TO: SHAREHOLDERS OF THE BERRETT-KOEHLER GROUP, INC.

Transcription

1 TO: SHAREHOLDERS OF THE BERRETT-KOEHLER GROUP, INC. FR: STEVEN PIERSANTI, PRESIDENT RE: QUESTIONS ABOUT STOCK PURCHASE DATE: AUGUST 31, 2011 What is being offered? The Berrett-Koehler Publishers, Inc. Employee Stock Ownership Plan ( the ESOP ) is offering to purchase up to 10,000 shares of Common Stock of The Berrett-Koehler Group, Inc. ( BKG ) at $5.00 per share. Who may participate in this stock purchase? Any holder of shares of Common Stock of BKG who qualifies to participate on the Berrett-Koehler Private Stock Trading Board (the Trading Board ) may elect to participate or to not participate in this ESOP stock purchase ( ESOP Stock Purchase ). What are the deadlines and steps for participation? To participate in this ESOP Stock Purchase, shareholders must do the following: qualify to participate on the Trading Board (see instructions below); post on the Trading Board by 5:00 pm Pacific time on Monday, September 19, 2011, an offer to sell a specified number of shares; and then fill out, sign, and fax or mail back the Election Form found on the Trading Board so that it is received at the BKG office by 5:00 p.m. Pacific time on Monday, September 19, Those who tender shares will then be ed the Stock Purchase Agreement, which they must print, fill out, sign, and return in hard copy form, along with the original of their BKG stock certificate, so that these documents are received by the BKG office by 5:00 p.m. Pacific time on Friday, September 30, Then during October 2011 those who complete these steps will be sent a confirmation of their stock sale, a new BKC stock certificate (reflecting the reduced number of shares that they now own), and full payment for their shares sold to the ESOP. How many shares may BKG shareholders sell in this ESOP Stock Purchase? BKG shareholders may tender for sale any portion of the BKG shares that they own, from 0 to 100 percent. If the number of shares tendered by BKG shareholders exceeds 10,000, then the BK ESOP will reduce prorata (by multiplying the number of tendered shares by the quotient of 10,000 divided by the total number of shares tendered, and rounding the result down to the nearest whole share) the number of shares it purchases from each tendering shareholder. For example, if 20,000 shares were tendered, then the ESOP would purchase 50 percent of the shares tendered by each shareholder. Why is this ESOP Stock Purchase offer being made and will it be repeated? The Board of Directors ( the Board ) of The Berrett-Koehler Group, Inc. has established a stock buyback plan in order to provide a limited potential source of liquidity for BKG 1

2 shareholders who desire to sell their BKG stock. This plan contemplates that each year the Board will decide in its discretion whether BKG (either directly or through the ESOP) will offer to purchase shares of its Common Stock that year, and, if so, how much stock to purchase, based on funds available for the purchase, the financial status of BKG, the profitability of BKG, and other factors. The Board may decide not to make a stock purchase in any given year or series of years. Therefore this ESOP Stock Purchase should be considered a one-time offer. Previously, in 2007 and 2008, BKG through the ESOP purchased 12,500 shares from BKG shareholders at a price of $7.88 per share and 6,000 shares from BKG shareholders at a price of $5.00 per share. BKG did not purchase any shares in 2009 or in 2010, and it is not yet known whether BKG will purchase shares in 2012 or in subsequent years (and, if so, at what price), although BKG hopes to do so. Why is the stock purchase being made by the ESOP? BKG is making a cash contribution to the ESOP, so that the ESOP rather than BKG is purchasing the stock, because this has substantial tax advantages to BKG (thereby lowering the cost to BKG to make the stock purchase) as well as offering a benefit to BKG employees (by increasing the stock holdings of the ESOP). Why is the price being offered set at $5.00 per share? The price of $5.00 per share is an arbitrary price that was selected to provide the opportunity for BKG shareholders who desire to sell a portion of their shares to do so and to encourage use of the Trading Board. Neither BKG nor the Board of Directors of BKG is suggesting that the $5.00 per share price being offered by the ESOP is the market value of BKG shares. The price per share likely does not adequately reflect the current value of BKG as an enterprise 1, and of course cannot reflect future changes in BKG s operating results, financial condition, or prospects. Rather, the ESOP Stock Purchase offers an opportunity for liquidity to those who need or value an immediate payout for a portion of their shares rather than holding their entire investment indefinitely. In deciding whether to participate, please consider the observations in the Supplemental Information Statement that appears below, regarding BKG's intentions and expectations affecting future opportunities for liquidity of your stock. You will need to decide for yourself whether this is an adequate purchase price, based on your reasons for selling or holding shares, based on your study of BKG s financial statements, and based on other factors. Why is the ESOP Stock Purchase offer being made on the Trading Board? Part of the purpose of this ESOP Stock Purchase is to encourage use of the Trading Board. BKG is seeking to establish the Trading Board as an option for buying and selling BKG stock by persons who qualify to participate on the Trading Board. 1 It is likely that if the company were sold presently, the stock price would be considerably higher than $5, but the valuation of shares sold by minority shareholders in an illiquid private company are generally subject to a sizeable discount from their value in a sale of the entire enterprise. Relevant to the enterprise valuation, the trustee of the ESOP is required to establish a valuation for the BKG Common Stock annually, but for various reasons this valuation is discounted only 5% from the assessed enterprise value. The ESOP's most recent assessment of the price per share of Common Stock as of December 31, 2010, set a valuation of $9.70 per share, but an isolated sale of a small minority interest could be expected to be discounted much more significantly. 2

3 Can Trading Board participants offer to sell or buy BKG shares at prices other than $5.00 per share? Yes. Trading Board participants can make any offer they wish to make at any time on the Trading Board, including offers to sell or buy BKG shares at prices higher or lower than $5.00 per share. For example, a Trading Board participant could offer to purchase BKG shares at this time at a price higher than $5.00 per share, and interested BKG shareholders could respond to this higher offer instead of responding to the ESOP Stock Purchase offer. Again, BKG is seeking to encourage use of the Trading Board by interested buyers and sellers of BKG stock. Where is the Trading Board found and who can access it? The Berrett-Koehler Private Stock Trading Board is a Google Site. Anyone who qualifies to participate on the Trading Board receives a link and a password to access it and can access it at any time that they wish to do so. How does one qualify to participate on the Trading Board? To qualify to participate on the Trading Board, you will need to complete the Berrett- Koehler Private Stock Trading Board Participation Questionnaire which you can receive by ing BKG Corporate Secretary Arielle Kesweder (akesweder@bkpub.com) -- and meet the participation qualifications. These participation qualifications are similar to the qualifications that most BKG shareholders met to be able to purchase BKG stock in the first place. Can non-bkg shareholders participate on the Trading Board? Yes, as long as they complete the Questionnaire and meet the qualifications (see above). Does BKG management or the BKG Board recommend that BKG shareholders sell shares in this Stock Offering? BKG management and the BKG Board are making no recommendation, and they have not authorized any other person to make a recommendation, as to whether any BKG shareholder should participate in the ESOP Stock Purchase. You must make your own decision about whether or not to participate in the ESOP Stock Purchase. What are the risks associated with participating in this Stock Purchase or choosing not to participate? Some of the significant risks associated with this decision are set forth in the Risk Factors section of the Supplemental Information Statement that appears below. You are encouraged to review the Risk Factors information carefully. Is $5.00 per share more or less than BKG shareholders have paid for their shares? Individual BKG shareholders may have paid more or less than $5.00 per share, depending on when they purchased shares between 1992 and now. There have been multiple stock offerings over these years, with the price of shares varying from offering to offering according to BKG s financial status as well as general U.S. economic conditions, swings in the valuation of publishing companies in the marketplace, and other factors. Please keep in mind that the BKG stock was split three-for-one in fall 2004, so 3

4 the purchase price of stock purchased before then needs to be divided by three in order to compare it to $5.00 per share. Please also keep in mind that the price of stock on the major stock exchanges has been highly volatile over the past dozen years, in many cases much more so than the price of BKG stock. May holders of BKG Preferred Stock participate in the ESOP Stock Purchase? In order for holders of Preferred Stock of The Berrett-Koehler Group, Inc., to participate in this ESOP Stock Purchase, they must first convert their Preferred Stock into Common Stock in accordance with the Conversion Rights specified in the Restated Articles of Incorporation of The Berrett-Koehler Group, Inc. (which all holders of Preferred Stock received when they purchased the stock). Doing so would result in the loss of various rights, preferences, and privileges enjoyed by the holders of Preferred Stock and should be considered carefully. What are the tax consequences of participating in the ESOP Stock Purchase? Shareholders should consult their own tax advisors about this question. However, some important information is contained in the Material Federal Income Tax Consequences section of the Supplemental Information Statement that appears below. What if a BKG shareholder cannot locate his or her BKG stock certificate? If you are unable to locate your BKG stock certificate, you may nonetheless participate in the ESOP Stock Purchase by completing an affidavit of lost certificate. To receive an affidavit and instructions for submitting it, please contact BKG Corporate Secretary Arielle Kesweder. Who do shareholders contact with questions? If you have questions about this ESOP Stock Purchase, please contact Arielle Kesweder (akesweder@bkpub.com; ) or Steven Piersanti (spiersanti@bkpub.com; ). SUPPLEMENTAL INFORMATION STATEMENT THE BERRETT-KOEHLER GROUP, INC. ESOP STOCK PURCHASE August 30, 2011 REASONS FOR FURNISHING THIS SUPPLEMENTAL INFORMATION STATEMENT The Board of Directors of The Berrett-Koehler Group, Inc. ( BKG ) determined to furnish this Supplemental Information Statement to you to provide you with information concerning the ESOP Stock Purchase and related matters. We encourage you to carefully read this Supplemental Information Statement and any related information or exhibits prior to 4

5 execution and returning the ESOP Stock Purchase documentation. In addition, we also urge you to consult with your own legal, investment, tax, accounting and other advisors to determine the potential benefits, burdens, and other consequences of the ESOP Stock Purchase particular to you. RISK FACTORS In deciding whether to participate in the ESOP Stock Purchase, you should carefully consider the risks relating to selling your shares of Common Stock pursuant to the ESOP Stock Purchase and the risk relating to not selling your shares of Common Stock pursuant to the ESOP Stock Purchase, in addition to the risks associated with the business of BKG, including those described below. Risks Related to Selling Your Shares Pursuant to the ESOP Stock Purchase The price that you are being offered for your shares of Common Stock may not reflect the current or future value of those shares. Neither BKG nor the Board of Directors of BKG is making any recommendation as to whether you should sell or refrain from selling your shares of Common Stock in the ESOP Stock Purchase. And neither BKG nor the Board of Directors of BKG is suggesting that the $5.00 per share price being offered by the ESOP is the market value of BKG shares. Instead, this is an arbitrary price that was selected to provide the opportunity for BKG shareholders who would like to sell a portion of their shares to do so and to encourage use of the Berrett- Koehler Private Stock Trading Board. The price per share likely does not adequately reflect the current value of BKG as an enterprise, and of course cannot reflect future changes in BKG s operating results, financial condition, or prospects. You must make your own determination as to the adequacy of the price that you are being offered by the ESOP. We have not authorized any of our directors, officers, or team members or any other person to assess for you the adequacy of the ESOP Stock Purchase price or to make any recommendation on BKG s behalf as to whether you should sell or refrain from selling your shares of Common Stock pursuant to the ESOP Stock Purchase. If you rely on any such assessment or recommendation or on any information other than that which is provided in this Supplemental Information Statement and the other information made available to you by BKG, you do so at your own risk. To the extent you sell your shares of Common Stock in the ESOP Stock Purchase, you will not be entitled to directly participate in any increase in the value of such shares of Common Stock in the future. With respect to any shares of Common Stock that you currently own and subsequently sell in the ESOP Stock Purchase, you will no longer be entitled to participate in future increases, if any, in the value of BKG and its shares of Common Stock that may result if BKG succeeds in achieving its strategic objectives, or that may result from market trends or otherwise. 5

6 Any future liquidity event or other transaction may offer higher per share consideration for shares of Common Stock than the ESOP Stock Purchase. A future liquidity event or other transaction, whether by means of a future ESOP stock purchase, another limited stock purchase, an initial public offering, private sale, a merger, other business combination, or otherwise, could result in shareholders of BKG receiving per share consideration that is higher than the price being offered in the ESOP Stock Purchase. BKG s policy is to continue making offers to repurchase BKG stock from shareholders from time-to-time, generally through the ESOP, but there is no guarantee that such a repurchase will be made in any given year or at any given share price. However, to the extent that you sell your shares of Common Stock in the ESOP Stock Purchase, you will forgo the right to participate in any increase in the value of those shares if and when BKG makes a future stock repurchase offer. BKG has no immediate plans for an initial public offering or other general liquidity event, and believes that a public offering of its stock is not reasonably foreseeable. However, if BKG were to consummate a public offering, the stock then held by its shareholders may become saleable in the public market, subject to the application of the federal securities laws to each shareholder and to certain contractual restrictions on the transfer of shares subsequent to a public offering. In addition, in the event of a public offering, the price of shares of BKG s Common Stock may be substantially higher than the price available to the holders of such shares in the ESOP Stock Purchase or otherwise prior to a public offering. To the extent that you sell your shares of Common Stock in the ESOP Stock Purchase, you will forgo the right to participate in any increase in the value of those shares if and when BKG engages in a public offering or otherwise engages in any transaction that allows its shareholders to realize the value of their investment. In addition, a future merger, consolidation, share exchange or other business combination involving BKG and one or more of its affiliates could result in shareholders receiving per share consideration that is higher than the price being offered in the ESOP Stock Purchase. Although BKG does not have any plans with respect to such a transaction in the immediate future and has stated that its long-term goal is to retain its independence from larger publishing enterprises, to the extent you sell your shares of Common Stock in the ESOP Stock Purchase, you will forgo the opportunity to participate in any such future transaction. To the extent that you cease to hold shares of Common Stock after the ESOP Stock Purchase, you will not be entitled to receive any future dividends or other distribution on the Common Stock. BKG has not previously paid any cash dividends and does not expect to declare or pay any dividends in the near future. However, to the extent that you cease to hold shares of BKG Common Stock after completion of the ESOP Stock Purchase, you will not be entitled to receive any dividends or distributions that BKG may pay or make in respect of such shares. 6

7 Risks Related to Not Selling Your Shares in the ESOP Stock Purchase If you do not sell your shares of Common Stock in the ESOP Stock Purchase, you may not have another opportunity to liquidate or otherwise receive value for your shares of Common Stock. There is no established market for the Common Stock of BKG. BKG may never consummate a public offering of its capital stock. Even if BKG consummates a public offering in the future, an active trading market for its capital stock may not develop or be sustained. If you decide not to sell your shares of Common Stock in the ESOP Stock Purchase, you will be taking the risk that BKG, and thus your shares of Common Stock, may lose value over time, that no future dividends or distributions may be made, and that no future liquidity event may occur to afford you the opportunity to receive value for your shares of Common Stock. We cannot assure you that you will be afforded the opportunity to sell your shares or otherwise receive any value in exchange for your shares of Common Stock in the future. Nor can we assure you that any future transaction that does occur will afford you a price that is equivalent to, or higher than, the price being offered in the ESOP Stock Purchase. The Common Stock is subject to transfer restrictions under securities laws and certain contracts. No shares of Common Stock have been registered under the Securities Act of 1933, as amended. If you continue to hold shares of BKG Common Stock after the completion of the ESOP Stock Purchase, and you wish at any time to resell or otherwise transfer any shares of Common Stock, your ability to do so will depend on the application of federal and state securities laws to each particular proposed transfer. FORWARD LOOKING STATEMENTS The materials you have been provided in connection with the ESOP Stock Purchase contain forward-looking statements that involve many risks and uncertainties. Any statements in the materials that are not historical statements, including any discussion of future liquidity events, are forward-looking statements within the meaning of the federal securities laws. Actual results could differ materially from those discussed in the forwardlooking statements as a result of certain factors, including those set forth in Risk Factors above and elsewhere in the materials. We urge you to review such information with care. BKG disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. MATERIAL FEDERAL INCOME TAX CONSEQUENCES The following summary is a general discussion of certain of the expected United States federal income tax consequences of the ESOP Stock Purchase under the Internal Revenue Code of 1986, as amended (the Code ), to shareholders of BKG. This summary is not a complete description of all tax consequences of the ESOP Stock Purchase and does not 7

8 address the tax consequences that may be relevant to particular categories of shareholders subject to special treatment under certain federal income tax laws, such as dealers in securities, banks, insurance companies, tax- exempt organizations, non-united States persons, shareholders who acquired shares of BKG capital stock pursuant to the exercise of options or otherwise as compensation, shareholders who are subject to the alternative minimum tax provisions of the Code or shareholders who hold their shares as a hedge or as part of a hedging, straddle, conversion or other risk reduction transaction. This summary is based on the Code, currently applicable Treasury regulations, published administrative rulings and court decisions all as of the date hereof. All of the foregoing is subject to change either prospectively or retroactively, and any such change could affect the continuing validity of the tax consequences described below. No information is provided herein with respect to the tax consequences of the ESOP Stock Purchase arising under the laws of any state, local or foreign jurisdiction. This summary discusses only the federal income tax consequences of the ESOP Stock Purchase and does not discuss the tax consequences of any other transaction. In view of the summary nature of this discussion and the individual nature of tax consequences, shareholders should consult their own tax advisors as to the specific federal income tax consequences to them for participating in the ESOP Stock Purchase, as well as the applicability of state, local, and foreign tax laws. IRS Circular 230 Disclosure: To ensure compliance with Internal Revenue Service Circular 230, you arc hereby notified that: (a) any discussion of United States federal tax issues in this Supplemental Information Statement is not intended or written by us to be relied upon, and cannot be relied upon by any taxpayer, for the purpose of avoiding penalties that may be imposed on any taxpayer under the Internal Revenue Code; (b) such discussion is written in connection with the promotion or marketing of the transactions or matters addressed herein; and (c) each shareholder should seek advice based on its particular circumstances from an independent tax advisor. Consequences of Participating in the ESOP Stock Purchase. The receipt of cash for Common Stock sold pursuant to the ESOP Stock Purchase will be a taxable transaction for federal income tax purposes (and also may be a taxable transaction under applicable state, local and other income tax laws). The ESOP Stock Purchase should have the following tax consequences: A shareholder who receives cash for the selling of shares will generally recognize gain or loss, measured by the difference between the shareholder s basis in such stock and the amount of cash received, provided that the payment is not essentially equivalent to a dividend within the meaning of Section 302 of the Code (a Dividend Equivalent Transaction ). In the case of an individual, capital gain is generally subject to United States federal income tax at a maximum rate of 15% if such individual has held shares of Common Stock for more than one year at the time of the ESOP Stock Purchase, and at ordinary income rates (as a short-term capital gain) if the individual has held shares of Common Stock for one year or less at the time of the consummation of the ESOP Stock Purchase. The deductibility of capital losses may be limited. If the cash payment is treated as a Dividend Equivalent Transaction (discussed below), the shareholder will have taxable dividend income to the extent of such shareholder s pro rata share of the current and accumulated earnings and profits ( E&P ) of BKG as of the end of the year in which the Dividend Equivalent Transaction occurs. The maximum tax rate on dividend income is currently 15%. If the cash payment exceeds the shareholder s pro rata 8

9 share of E&P, the excess will be treated first as a basis-reducing, tax-free return of capital to the extent of the shareholder s adjusted tax basis in each share, and then as a capital gain (treated as short- term or long term depending on the duration the shareholder has held shares of Common Stock). BKG expects to have current E&P in A payment will generally not be a Dividend Equivalent Transaction if it is substantially disproportionate with respect to the shareholder or if it is not essentially equivalent to a dividend to the shareholder. A distribution will be substantially disproportionate if the shareholder s proportionate interest in BKG voting stock he or she actually holds after the ESOP Stock Purchase is (a) less than 50% of the total of all outstanding BKG voting stock and (b) less than 80% of what the shareholder s proportionate interest in BKG voting stock was before the ESOP Stock Purchase. In applying this test, the constructive ownership rules of Section 318 of the Code shall apply. Under the constructive ownership rules, a shareholder is treated as holding not only his or her own shares but also shares held by certain related persons and entities and also any shares he or she has an option to purchase. Even though a distribution does not satisfy the substantially disproportionate test discussed above, it still may be not essentially equivalent to a dividend depending upon the shareholder s particular facts and circumstances. The United States Supreme Court in Davis v. United States, 397 U.S. 301, 313 (1970), concluded that a distribution will be considered not essentially equivalent to a dividend if there is a meaningful reduction of the shareholder s proportionate interest. Shareholders are urged to consult their own tax advisors to determine whether or not any cash received in exchange for the selling of their shares of Common Stock would be considered a Dividend Equivalent Transaction in light of their particular circumstances. Timing of Recognition. Assuming the shareholder is a cash basis taxpayer, this transaction will be reportable on the shareholder s return in the tax year in which the transaction closes and the cash is tendered. Backup Withholding. Unless an exemption applies under applicable law and regulations, BKG is required to withhold, and will withhold, 28% of any cash payments to shareholders selling shares pursuant to the ESOP Stock Purchase unless the shareholder provides the appropriate form as described below. Backup withholding will generally apply if a shareholder (1) fails to furnish his or her social security number or other taxpayer identification number ( TIN ), (2) furnishes an incorrect TIN, (3) fails to properly report interest or dividends or (4) under certain circumstances fails to provide a certified statement signed under penalties of perjury that the TIN provided is the correct number and that he or she is not subject to backup withholding. Backup withholding is not an additional tax but merely an advance payment, which may be refunded to the extent it results in an overpayment of tax. Certain persons generally are entitled to exemption from backup withholding, including corporations and financial institutions. Each shareholder should complete and sign a Substitute Form W-9, so as to provide the information, including such shareholders taxpayer identification number, and certification necessary to avoid backup withholding, unless an applicable exemption exists and is proved in a manner satisfactory to BKG. 9

10 Nonresident Aliens. Payment to a nonresident alien will be subject to U.S. federal income tax withholding if the repurchase is a Dividend Equivalent Transaction as to that shareholder. The withholding rate is generally 30% of the gross proceeds but may be reduced by treaty if the shareholder submits a completed IRS form W-8BEN. The reduced withholding rate is generally 15% , v. 1 10