finally the SunTrust Equitable Securities Opinion was based on
economic, monetary, market and other conditions as they existed and could be
evaluated on the date of the SunTrust Equitable Securities Opinion and did not
address the fairness of the Offer Price as of any other date. Where the
following analyses present information regarding the multiples implied by the
Offer Price, the Offer Price has been valued for purposes of analysis at $8.25
per Share.
The following is a summary of material financial analyses performed by
SunTrust Equitable Securities in connection with the SunTrust Equitable
Securities Opinion.
ANALYSIS OF PREMIUMS PAID
SunTrust Equitable Securities performed an analysis comparing the revised
Offer Price with the closing stock price the day before the original
transaction announcement. SunTrust Equitable Securities viewed this analysis
as supporting fairness since the implied premium was above the range of
premiums in similar transactions.
SunTrust Equitable Securities reviewed the acquisition premiums paid for
selected public companies over the market price of a certain number of days
prior to the announcement of a transaction. For the group, consisting of 43
completed transactions having a transaction value of between $25 million and
$250 million, the average premium paid in the transaction over the acquired
company's stock price one day, one week, four weeks and one year prior to the
announcement of the transaction is presented in the table below.
<TABLE>
<CAPTION>
Premium Prior to
Announcement
------------------------------
<S> <C> <C> <C> <C>
1 Day 1 Week 4 Weeks 1 Year
----- ------ ------- ------
Average Premium.............................. 28.0% 30.2% 38.8% 44.3%
BI Inc. Premium.............................. 78.4% 103.1% 63.0% 3.9%
</TABLE>
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COMPARABLE COMPANIES ANALYSIS
SunTrust Equitable Securities analyzed publicly-traded
corrections/treatment companies. The group consisted of America Service Group,
Avalon Correctional Services, Children's Comprehensive Services, Cornell
Companies, Correctional Services Corporation, Ramsay Youth Services, Res-Care
and Wackenhut Corrections Corporation. The table below presents, for the
companies, the average and median multiples of total market capitalization to
the latest twelve months' ("LTM") revenue, LTM EBITDA and LTM earnings before
interest and taxes ("EBIT"). The multiples are compared to the multiples for
the Company implied by the Offer Price.
CORRECTIONS / TREATMENT COMPANIES
<TABLE>
<CAPTION>
BI Incorporated
Average Median Offer Multiples
------- ------ ---------------
<S> <C> <C> <C>
MULTIPLE OF:
------------
LTM Revenues..................................... 0.7x 0.4x 1.1x
LTM EBITDA....................................... 5.4x 5.6x 6.8x
LTM EBIT......................................... 7.5x 7.8x 20.6x
</TABLE>
SunTrust Equitable Securities judged this analysis as supporting fairness
since the valuation multiples implied by the Offer Price were greater than the
range of the valuation multiples of comparable companies. No company or
transaction used in the above analysis is identical to the Company or the
Offer. Accordingly, an analysis of the results of the above involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the
public trading value of the companies to which the Company and the Offer are
being compared. Mathematical analysis (such as determining the average or
median) is not, in itself, a meaningful method of using comparable company
data.
COMPARABLE TRANSACTIONS ANALYSIS
SunTrust Equitable Securities developed a list of 41 merger and acquisition
transactions involving selected corrections/treatment companies and compared
transaction value as a multiple of revenue, gross profit and EBITDA for these
transactions to the transaction value multiples for the Company. SunTrust
Equitable Securities examined this group of completed transactions in the
corrections/treatment industry from February 1993 to the present. The average
(excluding high and low) and median multiples paid for these transactions are
presented in the table below.
<TABLE>
<CAPTION>
Average BI Incorporated
(excluding high and low) Median Offer Multiples
------------------------ ------ ---------------
<S> <C> <C> <C>
Revenues........................ 1.1x 0.8x 1.1x
EBITDA.......................... 9.1x 6.0x 6.8x
</TABLE>
No company or transaction used in the above analysis is identical to the
Company or the Offer. Accordingly, an analysis of the results of the above
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors
that could affect the public trading value of the companies to which the
Company and the Offer are being compared. Mathematical analysis (such as
determining the average or median) is not, in itself, a meaningful method of
using comparable transaction data. SunTrust Equitable Securities judged this
analysis as supporting fairness since the valuation multiples implied by the
transaction value were within the range of the valuation multiples of
comparable transactions.
The companies in the comparable companies analysis and comparable
transaction analysis were selected because their products, customers or
strategy were similar to that of the Company. However, none of the companies
operate solely in the segments that the Company does and none serve the same
customer base.
9
<PAGE>
DISCOUNTED CASH FLOW ANALYSIS
Using certain projected financial information supplied by the Company for
both a Management Case and a Sensitivity Case for calendar years 2001 to 2005,
SunTrust Equitable Securities calculated the net present value of free cash
flows of the Company through 2005 using discount rates ranging from 9.3% to
11.3%. SunTrust Equitable Securities' estimate of the appropriate discount
rate was based on the estimated weighted average cost of capital for
comparable corrections/treatment companies. SunTrust Equitable Securities also
calculated the terminal value of the Company in the year 2005 based on
multiples of 2005 EBITDA ranging from 3.0x to 7.0x and discounted these
terminal values using the assumed range of discount rates. This analysis
indicated a range of per share values under both scenarios indicated in the
table below.
<TABLE>
<CAPTION>
Low High
----- ------
<S> <C> <C>
Management Case Implied Equity Value Per Share.................... $6.76 $17.42
Sensitivity Case Implied Equity Value Per Share................... $4.07 $12.21
</TABLE>
Inherent in any discounted cash flow valuation are the use of a number of
assumptions, including the accuracy of projections, and the subjective
determination of an appropriate terminal value and discount rate to apply to
the projected cash flows of the entity under examination. Variations in any of
these assumptions or judgments could significantly alter the results of a
discounted cash flow analysis. SunTrust Equitable Securities judged this
analysis as supporting fairness since the transaction value was within the
range of values generated by this analysis.
LEVERAGED BUYOUT ANALYSIS
SunTrust Equitable Securities applied a leveraged buyout analysis to the
projected financial information supplied by the Company for calendar years
2001 to 2005 to calculate the rate of return the Investor Group would receive
in a leveraged transaction. SunTrust Equitable Securities utilized the capital
structure assumed by the Investor Group. The analysis assumes that the
business is sold at the end of a five-year time period at a value, the "exit
valuation," equal to 6.0x to 7.0x EBITDA. The range of exit valuation
multiples approximates the valuation implied by the Offer Price in this
transaction. This analysis suggested that the equity provided by the Investor
Group would receive an internal rate of return shown in the table below.
<TABLE>
<CAPTION>
Assumed Exit
Valuation Multiple
------------------
6.0X 7.0X
---- ----
<S> <C> <C>
Implied Internal Rate of Return............................. 32.1% 36.8%
</TABLE>
Inherent in any leveraged buyout analysis are the use of a number of
assumptions, including the accuracy of projections, the appropriate capital
structure and the exit multiple used in the analysis. Variations in any of
these assumptions or judgments could significantly alter the results of a
leveraged buyout analysis. SunTrust Equitable Securities judged this analysis
as supporting fairness because the returns implied by the transaction value
are consistent with the returns that in SunTrust Equitable Securities'
experience are expected by equity investors in leveraged transactions of this
type.
The above summary does not purport to be a complete description of the
presentation by SunTrust Equitable Securities to the Board of Directors or the
analyses performed by SunTrust Equitable Securities. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. SunTrust Equitable Securities
believes that the analyses and the above summary must be considered as a whole
and that selecting portions of its analyses and of the factors considered,
without considering all of the analyses and factors, would create an
incomplete or misleading view of the evaluation process underlying its
opinion. In addition, SunTrust Equitable Securities may have given various
analyses more or less emphasis than other analyses, so that the ranges of
valuations resulting from any particular analysis described above should not
be taken to be SunTrust Equitable Securities' view of the actual value of the
Company.
In performing its analyses, SunTrust Equitable Securities made numerous
assumptions related to industry performance, general business and economic
conditions and other matters, many of which are beyond the control
10
<PAGE>
of the Company. The analyses performed by SunTrust Equitable Securities are
not necessarily indicative of actual values or actual future results, which
may be significantly more or less favorable than suggested by the analyses.
The analyses were prepared solely as part of SunTrust Equitable Securities'
analysis of the fairness of the Offer Price in connection with the delivery of
the SunTrust Equitable Securities Opinion. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold
or the prices at which any securities may trade at the present time or at any
time in the future. SunTrust Equitable Securities used in its analyses various
projections of future performance prepared by the management of the Company.
See "Certain Information Concerning the Company--Certain Company Projections."
The projections are based on numerous variables and assumptions, which are
inherently unpredictable and must be considered not certain of occurrence as
projected. Accordingly, actual results could vary significantly from those in
the projections.
SunTrust Equitable Securities was engaged by the Company to render its
fairness opinion as provided by an engagement letter dated November 25, 1998.
Under the terms of the engagement letter, the Company agreed to pay
. a valuation fee of $50,000
. a retainer fee of $50,000,
. an additional fee of $150,000 following the delivery of its oral opinion
to the Board of Directors; and
. a financial advisory fee of one and one-quarter percent (1.25%) of the
aggregate consideration on a sale transaction (approximately $1.0
million).
The Company has also agreed to reimburse SunTrust Equitable Securities for
its reasonable out-of-pocket expenses. The Company has paid $100,000 to date
in fees to SunTrust Equitable Securities. SunTrust Equitable Securities
expects to receive $1,250,000 for services rendered and an additional $85,000
in expenses. Under a separate letter agreement, the Company has agreed to
indemnify SunTrust Equitable Securities, its affiliates, and their respective
partners, directors, officers, agents, consultants, employees and controlling
persons against certain liabilities, including liabilities under the federal
securities laws. In the ordinary course of its business, SunTrust Equitable
Securities actively trades securities of the Company for its own account and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in the securities.
A copy of the fairness opinion from SunTrust Equitable Securities will be
made available at the principal executive offices of the Company during its
regular business hours by any interested equity security holder of the Company
or representative thereof who has been so designated in writing.
Reasons for Rejection of Alternatives.
The Board rejected the alternatives to sale of the Company described in the
foregoing discussion and in "Background of Offer" for the following reasons:
Acquisitions were rejected because the Company's cash position was not
strong enough to finance significant transactions. Additionally, the Company's
Common Stock was trading at levels where such acquisitions in stock
transactions would be dilutive (not accretive) to the Company's shareholders.
The Company did close in July 2000, an acquisition of a CCS company in a
transaction that began in 1999, financed entirely by debt (the "Intervention
Transaction").
Raising additional financing was rejected because the market valuations for
the Company and other public companies in the corrections industry
deteriorated so significantly that such equity financing, even if able to be
accomplished, would be highly dilutive to the Company's existing shareholders.
The Company did complete the Intervention Transaction raising debt financing
to the maximum level the Board felt advisable for the Company's balance sheet,
taking into consideration the interests of the Company's public shareholders
(other than the Management Shareholders).
The Company did seek the interest of potential industry partners but
received no bona fide offers.
11
<PAGE>
Purpose of the Offer; Plans for the Company.
See the discussion under Section 12, "Purpose of the Offer; The Merger;
Plans for the Company" on page 24 of the Offer to Purchase.
Interests of Certain Persons in the Offer and the Merger.
The beneficial ownership of the Common Stock of the Company with respect to
the Management Shareholders, the directors of the Company and five percent
shareholders of the Company is set forth in Annex II attached hereto and
incorporated herein by reference.
KBII Acquisition Company, L.P. KBII Acquisition Company, L.P. ("KBII,
L.P.") intends to invest approximately $28 million in Parent in exchange for
approximately 99.59% (72.90% on a fully diluted basis) of the outstanding
capital stock of Parent. See Section 4, "Certain Information Concerning
Offeror and Parent."
Management Shareholders. The Management Shareholders have agreed pursuant
to the Voting Agreement to tender their Shares in the Offer and, if necessary,
to vote their Shares (whether now owned or hereafter acquired) in favor of the
Merger and the transactions contemplated thereby and against any competing
offer. As of August 10, 2000, the Management Shareholders owned directly 3.2%
of the issued and outstanding Common Stock. See Annex II attached hereto.
Upon completion of the Merger, the Management Shareholders will
beneficially own approximately 1.75% (including shares subject to options that
may be acquired within 60 days of the Merger) of the issued and outstanding
capital stock of Parent on a fully diluted basis. In addition, Parent will
grant the Management Shareholders additional compensatory options to purchase
up to 8.19% of the capital stock of Parent on a fully diluted basis, which
options will vest ratably over three years based on the Company attaining
certain performance goals. Jacqueline A. Chamberlin has agreed to purchase for
$66,563 in cash 44,375 shares representing approximately 0.23% (0.17% on a
fully diluted basis) of Parent's issued and outstanding capital stock, and
Steven P. Merrefield has agreed to purchase for $52,223 in cash 34,815 shares
representing approximately 0.18% (0.13% on a fully diluted basis) of Parent's
issued and outstanding capital stock. David J. Hunter, Steven P. Merrefield,
Jacqueline A. Chamberlin, Mckinley C. Edwards Jr. and Jonathan M. Hinebauch
will rollover vested options to acquire Common Stock of the Company into
options with an exercise price of $0.01 per share to acquire 156,040 shares,
38,570 shares, 89,555 shares, 33,557 shares and 57,146 shares, respectively,
representing approximately 0.60%, 0.15%, 0.34%, 0.13% and 0.22%, respectively,
of the outstanding capital stock of Parent on a fully diluted basis. The form
of rollover option grant letter is attached as Exhibit (d)(8) to the Schedule
TO and is incorporated herein by reference. In addition, Parent will grant to
Mr. Hunter, Mr. Merrefield, Ms. Chamberlin, Mr. Edwards and Mr. Hinebauch
compensatory options with an exercise price of $1.50 per share to purchase up
to 725,000 shares, 365,000 shares, 335,000 shares, 350,000 shares and 347,000
shares, respectively, representing approximately 2.80%, 1.41%, 1.29%, 1.35%
and 1.34%, respectively, of the outstanding capital stock of Parent on a fully
diluted basis, which options will vest ratably over three years based on the
Company attaining certain performance goals. The non-rollover stock options to
be granted to the Management Shareholders will vest as follows: (i) options to
acquire one-third of the shares will vest on January 1, 2002 if the Company
reaches an earnings before interest, taxes, depreciation and amortization
("EBITDA") for fiscal year 2001 of $17.1 million, (ii) options to acquire one-
third of the shares will vest on January 1, 2003 if the Company reaches an
EBITDA for fiscal year 2002 of $19.5 million, and (iii) options to acquire
one-third of the shares will vest on January 1, 2004 if the Company reaches an
EBITDA for fiscal year 2003 of $21.4 million. The form of non-rollover option
grant letter is attached as Exhibit (d)(9) to the Schedule TO and is
incorporated herein by reference. The non-rollover options to acquire
2,122,000 shares of capital stock of Parent to be granted to the Management
Shareholders represent approximately 77% out of the total option pool for all
employees of options to acquire 2,765,000 shares of capital stock of Parent.
On a fully diluted basis, including unvested options, Mr. Hunter, Mr.
Merrefield, Ms. Chamberlin, Mr. Edwards and Mr. Hinebauch will beneficially
own 3.40%, 1.69%, 1.81%, 1.48% and 1.56%, respectively, of outstanding capital
stock of Parent. In addition, in connection with the Merger, Mr. Hunter and
Mr. Edwards will be entitled to
12
<PAGE>
receive $101,563 and $158,281, respectively, as part of the Merger
consideration to cash out non-rollover options to acquire Shares (based on the
amount that $8.25 exceeds the exercise price of such options). Parent
anticipates that following the Merger, it will expand its Board of Directors
to consist of seven persons, one of whom will be a Management Shareholder. See
Section 13, "The Transaction Documents."
Merger Agreement.
See the discussion under Section 13, "The Transaction Documents--The Merger
Agreement" on page 26 of the Offer to Purchase.
Dissenters' Rights.
See the discussion under Section 12, "Purpose of the Offer; The Merger;
Plans for the Company--Dissenters' Rights" on page 25 of the Offer to
Purchase.
Certain United States Federal Income Tax Consequences.
See the discussion under Section 5, "Certain Federal Income Tax
Consequences" on page 14 of the Offer to Purchase.
Financing of the Offer.
See the discussion under Section 10, "Source and Amount of Funds" on page
20 of the Offer to Purchase.
Transactions and Agreements Concerning the Common Stock.
See the discussion under Section 9, "Certain Information Concerning Offeror
and Parent" on page 18 of the Offer to Purchase and under Section 13, "The
Transaction Documents" on page 26 of the Offer to Purchase.
Steven P. Merrefield and Jonathan M. Hinebauch, executive officers of the
Company, purchased 64 and 1,058 shares of Common Stock, respectively, on June
30, 2000 pursuant to the Company's Employee Stock Purchase Plan. The following
six of the Company's directors received options for 4,500 shares each of the
Company's common stock on June 30, 2000, exercisable at $5.375 per share, the
closing sale price per Share on Nasdaq on June 30, 2000, pursuant to the
Company's Director Compensation Plan: William, E. Coleman, Beverly J. Haddon,
Jeremy N. Kendall, Perry M. Johnson, Barry J. Nidorf and Byam K. Stevens, Jr.
Offeror and Parent have been advised that all of the Company's executive
officers, directors and affiliates intend to tender all Shares held of record
or beneficially by them pursuant to the Offer (other than Shares issuable on
the exercise of options and Shares, if any, which if tendered could cause such
persons to incur liability under the provisions of Section 16(b) of the
Exchange Act), subject to and consistent with any fiduciary obligations of
such persons.
Certain Effects of the Offer and the Merger.
See the discussion under Section 7, "Effect of Offer on Market for Shares;
Nasdaq Listing; SEC Registration; Margin Regulations" on page 15 of the Offer
to Purchase.
Price Range of Shares; Dividends on the Shares. The section entitled "Price
Range of Shares; Dividends on the Shares" is hereby amended by inserting at
the end of the second paragraph thereunder on page 15 of the Offer to Purchase
the following:
The Company's current line of credit requires the Company to obtain the
lender's prior written consent to the payment of any dividends.
13
<PAGE>
The section entitled "Price Range of Shares; Dividends on the Shares" is
hereby further amended by inserting at the end of the last paragraph
thereunder on page 15 of the Offer to Purchase the following:
The closing sale price per Share on Nasdaq on September 18, 2000 was $8.13.
Certain Information Concerning the Company. The section entitled "Certain
Information Concerning the Company" is hereby amended by inserting after the
second paragraph thereunder on page 16 of the Offer to Purchase the following
paragraphs:
Financial Information. Certain financial information relating to the
Company is hereby incorporated by reference to (i) the audited financial
statements for the Company's 1998 and 1999 fiscal years set forth in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999
on pages F-1 through F-22 of such report and (ii) the unaudited financial
statements for the nine months ended March 31, 1999 and 2000 set forth in the
Company's Quarterly Report on Form 10-Q for the nine months ended March 31,
2000 on pages 2 through 6 of such report. These reports may be inspected at,
and copies obtained from, the same places and in the same manner set forth
under "--Available Information" below. Based on these reports, the Company's
ratio of earnings to fixed charges was 6.9 and 6.1 for the fiscal years ended
June 30, 1998 and 1999, respectively, and 6.6 and 2.7 for the nine months
ended March 31, 1999 and 2000, respectively. As of March 31, 2000, the
Company's net book value per share was $6.06 (on a non-diluted basis).
The section entitled "Certain Information Concerning the Company" is hereby
further amended by amending and restating the sixth paragraph thereunder on
page 18 of the Offer to Purchase in its entirety as follows:
The inclusion of the foregoing projections should not be regarded as an
indication that the Company, Offeror, Parent or any other person who received
such information considers it a reliable prediction of future events, and
neither Offeror nor Parent has relied (nor should any other person rely) on
them as such. None of Offeror or Parent or any of their advisors assumes any
responsibility for the reasonableness, completeness, accuracy or validity of
any of the projections. None of the Company, Parent or Offeror or any of their
representatives has made, or makes, any representation to any person regarding
the information contained in the projections, and none of them intends to
update or otherwise revise the projections to reflect circumstances existing
after the date when made or to reflect the occurrence of future events even in
the event that any or all of the assumptions underlying the projections are
shown to be in error.
Certain Information Concerning Offeror and Parent. The section entitled
"Certain Information Concerning Offeror and Parent" is hereby amended by
amending and restating the seventh, eighth and ninth paragraphs thereunder on
pages 19 and 20 of the Offer to Purchase in their entirety as follows:
Information Concerning Kohlberg & Co., L.L.C. Kohlberg is a well known U.S.
private equity firm specializing in middle market investing whose objective
has been to realize gains through control investments in a diversified
portfolio of companies. Parent and Offeror were formed at the direction of
Kohlberg, and representatives of Kohlberg conducted the initial negotiations
with management of the Company in connection with the Offer and the Merger
Agreement. See Section 11, "Background of the Offer." Kohlberg is not subject
to the informational filing requirements of the Exchange Act.
The principal executive offices of Kohlberg are located at 111 Radio
Circle, Mount Kisco, New York 10549, telephone number (914) 241-7430. The
name, business address, past and present principal occupations and citizenship
of each of the principals of Kohlberg are set forth in Annex I to this Offer
to Purchase.
Ownership Interest in the Company. Pursuant to the Voting Agreement,
Parent, Offeror, KBII, LLC, KBII, L.P. and James A. Kohlberg may be deemed to
beneficially own 749,849 Shares (including Shares subject to options that may
be acquired within 60 days) constituting approximately 8.86% of the issued and
outstanding Common Stock of the Company. All of such 749,849 Shares are
directly beneficially owned by the Management
14
<PAGE>
Shareholders. See "INTRODUCTION" and Section 13, "The Transaction Documents--
Stock Voting and Tender Agreement." Each of Parent, Offeror, KBII, LLC, KBII,
L.P. and James A. Kohlberg disclaims beneficial ownership of such Shares.
Except as set forth in this Offer to Purchase:
. none of KBII, LLC, KBII, L.P., Kohlberg, Parent nor Offeror nor, to the
best knowledge of KBII, LLC, KBII, L.P., Kohlberg, Parent and Offeror,
any of the persons listed in Annex I to this Offer to Purchase, or any
associate or majority owned subsidiary of any of the foregoing, (i)
beneficially owns or has a right to acquire any Shares or any other
equity securities of the Company except for 749,849 Shares which may be
deemed beneficially owned by Parent, Offeror, KBII, LLC, KBII, L.P. and
James A. Kohlberg by virtue of the Voting Agreement; (ii) has any
contract, arrangement, understanding or relationship with any other
person with respect to any securities of the Company other than the
Voting Agreement; or (iii) has effected any transaction in the Shares or
any other equity securities of the Company during the past 60 days;
. there have never been any transactions which would be required to be
disclosed under the rules and regulations of the Commission between any
of KBII, LLC, KBII, L.P., Kohlberg, Parent, Offeror or any of their
respective subsidiaries, or, to the best knowledge of KBII, LLC, KBII,
L.P., Kohlberg, Parent and Offeror, any of the persons listed in Annex I
to this Offer to Purchase, on the one hand, and the Company or any of
its executive officers, directors or affiliates, on the other hand; and
. there have never been any negotiations, transactions or material
contacts between any of KBII, LLC, KBII, L.P., Kohlberg, Parent, Offeror
or any of their respective subsidiaries or, to the best knowledge of
KBII, LLC, KBII, L.P., Kohlberg, Parent and Offeror, any of the persons
listed in Annex I to this Offer to Purchase, on the one hand, and the
Company or its affiliates, on the other hand, concerning any merger,
consolidation, acquisition, tender offer or other acquisition of
securities of the Company, any election of directors of the Company, or
any sale or other transfer of a material amount of assets of the
Company.
Neither KBII, LLC, KBII, L.P., Kohlberg, Parent nor Offeror had any
relationship with the Company or the Management Shareholders prior to the
commencement of the discussions which led to the execution of the Merger
Agreement. See Section 11, "Background of Offer." Each of KBII, LLC, KBII,
L.P., Kohlberg, Parent and Offeror disclaims that it is an "affiliate" of the
Company within the meaning of Rule 13e-3 under the Exchange Act.
Available Information. Parent, Offeror, Kohlberg, KBII, LLC and KBII, L.P.
are privately-held companies and are generally not subject to the information
filing requirements of the Exchange Act, and are generally not required to
file reports, proxy statements and other information with the Commission
relating to their respective businesses, financial condition and other
matters. However, pursuant to Rule 14d-3 under the Exchange Act, Parent,
Offeror and Kohlberg, filed with the Commission a Schedule TO, together with
exhibits, including this Offer to Purchase and the Merger Agreement, which
provides certain additional information with respect to the Offer, and Parent,
Offeror, KBII, L.P., KBII, LLC, James A. Kohlberg and the Management
Shareholders filed a statement of beneficial ownership on Schedule 13D filed
with the Commission on August 18, 2000, which describes the filing persons'
ownership interests in the Company. The Schedule TO and Schedule 13D and any
amendments thereto, including exhibits, should be available for inspection and
copies should be obtainable at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such
information should also be obtainable (i) by mail, upon payment of the
Commission's customary charges, by writing to the Commission's principal
office at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, Suite 1300, New
York, NY 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60661 and (ii) by accessing the Commission's website on the
Internet at http://www.sec.gov.
15
<PAGE>
Background of Offer. The section entitled "Background of Offer" is hereby
amended by amending and restating the section on pages 22 through 24 of the
Offer to Purchase in its entirety as follows:
Prior to 1996, the Company's business involved primarily home incarceration
electronic monitoring ("EM"), both selling EM products and providing
monitoring services. In that time frame, based on changes in the corrections
industry toward privatization, the Company's Board believed that there was an
opportunity to create a large, profitable, differentiated corrections company
that could substantially benefit the Company's shareholders. In 1996 and 1997,
the Company made acquisitions in the community correctional services ("CCS")
area, creating a CCS business unit in 1996.
During 1997, the Company's Board of Directors and the management team were
concerned about the overall deterioration of the stock prices of the publicly
traded corrections companies. Additionally, there was disappointment in the
price and trading volume of the Company's stock in light of the Company's
business strategy and performance. Due to these factors, both management and
the Board of the Directors began considering ways to improve the Company's
stock price and deliver greater value to the shareholders.
The Company was able in fiscal years 1997 and 1998 to create strong
recurring revenue and to grow its CCS division. However, at the end of fiscal
year 1998, the Company was not experiencing the growth in earnings and the
cash flow return that the Board desired from the Company's diversification and
growth. In the calendar year 1998, the Board of Directors considered a number
of alternatives including (i) the possibility of a business combination with
another corrections industry company, (ii) additional financing to allow
expansion, (iii) acquisitions of existing companies or businesses to achieve
the Company's goals, and (iv) a sale or leveraged buyout of the Company.
The Company experienced an increase in its market valuation in the first
half of calendar year 1998 but the price was already eroding by the June 30,
1998 fiscal year end. At a meeting of the Board of Directors held November 5,
1998, the option of divesting the Corrections Information Systems division
("CIS") was discussed as one means for enhancing shareholder value. A decision
was made to divest CIS which had proved to be less strategic than originally
thought and was a drain on cashflow. The Company retained SunTrust Equitable
Securities to assist in that divestiture. SunTrust Equitable Securities began
the process of preparing CIS for sale and preparing marketing materials during
the period November 1998 to March 1999 and, upon completion of the materials,
began contacting prospective buyers. Negotiations, presentations and due
diligence with Compudyne Corporation occurred over several months prior to the
sale of CIS to Compudyne in June 1999.
In late 1998 and early 1999 the Company conducted conversations with four
different private equity groups that approached the Company on an unsolicited
basis regarding a potential buyout. During that period there was continued
market deterioration and the Company was under-performing relative to its
operating plan. The Board of Directors and management concluded that the
Company should consider retaining an investment banking firm to discuss the
full range of alternatives that might be available and to provide guidance on
valuation expectations. There was a view by the Board of Directors and
management at that time that if a sale strategy was considered, a strategic
buyer might yield a higher valuation than that of a financial buyer.
At its November 1998 meeting, the Board of Directors formally charged
management with seeking ways to maximize shareholder value. SunTrust Equitable
Securities was retained by the Company on November 25, 1998 to evaluate
strategic alternatives, as well as to divest CIS. The Company selected
SunTrust Equitable Securities based in large part on the firm's expertise and
experience in the corrections industry and with mergers and acquisitions
specifically. SunTrust Equitable Securities actively followed all the
companies within the corrections industry from a research standpoint,
including the Company, and their investment banking group had been involved in
several capital raising and advisory transactions with many of the players in
the industry.
Upon being retained, SunTrust Equitable Securities spent the next several
weeks conducting significant due diligence on the Company including site
visits, management interviews and review of historical and projected financial
and operating data. In February 1999, SunTrust Equitable Securities made a
presentation to the Board
16
<PAGE>
of Directors in which it outlined and discussed various strategic alternatives
including a strategic alliance or joint venture, private equity infusion, sale
or leveraged buyout. In addition, SunTrust Equitable Securities provided
preliminary valuation analysis which presented various equity values for the
Company under certain assumptions. The value range presented, which was based
on then current market dynamics and the specific assumptions available at that
time, was between $12.22 and $18.39 per share. The range in per share values
was largely attributable to reliance on various valuation methodologies and
multiple comparable company analysis.
The Board of Directors and management continued to monitor the situation
over the ensuing several months. During the summer and fall of 1999, SunTrust
Equitable Securities and management of the Company had several phone
conversations and face-to-face meetings to discuss strategy and to offer
opinions on strategic alternatives that would maximize shareholder value.
During that time frame, there were discussions regarding the perceived factors
that were preventing the Company from enjoying a strong stock price, robust
trading volume and significant interest from the research community. It was
the belief of SunTrust Equitable Securities that the Company was likely too
small in terms of market capitalization to realistically capture the attention
of the investment community and research analysts. This was particularly true
given the recent dramatic move by the financial community towards technology
and large capitalization stocks and away from non-technology small cap stocks
in general.
A strategy was developed that entailed the Company growing via strategic
acquisitions and, in doing so, becoming a much larger, more diverse firm. It
was believed at the time that if the Company could increase substantially in
size and continue to execute successfully on their business plan, the interest
in the Company would increase. To accomplish this growth, the strategy
contemplated rolling up multiple players in the fragmented
corrections/treatment industry.
It was agreed that SunTrust Equitable Securities would approach three
parties (A,B,C) to discuss the merits of a business combination. Over the next
couple of months meetings were scheduled with each of the three parties during
which each party discussed their respective businesses and the synergies that
might exist between the companies.
After the discussions, it was concluded that Party A did not have a
sufficiently strong base business or management team to warrant further
discussions. Party B, while an attractive candidate, was not receptive to
being acquired at that time. With respect to Party C, a compelling argument
could not be developed as to why the two companies should be combined given
their respective business focuses.
Without significant progress resulting from contacting the three specific
parties, the Board of Directors and management decided to more formally and
comprehensively explore a wide range of alternatives. SunTrust Equitable
Securities was asked to revise the valuation materials previously presented
and provide the Board of Directors with an updated presentation during the
November 19, 1999 Board meeting. SunTrust Equitable Securities presented a
revised range of values, based on then current market dynamics and specific
assumptions available at that time, of $9.76 to $17.52 per share. Again, the
variance in values was largely attributable to multiple valuation
methodologies being employed and reliance on multiple comparable companies.
The Board of Directors decided to charge SunTrust Equitable Securities with
formally exploring alternatives available to the Company for maximizing
shareholder value, with the focus being on a strategic combination or sale.
Also at that meeting, a special committee of independent directors was formed
to consider strategic alternatives presented to the Company, to enter into
discussions and negotiations related to such alternatives and to recommend to
the Board of Directors what action, if any, should be taken.
At that meeting, a discussion was held regarding whether to publicly
disclose SunTrust Equitable Securities' activities and the pros and cons of
doing so. It was decided by the Board of Directors that, in order to ensure
that the Company received the broadest range of interest possible, a public
announcement would be made.
During that same meeting, the Board of Directors acted on previously held
discussions regarding the adoption of a shareholder rights plan. The Board of
Directors chose to adopt the plan to provide the Company
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with ample time to consider fair and compatible offers from parties interested
in pursuing constructive strategic paths with the Company. The plan also
optimized the probability of fair compensation for all the shareholders by
encouraging interested parties to negotiate with the Board of Directors.
SunTrust Equitable Securities reviewed previously distributed materials
regarding shareholder rights plans in general and the particular price and
terms appropriate for the Company. In consultation with legal counsel, the
Company's Board of Directors approved the adoption of a shareholder rights
plan at the November 16, 1999 meeting.
Immediately following the Board meeting SunTrust Equitable Securities began
working with management on a public information book which contained 5 year
projections prepared by management to be made available to selected interested
parties who would enter into Confidentiality Agreements. Simultaneous with
that undertaking, SunTrust Equitable Securities worked with management to
create a comprehensive list of strategic partners and financial buyers to be
contacted. Beginning in late November 1999 and continuing through January
2000, SunTrust Equitable Securities contacted prospective partners and/or
buyers to assess their level of interest in discussing a potential transaction
with the Company. SunTrust Equitable Securities contacted 91 parties, of which
41 were strategic in nature and 50 were financial buyers. After engaging in
one-on-one discussions about the Company and the opportunity, 38 parties
expressed an interest in reviewing information on the Company and discussing
the situation further. Confidentiality agreements were executed with 37 of the
38 interested parties (with the one party not signing a confidentiality
agreement receiving only publicly available information but not the
projections prepared by management). Accompanying the materials disbursed to
the interested parties SunTrust Equitable Securities also forwarded a letter
outlining the process the parties should follow to continue exploring the
opportunity. In that letter, and in a subsequent letter containing additional
supplemental information, the parties were requested to submit in writing
preliminary indications of interest outlining: the purchase price, proposed
structure and form of consideration for a combination with or acquisition of
the Company, an indication of whether or not the proposal was subject to
financing or any other contingency, a list of additional information needs,
plans for integration and operation of the Company following the transaction,
and the level of review by senior officers that the potential transaction had
received and a preliminary timetable for the closing of the transaction.
During the period of time between the delivery of the initial materials and
the due date of the preliminary indication of interest, SunTrust Equitable
Securities had numerous additional discussions with several of the parties and
provided supplemental information as requested and appropriate for that stage
of the process. Additionally, during this time period members of senior
management were made available via conference calls to discuss the business or
specific questions if requested to do so by the parties.
From the period of February 3, 2000 to February 14, 2000, SunTrust
Equitable Securities received eight indications of interest. In early February
2000, the Company's stock was trading in the $8.00 range.
Party 1 was a publicly-traded strategic buyer who proposed a tax-free
stock-for-stock pooling of interest transaction at $8.00 per share.
Party 2 was a publicly-traded equity investment firm who proposed either a
100% cash transaction or a tax-free stock-for-stock exchange at $9.91-$11.91
per share. The proposal was contingent upon third party senior debt and junior
capital from Party 2 or Party 2's common stock. The interest was predicated on
management's willingness to stay post transaction and the Company's ability to
meet the projections presented.
Party 3 was a private equity firm who proposed a 100% cash transaction at
$8.00 - $9.00 per share. The offer was contingent upon externally raised
financing. Interest was also predicated on management remaining with the
Company and an assumed earnings before interest, taxes, depreciation and
amortization ("EBITDA") run rate of $14.0 million.
Party 4 was a publicly-traded company operating in the broader corrections
industry who proposed either a 100% cash purchase or a 59.5% cash / 40.5%
stock purchase at $10.00 - $11.00 per share. The offer was
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contingent upon external financing. Concerns were expressed over results
reported for first half of the fiscal year ended June 30, 2000. Interest was
also predicated on the Company being on pace to hit the projections provided.
The fifth party, Kohlberg, was a private equity firm which proposed a 100%
cash purchase at $11.00 - $12.00 per share. The offer was contingent upon
raising senior and subordinated debt along with up to $45 million in equity
being provided by Kohlberg.
Party 6 was a private equity firm that proposed a 100% cash purchase at
$7.50 per share. Interest was silent on financing and was predicated on
forming a strong relationship with management.
Party 7 was a private equity arm of a large bank who proposed a 100% cash
transaction at $9.09 - $9.64 per share. The offer was contingent upon raising
external senior and subordinated debt financing, management co-investing and
that the Company be on pace to deliver $14.5 million in EBITDA for the fiscal
year ended June 30, 2000.
Party 8 was a large, public international firm operating various lines of
business that proposed either a 100% cash acquisition at $10.08 per share or a
joint venture. This party expressed desire to retain existing management,
preference for joint venture and the need for indemnification from lawsuits.
The Board of Directors met on February 17, 2000 to receive a presentation
by SunTrust Equitable Securities on the status of the marketing process and to
discuss which, if any, of the indications of interest received warranted
further consideration.
The Board considered the following factors regarding the indications of
interest before determining whether to continue and, if so, with which
parties. The factors considered included, but were not limited to, the
following: (i) the strategic fit of the prospective partner, (ii) the
valuation and terms of the indication of offer, (iii) the level of seriousness
demonstrated by the party producing the indication of interest and the amount
of work completed leading up to the indication, (iv) the party's knowledge of
the community corrections subset of the overall corrections industry, and (v)
consideration of the party's reputation and capability to consummate the
transaction proposed including access to equity capital and bank financing.
Based on factors noted above the Board of Directors decided to invite three
parties (Party 2, Kohlberg and Party 8) to participate in on-site management
presentations and additional due diligence.
SunTrust Equitable Securities contacted each of the three parties and
scheduled site visits to participate in management presentations and review
information available in a data room.
In March 2000, Kohlberg provided management of the Company with a
preliminary due diligence request list, and Kohlberg conducted additional due
diligence during the ensuing weeks through receipt of its information requests
as well as telephone conversations with management.
On March 7, 2000, representatives of Kohlberg traveled to the Company's
headquarters in Colorado for a presentation by management and tours of the
Company's Boulder and Denver facilities. On March 8, 2000, representatives of
Kohlberg met with management and representatives of SunTrust Equitable
Securities to conduct preliminary business and financial due diligence and
review the materials provided in the Company's data room.
Party 8 visited the Company's offices on March 9, 2000 and March 10, 2000.
A management presentation was conducted during the first half of the day,
followed by a site visit at the Denver community corrections facility and then
by dinner. The second day representatives from Party 8 reviewed information in
the data room and conducted additional management interviews.
Party 2 visited the Company's Chicago community corrections facility on
February 25, 2000 with a member of the Company's management. Party 2 then
visited the Company's offices on March 23, 2000 and March 24, 2000. A
management presentation was conducted during the first half of the day
followed by a site visit to the Denver community corrections facility.
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Following the management presentations, SunTrust Equitable Securities and
the management of the Company responded to additional information requests and
specific questions from each of the parties involved both in writing and via
conference calls.
After Party 2, Party 8 and Kohlberg completed management presentations and
data room due diligence, the Company collected input to determine which, if
any, of the indications of interest were attractive enough to warrant further
discussion. It was determined that work would continue with each of the three
parties, however with special emphasis on Party 8. It was the view at the time
that Party 8, as a large strategic buyer, might be in a better position to
take a long-term view of the business and industry and be less concerned about
the short-term earnings volatility being experienced by the Company.
Toward the end of March 2000, it became apparent that the Company would not
achieve the third quarter results previously expected and that information was
conveyed to the three interested parties.
On April 8, 2000, Party 8 provided a list of additional questions for the
management team of the Company to discuss on a scheduled April 11 conference
call.
On April 11, 2000, the Company's senior management team participated in a
conference call with Party 8 during which additional diligence questions and
operational issues were addressed.
On April 17, 2000, management of the Company informed Kohlberg that it was
also revising downward its EBITDA forecast for fiscal 2000 and provided
Kohlberg with its reforecast. Based on this information, Kohlberg determined
that the Company's performance did not support the valuation provided in its
initial indication of interest.
On April 18, 2000, Party 8 informed SunTrust Equitable Securities that
based on the due diligence conducted Party 8 would have difficulty getting to
the $10.50 offer price. Specifically, Party 8 expressed concerns over the
EBITDA run rate versus projections and the higher than expected level of
capital expenditures. Party 8 was also concerned over the anticipated release
of the Company's third quarter earnings.
On April 20, 2000, the Company and Party 8 scheduled a face to face meeting
for May 2, 2000 and May 3, 2000 at Party 8's offices to better address the
concerns being raised by Party 8.
On April 24, 2000, Kohlberg contacted SunTrust Equitable Securities and
informed them they were uncomfortable with the $11.50 price per share
originally expressed due to a concern over growth prospects and margin
pressure. Kohlberg suggested their revised interest level would be
approximately $8.50 per share in cash.
On April 26, 2000, the Company released its third quarter results and
conducted its regular analysts call.
On April 27, 2000, representatives from Party 8 visited the Company's
offices to conduct additional due diligence and to gather additional
information necessary for their business justification case to be presented to
their parent company.
On April 27, 2000, there was a review of the status of the discussions with
Party 2, Party 8 and Kohlberg. During that review it was decided that Kohlberg
and Party 8 were the most serious and that meetings with each party would be
scheduled to facilitate further discussions.
On April 28, 2000, the planned trip to Party 8's offices was rescheduled
for May 4, 2000 and May 5, 2000 to afford Party 8 additional time to review
the situation internally.
By the end of April, the Company's stock price had fallen to the $7.00
range.
On May 1, 2000, David J. Hunter, President of the Company, called
Christopher Lacovara, a principal of Kohlberg, to request an additional
meeting to discuss Kohlberg's interest in continuing discussions regarding a
potential transaction with the Company.
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On May 2, 2000, SunTrust Equitable Securities was informed by Party 8 that
they were unable to support a price above the current market price and would
prefer to let three to six months lapse to allow them time to conduct further
research on the American Corrections market.
On May 8, 2000, SunTrust Equitable Securities received a call from Party 4
inquiring as to the status of the process. Party 4, during the course of the
conversation, expressed a weakening interest in the Company's market area, and
indicated it was pursuing another transaction outside the Company's areas of
focus and further expressed both a concern over the Company's third quarter
earnings and a reduced level of interest in the Company.
On May 8, 2000, the Company's Board of Directors met and discussed the
status of the process and a strategy for moving forward. It was decided that
SunTrust Equitable Securities would reassess the interest of Party 1. SunTrust
Equitable Securities updated the Board of Directors on the interest level of
Party 4. Additionally, it was decided that a trip would be scheduled to meet
with Kohlberg to discuss the Company's third quarter and projected performance
face to face. A meeting was scheduled for May 12, 2000.
On May 12, 2000, representatives of management of the Company, Kohlberg and
SunTrust Equitable Securities met in New York to discuss the Company's year-
to-date performance, the revisions to its fiscal year 2000 forecast, and its
prospects for fiscal year 2001. During the ensuing three weeks, Kohlberg
revised its financial analysis based on the new information provided by
management and contacted several financing institutions to discuss financing
for the transaction.
On May 22, 2000, Kohlberg submitted a draft letter of intent which included
a purchase price of $8.00 per share. The Company, through SunTrust Equitable
Securities, rejected this price, but indicated that a price of $9.00 per share
would likely be acceptable.
On May 22, 2000, members of the management of the Company and
representatives from Party 1 participated in a conference call to continue
discussing the possibility of a combination. A conclusion was reached
following the conversation that a combination did not make sense as a stock-
for-stock exchange at the current market value for the Company due to the lack
of a synergistic fit between the two companies.
On May 24, 2000, the Special Committee met to discuss the status of the
discussions with each of the parties and to discuss the strategy for moving
forward. In particular, attention was given to the status of the Kohlberg
negotiations, which included an update on their lack of flexibility regarding
the Company's $9.00 counter offer.
On May 25, 2000, the Board of Directors met telephonically. They were
briefed by the Special Committee on the status of concerning possible
strategic or financial combinations and the offer from Kohlberg. The Board of
Directors authorized the Special Committee to continue to pursue a counter-
proposal at $9.00 per share.
By the end of May 2000, the Company's stock price had fallen to
approximately $5.50 per share.
On June 2, 2000, Jeremy Kendall, Chairman of the Board for the Company,
contacted Christopher Lacovara, a principal of Kohlberg, directly to express
the Special Committee's position regarding valuation and what was necessary
for exclusivity to be granted.
On June 6, 2000, the Board of Directors met telephonically and after
extensive discussion and consideration of various issues and alternatives,
approved execution of a Letter of Intent (the "Letter of Intent") between the
Company and Kohlberg at $8.75 per share, which contained a three-week period
to allow Kohlberg to confirm their willingness to go forward at that price.
On June 6, 2000, Kohlberg and the Company signed the Letter of Intent for
an acquisition of the Company for a purchase price of $8.75 per share. The
Letter of Intent provided for a three-week period during which Kohlberg had
the opportunity to confirm the price per share at which it would be prepared
to complete the transaction.
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On June 13, 2000, representatives of Kohlberg, Credit Agricole Indosuez
("Indosuez"), The Prudential Insurance Company of America (the "Subordinated
Agent"), SunTrust Equitable Securities and management of the Company met at
the Company's headquarters for a presentation by management and tours of its
Boulder and Denver facilities.
On June 14, 2000, Kohlberg met with management of the Company and
representatives of SunTrust Equitable Securities to conduct additional
business and financial due diligence.
On June 19, 2000, representatives of Kohlberg, SunTrust Equitable
Securities and management of the Company met in New York to discuss the
various contemplated management and shareholder arrangements following the
completion of the transaction.
On June 20, 2000, representatives of Kohlberg, Indosuez, SunTrust Equitable
Securities and management of the Company held a meeting in New York to provide
Indosuez with an opportunity to conduct additional business and financial due
diligence. Following that meeting, Mr. Hunter and Mr. Lacovara met in Mount
Kisco, New York to discuss management arrangements following the completion of
the transaction.
On June 26, 2000, management of the Company met with representatives of
Kohlberg in Menlo Park, California and via video teleconferencing with
Kohlberg's Mount Kisco, New York office to provide a presentation to all of
Kohlberg's principals and associates.
On June 27, 2000, representatives of Kohlberg, the Subordinated Agent and
management of the Company met at the Company's headquarters to provide the
Subordinated Agent with an opportunity to conduct additional business and
financial due diligence.
On June 28, 2000, the Special Committee met and was briefed by counsel and
a representative of SunTrust Equitable Securities on procedures and duties
concerning the current status of the Kohlberg transaction and to prepare for
the meeting of the Committee with Kohlberg representatives to be held the
following day. The Committee reviewed the current status of the Letter of
Intent ($8.75 per share price) as well as the proposed continuing position in
equity and options for management. The Committee also was apprised of a
possible shortfall in EBIDTA coverage for the fiscal year. There was concern
that Kohlberg would not be able to confirm the $8.75 price. Methods of
bridging the gap on EBIDTA, such as reducing the stock option pool or the
Kohlberg fee, was discussed. Mr. Hunter, the Company's Chief Executive
Officer, joined the meeting at its invitation and apprised the Committee of
his understanding as to the EBIDTA shortfall and answered questions of the
Committee.
On June 29, 2000, representatives of Kohlberg met with SunTrust Equitable
Securities and the Special Committee to request a reduction in the purchase
price to $8.25 per share, based on the results of the accounting due diligence
conducted by Arthur Andersen LLP on Kohlberg's behalf. The Special Committee
rejected this price, countering with a price of $8.50 per share.
On June 30, 2000, Kohlberg contacted SunTrust Equitable Securities to
discuss the results from their financial accountants regarding their
observations of the fiscal year end numbers for the Company. Based on this
information, Kohlberg stated that it would be necessary to reduce the $8.50
offer to $8.25 per share.
On July 3, 2000, a meeting of the Board of Directors was held to discuss
the latest Kohlberg position. At that meeting, options were discussed for
increasing the potential proceeds to the shareholders. It was determined that
the only course of action would be for the Special Committee to insist that
the senior management of the Company rollover all of their outstanding stock
options to reduce the amount of equity necessary for Kohlberg to invest. The
economic impact to the shareholders from this requirement would be an
additional ten cents to the shareholders. It was decided that Jeremy Kendall,
Chairman of the Board, would approach management with the Special Committee's
requirement for management rollover. Management ultimately agreed to the
rollover provision.
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On July 5, 2000, Kohlberg and the Company signed an amendment to the letter
agreement dated June 6, 2000, revising the purchase price to $8.35 per share
and extending the term of exclusivity between Kohlberg and the Company.
During the two weeks following July 5, 2000, Kohlberg, Indosuez and the
Subordinated Agent conducted additional due diligence through information
requests and telephone conversations with management.
On July 14, 2000, the Special Committee met again by telephone. A
representative of SunTrust Equitable Securities was present at the meeting.
Various matters were discussed, including the status of the transaction with
Kohlberg and timing of various events related to the transaction. The
Committee was also briefed on the status of Kohlberg's financing and the
SunTrust Equitable Securities representative described various items to be
considered in determining the fairness of the transaction to the Company's
shareholders (other than the Management Shareholders).
On July 21, 2000, the Special Committee met telephonically. A
representative of SunTrust Equitable Securities was present at the meeting.
The Committee was briefed concerning the status of the Kohlberg transaction,
especially about management issues and the status of lender meetings and a
likely change in financing entities. Other alternatives with respect to a
transaction were discussed at length by the Committee. The Committee was also
briefed on management stock and options provisions, including the likely tax
treatment of the transaction to the Management Shareholders.
On July 21, 2000, representatives of Kohlberg introduced two additional
potential financing sources to the Company, one of which met with management
at the Company's headquarters for a presentation by management and a tour of
its Boulder facility. The other potential new financing source participated in
the presentation by telephone.
On July 25, 2000, Kohlberg was notified by management of the Company about
a reduction in its likely fiscal year 2000 EBITDA result.
On July 26, 2000, representatives of Kohlberg and one of the proposed
financing sources met with the Company's Southeast Regional Director,
Tennessee State Director and Murfreesboro, Tennessee Program Manager in the
Company's Murfreesboro CCS office for additional business due diligence and a
facility tour.
On July 28, 2000, the Special Committee met telephonically. A
representative of SunTrust Equitable Securities was present at the meeting.
The Committee was briefed concerning the status of the Kohlberg transaction,
including timing, financing and management matters. The Committee also was
advised about the likely reduction in fiscal year end results that had been
reported to Kohlberg. Other alternatives with respect to a transaction were
discussed at length by the Committee.
On July 31, 2000, representatives of Kohlberg contacted representatives of
SunTrust Equitable Securities to request a reduction in the purchase price to
$8.25 per share based on the Company's likely fiscal year 2000 EBITDA results
as communicated on July 25, 2000. Kohlberg indicated that the senior financing
sources would not provide commitments at a price above $8.25 per share.
On July 31, 2000, the Special Committee met telephonically. A
representative of SunTrust Equitable Securities was present at the meeting.
The Committee discussed extensively the proposed change in the transaction
price proposed by Kohlberg as well as the status of the transaction from a
financing perspective. They also discussed possible alternatives to going
forward with the transaction. The Committee was apprised of the perceived
ability of Kohlberg to complete the transaction, the conditions being
requested by Kohlberg and the timing for completion. Following extensive
discussion and questioning of the SunTrust Equitable Securities
representative, the Special Committee unanimously approved the entry of an
amended Letter of Intent at the $8.25 per share price proposed by Kohlberg.
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On July 31, 2000, Kohlberg and SunTrust Equitable Securities (per the
authorization of the Special Committee) signed an amendment to the Letter of
Intent revising the purchase price to $8.25 per share and extending the term
of exclusivity between Kohlberg and the Company.
The Company's stock closed on July 31, 2000 at $4.31.
On August 4, 2000, the Special Committee met telephonically. A
representative of SunTrust Equitable Securities was present at the meeting.
The Special Committee was briefed on the status of financing and other matters
concerning the Kohlberg transaction. Any possible alternatives were reviewed
and the Special Committee determined that unless the situation changed, it
still supported the transaction with Kohlberg.
Between July 31, 2000 and August 10, 2000, representatives of Kohlberg,
management of the Company and their respective legal advisors negotiated the
Merger Agreement and the Voting Agreement.
On August 9 and 10, 2000, the Board of Directors of the Company met and
considered the final terms and conditions of the transaction with Kohlberg.
The Board was briefed extensively as to all aspects of the transaction,
including the proposed terms of the tender offer and follow-on merger, the
expense provisions of the agreement, the break-up fee provisions of the
agreement and management's interests in the transaction. Also discussed were
possible alternatives to the transaction. A representative of SunTrust
Equitable Securities presented its fairness opinion to the Board of Directors
and the Special Committee presented its report to the Board of Directors.
SunTrust Equitable Securities confirmed orally with the Board that its
analysis was done for the shareholders other than the Management Shareholders.
The Directors then determined that the transaction was in the best interest of
the Company's unaffiliated shareholders and approved the execution of the
Merger Agreement and related documents.
On August 10, 2000, Kohlberg formed Offeror and Parent. Also on August 10,
2000, the Board of Directors of Parent approved the Merger Agreement and the
Voting Agreement. On August 10, 2000, Offeror, Parent and the Company executed
the Merger Agreement and Offeror, Parent and the Management Shareholders
executed the Voting Agreement.
On August 11, 2000, Parent issued a press release announcing the proposed
acquisition of the Company.
On August 18, 2000, Offeror commenced the Offer.
On September 18, 2000, the initial Offer period was extended through
October 3, 2000. Approximately 93% of the outstanding common stock of the
Company had been tendered as of 12:00 Midnight on September 15, 2000.
Certain Conditions to Offeror's Obligations. The section entitled "Certain
Conditions to Offeror's Obligations" is hereby amended by amending and
restating the paragraph under the caption "--Going Private Transactions" on
page 25 of the Offer to Purchase in its entirety as follows:
The Commission has adopted Rule 13e-3 under the Exchange Act which is
applicable to certain "going private" transactions and which may be applicable
to the Offer. Rule 13e-3 requires, among other things, that certain financial
information concerning the Company and certain information relating to the
fairness of the proposed transaction and the consideration offered to minority
shareholders in such transaction be filed with the Commission and disclosed to
shareholders prior to consummation of the transaction.
Purpose of the Offer; The Merger; Plans for the Company. The section
entitled "Purpose of the Offer; The Merger; Plans for the Company" is hereby
amended by inserting after the last paragraph under the caption "--Purpose" on
page 24 of the Offer to Purchase the following:
Each of Offeror's, Parent's and the Management Shareholders' purpose for
engaging in the transaction is to own a portion of the Company and to obtain
the benefits of its future prospects as a private company. The
24
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determination to proceed with the Offer and the Merger at this time would, in
the view of each of such persons, afford the shareholders of the Company
(other than the Management Shareholders) an opportunity to dispose of their
shares at a premium over market prices. Parent and Offeror determined that the
acquisition would provide them with an opportunity to increase the value of
the Company. In addition, causing the Company to be privately held would
eliminate the need to file periodic reports with the Commission, would reduce
management's commitment of resources with respect to procedural and compliance
requirements of a public company and would reduce costs associated with the
Company's obligations and reporting requirements under the securities laws.
The section entitled "Purpose of the Offer; The Merger; Plans for the
Company" is hereby further amended by amending and restating the third
paragraph under the caption "--Dissenters' Rights" on page 25 of the Offer to
Purchase in its entirety as follows:
The foregoing discussion is not a complete statement of law pertaining to
dissenters' rights under the CBCA and is qualified in its entirety by the full
text of Section 7-113-102 et seq. of the CBCA. A summary of such dissenters'
rights is attached as Annex III hereto and is incorporated herein by
reference.
The section entitled "Purpose of the Offer; The Merger; Plans for the
Company" is hereby further amended and supplemented by inserting after the
last paragraph under the caption "--Plans for the Company" on page 26 of the
Offer to Purchase the following:
Parent determined that an acquisition of the Company on the terms described
in this Offer to Purchase represented an attractive opportunity, and Parent
and Offeror negotiated and executed a Merger Agreement for the acquisition of
the Company. As a result of the Offer and the Merger and the related
financing, the Company will be substantially leveraged. Parent has received no
assurance that, following the consummation of the Offer and the Merger, the
Company will be able to service its indebtedness or refinance its indebtedness
on satisfactory terms.
As a result of the Offer, the interest of Parent in the Company's net book
value and net earnings will be in proportion to the number of Shares acquired
in the Offer. Upon completion of the Offer, Offeror will effect the Merger in
accordance with the Merger Agreement. Upon consummation of the Merger, the
Company will become a privately held corporation. If the Merger is
consummated, Parent's interest in such items and in the Company's equity
generally will equal 100%, and Parent and its subsidiaries will be entitled to
all benefits resulting from such interest, including all income generated by
the Company's operations and any future increase in the Company's value.
Similarly, Parent will also bear the risk of losses generated by the Company's
operations and any future decrease in the value of the Company after the
Merger.
The benefits to the Company as the surviving corporation upon completion of
the Merger include that as a private company, the Company's management will be
able to (i) react with greater flexibility to changing conditions and
opportunities, (ii) make decisions based on long-term business interests
without considering the possible adverse short-term effect on the market price
of the Company's stock and (iii) reduce operating costs by eliminating the
public company reporting requirements. In addition, the Company will have
access to the financial and other resources of Parent, which may facilitate
future growth. The detriments to the Company are that the Company will no
longer have access to the public capital markets, will no longer be able to
grant employee stock options to acquire publicly-traded securities and will be
highly leveraged and will be required to dedicate a substantial portion of its
cash flow to servicing its debt.
The benefits of the transaction to each of Offeror, Parent and the
Management Shareholders consists of each person having an ownership stake in
the Company and its right to be entitled to all of the benefits resulting from
such ownership, including each person's ownership percentage of all income
generated by the Company and any increase in the Company's value. The
detriments would be that they would have to suffer their ownership percentage
of losses of the Company and any decrease in the Company's value. KBII, L.P.
intends to invest approximately $28 million in exchange for capital stock of
the Parent and a detriment to it would be a loss of
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such investment. Two Management Shareholders intend to invest $118,786 in
exchange for capital stock of Parent, and the Management Shareholders are
foregoing approximately $558,556, in the aggregate, that they would receive as
merger consideration in the Merger by rolling over options to acquire Common
Stock of the Company into options to acquire capital stock of Parent, which
investment will be at risk. The Management Shareholders will benefit as they
will receive the Offer Price for all shares they tender in the Offer on the
same basis as the other shareholders of the Company. In addition, two
Management Shareholders will be entitled to receive $259,844, in the
aggregate, in connection with the cash out of non-rollover options to acquire
Shares pursuant to the Merger on the same basis as other option holders
(calculated based on the amount that $8.25 exceeds the exercise price of such
options). Also, the Management Shareholders will receive options in Parent and
will be subject to Parent's separation policy. See "Special Factors--Interests
of Certain Persons in the Offer and the Merger" and Section 13, "The
Transaction Documents--Separation Policy."
The detriments of the transaction to the current shareholders of the
Company (other than the Management Shareholders) include the fact that such
shareholders will cease to own any Common Stock of the Company, will not have
the opportunity to participate in the earnings and growth of the Company after
the consummation of the Merger and will not have any right to vote on
corporate matters. In addition, the current shareholders of the Company (other
than the Management Shareholders) will not be entitled to share in any premium
which might be payable by an unrelated third-party acquiror of all of the
Common Stock in a sale transaction, if any, occurring after the consummation
of the Merger. No such transactions are contemplated at this time. However,
the current shareholders of the Company (other than the Management
Shareholders) will benefit from the fact that such shareholders will not face
the risk of losses generated by the Company's operations or any decrease in
the value of the Company after the consummation of the Merger. The
shareholders of the Company will no longer be subject to the risks of the
public securities markets in general or the risks inherent in owning
securities in a company without a substantial market capitalization. In
addition, the shareholders will receive a substantial premium for their Shares
over the $4.63 per Share closing price on August 10, 2000, the last full
trading day prior to public announcement of the Merger Agreement. Also, the
shareholders will not pay the commission on brokerage fees they would normally
incur in connection with the sale of their Shares.
According to the Company's Quarterly Report on Form 10-Q for the nine
months ended March 31, 2000, the Company's net book value was approximately
$48.2 million and its net earnings were approximately $1.4 million, and
according to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1999, the Company's net earnings were approximately $54,000. As
part of the Offer and Merger, the Company will be issuing additional debt and
common stock purchase warrants, and it is estimated that the net book value
after the Merger will be approximately $34.0 million. Therefore, to the best
knowledge of Parent and Offeror at this time concerning the ownership
interests of the Company through Parent following completion of the Offer and
the Merger, KBII, L.P.'s interest in the Company's net book value and net
earnings will increase from 0% to approximately 99.6% (72.9% on a fully
diluted basis), which would consist of an increase in net book value interest
from $0 to $33.9 million ($24.8 million on a fully diluted basis) and in an
increase in net earnings interest from $0 to $53,784 ($39,366 on a fully
diluted basis) for the fiscal year ended June 30, 1999, and from $0 to $1.4
million ($989,000 on a fully diluted basis) for the nine months ended March
31, 2000. Each of David J. Hunter's and Mckinley C. Edwards Jr.'s interests in
the Company's net book value and net earnings will be reduced from
approximately 4.0% to 3.4% and from 2.2% to 1.5%, respectively, on a fully
diluted basis, which would consist of a decrease in net book value interest
from approximately $1.9 million to $1.2 million and from $1.1 million to $0.5
million, respectively, and a decrease in net earnings interest from
approximately $2,160 to $1,836 and from $1,188 to $810, respectively for the
fiscal year ended June 30, 1999, and from $56,000 to $47,600 and from $30,800
to $21,000, respectively, for the nine months ended March 31, 2000. Each of
Jacqueline A. Chamberlin's, Steven P. Merrefield's and Jonathan M. Hinebauch's
interests in the Company's net book value and net earnings will increase from
approximately 1.4% to 1.8%, from 0.8% to 1.7% and from 1.0% to 1.6%,
respectively, on a fully diluted basis, which would consist of a decrease in
net book value interest from approximately $0.7 million to $0.6 million, an
increase in net book value interest from $0.4 million to $0.6 million and no
change in net book value interest from $0.5 million, respectively, and an
increase in net earnings interest from approximately $756 to $972, from $432
to $918 and from $540 to $864, respectively, for the fiscal
26
<PAGE>
year ended June 30, 1999, and from $19,600 to $25,200, from $11,200 to $23,800
and from $14,000 to $22,400, respectively, for the nine months ended March 31,
2000.
Alternative Structures Considered by Parent and Offeror. In structuring the
transaction, Parent and Offeror considered various legal structures to effect
the acquisition of all of the outstanding Shares, including a one-step merger
transaction and a two-step tender offer followed by a merger transaction. The
two-step tender offer and merger structure has been selected by Parent and
Offeror in lieu of the alternative one-step merger structure because Parent
and Offeror believe that the two-step structure can be completed more quickly
than a one-step merger transaction.
Certain Regulatory and Legal Matters. The section entitled "Certain
Regulatory and Legal Matters" is hereby amended and supplemented by adding the
following thereto on page 38 of the Offer to Purchase:
Other Matters. On August 21, 2000, Offeror and Parent were informed that on
August 14, 2000, the next business day after the Offer was announced, M. Dean
Briggs, a purported shareholder of the Company, instituted an action in the
District Court, County of Boulder, Colorado (the "Complaint"), against the
Company and David J. Hunter, William E. Coleman, Mckinley C. Edwards, Jr.,
Beverly J. Haddon, Jeremy N. Kendall, Perry M. Johnson, Barry J. Nidorf and
Byam K. Stevens, Jr. (the "Defendants"), all of whom are directors of the
Company. Messrs. Hunter and Edwards are also officers of the Company. The
complaint states that the action is brought as a class action on behalf of the
holders of the Company's Shares (the "Class") against the Company,
its directors and certain officers, claiming that the Defendants "individually
and as part of a common plan and scheme or in breach of their fiduciary duties
to plaintiff and the other members of the Class, are attempting unfairly to
deprive plaintiff and other members of the Class of the true value of their
investment in BI" by having the Company enter into the Merger Agreement.
Plaintiff Briggs claims that the "merger consideration to be paid to Class
members is unconscionable, unfair and grossly inadequate." The suit seeks,
among other things, an injunction against the Defendants from consummating the
Merger, rescission of the Merger Agreement, damages, and attorneys' fees.
Offeror and Parent were informed by the Company that the Company intends to
defend the lawsuit vigorously and believes the lawsuit is without merit. The
foregoing description of the lawsuit is qualified in its entirety by the
Complaint, a copy of which is attached as Exhibit (a)(5)(A) to the Schedule TO
and is incorporated herein by reference.
On September 1, 2000, the Company filed with the Court a Motion for
Extension of Time in which to Answer or Otherwise Move (the "Motion for
Extension") in response to the Complaint. The Motion for Extension seeks to
extend the date to answer the Complaint from September 11, 2000 until October
2, 2000. The Court issued an order (the "Order") approving this motion on
September 13, 2000. The foregoing description is qualified in its entirety by
the Motion for Extension and the Order, copies of which are attached as
Exhibits (a)(5)(B) and (a)(5)(C) to the Schedule TO and are incorporated
herein by reference.
Fees and Expenses. The section entitled "Fees and Expenses" is hereby
amended and supplemented by adding the following thereto on page 39 of the
Offer to Purchase:
The following table presents the estimated fees and expenses to be incurred
in connection with the Offer and the Merger:
<TABLE>
<S> <C>
Financing and Commitment Fees.................................... $4,040,000
Dealer Manager and Investment Banking Fees....................... 1,375,000
Legal Fees and Expenses.......................................... 920,000
Printing and Mailing Costs....................................... 100,000
Filing Fees...................................................... 15,857
Depositary Fees.................................................. 15,000
Information Agent Fees........................................... 25,000
Accounting Fees.................................................. 120,000
Tombstone Advertisement.......................................... 75,000
Miscellaneous.................................................... 125,000
----------
Total.......................................................... $6,810,857
==========
</TABLE>
27
<PAGE>
The Merger Agreement provides that all fees, costs and expenses incurred in
connection with the Offer and the Merger shall be paid by the party incurring
such fees, costs and expenses, except that (i) expenses incurred in connection
with the printing and mailing of the Offer shall be shared equally by Parent
and the Company, (ii) the Company shall pay all transfer taxes, and (iii) in
certain circumstances the Company shall be required to reimburse Parent for
Parent's expenses. Therefore, the Company shall be obligated to pay
approximately $1,685,000 of the foregoing expenses, including investment
banking fees and expenses of $1,325,000, legal fees and expenses of $275,000,
printing and mailing costs of $50,000, accounting fees of $10,000 and
miscellaneous fees of $25,000. See Section 13, "The Transaction Documents--The
Merger Agreement--Termination Fee."
28
<PAGE>
ANNEX I. Annex I of the Offer to Purchase is hereby amended by amending and
restating ANNEX I in its entirety and adding ANNEX II as follows:
ANNEX I
DIRECTORS AND EXECUTIVE OFFICERS
OF PARENT, OFFEROR AND KOHLBERG
The names and ages of the directors, executive officers and principals of
Parent, Offeror, Kohlberg, KBII, L.P. and KBII, LLC, and their present
principal occupations or employment and five-year employment history, are set
forth below. Unless otherwise indicated, each individual is a citizen of the
United States, his business address is 111 Radio Circle, Mount Kisco, New York
10549, and his business telephone number is 914-241-7430.
PARENT, OFFEROR AND KOHLBERG
<TABLE>
<CAPTION>
Present Principal Occupation or Employment with
KBII Holdings, Inc., KBII Acquisition Company,
Inc., Kohlberg & Co., L.L.C., KBII Acquisition
Company, L.P. and KBII Management, LLC Material
Name and Age Positions Held During the Past Five Years
------------ ------------------------------------------------
<S> <C>
James A. Kohlberg (42)................ President of KBII Acquisition Company, Inc. and
KBII Holdings, Inc., Managing Member of KBII
Management, L.L.C. (General Partner of KBII
Acquisition Company, L.P., the controlling
shareholder of KBII Holdings, Inc.). Mr.
Kohlberg has been a principal of Kohlberg & Co.,
L.L.C. for more than the past five years.
Christopher Lacovara (35)............. Secretary of KBII Acquisition Company, Inc. and
KBII Holdings, Inc., and Secretary of KBII
Management, L.L.C. Mr. Lacovara has been an
associate with and/or principal of Kohlberg &
Co., L.L.C. for more than the past five years.
Samuel P. Frieder (35)................ Mr. Frieder has been a principal of Kohlberg &
Co., L.L.C. for more than the past five years.
Evan Wildstein (29)................... Mr. Wildstein has been an associate with and/or
principal of Kohlberg & Co., L.L.C. for more
than the past five years.
Ranjit S. Bhonsle (31)................ Mr. Bhonsle has been an associate with and/or
principal of Kohlberg & Co., L.L.C. for more
than the past five years.
</TABLE>
A-1
<PAGE>
ANNEX II
BENEFICIAL OWNERSHIP OF COMMON STOCK OF THE COMPANY
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, as of August 10, 2000 (except as
specifically noted with respect to certain persons) by (i) persons known to
the Company to own beneficially more than five percent (5%) of the outstanding
Common Stock of the Company, (ii) by each director, (iii) by each named
executive officer of the Company, and (iv) by all executive officers and
directors as a group. A person is deemed to be a beneficial owner of Common
Stock that can be acquired by such person within 60 days from August 10, 2000
upon the exercise of warrants or options. The address of each person for whom
an address is not shown is care of the Company.
<TABLE>
<CAPTION>
Amount and nature
Name of beneficial ownership Percent of Class
---- ----------------------- ----------------
<S> <C> <C>
Merrill Lynch Asset Management....... 722,200(1) 9.1%
800 Scudders Mill Road
Plainsboro, NJ 08536
Neil J. Weisman...................... 684,300(1) 8.6%
c/o Home Port Holdings, Inc.
139 West Saddle River Road
Saddle River, NJ 07458
Dimensional Fund Advisors, Inc. ..... 591,300(2) 7.4%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Jackie A. Chamberlin................. 113,372(3) 1.4%
William E. Coleman................... 28,500(4) *
Mckinley C. Edwards, Jr. ............ 180,063(5) 2.2%
Beverly J. Haddon.................... 56,000(6) *
Jonathan M. Hinebauch................ 74,290(7) *
David J. Hunter...................... 323,373(8) 4.0%
Perry M. Johnson..................... 58,000(9) *
Jeremy N. Kendall.................... 72,150(10) *
Steven P. Merrefield................. 58,751(11) *
Barry J. Nidorf...................... 18,000(12) *
Byam K. Stevens, Jr. ................ 81,950(13) 1.0%
All Officers and Directors as a Group 1,064,449(14) 12.2%
(11 persons)........................
</TABLE>
--------
* Represents less than 1%
(1) As of June 30, 2000.
(2) As of March 31, 2000.
(3) Includes options to purchase 82,500 shares, exercisable within sixty days.
Upon completion of a merger between the Company, Offeror and Parent, all
options will vest on the effective date of the merger, including 10,000
additional options, which are not included in the table.
(4) Includes options to purchase 28,500 shares which are presently
exercisable.
(5) Includes options to purchase 122,500 shares, exercisable within sixty
days. Upon completion of a merger between the Company, Offeror and Parent,
all options will vest on the effective date of the merger, including
options to purchase an additional 10,000 shares, which are not included in
the table.
A-2
<PAGE>
(6) Includes options to purchase 55,000 shares which are presently
exercisable.
(7) Includes options to purchase 65,618 shares, exercisable within sixty days.
Upon completion of a merger between the Company, Offeror and Parent, all
options will vest on the effective date of the merger, including options
to purchase an additional 18,500 shares, which are not included in the
table.
(8) Includes options to purchase 185,000 shares, exercisable within sixty
days. Upon completion of a merger between the Company, Offeror and Parent,
all options will vest on the effective date of the merger, including
options to purchase an additional 10,000 shares, which are not included in
the table.
(9) Includes options to purchase 55,000 shares which are currently
exercisable.
(10) Includes options to purchase 61,000 shares which are currently
exercisable.
(11) Includes options to purchase 38,475 shares, exercisable within sixty
days. Upon completion of a merger between the Company, Offeror and
Parent, all options will vest on the effective date of the merger,
including options to purchase an additional 20,000 shares, which are not
included in the table.
(12) Includes options to purchase 18,000 shares which are currently
exercisable.
(13) Includes 4,000 shares owned by Mr. Stevens' relatives, as to which shares
he disclaims beneficial ownership. Also includes options to purchase
61,000 shares which are currently exercisable.
(14) Includes options to purchase 278,500 shares which are presently
exercisable and 494,093 shares issuable on exercise of options which will
become exercisable within sixty days. Upon completion of a merger between
the Company, Offeror and Parent, all options will vest on the effective
date of the merger.
A-3
<PAGE>
ANNEX III
Colorado Dissenter's Rights
THE FOLLOWING PARAGRAPHS SUMMARIZE THE PROCEDURES FOR DISSENTING
SHAREHOLDERS PRESCRIBED BY ARTICLE 113 OF THE COLORADO BUSINESS CORPORATION
ACT ("CBCA"). YOU ARE ENCOURAGED YOU TO READ THIS STATUTE AND/OR CONTACT YOUR
LEGAL COUNSEL FOR A MORE COMPLETE UNDERSTANDING OF YOUR RIGHTS AND DUTIES.
Colorado law provides that each record or beneficial holder of the
Company's common stock is entitled to dissent from the Merger and obtain
payment of the fair value of his or her shares of common stock. A shareholder
wishing to exercise dissenters' rights must (1) prior to any required
shareholder vote on the Merger, deliver to the Company written notice of his
or her intention to demand payment for shares if the shareholders approve the
Merger, and (2) either abstain from voting on or vote against the Merger, if a
shareholder vote is required. A shareholder who votes in favor of the Merger
may not exercise dissenters' rights. If a shareholder vote is not required for
the Merger, then the dissenting shareholder must the provide a written payment
demand and certificates for certificated shares by the date set forth in the
dissenters' notice provided by the Company.
A beneficial shareholder as defined by Section 7-113-101(1) of the CBCA
must cause the record shareholder to notify the Company of his or her intent
to dissent and demand payment. A beneficial shareholder should contact the
record shareholder who owns the beneficial shareholder's shares for
instructions on how to dissent.
Within ten days after the Merger becomes effective, the Company must
deliver a written dissenters' notice to all shareholders who properly deliver
written notice of their intent to demand payment and who also either abstain
from voting on or vote against the Merger, if required. If shareholder
approval for the Merger is not required, the Company shall deliver a written
dissenters' notice to all shareholders. In the notice, the Company must (1)
state that the Merger was authorized, (2) state the effective date of the
Merger, (3) include the address where the Company will receive payment demands
and the stock certificates, (4) supply a form which the dissenting shareholder
may use to demand payment, (5) set the date by which the Company must receive
the payment demand and the stock certificates, which cannot be less than 30
days after the delivery of the notice, and (6) include a copy of Article 113
of the CBCA. Furthermore, the notice may require that all beneficial
shareholders of the dissenting shares, if any, certify that they have asserted
or will assert their dissenters' rights.
After receiving the notice a dissenting shareholder must demand payment in
writing and deposit any stock certificates according to the instructions in
the notice. Any shareholders who fail to demand payment in writing or properly
deposit stock certificates will not be entitled to the fair value of their
shares. A shareholder's demand for payment and the deposit of any stock
certificates is irrevocable except as provided in Section 7-113-204(3) of the
CBCA. Once a shareholder demands payment and deposits the certificates with
the Company, he or she may not transfer his or her shares. However, if the
effective time of the Merger does not occur within 60 days after the date the
Company sets as the day by which a shareholder must demand payment, the
Company must return the deposited shares and lift the transfer restrictions,
and send a new notice to the dissenting shareholders.
Upon the later of the effective date of the Merger, or upon receipt of a
demand for payment by a dissenting shareholder, the Company must pay each
dissenting shareholder who properly demands payment and deposits his or her
stock certificates the amount the Company estimates to be the fair value of
such shares, plus accrued interest. The payment must be accompanied by (1) the
Company's balance sheet for the fiscal year ending not more than sixteen
months before the date of payment, an income statement for that year, a
statement of changes in shareholders' equity for that year, and the latest
available interim financial statement; (2) a statement of the Company's
estimate of the fair value of the shares; (3) an explanation of how the
interest was calculated; (4) a statement of the dissenting shareholder's right
to demand payment if he or she rejects the Company's estimate of the fair
value of the shares; and (5) a copy of Article 113 of the CBCA.
A dissenting shareholder may reject the Company's valuation of the fair
value of the shares if: (1) the dissenting shareholder believes that the
amount paid or offered is less than the fair value of the shares or that the
interest due is incorrectly calculated; (2) the Company fails to make payment
within 60 days after the date set
A-4
<PAGE>
for demanding payment; or (3) the Company does not return the deposited stock
certificates within the time specified by Section 7-113-207 of the CBCA. In
order to reject the Company's estimation of fair value, the shareholder must
notify the Company of his or her rejection in writing within 30 days after the
Company makes or offers payment to such dissenting shareholder. This
notification must include either the shareholder's own estimate of the fair
value of his or her shares and the amount of interest due, and demand payment
of their estimate, less any payment already made by the Company, or a demand
for payment of the fair value of the shares and interest due. In the event a
demand for payment remains unresolved, the Company may commence a court
proceeding to determine the fair value of the shares and accrued interest
within 60 days after receiving the payment demand from a dissenting
shareholder.
A-5
<PAGE>
The Depositary for the Offer is:
Computershare Investor Services LLC
<TABLE>
<CAPTION>
By Telephone
(212) 701-7624
By Mail: By Facsimile Transmission: By Hand/Overnight Courier:
<S> <C> <C>
Computershare Investor (FOR ELIGIBLE INSTITUTIONS ONLY) Computershare Investor Services LLC
Services LLC (212) 701-7636 Wall Street Plaza
Wall Street Station 88 Pine Street, 19th Floor
P.O. Box 1023 New York, New York 10005
New York, New York
10268-1023
</TABLE>
Confirm Facsimile by Telephone:
(212) 701-7624
(for Confirmation Only)
Any questions and requests for assistance may be directed to the
Information Agent or the Dealer Manager at their respective addresses and
telephone numbers listed below. Additional copies of this Offer to Purchase,
the Letter of Transmittal and other tender offer materials may be obtained
from the Information Agent as set forth below and will be furnished promptly
at Offeror's expense. A shareholder may also contact its broker, dealer,
commercial bank, trust company or other nominee for assistance concerning the
Offer.
The Information Agent for the Offer is:
[LOGO OF INNISFREE M&A INCORPORATED]
501 Madison Avenue
New York, NY 10022
Call Collect (212) 750-5833
Banks and Brokerage Firms, Please Call Collect: 212-750-5833
Shareholders, Please Call Toll Free: 1-888-750-5834
The Dealer Manager for the Offer is:
[LOGO OF BB&T CAPITAL MARKETS]
909 East Main Street
Richmond, VA 23219
(804) 787-8252
