Going private transactions involve the acquisition of the equity of a publicly traded company by an individual, management team, or private investment group. Many going private transactions are accomplished through leveraged buyouts, with the assets of the target company used as collateral for the loan. Other financing sources for the acquisition of shares include new equity, rollover of management/insider stock into the new equity of the acquiring party, and the cash on hand of the target company.

Even considering the Nasdaq's sharp decrease beginning in late March 2000, the stock market has favored "new economy" companies (i.e., high-tech firms) over "old economy" companies (e.g., manufacturing and retail firms) over the past few years. As a result, the number of going private transactions for "old economy" stocks has increased every year since 1996.

The benefits for a going private transaction vary, but they typically include one or more of the following:

• eliminating time and expenses associated with your company being public (e.g., SEC filing and disclosure requirements);
  
• managing your business with a long-term outlook while not being subject to market pressures to maximize short-term profits;
  
• eliminating concerns among stockholders, creditors, customers and employees arising from low share prices;
  
• operating your business without exposure to liability under new federal securities legislation by removing conflicts of interest and SEC-mandated fiduciary duties;
  
• capitalizing on an opportunity in distressed market conditions to acquire the remaining equity of your company at an attractive price;
  
• managing your business in a more private way (resulting in a variety of benefits, such as not having to disclose key facets of your business operations to competitors); and
  
• providing a defense mechanism for your company against a hostile takeover attempt.

History

The term "going private" first became commonly used during the bear market of 1973 to 1974. During that period, the senior management of many companies made tender offers for all of their outstanding common stock in response to poor stock market conditions. As a result of concern about fairness to shareholders, the SEC began an investigation into going private transactions. The end result of the proceedings was SEC Rule 13e-3, which became effective September 7, 1979. Rule 13e-3 covers all going private transactions and subjects these transactions to certain filing and disclosure requirements, including Schedule 13e-3.

As presented in the following table, according to Mergerstat Review, there have been 822 going private transactions over the 1979 to 1999 time frame.

The number of going private transactions in the 1980s increased significantly due to:

1. poor stock market conditions prior to the start of the bull market in 1982,
2. a surge in leveraged buyout transactions in the mid to late 1980s associated with the popularity of "junk" bond offerings.

After decreasing in the early 1990s, the number of going private transactions has recently grown among "old economy" companies in response to investors favoring "new economy" companies. In 1999, there were 74 going private transactions, up significantly from the 3 transactions reported in 1994.

Unique Aspects of Going Private Transactions

Generally, going private transactions begin with a proposal from proponents of the transaction, typically the management team, to your company's Board of Directors. The Board of Directors then forms a group of "independent directors", referred to by various names such as the "Special Committee of the Board of Directors" or the "Independent Director Committee".

The independent directors are responsible for both ensuring the fairness of the transaction and negotiating a higher price than originally proposed, if necessary. The independent directors typically retain separate legal counsel and engage an independent financial advisor.

Role of Bristol Investment Group

Evaluation of Suitability

Bristol can determine whether your company is a good candidate for a going private transaction. The evaluation process typically includes:

• analyzing the strategic vision of your company;
  
• creating a detailed financial model of its operations;
  
• valuating and recommending appropriate capital structures and leverage; and
  
• valuing the business based on both public and private comparables.

What is the profile of an ideal candidate for a going private transaction? The ideal candidate would have some or all of the following characteristics:

• limited access to capital, as few institutional funds invest in minority positions in micro cap companies (less than $200 million market cap);
  
• limited or no analyst coverage as a result;
  
• volatile stock price, as a small float makes it difficult for large shareholders to liquidate;
  
• positive cash flow; and
  
• a talented and respected management team with a viable strategy for growth.

Compliance with Rule 13e-3

Rule 13e-3 protects minority stockholders by requiring disclosure as to the fairness of the transaction. Both the acquirer and its affiliates must file a Schedule 13E-3 with the SEC, as does the target company's Board of Directors or Special Committee, if they recommend the acquirer's tender offer.

Schedule 13E-3 must disclose extensive information about the transaction, including:

• the terms of the transaction;
  
• the post-transaction plans of the newly formed company;
  
• the source and amount of the funds used in the transaction;
  
• the purposes of, reasons for and alternatives to the transaction;
  
• the filer's belief that the transaction is fair, and the factors supporting such belief (typically with the independent financial advisor's fairness opinion attached);
  
• all additional relevant reports and appraisals; and
  
• the financial statements of the acquirer and pro forma data disclosing the effect of the transaction.

Because Schedule 13E-3 receives close scrutiny from the SEC, Bristol can work closely with both the Independent Director Committee and its legal counsel in its preparation.

Preparation of Fairness Opinion

The services that Bristol provides as part of rendering a fairness opinion for a going private transaction typically involve completing an extensive due diligence process regarding your company. The due diligence process that Bristol undertakes includes:

• collecting historical company financial statement information and legal documents;
  
• reviewing the economic and industry environment;
  
• analyzing and adjusting your company's historical financial statements;
  
• comparing its financial performance to industry peers;
  
• analyzing prospective financial statements;
  
• identifying and selecting appropriate valuation approaches (market approach, income approach, and/or asset-based approach);
  
• performing the selected valuation methods (e.g., comparable transactions, discounted cash flow, adjusted net assets, etc.);
  
• preparing a value conclusion; and
  
• preparing a fairness opinion letter.
  

Additionally, Bristol would deliver a presentation to the Independent Director Committee, during which we would (1) present the valuation methods used to appraise the company, and (2) explain the fairness opinion being rendered.

Selecting a Financial Advisor

Your company should consider a number of factors when evaluating potential financial advisors to structure a going private transaction and/or to render a fairness opinion. Two of the most important issues include the following:

Valuation Expertise and Structuring Experience

Our bankers have had a substantial amount of experience in valuing businesses and structuring a broad range of transactions, both while at Bristol and previously at other firms. In addition, our substantial relationships with financing institutions allow us to deliver on cost-effective debt and equity commitments of capital. Finally, we have an exceptional network of relationships in the general corporate community to provide add-on acquisitions, incremental sales opportunities and practical business guidance.

No Conflicts of Interest

An important consideration in determining which financial advisor is suitable to issue a fairness opinion is the objectivity of the advisor. Clearly, the credibility and value of a fairness opinion depend to a large degree on whether it is prepared by an advisor who can be viewed as unequivocally independent by shareholders who are not proponents of the transaction and the courts. Bristol will render a fairness opinion only if we have no prior relationship with the management team or shareholders of your company and thus face no potential conflicts of interest. More importantly, Bristol is committed to acting with absolute integrity in dealing with shareholders, management and the other parties in a transaction, and to ensuring that all parties have access to all material information.

We look forward to hearing from you.

Alan P. Donenfeld
President
Bristol Investment Group, Inc.
110 East 59th Street. 29th fl.
New York, NY 10022
Tel: (212) 593-3157
Fax: (212) 202-5022
Email: