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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13E-3
AMENDMENT NO. 1
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE SECURITIES EXCHANGE
ACT OF 1934)
PREFERRED EMPLOYERS HOLDINGS, INC.
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(Name of Issuer)
PREFERRED EMPLOYERS HOLDINGS, INC.
MEL HARRIS
PETER E. KILISSANLY
WILLIAM R. DRESBACK
JOSE MENENDEZ
NANCY RYAN
JACK D. BURSTEIN
STUART J. GORDON
ALEXANDER M. HAIG, JR.
MAXWELL M. RABB
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(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class of Securities)
739908-101
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(CUSIP Number of Class of Securities)
MEL HARRIS
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
PREFERRED EMPLOYERS HOLDINGS, INC.
10800 BISCAYNE BOULEVARD
MIAMI, FLORIDA 33161
(305) 893-4040
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of Person(s) Filing Statement)
With a copy to:
FERNANDO C. ALONSO, ESQ.
GREENBERG TRAURIG, P.A.
1221 BRICKELL AVENUE
MIAMI, FLORIDA 33131
(305) 579-0500
This statement is filed in connection with (check the appropriate box):
a. [ ] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13E-3(c) under the
Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of
1933.
c. [X] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [ ]
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
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Amount Previously Paid: $2,968.00 Filing Party: Preferred Employers Holdings, Inc.
Form or Registration No: Schedule 13E-4 Date Filed: September 17, 1999
</TABLE>
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INTRODUCTION
This Amendment No. 1 to the Rule 13e-3 Transaction Statement on
Schedule 13E-3 (the "Schedule 13E-3") is being filed by Preferred Employers
Holdings, Inc., a Delaware corporation (the "Company"), and Mel Harris, Peter
E. Kilissanly, William R. Dresback, Jose Menendez, Nancy Ryan, Jack D.
Burstein, Stuart J. Gordon, Alexander M. Haig, Jr. and Maxwell M. Rabb,
pursuant to Section 13(e) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and Rule 13e-3 thereunder in connection with the tender
offer by the Company for all of its issued and outstanding shares of common
stock, $.01 par value per share (the "Shares"), including Shares of common stock
held by the executive officers and directors of the Company, at a price of $5.00
per Share, net to the seller in cash, upon the terms and subject to the
conditions set forth in the Offer to Purchase, dated September 17, 1999 (the
"Offer to Purchase") and the related Letter of Transmittal (which, together with
the Offer to Purchase, constitute the "Offer"), copies of which are filed as
Exhibits (d)(1) and (d)(2) hereto, respectively.
The following Cross-Reference Sheet prepared pursuant to General
Instruction F to Schedule 13E-3 shows the location in the Issuer Tender Offer
Statement on Schedule 13E-4 filed by the Company (the "Schedule 13E-4") with
the Securities and Exchange Commission (the "Commission") on the date hereof of
the information required to be included in this Schedule 13E-3. The information
set forth in Schedule 13E-4, including all Exhibits thereto, is expressly
incorporated herein by reference as set forth in the Cross-Reference Sheet and
the responses in this Schedule 13E-3, and such responses are qualified in their
entirety by reference to the information contained in the Offer to Purchase and
the annexes thereto.
CROSS-REFERENCE SHEET
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WHERE LOCATED IN
ITEM IN SCHEDULE 13E-3 SCHEDULE 13E-4
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Item 1(a)................................................................................ Item 1(a)
Item 1(b)................................................................................ Item 1(b)
Item 1(c)................................................................................ Item 1(c)
Item 1(d)................................................................................ *
Item 1(e)................................................................................ *
Item 1(f)................................................................................ *
Item 2(a)................................................................................ *
Item 2(b)................................................................................ *
Item 2(c)................................................................................ *
Item 2(d)................................................................................ *
Item 2(e)................................................................................ *
Item 2(f)................................................................................ *
Item 2(g)................................................................................ *
Item 3(a)................................................................................ *
Item 3(b)................................................................................ *
Item 4(a)................................................................................ *
Item 4(b)................................................................................ Item 5
Item 5................................................................................... Item 3
Item 6(a)................................................................................ Item 2
Item 6(b)................................................................................ *
Item 6(c)................................................................................ Item 2
Item 6(d)................................................................................ *
Item 7(a)................................................................................ Item 3
Item 7(b)................................................................................ Item 3
Item 7(c)................................................................................ Item 3
Item 7(d)................................................................................ Item 3
Item 8................................................................................... *
Item 9................................................................................... *
Item 10(a)............................................................................... *
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WHERE LOCATED IN
ITEM IN SCHEDULE 13E-3 SCHEDULE 13E-4
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Item 10(b)............................................................................... *
Item 11.................................................................................. Item 5
Item 12(a)............................................................................... *
Item 12(b)............................................................................... *
Item 13.................................................................................. *
Item 14.................................................................................. Item 7
Item 15(a)............................................................................... *
Item 15(b)............................................................................... Item 6
Item 16.................................................................................. Item 8(e)
Item 17.................................................................................. *
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* The Item is located in Schedule 13E-3 only.
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION
(a)-(c) The response to Item 1(a)-(c) of Schedule 13E-4 is
incorporated herein by reference and the information set forth in the Offer to
Purchase under "The Tender Offer -- 6. Price Range of Shares; Dividends" is
incorporated herein.
(d) The information set forth in the Offer to Purchase
under "The Tender Offer -- 6. Price Range of Shares; Dividends" is incorporated
herein by reference.
(e) The Company consummated an underwritten public offering
of 1,500,000 Shares on February 5, 1997 pursuant to a registration statement
filed with the Commission under the Securities Act of 1933, as amended (the
"Public Offering"). The price to the public of the Shares sold in the Public
Offering was $7.25 per Share and the aggregate net proceeds received by the
Company thereunder were $10,113,750.00.
(f) Not applicable.
ITEM 2. IDENTITY AND BACKGROUND
This statement is filed by the issuer of the equity securities that
are the subject of the Rule 13e-3 transaction. This statement also is filed by
Mel Harris, the Chairman of the Board of Directors and Chief Executive Officer
of the issuer, Peter E. Kilissanly, President, Chief Operating Officer and
Director of the issuer, William R. Dresback, Jose Menendez and Nancy Ryan, each
of whom is an officer of the issuer, and Jack D. Burstein, Stuart J. Gordon,
Alexander M. Haig, Jr. and Maxwell M. Rabb, each of whom is a director of the
issuer. The response to Item 1(a) of Schedule 13E-4 is incorporated herein by
reference. The information set forth in Schedule I to the Offer to Purchase is
incorporated herein by reference.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS
(a) Not applicable.
(b) Not applicable.
ITEM 4. TERMS OF THE TRANSACTION
(a) The information set forth in the Offer to Purchase on
the cover page thereof and under "Introduction," "Special Factors -- 1. Purpose
and Background of the Offer; Certain Effects of the Offer; Plans of the Company
After the Offer," "Special Factors -- 4. Interests of Certain Persons in the
Offer," "The Tender Offer -- 1. Terms of the Offer; Expiration Date," "The
Tender Offer -- 2. Acceptance for Payment and Payment for Shares," "The Tender
Offer -- 3. Procedures for Accepting the Offer and Tendering Shares," "The
Tender Offer -- 4. Withdrawal Rights," "The Tender Offer -- 8. Financing of the
Offer," "The Tender Offer -- 9. Dividends and Distributions," "The Tender Offer
- -- 11. Certain Conditions of the Offer," "The Tender Offer -- 12. Certain Legal
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Matters and Regulatory Approvals," "The Tender Offer -- 13. Fees and Expenses"
and "The Tender Offer -- 14. Miscellaneous" is incorporated herein by
reference.
(b) The response to Item 5 of Schedule 13E-4 is
incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE
(a)-(e) Not applicable.
(f)&(g) The response to Item 3 of Schedule 13E-4 is
incorporated herein by reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
(a)&(c) The response to Item 2 of Schedule 13E-4 is
incorporated herein by reference.
(b) The information set forth in the Offer to Purchase in
"Special Factors -- 6. Fees and Expenses" and "The Tender Offer -- 13. Fees and
Expenses" is incorporated herein by reference.
(d) Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS
(a)-(d) The response to Item 3 of Schedule 13E-4 is
incorporated herein by reference. The information set forth in the Offer to
Purchase under "Special Factors -- 3. Opinion of Advest, Inc." and "The Tender
Offer -- 5. Certain U.S. Federal Tax Consequences" is incorporated herein by
reference.
ITEM 8. FAIRNESS OF THE TRANSACTION
(a)-(f) The information set forth in the Offer to Purchase
under "Introduction," "Special Factors -- 1. Purpose and Background of the
Offer; Certain Effects of the Offer; Plans of the Company After the Offer"
"Special Factors -- 2. Recommendation of the Company's Board; Fairness of the
Offer," "Special Factors -- 3. Opinion of Advest, Inc." and "Special Factors --
4. Interests of Certain Persons in the Offer" is incorporated herein by
reference.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS
(a)-(c) The information set forth in the Offer to Purchase
under "Special Factors -- 1. Purpose and Background of the Offer; Certain
Effects of the Offer; Plans of the Company After the Offer," "Special Factors
- -- 2. Recommendation of the Company's Board; Fairness of the Offer," "Special
Factors -- 3. Opinion of Advest, Inc.," "The Tender Offer -- 8. Financing of
the Offer" and in Schedule II is incorporated herein by reference.
ITEM 10.INTEREST IN SECURITIES OF THE ISSUER
(a) The information set forth in the Offer to Purchase
under "Special Factors -- 5. Beneficial Ownership of Shares" and Schedule I is
incorporated herein by reference.
(b) Not applicable.
ITEM 11.CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES
The response to Item 5 of Schedule 13E-4 is incorporated herein by
reference.
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ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION
(a)-(b) The information set forth in the Offer to Purchase
under "Introduction," "Special Factors -- 1. Purpose and Background of the
Offer; Certain Effects of the Offer; Plans of the Company After the Offer,"
"Special Factors -- 2. Recommendation of the Company's Board; Fairness of the
Offer," "Special Factors -- 4. Interests of Certain Persons in the Offer" and
"Special Factors --5. Beneficial Ownership of Shares" is incorporated herein by
reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION
(a) The information set forth in the Offer to Purchase
under "Special Factors -- 7. Dissenters' Rights" is incorporated herein by
reference.
(b) Not applicable.
(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION
The response to Item 7 of Schedule 13E-4 is incorporated herein by
reference.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED
(a) The information set forth in the Offer to Purchase
under "Special Factors -- 1. Purpose and Background of the Offer; Certain
Effects of the Offer; Plans of the Company After the Offer," "Special Factors
- -- 2. Recommendation of the Company's Board; Fairness of the Offer," "The
Tender Offer -- 8. Financing of the Offer" and "The Tender Offer -- 10. Effect
of the Offer on the Market for the Shares; Quotation and Exchange Act
Registration" is incorporated herein by reference.
(b) The response to Item 6 of Schedule 13E-4 is
incorporated herein by reference.
ITEM 16. ADDITIONAL INFORMATION
The response to Item 8(e) of Schedule 13E-4 is incorporated herein by
reference.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS
(a)(1) Commitment Letter, dated September 10, 1999, from City National
Bank of Florida to the Company.*
(a)(2) Loan and Security Agreement, dated October 12, 1999, among
the Company, Preferred Healthcare Staffing, Inc. and City
National Bank of Florida.
(b)(1) Opinion Letter of Advest, Inc., dated September 10, 1999.*
(b)(2) Fairness Opinion Presentation Materials prepared by Advest, Inc.,
dated September 9, 1999.
(c) Share Escrow Agreement, dated as of February 5, 1997, between the
Company and Mr. Howard Odzer.*
(d)(1) Form of the Offer to Purchase, dated September 17, 1999.
(d)(2) Form of the Letter of Transmittal.
(d)(3) Form of the Notice of Guaranteed Delivery.
(d)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees.
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(d)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees to Clients.
(d)(6) Form of Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.*
(d)(7) Press Release issued by the Company on September 17, 1999.*
(d)(8) Letter to Stockholders from Mr. Mel Harris, Chairman of the Board
of Directors and Chief Executive Officer, dated as of September 17,
1999.
(e) Not applicable.
(f) None.
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* Previously filed as an exhibit to Schedule 13e-3, dated September 17, 1999.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
Dated: October 25, 1999
PREFERRED EMPLOYERS HOLDINGS, INC.
By: /s/ Mel Harris
-------------------------------------------
Name: Mel Harris
Title: Chairman of the Board of Directors and
Chief Executive Officer
/s/ Mel Harris
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/s/ Peter E. Kilissanly
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/s/ William R. Dresback
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/s/ Jose Menendez
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/s/ Nancy Ryan
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/s/ Jack D. Burstein
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/s/ Stuart J. Gordon
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/s/ Alexander M. Haig, Jr.
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/s/ Maxwell M. Rabb
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EXHIBIT INDEX
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EXHIBIT NO. DESCRIPTION
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(a)(1) Commitment Letter, dated September 10, 1999, from
City National Bank of Florida to the Company.*
(a)(2) Loan and Security Agreement, dated October 12, 1999,
among the Company, Preferred Healthcare Staffing,
Inc. and City National Bank of Florida.
(b)(1) Opinion Letter of Advest, Inc., dated September 10, 1999.*
(b)(2) Fairness Opinion Presentation Materials prepared by
Advest, Inc., dated September 9, 1999.
(c) Share Escrow Agreement, dated as of February 5,
1997, between the Company and Mr. Howard Odzer.*
(d)(1) Form of the Offer to Purchase, dated September 17,
1999.
(d)(2) Form of the Letter of Transmittal.
(d)(3) Form of the Notice of Guaranteed Delivery.
(d)(4) Form of Letter to Brokers, Dealers, Commercial
Banks, Trust Companies and Nominees.
(d)(5) Form of Letter from Brokers, Dealers, Commercial
Banks, Trust Companies and Nominees to Clients.
(d)(6) Form of Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W9.*
(d)(7) Press Release issued by the Company on September 17,
1999.*
(d)(8) Letter to Stockholders from Mr. Mel Harris,
Chairman of the Board of Directors and Chief
Executive Officer, dated as of September 17, 1999.
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* Previously filed as an exhibit to Schedule 13e-3, dated September 17, 1999.
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<PAGE> 1
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement"), dated the 12th day of
October, 1999, and executed at Miami, Florida, between PREFERRED EMPLOYERS
HOLDINGS, INC., a Delaware corporation, 10800 Biscayne Boulevard, Miami,
Florida, (the "Company", "Borrower" or "Debtor"), and CITY NATIONAL BANK OF
FLORIDA, a national banking association, 25 West Flagler Street, Miami, Florida
33131 (the "Bank" or "Lender");
WITNESSETH:
WHEREAS, Lender has simultaneously herewith extended credit to Company
under Line of Credit Promissory Note of even date herewith, in the original
principal sum of $7,500,000.00 ("the Note"); and,
WHEREAS, this Loan and Security Agreement shall apply to the manner and
conditions on which disbursements are to be made under the Note and other
matters specifically set forth herein;
NOW, THEREFORE, in consideration of the loan or extensions of credit
heretofore, now or hereafter made to or for the benefit of the Company by the
Bank, the parties agree as follows:
1. RECITALS. The foregoing recitals are true and correct.
2. DEFINITIONS. GENERAL TERMS. Unless the context otherwise requires,
when used herein, the following terms shall have the following meanings, which
meanings shall be equally applicable to both the singular and plural forms of
such terms:
"BUSINESS DAYS" shall mean days on which the Bank is open for
normal business.
"COLLATERAL" OR "COLLATERAL SECURITY" shall have the meaning
set forth in Paragraph 4 hereof.
"INDEBTEDNESS" shall mean, collectively, all of the Company's
presently existing or hereafter created or assumed obligations for borrowed
money; notes payable and drafts accepted representing extensions of credit;
obligations representing the deferred purchase price of property indebtedness,
whether or not assumed, secured by Liens on, or payable out of the proceeds or
production from, property now or hereafter owned or acquired by the Company.
"LIEN" shall mean any security interest, mortgage, pledge,
lien, claim, counterclaim, set-off, charge, encumbrance, title retention
agreement or analogous instrument, in, of or on any of the Company's assets or
properties, now owned or hereafter acquired.
<PAGE> 2
"MATURITY DATE" shall mean October 10th, 2000.
"PERSON" shall mean, as the case may be, any corporation,
natural person, firm, joint venture, partnership, trust, unincorporated
organization and government, or any department or agency of any government.
"RELATED PARTY" shall mean and refer to any entity whereby
there is common or affiliated ownership of a material portion of the Borrower's
capital stock and the stock or partnership interest of said related party.
"SUBSIDIARY" shall mean any corporation of which more than
fifty (50%) percent of the outstanding capital stock having ordinary voting
power to elect a majority of the board of directors of such corporation
(irrespective of whether at the time stock of any other class or classes of such
corporation shall have or might have voting power by reason of the happening of
any contingency) is at the time, directly or indirectly, owned by the Company.
"UNMATURED EVENT OF DEFAULT" shall mean any condition, event
or act which, with notice or lapse of time, or both, as the case may be, would
constitute an Event of Default.
3. DESCRIPTION OF THE LOAN. The Loan ("Loan") is evidenced by the Note.
The Borrower intends to use the proceeds of the Loan to repurchase certain of
the outstanding common stock and/or the 7% subordinated Convertible Notes of the
Borrower.
Subject to the terms and conditions hereof, Borrower shall,
with respect to the Loan:
a. Borrower agrees to pay all taxes and assessments, and all
recording, documentary fees, and registration taxes.
b. All interest shall be payable monthly in arrears. All
interest shall be computed on the basis of a 360-day year and shall be charged
for the actual number of days within the period for which interest is being
charged.
c. If any payment to be made by Borrower under the Loan shall
become due on a Saturday, Sunday or business holiday under the laws of the State
of Florida, the due date of such payment shall be extended to the next
succeeding business day, and the period of such extension shall be included in
computing any interest in respect of such payment.
d. The Note may be prepaid, at any time, in whole or in part,
without premium or penalty.
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Borrower agrees that it shall be solely responsible for any
taxes, fees, penalties or assessments, including reasonable attorneys fees,
which may now or hereafter be imposed by the State of Florida or any
governmental agency having jurisdiction thereof as a result of the execution and
delivery of the Note outside of the State of Florida and any extensions of the
maturity date of the Note pursuant to the terms of this Agreement and such sums
shall, if not paid by Borrower, automatically be added to the principal due
under the Note and shall be secured by the collateral described herein.
4. SECURITY INTEREST. For value received and as security for the Note
(the "Loan"), the Borrower with full recourse to Borrower and pursuant to and
upon all of the representations, warranties, covenants and agreements contained
in this Loan and Security Agreement or otherwise made in writing in connection
herewith, hereby acknowledges all security agreements executed simultaneously to
secure repayment of the Loan to Bank and does hereby further pledge, assign,
transfer to and grant Lender a continuing first lien security interest in the
following property (collectively called "Collateral") together with any
additional shares of PHS stock acquired by or in the possession of Borrower:
All of the outstanding and issued shares of the capital stock
of Preferred Healthcare Staffing, Inc., a Delaware corporation
evidenced by certificate Number 1 (the "PHS Stock").
With respect to the PHS Stock, the Borrower hereby represents
and warrants as follows:
a. The PHS Stock does not serve as collateral or security for
any other indebtedness or obligation except the indebtedness evidenced by the
Note and this Agreement.
b. Borrower has done no act to impair or encumber the PHS
Stock and the security therefor or any other collateral tendered to Lender and
Lender shall have quiet possession of the same, free from all liens, claims, or
encumbrances whatsoever.
c. Borrower owns the PHS Stock, legally and equitably, free
and clear of all liens and encumbrances and Borrower will defend the PHS Stock
against all claims and demands of all persons at any time claiming any title or
interest in the PHS Stock.
d. That the making, execution, delivery and performance of
this Agreement: (i) is not and will not be in violation of any law or any
regulation promulgated by any governmental agency or body, including without
limitation, the Federal Securities Act of 1933, as amended, the Florida
Securities Act, as amended, the regulations promulgated under those statutes;
(ii) does not require the approval or consent of any governmental agency or
body; and (iii) will not conflict with or result in any breach of any term,
condition or provision of, or constitute a default under any instrument to which
Borrower is a party or by which Borrower may be bound or affected or constitute
(with or without the giving of notice or the passage of time or both) a default
under any such instrument, or result in the acceleration of any indebtedness, or
result in the breach of any
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regulation, order, writ, injunction or decree of any court or any commission,
board or other administrative agency entered in any proceeding to which Borrower
is a party or to which either may be bound or affected.
e. Borrower shall deliver to Lender, in assignable form, any
additional shares of PHS Stock acquired by Borrower on account of or with
respect to its ownership of the PHS Stock.
Lender agrees, for so long as there is no existing uncured
Event of Default, that Borrower shall have the right to vote the shares of PHS
Stock, but in no event in any manner which would jeopardize the security
interest granted to the Lender under this Agreement.
5. EVIDENCE OF AND SECURITY FOR THE LOAN ("LOAN DOCUMENTS"). Borrower
with respect to Paragraph 4, by execution of this Agreement hereby pledges,
assigns and transfers to Lender a continuing first security interest in the said
collateral described therein to Bank, as security for the prompt and full
payment, when due, of the Loan.
Borrower acknowledges that all security interests and all
documents, instruments and agreements evidencing such interest, now or
heretofore granted by Borrower to Bank to secure the Loan, are and shall
continue to be in full force and effect to secure the Loan evidenced by the
Note, and terms, conditions, covenants and agreements set forth in this Loan and
Security Agreement, and such other security instruments and documents as may be
required by Bank, including, but not limited to, those mentioned in this Loan
and Security Agreement.
6. RELEASE OF COLLATERAL. Notwithstanding the amount of the outstanding
balance due on the Note, Lender shall not be required to release any of the
collateral described herein until all sums due Lender under the Note have been
paid in full.
7. COMMITMENT FEE. Borrower shall pay a commitment fee in the sum of
$30,000.00 which shall be considered as earned upon payment. In addition,
Borrower shall pay a fee equal to one (1%) percent of each advance made under
this Loan, in excess of $3,000,000.00 ("Subsequent Advance"), which Lender is
authorized to deduct from each Subsequent Advance.
8. CONDITIONS PRECEDENT TO EFFECTIVENESS OF LOAN AGREEMENT. As
conditions precedent to the effectiveness of this Loan and Security Agreement,
Borrower shall furnish evidence to Lender that the following has occurred or
been prepared:
a. Borrower shall have executed and delivered to Lender this
Loan and Security Agreement, the Note, and all other Loan Documents, and
security instruments, each in form and substance satisfactory to Lender.
b. Maintain insurance in such amounts and against such risks
as shall be consistent with prudent business practices.
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<PAGE> 5
c. Acceptable evidence shall have been furnished to Lender
that Borrower and its subsidiary Preferred Healthcare Staffing, Inc., a Delaware
corporation ("PHS, Inc.") are in good standing with the State of Delaware and
are authorized to do business in the State of Florida.
d. PHS, Inc. has executed a Hypothecation-Security Agreement
and UCC-1 financing statement granting Lender a first lien security interest in
all accounts receivable .
9. INTENTIONALLY DELETED.
10. USE OF AND LIMITATION ON AVAILABILITY OF LOAN PROCEEDS.
a. Advances under the Note shall be limited to payment of the
outstanding balance of principal and interest due on the Promissory Note from
PHS, Inc. in favor of Lender in the original principal sum of $3,000,000.00 and
solely for the payment for the repurchase of outstanding shares of the common
stock and/or the 7% subordinated Convertigle Notes of Borrower.
b. Provided there is available undisbursed funds, all advances
above $3,000,000.00 shall be in minimum amounts of $1,000,000.00.
c. Notwithstanding anything to the contrary contained herein,
or in any of the documents executed in closing on the Loan, upon the expiration
of six months from the effective date of the Note, no advances of principal
shall be made to Borrower, and the Note shall automatically cease as a Line of
Credit and shall be considered as a Term Note, payable in the manner set forth
therein.
d. In the event Borrower shall close on a loan, the proceeds
of which are to finance or refinance the purchase of all of the outstanding
common stock of Borrower and to pay off the Borrower's Subordinated Convertible
Notes, which contains the right to convert to common stock, then the entire
outstanding principal balance of the Note, together with accrued interest, shall
be immediately due and payable.
11. NO DEFENSES, SET-OFFS OR COUNTERCLAIMS. Borrower affirmatively sets
forth that it has have no defenses, set-offs, or counterclaims against Lender in
connection with the Note.
12. FINANCIAL STATEMENTS. Borrower shall provide Lender with the
following financial information:
a. Annual audited consolidated financial statements prepared
in accordance with Generally Accepted Accounting Principles, within 90 days of
Borrower's fiscal year end.
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<PAGE> 6
b. Quarterly, unaudited, consolidated financial statements
within 45 days of Borrower's fiscal quarter end, certified as true and correct
by Borrower's chief financial officer.
c. Quarterly, commencing with the fourth quarter of 1999,
aging reports for PHS, Inc.'s accounts receivable within 30 days of each quarter
end.
13. INSPECTION OF BOOKS AND ASSETS. Borrower shall allow any
representative of Lender to visit and inspect any of its properties, to examine
its and PHS, Inc.'s books of record and account and to discuss the affairs,
finances and accounts with the respective officers, all at such reasonable times
with advance notice and as often as Lender may reasonably request, and, in each
case, cause each subsidiary so to do.
14. DEFAULTS; LITIGATION. Promptly give written notice to Lender of (a)
the occurrence of any Default or Event of Default, (b) all actions, proceedings
or claims, of which Borrower may have notice, which may be commenced or asserted
against Borrower or any subsidiary including PHS, Inc. after the date hereof
once the aggregate amount involved for all actions, proceedings and claims is at
least $200,000.00 in excess of the amount of any insurance applicable thereto,
and thereafter, all new actions, proceedings and claims whenever the aggregate
amount involved for all actions, proceedings and claims is at least $200,000.00
(in excess of applicable insurance) in excess of the amount involved at the time
of the last notice hereunder, and (c) any dispute which may exist between
Borrower or any subsidiary and any governmental regulatory body, which may
substantially adversely affect the normal business operations of Borrower or any
subsidiary or any of their respective properties and assets.
15. NEGATIVE COVENANTS. Borrower covenants and agrees that so long as
this Agreement is in effect and until the Note, together with interest and all
other obligations incurred hereunder are paid in full, Borrower and PHS, Inc.
will not:
a. LIENS. Contract, create, incur, assume, or suffer to exist
any mortgage, pledge, lien or other charge or encumbrance of any kind (including
the charge upon property purchased under conditional sale or other title
retention agreements) in excess of $250,000 (exclusive of employment agreements
and all leases) annually commencing from the date of execution of this Agreement
(exclusive of employment agreements and all leases), or grant any security
interest in (all of the foregoing "Liens"), any of its property or assets
whether now owned or hereafter acquired.
b. OTHER INDEBTEDNESS. Contract, create, incur, assume, be or
become contingently liable, or suffer to exist, any indebtedness for borrowed
money, in excess of $250,000.00 annually commencing from the date of execution
of this Agreement, except (i) indebtedness incurred pursuant to this Agreement,
(ii) indebtedness existing on the effective date of this Agreement to the extent
disclosed in writing to Lender prior to its execution of this Agreement.
c. ACCOUNTS RECEIVABLE, ETC. Sell, discount, transfer, assign
or otherwise dispose of any of its accounts or notes receivable at less than
face value
6
<PAGE> 7
thereof unless in each case the purpose is to accomplish collection of
delinquent accounts in the ordinary course of business, and except for
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business.
d. SALE OF CONTROLLING INTEREST. Borrower shall not, without
the prior written consent of Lender, which consent shall not be unreasonably
withheld, sell, transfer, assign, pledge or otherwise convey a controlling
interest in PHS, Inc. during the term of this Agreement.
e. RESTRICTION ON PAYMENT OF DIVIDENDS. Borrower shall not,
during the term of this Agreement, pay dividends to any of its stockholders nor
shall it make any distributions or repay all or any portion, including accrued
interest, of any loans from its stockholders (except for the 7% subordinated
Convertible Notes).
16. JURISDICTION. Borrower irrevocably agrees, that subject to Lender's
sole and absolute election, all actions or proceedings in any way arising out of
this Agreement, shall be litigated in courts having situs within Miami-Dade
County, State of Florida. Borrower hereby consents and submits to the
jurisdiction of any local, state or federal courts, located within said county
and state. Borrower waives any objection to venue of any actions instituted
hereunder and consents to the granting of such legal or equitable relief as is
deemed appropriate by the court.
17. EVENTS OF DEFAULT. Upon the occurrence of any of the following
events (hereinafter referred to as an "Event of Default") which are not cured by
Borrower within thirty (30) business days after delivery of a notice of default,
unless otherwise provided below and except for subparagraph (a), which shall be
ten (10) business days:
a. Borrower shall fail to make any payment of principal and/or
interest on the Note when the same shall become due and payable.
b. An Event of Default as defined in any other Loan Document
shall occur.
c. Borrower and/or PHS, Inc. shall permit, cause or suffer a
transfer of title to or encumber, or permit to be further encumbered, the assets
specifically described as being now owned and held by Borrower or PHS, Inc. in
which Lender has been granted a perfected security interest without Lender's
consent in writing.
d. Borrower shall fail to perform any other material term or
condition of this Agreement.
e. The filing by or against Borrower or PHS, Inc. of a
petition in bankruptcy or under any rehabilitative provision of the Bankruptcy
Code, or the insolvency of Borrower or PHS, Inc., or the making by Borrower or
PHS, Inc. of an assignment for the benefit of creditors, or the appointment of a
receiver or trustee for Borrower, shall constitute an Event of Default hereunder
which shall authorize Lender, at its option, to
7
<PAGE> 8
immediately accelerate maturity of all indebtednesses secured hereby, provided
that if such bankruptcy petition or receivership is involuntary, Borrower or
PHS, Inc. shall have a period of sixty (60) days in which to finally dismiss
same before Lender may exercise any of the hereinafter specified remedies in the
event of default.
f. Borrower shall fail to perform any material covenant or
term or condition of this Agreement, or any material representation or warranty
of Borrower herein or in any other loan documentation with Lender found to be
inaccurate, untrue or breached, or shall fail to timely perform all terms and
conditions for disbursement of the Loan.
g. The replacement, removal or resignation of Mel Harris as
Chief Executive Officer of Borrower or if Mel Harris, for any reason, transfers
his interest in any of the capital stock of Borrower subsequent to the date
hereof.
i. In the event the Borrower's earnings for any quarterly
period, commencing with the 1999 fourth quarter, as reflected in the financial
statements submitted to Lender pursuant to the terms of this Agreement, before
(a) interest expenses on all of its obligations (b) taxes (c) depreciation and
(d) amortization falls below the sum of$1,000,000.
The foregoing shall constitute "Events of Default" hereunder.
18. REMEDIES. Upon the happening of any Event of Default and in the
event Borrower shall have failed to cure such default in the applicable cure
time period provided herein, Lender, at its option, may:
a. Declare immediately due and payable all indebtednesses,
with interest, all monies advanced hereunder and accordingly accelerate payment
of the Note and, at Lender's option commence foreclosure of its security
interests, or take any other action permitted thereby, or by law,
notwithstanding anything to the contrary in the terms of payment stated herein;
and,
b. Proceed against Borrower to enforce any or all Loan
Documents, and the PHS Documents in any manner, in whole or in part and without
regard to marshalling thereof and sell any collateral securing the Loan at
public or private sale in any manner permitted by law; and,
c. The remedies herein provided for shall be in addition to,
and not in substitution for, the rights and remedies which would otherwise be
vested in Lender in law or equity or under the Note and any other Loan
Documents, all of which rights and remedies are specifically reserved by Lender,
and the failure by Lender to exercise the remedies herein provided shall not
preclude the resort to any other remedy or remedies, nor shall the exercise of
the remedies herein provided prevent the subsequent or concurrent resort to any
other remedy or remedies which by law or equity shall be vested in Lender for
the recovery of damages or otherwise in the event of a breach of any of the
undertakings of Borrower hereunder. No delay or omission by Lender in exercising
any
8
<PAGE> 9
right or remedy accruing upon the happening of an Event of Default shall impair
any such right or remedy or shall be construed as a waiver of any such default;
and every right and remedy hereby conferred upon Lender may be exercised from
time to time and as often as shall be deemed expedient by Lender. No waiver of
any Event of Default shall extend to or affect any other Event of Default.
d. The Bank is hereby irrevocably appointed the attorney in
fact of Borrower, which appointment is coupled with an interest, with full power
of substitution, to, in the name of Borrower after an Event of Default, (a)
receive and collect all distributions, profits, proceeds and payments in respect
of the collateral or any part thereof and to give full discharge for the same
and in connection with the foregoing to endorse all instruments made payable to
Borrower, (b) perform all acts and make and deliver all endorsements, notices,
instruments of assignments, and transfer releases, financing statements, and all
other writings whatsoever which the Bank deems appropriate to perfect and
maintain the Bank's security and rights in the collateral, (c) sell, assign and
transfer any and all of the collateral in the course of pursuing Bank's remedies
under this Paragraph, after default hereunder, (d) correct any scrivener's
errors or omissions whatsoever and (e) notify any obligor to make all further
payments to Bank or to Bank's designee; but if so requested by Bank, by any
purchaser of the collateral, or by any other party, Borrower shall ratify and
confirm the acts of Bank (and any substitute of the Bank) as Borrower's attorney
in fact and shall execute and deliver to Bank or Bank's designee any and all
endorsements, notices, instruments of assignments, transfers, releases,
financing statements, and other writings whatsoever that Bank or such purchaser
may request.
19. BORROWER'S ASSIGNMENT. This Loan and Security Agreement may not be
assigned by Borrower without the prior written consent of Lender, which consent
may be withheld in the Lender's sole and absolute discretion, and any attempt to
make such assignment without such consent shall be void and at the option of
Lender, be deemed a default hereunder.
20. LENDER'S ASSIGNMENT. This Agreement, the Loan and any documents
evidencing or securing the Loan, may be placed, assigned and/or serviced by
Lender and/or its successors or assigns, and in connection with any of the
foregoing Lender and/or its successors or assigns, may receive servicing,
brokerage and other fees. Any such placement, assignment or servicing shall be
at Lender's sole option and Lender and/or its successors or assigns shall have
no obligation to disclose to Borrower the receipt or contemplated receipt of any
such fees, nor shall Borrower have any claim or right to same.
Lender shall have the right to assign the Loan to an affiliate
of Lender or to a responsible institutional Lender, and any such assignee shall
have the same rights and privileges as Lender does.
21. DECLARATION OF NO SET-OFF. In the event Lender shall sell and
assign the Note and other Loan Documents, Borrower will, at the request of
Lender, execute and deliver to the purchaser thereof a Declaration of No
Set-Off, or if set-offs do exist, specifying the same, and shall otherwise
assist in every way in such assignment.
9
<PAGE> 10
22. INDEMNIFICATION. Borrower agrees to protect, indemnify, defend and
save harmless, Lender and its directors, officers, agents and employees from and
against any and all liability, expense or damage of any kind or nature and from
any suits, claims, or demands, including reasonable legal fees and expenses on
account of any matter or thing, whether in suit or not, arising out of this
Agreement, or in connection therewith, unless said suit, claim or damage is
caused by negligence or willful malfeasance of Lender. This obligation shall
survive the closing of the Loan and the repayment thereof.
23. NOTICES. All notices requests and demands to be made hereunder to
the parties hereto shall be in writing and deemed to have been given or made
when sent by the United States Postal Service to the addresses set forth on Page
1 above, and as to Lender, to the attention of Commercial Loan Department. Such
notices request and demand shall be by registered or certified mail, return
receipt requested, or by telegram or telegraph or may be personally delivered to
Borrower or to a responsible person in the Commercial Loan Department of Lender.
24. LENDER DETERMINATION OF FACTS. Lender shall at all times be free to
independently establish to its satisfaction the existence or nonexistence of any
facts, the existence or nonexistence of which is a condition of this Agreement.
25. INCORPORATION OF PREAMBLE, RECITAL AND EXHIBITS. The preamble,
recital and exhibits hereto are hereby incorporated into this Agreement.
26. TITLES AND HEADINGS. The titles and headings of sections of this
Agreement are intended for convenience only, and shall not in any way affect the
meaning or construction of any provision of this Agreement.
27. CHANGES, WAIVERS, DISCHARGE AND MODIFICATIONS IN WRITING. No
provision of this Agreement may be changed, waived, discharged or terminated
except by an instrument in writing signed by the party against whom enforcement
of the change, waiver, discharge or termination is sought. Each and every
covenant and condition for the benefit of Lender contained in this Agreement may
be waived by Lender; provided, however, that any waiver by Lender of any such
covenant or condition shall be in writing and a waiver only with respect to the
instance for which such waiver is granted, and shall not be deemed to be a
waiver by Lender of Borrower's obligation to thereafter perform each other or
the same covenant or condition of Lender's right to enforce such performance.
28. DEFINITIONS INCLUDE AMENDMENTS. Definitions contained in this
Agreement which identify documents, including, but not limited to, the Loan
Documents, shall be deemed to include all amendments and supplements to such
documents to the date hereof and all future amendments and supplements thereto
entered into from time to time to satisfy the requirements of this Agreement or
otherwise with the consent of Lender. Reference to this Agreement contained in
any of the foregoing documents shall be deemed to include all amendments and
supplements to this Agreement.
10
<PAGE> 11
29. LENDER NOT PARTNER OF BORROWER. Notwithstanding anything to the
contrary herein contained or implied, Lender, by this Agreement or by any action
pursuant hereto, shall not be deemed a partner of or joint venturer with
Borrower, and Borrower hereby indemnifies and agrees to hold Lender harmless
(including the payment of reasonable attorneys' fees) from any and all claims or
damages resulting from such a construction of the parties' relationship. The
requirements herein, and the restrictions imposed in this Agreement, are for the
sole protection and benefit of Lender, and not any third party, specifically but
not limited to contractors, suppliers and customers of Borrower. No such third
parties shall have any right to seek recourse against Lender hereunder or
otherwise, to require compliance with the terms and conditions hereof.
30. COSTS AND ATTORNEYS' FEES. All reasonable costs, including
reasonable attorneys' fees, paid or incurred by Lender in the enforcement or
defense of this Agreement, including proceedings in appellate courts, shall be
paid by Borrower.
31. SUCCESSORS AND ASSIGNS. Subject to the restrictions on Borrower's
right to transfer contained herein, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
32. ENTIRE AGREEMENT. No charge or modification of this Agreement shall
be valid unless the same is in writing and signed by the parties hereto. This
Agreement and the Notes and the other Loan Documents contain the entire
agreement between the parties hereto and there are no promises, agreements,
conditions, undertakings, warranties and representations, either written or
oral, express or implied, between the parties hereto other than as set forth
herein or executed concurrently herewith and therein set forth. It is expressly
understood and agreed that the parties hereto intend this Agreement to be an
integration of all prior and contemporaneous promises, agreements, conditions,
undertakings, warranties and representations between the parties hereto. Each
and every one of the obligations, conditions and undertakings therein of
Borrower shall continue and not cease until the Loan, together with all
interest, fees, costs and other amounts due Lender pursuant hereto and thereto
shall have been paid in full and until all obligations of Borrower, and
Guarantors shall have been discharged.
33. TIME. Time is of the essence as to all matters provided for in this
Agreement. In the event of any inconsistency between the applicable time periods
or dates contained in this Agreement and those contained in any other Loan
Document entered into between Borrower and Lender concurrently herewith, the
time periods and dates set forth herein shall control.
34. CONSENT OF PHS, INC. PHS, Inc. for the sole purpose of being bound
by all of the terms conditions and covenants of this Agreement which require
performance of on the part of PHS, Inc., and to affirm the representations
attributed to it, joins in the execution of this Agreement. PHS, Inc., however,
assumes no liability for the performance of any other terms and conditions
hereof.
35. BORROWER, LENDER AND PHS, INC. HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE ANY AND ALL RIGHT THEY MAY
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<PAGE> 12
HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION (INCLUDING BUT NOT LIMITED
TO, ANY CLAIMS, CROSS CLAIMS OR THIRD PARTY CLAIMS ARISING OUT OF, UNDER OR IN
CONNECTION WITH THE NOTE, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED HEREIN. BORROWER AND PHS, INC. HEREBY CERTIFY THAT NO
REPRESENTATIVE OR AGENT OF THE LENDER NOR THE LENDER'S COUNSEL HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT THE LENDER WOULD NOT, IN THE EVENT OF SUCH
LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION.
BORROWER AND PHS, INC. ACKNOWLEDGE THAT THE LENDER HAS BEEN INDUCED TO ENTER
INTO THIS LOAN BY, INTER ALIA, THE PROVISIONS OF THIS PARAGRAPH.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
Signed, sealed and delivered CITY NATIONAL BANK OF FLORIDA
in the presence of: a national banking corporation
By: /s/ Steve Capellan
- ----------------------- ----------------------------
Steve Capellan
- ----------------------- Assistant Vice President
PREFERRED EMPLOYERS HOLDINGS, INC.
a Delaware corporation
By: /s/ William R. Dresback
- ----------------------- ----------------------------
William R. Dresback
- ----------------------- Senior Vice President and
Chief Financial Officer
PREFERRED HEALTHCARE STAFFING, INC.
a Delaware corporation
By: /s/ William R. Dresback
- ----------------------- ----------------------------
William R. Dresback
- ----------------------- Vice President
12
<PAGE> 1
Exhibit(b)(2)
FAIRNESS OPINION
PRESENTATION MATERIALS
PREFERRED EMPLOYERS HOLDINGS,
INC.
SEPTEMBER 9, 1999
ADVEST
SERVING INVESTORS SINCE 1898
<PAGE> 2
TABLE OF CONTENTS
I. Scope of Fairness Opinion
II. Overview of PEGI
III. Summary of Principal Terms
IV. Historical Trading and Premium Paid Analyses
V. Public Comparable Company Analysis
Workers' Compensation Companies
Staffing Companies
VI. Historical Transaction Analysis
Workers' Compensation Companies
Staffing Companies
VII. Discounted Cash Flow Analysis
VIII. Conclusion
Page 1
<PAGE> 3
SCOPE OF FAIRNESS OPINION
Advest, Inc. has been engaged by the Board of Directors ("Board of Directors")
of Preferred Employers Holdings, Inc. ("PEGI" or the "Company"), to issue a
formal opinion with respect to the fairness from a financial point of view, to
the Company and the Company's stockholders (the "Shareholders") of the
consideration to be paid in conjunction with the Company's self tender (the
"Transaction").
Advest, as part of its investment banking business, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
Advest has relied upon the accuracy and completeness of all of the financial and
other information reviewed and has assumed its accuracy and completeness for
purpose of its opinion. In addition, Advest has not made an independent
evaluation or appraisal and did not physically inspect the assets of PEGI and it
has not made an independent valuation of the liabilities of PEGI, nor has Advest
been furnished with any such evaluation or appraisal. Advest's opinion is based
upon the economic and market conditions existing on the date hereof. Advest's
advisory services and opinion are provided for the information and assistance to
the Board of Directors in connection with its consideration of the Transaction.
Page 2
<PAGE> 4
SCOPE OF FAIRNESS OPINION
In arriving at our opinion, we reviewed certain information and documentation on
or related to PEGI, including:
- Audited financial statements, as filed with the SEC, for the
years ended December 1997 and 1998.
- Unaudited financial statements, as filed with the SEC, for the
quarters ended March 31, 1999 and June 30, 1999.
- Audited statutory financial statements of PEG Reinsurance
Company, Ltd. (a wholly owned subsidiary of the Company) for
the year ended December 1998.
- Prospectus regarding secondary offering dated December 1998.
- Certain PEGI interim financial analyses and forecasts prepared
by management.
Page 3
<PAGE> 5
SCOPE OF FAIRNESS OPINION
In addition to the above documentation, Advest conducted:
- A review and discussion with senior executives of the Company
concerning its business and prospects.
- An analysis of the market value, financial
performance/condition and operating characteristics of
companies which Advest deemed to be reasonably similar to the
Company.
- An analysis of the financial terms, to the extent publicly
available, of certain transactions involving companies which
Advest deemed to be reasonably similar to the Company.
- A review of the trading history of PEGI's stock over the last
two years.
- A review of certain other factors and analyses as Advest
deemed appropriate.
Page 4
<PAGE> 6
SCOPE OF FAIRNESS OPINION
Advest's approach to determine whether this transaction is fair to the
Shareholders, from a financial point of view, attempts to integrate its
transactional experience as investment bankers with theoretical models generally
accepted and used in the financial markets. The primary analyses used in
reaching our opinion are:
- PEGI Trading History and Premium Paid Analysis
- Public Comparable Company Analysis
- Historical Transaction Analysis
- Discounted Cash Flow Analysis
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Selecting
portions of this analysis or of this summary without considering the analyses as
a whole, could create an incomplete view of the processes underlying Advest's
opinion. In arriving at its fairness determination, Advest considered the
results, as a whole, of all such analyses.
Page 5
<PAGE> 7
OVERVIEW OF PEGI
PEGI was founded in 1988 as a managing general agent for workers' compensation
insurance, specializing in franchised fast food restaurants and convenience
stores. Today, the Company operates in three segments: general insurance agency,
reinsurance, and professional healthcare employee staffing.
Certain proceeds from the Company's IPO in February 1997 were used to capitalize
a Bermuda-domiciled reinsurance company, P.E.G. Reinsurance Company Ltd. This
company reinsures certain workers' compensation business produced by PEGI.
However, it limits its potential liability via an excess and aggregate
reinsurance treaty that limits losses and certain expenses to the first $300,000
per occurrence and to an amount not to exceed 70% of the gross written premium
for each individual underwriting year.
PEGI represents multiple nationally and internationally recognized insurance
carriers (AIG and Kemper) in its franchise business segment as a general agent.
This book of business, which includes workers' compensation, commercial,
multi-peril and small business package policies, currently has about $18 million
of annualized premiums in force. Of this, approximately $12 million of workers'
compensation premium is ceded to PEGI via its Bermuda-based reinsurance
subsidiary.
Page 6
<PAGE> 8
OVERVIEW OF PEGI
In addition to its insurance business, the Company expanded into the
professional healthcare employee staffing area through the acquisition of
certain of the assets of HSSI Travel Nurse Operations, Inc. in March 1998. In
August 1998, the Company merged, via a pooling-of-interest transaction, with NET
Healthcare Inc.
The professional healthcare staffing area has been growing rapidly over the last
several years, reflecting higher employer interest in "just in time" employees
as well as increasing overall demand in the area. After extensive analysis, PEGI
decided that its workers' compensation and claims cost handling skills may
provide it with a value-added approach to the professional healthcare staffing
and outsourcing segment.
While the Company has substantial experience in workers' compensation and claims
cost management, Management does not intend to expand its general agency and
reinsurance operations beyond its current book of business due to today's highly
competitive market conditions. As such, Management has reviewed a variety of
possible growth opportunities for the Company and developed a strategy to focus
on growing its presence in the professional healthcare staffing and outsourcing
market through additional acquisitions and internal growth.
Page 7
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FINANCIAL OVERVIEW OF PEGI
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months
Years ended December 31, ended June 30,
1997 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Staffing Income $11,594,300 42% $34,461,735 63% $14,863,410 61% $22,171,854 70%
Insurance Income (a) 15,428,648 56% 19,377,918 36% 9,378,787 38% 9,497,253 30%
Other 570,464 2% 471,327 1% 264,331 1% 210,790 1%
----------- --- ----------- --- ----------- --- ----------- ---
Total Revenues 27,593,412 100% 54,310,980 100% 24,506,528 100% 31,879,897 100%
=========== === =========== === =========== === =========== ===
Expenses:
Staffing costs 9,610,778 35% 27,140,355 50% 11,596,918 47% 17,060,963 54%
Insurance expenses (b) 10,418,979 38% 13,051,822 24% 6,450,277 26% 6,945,291 22%
Other operating expenses 6,080,808 22% 9,814,401 18% 4,519,855 18% 6,326,620 20%
----------- --- ----------- --- ----------- --- ----------- ---
Total operating expense 26,110,565 95% 50,006,578 92% 22,567,050 92% 30,332,874 95%
----------- --- ----------- --- ----------- --- ----------- ---
Operating income before income taxes 1,482,847 5% 4,304,402 8% 1,939,478 8% 1,547,023 5%
----------- --- ----------- --- ----------- --- ----------- ---
Interest expense 663,909 2% 1,076,947 2% 458,585 2% 536,691 2%
Amortization of intangible assets and
other non-operating expenses -- 0% 649,265 1% 238,621 1% 139,463 0%
----------- --- ----------- --- ----------- --- ----------- ---
Total non-operating expenses 663,909 2% 1,726,212 3% 697,206 3% 676,154 2%
Income before income taxes 818,938 3% 2,578,190 5% 1,242,272 5% 870,869 3%
Income taxes 208,980 1% 375,565 1% 141,968 1% 149,060 0%
Net income $ 609,958 2% $ 2,202,625 4% $ 1,100,304 4% $ 721,809 2%
=========== === =========== === =========== === =========== ===
</TABLE>
a) Includes premiums earned, net commission and interest income
b) Includes losses and loss adjustment expenses and amortization
of deferred acquisition costs
Page 8
<PAGE> 10
FINANCIAL OVERVIEW OF PEGI
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 3l, June 30,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
ASSETS
Investments:
Held-to-maturity securities, at amortized cost (fair value of $ 8,015,105 $ 15,454,481 $ 19,610,103
$19,438,700 in 1999, $15,692,019 in 1998 and $8,237,669 in 1997)
Held-to-maturity securities, at amortized cost - restricted 7,877,444 8,257,053 9,265,583
(fair value of $9,191,460 in 1999, 8,388,009 in 1998 and $7,941,981 in 1997)
Short-term investments 7,090,550 7,032,027 3,852,725
------------ ------------ ------------
Total investments 22,983,099 30,743,561 32,728,411
Cash 4,125,271 3,714,883 6,785,535
Accrued investments and interest income 311,934 408,538 471,100
Accounts, commissions and premiums receivable, net 2,699,657 11,200,923 11,899,245
Deferred acquisition costs 903,880 1,807,841 2,083,056
Property and equipment, net 709,800 897,625 939,341
Deferred tax assets 252,837 447,878 827,594
Deposits 154,787 344,165 436,719
Goodwill and other intangible assets, net 4,805,560 4,688,896
Other assets 102,556 2,036,453 2,131,190
------------ ------------ ------------
Total assets $ 32,243,821 $ 56,407,427 $ 62,991,087
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 2,440,000 $ 12,430,000 $ 11,021,417
Unpaid losses and loss adjustment expenses 6,107,613 13,878,892 18,113,136
Premiums, commissions and other insurance balances payable 8,189,169 7,175,659 7,243,435
Unearned premiums 2,671,831 5,463,405 6,295,120
Accounts payable and accrued expenses 1,360,613 1,588,326 2,124,095
Other liabilities 700,356 2,894,283 4,450,294
------------ ------------ ------------
Total liabilities 21,469,582 43,430,565 49,247,497
Shareholders' equity:
Common stock, $0.01 par value; authorized 20,000,000
shares; issued 5,771,497 shares in 1997 and 1998 and 5,776,497 in 1999 57,715 57,715 57,765
Additional paid-in capital 9,147,730 9,891,562 9,936,512
Retained earnings 2,074,351 3,533,142 4,254,870
------------ ------------ ------------
Total shareholders' equity 11,279,796 13,482,419 14,249,147
Treasury stock, at cost, 529,412 shares (505,557) (505,557) (505,557)
------------ ------------ ------------
Net shareholders' equity 10,774,239 12,976,862 13,743,590
------------ ------------ ------------
Total liabilities and shareholders' equity $ 32,243,821 $ 56,407,427 $ 62,991,087
</TABLE>
Page 9
<PAGE> 11
SUMMARY OF FINANCIAL RESULTS
A summary review of PEGI's historical financial performance indicates, among
other things:
- Revenues for the first half of 1999 increased 30% to $31.9
million versus $24.5 million in the first half of 1998.
- Staffing income increased $7,309,000 or 49.2% as a
result of the acquisition of certain of the assets of
HSSI Travel Nurse Operations, Inc. (acquired in March
1998) and the increase in business related to the
acquisition and merger of NET Healthcare.
- Insurance income earned increased $119,000 or 1.3%
for the six months ended June 30, 1999 as compared to
the prior year as a result of new business and
renewals of the prior year business.
- - Income before taxes declined to 3% of total revenues for the first half
of 1999 versus 5% in the first half of 1998 resulting in income before
taxes of $870,788 versus $1,242,272 respectively.
- Earnings were negatively affected by lower margins in
the insurance operations
- The Company failed to realize revenues related to the
managing general agency business although expenses
related to these activities reduced earnings. With
the departure of Mark Olsen, a key architect of this
program, this effort has been significantly reduced
in scope and Management will review its effectiveness
through the calendar year end.
- Increases in other operating expenses primarily
reflected expenses related to failed acquisition
activity and increased personnel expenses.
Page 10
<PAGE> 12
SUMMARY OF PRINCIPAL TERMS
Terms: PEGI will offer to purchase, through a self
tender, all of the issued and outstanding
capital stock of PEGI for the consideration
and on the terms set forth in the offer to
purchase. Mel Harris, Chairman of the Board
and Chief Executive Officer, currently owns
or has options to buy 1,879,706 shares that
will not be tendered.
Price: $5.00 per share
Form of Consideration: Cash
Calculation of Purchase Price:
Price Per Share: $5.00 per share
Shares Outstanding (1): 5,247,085
Implied Purchase Price (Equity): $ 26,235,425
Net Debt (2): $ 315,654
---------------
Total Implied Enterprise Value: $ 26,551,079
===============
(1) Excludes options and warrants totaling 1,411,800 shares with exercise
prices ranging from $7.25 to $9.25
(2) As of June 30, 1999, interest bearing debt was equal to $11,021,417 and
unrestricted cash, as calculated by management, was equal to $10,705,763
Page 11
<PAGE> 13
TRADING HISTORY OF PEGI
Price and Volume Chart of PEGI Stock from 9/5/97 until 9/7/99:
High Price: $11.25 on 2/5/99 Low Price: $2.88 on 9/7/99
High Volume: 793,700 on 7/17/98 Low Volume: 0 on several dates
Average Volume: 55,820 shares traded
PREFERRED EMPLOYERS HOLDINGS, INC.
WEEKLY PRICE VOLUME
SEPTEMBER 5, 1997 - SEPTEMBER 7, 1999
[GRAPH]
Page 12
<PAGE> 14
TRADING HISTORY OF PEGI
PREFERRED EMPLOYERS HOLDINGS, INC.
DAILY INDEXED PRICE PERFORMANCE
SEPTEMBER 5, 1997 - SEPTEMBER 7, 1999
[GRAPH]
Page 13
<PAGE> 15
TRADING HISTORY OF PEGI
PEGI VS. COMPARABLE TRADING INDICES
<TABLE>
<CAPTION>
S&P Small Cap S&P Insurance
PEGI Russell 2000 Healthcare Sector (P&C)
---- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Stock Price as of 9/7/98 $ 6.88 347.07 85.89 899.203
Stock Price as of 3/7/99 $ 9.75 398.01 104.24 930.54
Stock Price as of 6/7/99 $ 6.81 446.65 110.20 978.9137
Stock Price as of 8/7/99 $ 4.38 428.04 110.16 883.1691
Stock Price as of 9/7/99 $ 2.85 438.24 114.59 842.7263
LTM Stock Price Performance -58.5% 26.3% 33.4% -6.3%
Latest Six Month Stock Performance -70.8% 10.1% 9.9% -9.4%
Latest Three Month Stock Performance -58.2% -1.9% 4.0% -13.9%
Latest One Month Stock Performance -34.9% 2.4% 4.0% -4.6%
</TABLE>
Based on all measurement periods detailed above, PEGI's stock price performance
significantly underperformed the Russell 2000, S&P Small Capitalization
Healthcare and S&P Insurance (Property and Casualty) Indices.
Page 14
<PAGE> 16
PREMIUM PAID ANALYSIS
ANALYSIS OF PREMIUM PAID FOR PEGI STOCK IN THE TRANSACTION
<TABLE>
<CAPTION>
Closing PEGI Implied %
Stock Price Premium Paid
------------ ------------
<S> <C> <C>
Cash Consideration $ 5.00
Stock Price as of 9/7/99 $ 2.88 74%
Stock Price as of 8/24/99 $ 2.88 74%
Stock Price as of 8/10/99 $ 4.38 14%
Stock Price as of 7/6/99 $ 5.63 -11%
<CAPTION>
1998 Median Implied PEGI
% Premium Offered (1) Stock Price (2)
--------------------- ---------------
<S> <C> <C>
Transactions Less Than $25.0 million 39.8% $ 4.02
Cash Transactions 30.1% $ 3.74
Transactions with Stock Prices under $10 39.7% $ 4.02
Insurance Transactions 39.8% $ 4.02
Health Services Transactions 36.4% $ 3.92
</TABLE>
(1) Based on Study on Percent Premium Offered in 1999 Mergerstat Review
utilizing data from domestic transactions. Premium calculations are
based on the seller's closing price five business days before the
initial announcement.
(2) Implied PEGI stock prices are based on PEGI stock price as of 9-7-99
Based on the self tender price of $5.00, the implied premium over the unaffected
stock price of PEGI compares favorably on all measures to studies of premiums
offered based on a 74% premium over the current (9/7) closing share price. The
self tender price represents a premium to the measurement periods of two weeks
(8/24) and four weeks (8/10) prior to this analysis and represents a discount to
a measurement period of two months (7/6) prior to the date of this analysis.
Page 15
<PAGE> 17
ANALYSIS OF COMPARABLE COMPANIES
The analysis of comparable public companies examines trading multiples as a
benchmark to the transaction consideration offered for PEGI. The purpose of a
comparable company analysis is to:
Evaluate: Market values of publicly-traded companies in the same or
comparable lines of business
which should:
Indicate: Ranges of equity values for comparable companies, derived
from indicators of Total Enterprise Value or Equity Value
Equity Value - The market valuation of 100% of a company's outstanding common
stock, based on the price of a single share
Total Enterprise Value (TEV) - Equity Value plus Total Debt and Preferred Stock
less Cash and Marketable Securities
Page 16
<PAGE> 18
ANALYSIS OF COMPARABLE COMPANIES
A universe of public companies was established utilizing a business description
search for comparable publicly-traded companies primarily involved in workers'
compensation insurance and staffing services.
As a result of the search, Advest identified a number of companies and selected
ten which it deemed comparable to the operations of the two primary business
lines of PEGI.
<TABLE>
<CAPTION>
WORKERS' COMPENSATION INSURANCE STAFFING SERVICES
- ------------------------------- -----------------
<S> <C>
Argonaut Group Modis Professional Services
Donegal Group CDI Corporation
Fremont General Corporation On Assignment
Meadowbrook Insurance Group RCM Technologies
Paula Financial Westaff
</TABLE>
Page 17
<PAGE> 19
ANALYSIS OF COMPARABLE COMPANIES
Workers Compensation Insurance
ARGONAUT GROUP (NASDAQ: AGII)
Argonaut Group is a holding company whose subsidiaries are primarily engaged in
the selling, underwriting and servicing of workers compensation and other lines
of property-casualty insurance. For the six months ended 6/30/99, revenues fell
37% to $97.5 million. Net income fell 63% to $16.7 million. Revenues reflect
lower gains on the sale of investments. Earnings also reflect higher
underwriting, acquisition and insurance expenses as a percentage of sales.
DONEGAL GROUP (NASDAQ: DGIC)
Donegal is a regional insurance holding company which offers a range of
insurance products, including homeowner and private passenger automobile
policies, and commercial automobile, multiple peril and workers' compensation
policies. For the three months ended 3/31/99, revenues rose 30% to $40.1
million. Net income fell 35% to $2.2 million. Results reflect premium growth
due to the acquisition of Southern Heritage, offset by a higher loss ratio.
FREMONT GENERAL CORPORATION (NYSE: FMT)
Fremont underwrites workers' compensation insurance and is engaged in commercial
and residential real estate lending, commercial finance and premium financing.
For the six months ended 6/30/99, revenues rose 27% to $634.9 million. Net
income rose 8% to $69.3 million. Revenues reflect higher financial services
revenues. Earnings were partially offset by increased dividends paid to
policyholders.
Page 18
<PAGE> 20
ANALYSIS OF COMPARABLE COMPANIES
Workers Compensation Insurance
MEADOWBROOK INSURANCE GROUP (NYSE: MIG)
Meadowbrook Insurance Group, Inc. is a holding co. for Star Insurance, Savers
Property & Casualty Insurance and American Indemnity Insurance Co. Ltd. For the
three months ended 3/31/99, revenues rose 31% to $37.9 million. Net loss before
accounting change totaled $1.4 million vs. income of $3.3 million. Revenues
reflect higher net earned premiums due to a rise in existing business reflecting
new programs added. Losses reflect an increase in loss and loss adjustment
expenses.
PAULA FINANCIAL (NASDAQ: PFCO)
Paula Financial is an integrated insurance organization which specializes in the
production, underwriting and servicing of workers' compensation and accident &
health insurance for agribusiness clients. For the three months ended 3/31/99,
total revenues fell 34% to $20.6 million. Net income rose 25% to $1.3 million.
Revenues reflect lower gross premiums written due to decline of large accounts.
Earnings reflect decreases in loss ratio.
Page 19
<PAGE> 21
ANALYSIS OF COMPARABLE COMPANIES
SELECTED WORKERS' COMP INSURANCE COMPARABLE COMPANIES
(PEGI valuation completed using $5.00 share price)
SELECTED FINANCIAL DATA AND PRICING MULTIPLES
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
EQUITY PRICING LATEST TWELVE MONTHS
---------------------------------- ---------------------------------
Latest Price as % of Net
Fiscal Latest of 52 Week Shares Market EBITDA Inc.
COMPANY Ticker Year Quarter 9/03/99 High Out(a) Cap. Revenue Net Inc. Margin Margin
- ------- ------ ------ ------- -------- ------- ------ ------ ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREFERRED EMPLOYERS
HLDGS IN COM pegi 12/98 6/99 5.00 42.6% 5.24 26.2 61.70 1.83 6.3% 3.0%
ARGONAUT GROUP INC COM agii 12/98 03/99 25.50 89.9% 24.02 612.5 215.20 35.50 28.7% 16.5%
DONEGAL GROUP INC COM dgic 12/98 03/99 9.81 59.9% 8.25 80.9 139.80 7.85 8.6% 5.6%
FREMONT GEN CORP COM fmt 12/98 06/99 9.75 38.0% 70.08 683.3 1,174.27 138.02 37.9% 11.8%
MEADOWBROOK INS GROUP INC COM mig 12/98 03/99 11.13 43.7% 8.66 96.4 143.09 1.15 4.7% 0.8%
PAULA FINL DEL COM pfco 12/98 03/99 7.75 63.9% 5.93 45.9 133.66 (4.62) NM NM
---- ----- ----- ----- ---- ----- ----- -------- ------ ---- ----
Average 303.8 361.2 35.6 20.0% 8.7%
Median 96.4 143.1 7.9 8.6% 5.6%
----- -------- ------ ---- ----
</TABLE>
<TABLE>
<CAPTION>
GROWTH
EARNINGS PER SHARE RATE EQUITY MULTIPLES
-------------------------------- ------ ----------------------------------------------------------
Projected Price/Earnings Price/ Price/
COMPANY 98Actual CY99(b)(f) CY00(b)(f) EPS(b)(f) CY98(b)(f) CY99(b)(f) CY00(b)(f) Book Value LTM Net Inc
- ------- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREFERRED EMPLOYERS HLDGS
IN COM $ 0.43 $0.60 $0.84 20.0% 11.6 8.3 6.0 2.1 14.4
ARGONAUT GROUP INC COM $ 1.45 $1.40 NA NA 17.6 18.2 NA 0.8 17.3
DONEGAL GROUP INC COM $ 1.05 $1.02 $1.20 10.0% 9.3 9.6 8.2 0.8 10.3
FREMONT GEN CORP COM $ 1.90 $0.97 $1.94 15.1% 5.1 10.1 5.0 0.7 5.0
MEADOWBROOK INS GROUP
INC COM $ 0.65 $0.62 $1.54 18.3% 17.1 17.9 7.2 0.9 NM
PAULA FINL DEL COM $(0.96) $1.30 $1.41 8.0% NM 6.0 5.5 0.6 NM
------- ----- ----- ----- ---- ---- --- --- ----
----- ---- ---- --- --- ----
Average 12.9% 12.3 12.4 6.5 0.8 10.8
Median 10.0% 9.3 10.1 5.5 0.8 10.3
----- ---- ---- --- --- ----
<CAPTION>
RETURN
--------------
LTM LTM
COMPANY ROE(d) ROA(e)
- ------- ------ ------
<S> <C> <C>
PREFERRED EMPLOYERS HLDGS IN COM 14.8% 7.7%
ARGONAUT GROUP INC COM 4.8% 3.2%
DONEGAL GROUP INC COM 7.7% 3.2%
FREMONT GEN CORP COM 14.4% 5.1%
MEADOWBROOK INS GROUP INC COM 1.0% 0.7%
PAULA FINL DEL COM NM NM
---- ----
Average 7.0% 3.1%
Median 4.8% 3.2%
---- ----
</TABLE>
Notes: SOURCE: FACTSET
LQE=Latest Quarter End, LTM=Latest 12 Months, TEV=Total Enterprise Value (Market
Cap. + Total Debt - Cash)
(a) Shares Outstanding = Common Shares issued and outstanding as reported
on the cover of the latest 10-Q
(b) Mean earnings per share estimates and 5 year EPS growth rates from
First Call. CY98, CY99 and CY00 represent calendar year 1998, 1999 and
2000, respectively.
(c) CY99 Price/Earnings/Growth Ratio (PEG) equals CY99 P/E divided by First
Call 5yr Proj EPS Growth Rate; PEG ratio = 1.0 indicates fairly valued,
<1.0 indicates under valued, >1.0 indicates over valued.
(d) Return on Equity (ROE) is LTM Net Income divided by LQE Shareholders'
Equity.
(e) Return on Assets (ROA) is LTM EBIT divided by (LQE Total Assets less
LQE cash and equivalents).
(f) 1999 and 2000 EPS estimates for PEGl were provided by management
Page 20
<PAGE> 22
ANALYSIS OF COMPARABLE COMPANIES
Staffing Services
MODIS PROFESSIONAL SERVICES (NYSE: MPS)
MPS provides professional business services, consulting, outsourcing, training
and strategic human resources. For the six months ended 6/30/99, sales increased
23% to $984.5 million. Net income from continuing operations increased 9% to
$50.2 million. Revenues reflect higher sales from Information Technology and
Professional Services. Earnings were partially offset by higher general and
administration expenses due to acquisitions.
CDI CORPORATION (NYSE: CDI)
CDI Corporation provides staffing, outsourcing and consulting services in
technical, information technology, temporary and management recruiting services.
For the six months ended 6/30/99, revenues increased 4% to $796.7 million. Net
income from continuing operations increased 20% to $24.1 million. Revenues
benefited from increased information technology services revenues. Earnings also
benefited from an improved gross profit margin.
ON ASSIGNMENT (NASDAQ: ASGN)
ASGN provides temporary and permanent placement of scientific personnel within
the biotech, environmental, chemical, pharmaceutical, and food & beverage
industries. ASGN also provides medical billing and collections. For the three
months ended 3/99, revenues rose 22% to $34.8 million. Net income rose 31% to
$3 million. Revenues reflect increases in Lab and Healthcare staffing and higher
average hourly billing rates. Earnings also reflect higher gross margins.
Page 21
<PAGE> 23
ANALYSIS OF COMPARABLE COMPANIES
Staffing Services
RCM TECHNOLOGIES (NASDAQ: RCMT)
RCMT is a provider of Business, Technology and Resource solutions in Information
Technology and Professional Engineering to corporate and government sectors. For
the six months ended 4/99, revenues increased 72% to $147.9 million. Net income
increased 76% to $7.1 million. Revenues benefited from acquisitions and internal
growth. Earnings also benefited from interest income earned from investments in
interest bearing deposits.
WESTAFF (NASDAQ: WSTF)
Westaff, Inc. provides temporary staffing services, including replacement,
supplemental and on-site programs to businesses and government agencies in
regional and local markets in the U.S. and selected international markets. For
the 24 weeks ended 4/17/99, total revenues rose 9% to $279.7 million. Net income
from continuing operations rose 15% to $5.2 million. Results reflect increased
billed hours and average billing rates per hour, and a lower franchise agents'
share.
Page 22
<PAGE> 24
ANALYSIS OF COMPARABLE COMPANIES
SELECTED STAFFING COMPARABLE COMPANIES
(PEGI valuation completed using $5.00 share price)
SELECTED SIMILAR PUBLICLY TRADED COMPANIES
SELECTED FINANCIAL DATA AND PRICING MULTIPLES
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
EQUITY PRICING
-----------------------------------
Latest Price
Fiscal Latest as of % of 52 Shares Market
COMPANY Ticker Year Quarter 9/03/99 Week High Out (a) Cap.
- ------- ------ ------ ------- ------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
PREFERRED EMPLOYERS HLDGS I PEGI 12/98 6/99 5.00 42.6% 5.24 26.2
CDI CORP COM cdi 12/98 06/99 28.13 78.1% 19.05 535.8
MODIS PROFESSIONAL SVCS INC C mps 12/98 06/99 14.81 79.5% 95.90 1,420.6
ON ASSIGNMENT INC COM asgn 12/98 03/99 28.13 71.2% 11.06 311.2
RCM TECHNOLOGIES INC COM NEW rcmt 10/98 04/99 13.88 51.6% 10.48 145.5
WESTAFF INC COM wstf 10/98 04/99 6.23 44.5% 15.90 99.1
Average 502.4
Median 311.2
<CAPTION>
LATEST TWELVE MONTHS
----------------------------------------------------
EBITDA Net Inc.
COMPANY Revenue EBITDA EBIT Net Inc. Margin Margin
- ------- ------- ------ ---- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED EMPLOYERS HLDGS I 61.70 3.90 3.40 1.83 6.3% 3.0%
CDI CORP COM 1,569.63 100.48 84.02 48.29 6.4% 3.1%
MODIS PROFESSIONAL SVCS INC C 1,886.78 217.62 175.50 72.82 11.5% 3.9%
ON ASSIGNMENT INC COM 138.96 20.17 19.17 12.03 14.5% 8.7%
RCM TECHNOLOGIES INC COM NEW 263.21 24.25 22.14 12.85 9.2% 4.9%
WESTAFF INC COM 623.86 33.90 26.07 14.42 5.4% 2.3%
Average 896.5 79.3 65.4 32.1 9.4% 4.6%
Median 623.9 33.9 26.1 14.4 9.2% 3.9%
</TABLE>
<TABLE>
<CAPTION>
GROWTH EQUITY MULTIPLES
EARNINGS PER SHARE RATE
-------------------------------- ------ -------------------------------------------------------
Price/
Projected Price/Earnings Book Price/
COMPANY 98Actual CY99(b)(f) CY00(b)(f) EPS (b)(f) CY98(b)(f) CY99(b)(f) CY00(b)(f) Value LTM Net Inc
- ------- -------- ---------- ---------- ---------- ---------- ---------- ---------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREFERRED EMPLOYERS HLDGS I $ 0.43 $0.60 $0.84 20.0% 11.6 8.3 6.0 2.1 14.4
CDI CORP COM $ 2.33 $2.67 $3.01 12.9% 12.1 10.5 9.3 2.0 11.1
MODIS PROFESSIONAL SVCS INC C $ 0.84 $1.17 $1.42 27.1% 17.6 12.6 10.4 1.3 19.5
ON AS ASSIGNMENT INC COM $ 1.00 $1.26 $1.54 24.5% 28.1 22.3 18.3 5.3 25.9
RCM TECHNOLOGIES INC COM NEW $ 1.13 $1.49 NA 26.7% 12.3 9.3 NA 1.3 11.3
WESTAFF INC COM $ 0.90 $0.95 NA 15.0% 6.9 6.6 NA 1.4 6.9
Average 21.2% 15.4 12.3 12.7 2.2 14.9
Median 24.5% 12.3 10.5 9.3 1.4 11.3
<CAPTION>
RETURN
--------------
TEV/ TEV/ LTM LTM
COMPANY LTM Rev LTM EBITDA ROE(d) ROA(e)
- ------- ------- ---------- ------ ------
<S> <C> <C> <C> <C>
PREFERRED EMPLOYERS HLDGS I 0.4 6.8 14.8% 7.8%
CDI CORP COM 0.4 5.6 18.0% 17.4%
MODIS PROFESSIONAL SVCS INC C 0.8 7.4 6.4% 11.5%
ON ASSIGNMENT INC COM 2.0 13.6 20.6% 61.8%
RCM TECHNOLOGIES INC COM NEW 0.7 7.1 11.3% 14.0%
WESTAFF INC COM 0.3 4.7 20.1% 13.9%
Average 0.8 7.7 15% 24%
Median 0.7 7.1 18% 14%
</TABLE>
Notes: SOURCE: FACTSET
LQE=Latest Quarter End, LTM=Latest 12 Months, TEV=Total Enterprise Value
(Market Cap. + Total Debt - Cash)
(a) Shares Outstanding = Common Shares issued and outstanding as
reported on the cover of the latest 10-Q
(b) Mean earnings per share estimates and 5 year EPS growth rates from
First Call. CY98, CY99 and CY00 represent calender year 1998, 1999 and
2000, respectively.
(c) CY99 Price/Earnings/Growth Ratio (PEG) equals CY99 P/E divided by First
Call 5yr Proj EPS Growth Rate; PEG ratio = 1.0 indicates fairly valued,
<1.0 indicates under valued, >1.0 Indicates over valued.
(d) Return on Equity (ROE) is LTM Net income divided by LQE Shareholders'
Equity.
(e) Return on Assets (ROA) is LTM EBIT divided by (LQE Total Assets less
LQE cash and equivalents).
(f) 1999 and 2000 EPS estimates were provided by management
Page 23
<PAGE> 25
ANALYSIS OF COMPARABLE COMPANIES
The multiples implied by the purchase of PEGI are substantially within the range
of the derived comparable multiples.
<TABLE>
<CAPTION>
Price to Net Income(LTM) Price to CY99 NI Price to Book Value
------------------------ --------------------- ------------------------
Peers PEGI Peers PEGI Peers PEGI
WORKERS' COMPENSATION INSURANCE
<S> <C> <C> <C>
Multiple Range 5.0 to 17.3 14.4 6.0 to 18.2 8.3 0.6 to 0.9 2.1
Average 10.8 12.4 0.8
Average w/o High & Low 10.3 12.5 0.8
Median 10.3 10.1 0.8
<CAPTION>
TEV to Revenue(LTM) Price to Net Income(LTM) Price to CY99 NI Price to Book Value TEV to EBITDA(LTM)
------------------- ------------------------ ------------------ ------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Peers PEGI Peers PEGI Peers PEGI Peers PEGI Peers PEGI
STAFFING SERVICES
Multiple Range 0.3 to 2.0 0.4 6.9 to 25.9 14.4 6.6 to 22.3 8.3 1.3 to 5.3 2.1 4.7 to 13.6 6.8
Average 0.8 14.9 12.3 2.2 7.7
Average w/o High & Low 0.7 13.9 10.8 1.6 6.7
Median 0.7 11.3 10.5 1.4 7.1
</TABLE>
While the PEGI transaction multiples to the market multiples of the comparable
companies are substantially in the range, a discount to the comparable
companies' multiples is warranted based on, among other factors:
- Size (PEGI is significantly smaller than comparable companies)
- Hybrid focus of operations vs. pure play comparable companies
- Reinsurance operations are dependent on existing carrier relationship
- Flat insurance business with negative margin trends
Page 24
<PAGE> 26
ANALYSIS OF COMPARABLE TRANSACTIONS
The analysis of comparable transactions examines transaction multiples as a
benchmark to the Transaction consideration offered for PEGI. The purpose of a
comparable transaction analysis is to:
Evaluate: Valuation components of merger and acquisition transactions for
companies Advest deemed comparable
which should:
Indicate: Ranges of equity values for marketable control interests in comparable
transactions, derived from indicators of Total Enterprise Value or
Equity Value
Equity Value - The purchase price of 100% of a company's outstanding common
stock.
Total Enterprise Value (TEV) - Equity Value plus Total Debt and Preferred Stock
less Cash and Marketable Securities.
Page 25
<PAGE> 27
ANALYSIS OF COMPARABLE TRANSACTIONS
A universe of potential transactions was established utilizing a business
description search for comparable companies recently involved with a completed
merger or acquisition. These include companies that are primarily involved in
workers compensation/property and casualty insurance and/or staffing services.
As a result of that search, Advest identified a number of companies and selected
19 which it deemed comparable to the two distinct business lines of PEGI.
Because of the small size of many of these transactions, limited public
information, particularly financial, exists on many of the target companies. We
therefore eliminated a number of these transactions from our analysis due to
lack of information.
Page 26
<PAGE> 28
ANALYSIS OF COMPARABLE TRANSACTIONS
SELECTED COMPARABLE INSURANCE TRANSACTIONS
SELECTED TRANSACTION DATA
($ in millions)
<TABLE>
<CAPTION>
COMPLETION TRANSACTION
DATE ACQUIROR NAME TARGET NAME DESCRIPTION VALUE
---- ------------- ----------- ----------- -----
<S> <C> <C> <C> <C>
07/14/1998 Gryphon Holdings Inc First Reinsurance Co. Property & Casualty Insurance Holding Company $ 43.6
03/31/1998 Farm Bureau Mutual Ins Utah Farm Bureau Insurance Property & Casualty Insurance Company 35.0
04/01/1998 ACE Ltd. CAT Ltd. Property & Casualty Underwriting and Service Company 644.1
08/05/1998 Zurich Allied AG Mountbatten, Inc. Property & Casualty Insurance Holding Company 44.4
09/30/1998 Liberty Mutual Insurance Summit Holding Southeast Property & Casualty Insurance Company 218.5
08/18/1998 Fund Amer Entrpr Holdings Folksamerica Holding Co Property & Casualty Insurance Holding Company 169.1
05/14/1999 First American Financial National Information Group Property & Casualty Insurance Holding Company 112.2
03/31/1999 Nationwide Mutual Ins CalFarm Insurance Co. Property & Casualty Insurance Company 272.0
08/10/1999 United Fire & Casualty American Indemnity Finl Property & Casualty Insurance and Financing Company 30.2
NA Trenwick Group Inc. Chartwell Re Corp. Property & Casualty Underwriting and Service Company 226.3
<CAPTION>
BOOK VALUE
COMPLETION OF TARGET
DATE ACQUIROR NAME TARGET NAME DESCRIPTION COMPANY
---- ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
07/14/1998 Gryphon Holdings Inc First Reinsurance Co. Property & Casualty Insurance Holding Company $ 35.0
03/31/1998 Farm Bureau Mutual Ins Utah Farm Bureau Insurance Property & Casualty Insurance Company 27.7
04/01/1998 ACE Ltd. CAT Ltd. Property & Casualty Underwriting and Service Company 540.4
08/05/1998 Zurich Allied AG Mountbatten, Inc. Property & Casualty Insurance Holding Company 10.0
09/30/1998 Liberty Mutual Insurance Summit Holding Southeast Property & Casualty Insurance Company 102.6
08/18/1998 Fund Amer Entrpr Holdings Folksamerica Holding Co Property & Casualty Insurance Holding Company 255.0
05/14/1999 First American Financial National Information Group Property & Casualty Insurance Holding Company 29.5
03/31/1999 Nationwide Mutual Ins CalFarm Insurance Co. Property & Casualty Insurance Company 108.7
08/10/1999 United Fire & Casualty American Indemnity Finl Property & Casualty Insurance and Financing Company 33.3
NA Trenwick Group Inc. Chartwell Re Corp. Property & Casualty Underwriting and Service Company 285.8
<CAPTION>
TRANSACTION
COMPLETION VALUE TO
DATE ACQUIROR NAME TARGET NAME DESCRIPTION BOOK VALUE
---- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
07/14/1998 Gryphon Holdings Inc First Reinsurance Co. Property & Casualty Insurance Holding Company 1.2
03/31/1998 Farm Bureau Mutual Ins Utah Farm Bureau Insurance Property & Casualty Insurance Company 1.3
04/01/1998 ACE Ltd. CAT Ltd. Property & Casualty Underwriting and Service Company 1.2
08/05/1998 Zurich Allied AG Mountbatten, Inc. Property & Casualty Insurance Holding Company 4.4
09/30/1998 Liberty Mutual Insurance Summit Holding Southeast Property & Casualty Insurance Company 2.1
08/18/1998 Fund Amer Entrpr Holdings Folksamerica Holding Co Property & Casualty Insurance Holding Company 0.7
05/14/1999 First American Financial National Information Group Property & Casualty Insurance Holding Company 3.8
03/31/1999 Nationwide Mutual Ins CalFarm Insurance Co. Property & Casualty Insurance Company 2.5
08/10/1999 United Fire & Casualty American Indemnity Finl Property & Casualty Insurance and Financing Company 0.9
NA Trenwick Group Inc. Chartwell Re Corp. Property & Casualty Underwriting and Service Company 0.8
----
AVERAGE: 1.9
AVERAGE W/O HIGH AND LOW: 1.8
MEDIAN: 1.3
Source: SNL Database
<CAPTION>
TRANSACTION
COMPLETION VALUE TO
DATE ACQUIROR NAME TARGET NAME DESCRIPTION EARNINGS
---- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
07/14/1998 Gryphon Holdings Inc First Reinsurance Co. Property & Casualty Insurance Holding Company NA
03/31/1998 Farm Bureau Mutual Ins Utah Farm Bureau Insurance Property & Casualty Insurance Company 50.1
04/01/1998 ACE Ltd. CAT Ltd. Property & Casualty Underwriting and Service Company 6.1
08/05/1998 Zurich Allied AG Mountbatten, Inc. Property & Casualty Insurance Holding Company 26.1
09/30/1998 Liberty Mutual Insurance Summit Holding Southeast Property & Casualty Insurance Company 18.1
08/18/1998 Fund Amer Entrpr Holdings Folksamerica Holding Co Property & Casualty Insurance Holding Company 9.4
05/14/1999 First American Financial National Information Group Property & Casualty Insurance Holding Company 36.6
03/31/1999 Nationwide Mutual Ins CalFarm Insurance Co. Property & Casualty Insurance Company 24.3
08/10/1999 United Fire & Casualty American Indemnity Finl Property & Casualty Insurance and Financing Company NM
NA Trenwick Group Inc. Chartwell Re Corp. Property & Casualty Underwriting and Service Company 10.1
------
AVERAGE: 22.6
AVERAGE W/O HIGH AND LOW: 20.8
MEDIAN: 21.2
</TABLE>
Source: SNL Database
Page 27
<PAGE> 29
ANALYSIS OF COMPARABLE TRANSACTIONS
SELECTED COMPARABLE STAFFING TRANSACTIONS
SELECTED TRANSACTION DATA
<TABLE>
<CAPTION>
Target Data ($ mil)
Trans.
Date Acquiror Name Target Name Target Business Description Value
---- ------------- ----------- --------------------------- -----
<S> <C> <C> <C> <C>
06/08/99 Coastal Physician Group The staffing business of FPA Medical Management Emergency-room management busi 89.0
03/12/99 Private Investor Group Team Health (sub of MedPartners) Medical staffing services 361.4
12/01/98 Automatic Data Processing Vincam Group Provide temporary help svcs 291.9
08/31/98 Linsalata Capital Partners Personnel Management Employment agency 34.9
08/04/98 ACSYS Inc. Staffing Edge Employment agency 30.4
08/01/98 RehabCare Group StarMed Staffing Nurse staffing unit of Med. Res. 33.0
06/01/98 Corporate Services Group Corestaff Staffing unit of Metamor 200.0
04/20/98 Romac International Source Services Corp Staffing services company 454.4
10/01/97 TEAM America Corp. Aspen Consulting Group Professional Employer Org. 9.6
<CAPTION>
Target Data ($ mil)
Revenue
Date Acquiror Name Target Name Target Business Description LTM
---- ------------- ----------- --------------------------- -------
<S> <C> <C> <C> <C>
06/08/99 Coastal Physician Group The staffing business of FPA Medical Management Management Emergency-room management
busi 160
03/12/99 Private Investor Group Team Health (sub of MedPartners) Medical staffing services 547.6
12/01/98 Automatic Data Processing Vincam Group Provide temporary help svcs 1,194.4
08/31/98 Linsalata Capital Partners Personnel Management Employment agency 79.4
08/04/98 ACSYS Inc. Staffing Edge Employment agency 21.3
08/01/98 RehabCare Group StarMed Staffing Nurse staffing unit of Med. Res. 58.0
06/01/98 Corporate Services Group Corestaff Staffing unit of Metamor 470.0
04/20/98 Romac International Source Services Corp Staffing services company 294.7
10/01/97 TEAM America Corp. Aspen Consulting Group Professional Employer Org. 44.1
<CAPTION>
Target Data ($ mil)
EBITDA
Date Acquiror Name Target Name Target Business Description LTM
---- ------------- ----------- --------------------------- -------
<S> <C> <C> <C> <C>
06/08/99 Coastal Physician Group The staffing business of FPA Medical Management Management Emergency-room management
busi NA
03/12/99 Private Investor Group Team Health (sub of MedPartners) Medical staffing services 55.6
12/01/98 Automatic Data Processing Vincam Group Provide temporary help svcs 14.6
08/31/98 Linsalata Capital Partners Personnel Management Employment agency 3.7
08/04/98 ACSYS Inc. Staffing Edge Employment agency 0.6
08/01/98 RehabCare Group StarMed Staffing Nurse staffing unit of Med. Res. 3.0
06/01/98 Corporate Services Group Corestaff Staffing unit of Metamor NA
04/20/98 Romac International Source Services Corp Staffing services company 20.4
10/01/97 TEAM America Corp. Aspen Consulting Group Professional Employer Org. 0.8
<CAPTION>
Transaction
Multiples
TEV/
Date Acquiror Name Target Name Target Business Description Revenue
---- ------------- ----------- --------------------------- -------
<S> <C> <C> <C> <C>
06/08/99 Coastal Physician Group The staffing business of FPA Medical Management Management Emergency-room management
busi 0.6
03/12/99 Private Investor Group Team Health (sub of MedPartners) Medical staffing services 0.7
12/01/98 Automatic Data Processing Vincam Group Provide temporary help svcs 0.2
08/31/98 Linsalata Capital Partners Personnel Management Employment agency 0.4
08/04/98 ACSYS Inc. Staffing Edge Employment agency 1.4
08/01/98 RehabCare Group StarMed Staffing Nurse staffing unit of Med. Res. 0.6
06/01/98 Corporate Services Group Corestaff Staffing unit of Metamor 0.4
04/20/98 Romac International Source Services Corp Staffing services company 1.5
10/01/97 TEAM America Corp. Aspen Consulting Group Professional Employer Org. 0.2
-----
AVERAGE: 0.7
AVERAGE W/O HIGH AND LOW: 0.6
MEDIAN: 0.6
<CAPTION>
Transaction
Multiples
TEV/
Date Acquiror Name Target Name Target Business Description EBITDA
---- ------------- ----------- --------------------------- -------
<S> <C> <C> <C> <C>
06/08/99 Coastal Physician Group The staffing business of FPA Medical Management Management Emergency-room management
busi NA
03/12/99 Private Investor Group Team Health (sub of MedPartners) Medical staffing services 6.5
12/01/98 Automatic Data Processing Vincam Group Provide temporary help svcs 20.0
08/31/98 Linsalata Capital Partners Personnel Management Employment agency 9.4
08/04/98 ACSYS Inc. Staffing Edge Employment agency NM
08/01/98 RehabCare Group StarMed Staffing Nurse staffing unit of Med. Res. 11.0
06/01/98 Corporate Services Group Corestaff Staffing unit of Metamor NA
04/20/98 Romac International Source Services Corp Staffing services company 22.3
10/01/97 TEAM America Corp. Aspen Consulting Group Professional Employer Org. 11.9
------
AVERAGE: 14.4
AVERAGE W/O HIGH AND LOW: 15.6
MEDIAN: 9.4
</TABLE>
Source: OneSource Information Systems
Page 28
<PAGE> 30
ANALYSIS OF COMPARABLE TRANSACTIONS
The multiples implied by the purchase of PEGI are substantially within the range
of the derived comparable multiples.
<TABLE>
<CAPTION>
Transaction Value to Book Value Transaction Value to Net Income
---------------------------------------- ---------------------------------------
Peers PEGI Peers PEGI
<S> <C> <C>
WORKERS' COMPENSATION INSURANCE
Multiple Range 0.7 to 4.4 2.2 6.1 to 50.1 14.7
Average 1.9 22.6
Average w/o High & Low 1.8 20.8
Median 1.3 21.2
Total Enterprise Value to Revenue Total Enterprise Value to EBITDA
----------------------------------------- ---------------------------------------
Peers PEGI Peers PEGI
STAFFING SERVICES
Multiple Range 0.2 to 1.5 0.4 6.5 to 22.3 6.8
Average 0.7 14.4
Average w/o High & Low 0.6 15.6
Median 0.6 9.4
</TABLE>
Page 29
<PAGE> 31
ANALYSIS OF DISCOUNTED CASH FLOW
The discounted cash flow analysis provides an estimate as to the value creation
potential of a business based on a projected stream of cash flows. The general
purpose of this form of analysis is to:
Evaluate: The projected free cash flows of the Company, with
appropriate growth assumptions on a discounted basis
which should:
Indicate: A range of equity values for marketable control interest,
derived from indicators of Total Enterprise Value calculated
using various required rates of return and perpetuity growth
rate assumptions.
Equity Value - The valuation of 100% of a company's common stock.
Total Enterprise Value - Equity Value plus Total Debt and Preferred Stock less
Cash and Marketable Securities
Page 30
<PAGE> 32
ANALYSIS OF DISCOUNTED CASH FLOW
In determining a range of values for PEGI using the Discounted Cash Flow
approach, Advest:
- Determined a required equity rate of return (cost of equity) using the
Capital Asset Pricing Model (CAPM)
- Calculated a range of weighted average costs of capital using various:
- required equity rates of return; and
- capital structures
- Discounted the Company's projected free cash flows using the 1999
through 2000 forecasts prepared by management
- Derived a range of equity values using various:
- required rates of return; and
- perpetual growth rate assumptions
Page 31
<PAGE> 33
ANALYSIS OF DISCOUNTED CASH FLOW
Capital Asset Pricing Model
Equity Discount Rate Build-up
<TABLE>
<CAPTION>
WORKERS' COMP STAFFING
<S> <C> <C>
Risk Free Rate: 6.00% (1) 6.00% (1)
Equity Risk Premium: 7.80% (2) 7.80% (2)
----- -----
Average Comparative Company Return 13.80% 13.80%
Risk Adjustment for Size: 3.60% (3) 3.60% (3)
Other Risk Factors: 12.60% (4) 2.60% (5)
----- -----
Equity required rate of return 30.00% 20.00%
</TABLE>
(1) Ten year Treasury rate at September 3, 1999.
(2) Market risk premium for equity based on Intermediate-horizon expected
equity risk premium studies by Ibbotson Associates.
(3) Ibbotson 1996 study shows a 3.6% expected micro-capitalization equity size
premium for capitalization's below $171 million.
(4) Risk factors considered include: relative size of the business segments in
relation to the industry, pricing pressures in workers' compensation
business, diversification away from core business and risks associated
with the reinsurance business.
(5) Risk factors considered include: relative size of the business segments in
relation to the industry, diversification of operations, ability to
effectively compete for acquisitions
Page 32
<PAGE> 34
ANALYSIS OF DISCOUNTED CASH FLOW
PEGI
Projected Free Cash Flow Analysis
The projections provided below represent management projections through the year
2000.
<TABLE>
<CAPTION>
WORKERS' COMPENSATION PROJECTIONS
1999 2000
CASH FLOW ASSUMPTIONS Q3/Q4 FULL YEAR
<S> <C> <C>
Operating Profit 1,191,493 2,753,378
Tax Effect 173,000 487,000
Net Operating Profit After Tax 1,018,493 2,266,378
Depreciation & Amortization 20,000 101,600
--------- ---------
Gross Cash Flow 1,038,493 2,367,978
Investments:
Change in Working Capital NA NA
Capital Expenditures 15,000 40,000
--------- ---------
Free Cash Flow 1,023,493 2,327,978
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
STAFFING BUSINESS PROJECTIONS
1999 2000
CASH FLOW ASSUMPTIONS Q3/Q4 FULL YEAR
<S> <C> <C>
Operating Profit 1,759,507 3,985,622
Tax Effect 621,000 1,631,000
Net Operating Profit After Tax 1,138,507 2,354,622
Depreciation & Amortization 180,000 914,400
--------- ---------
Gross Cash Flow 1,318,507 3,269,022
Investments:
Change in Working Capital 837,000 2,531,000
Capital Expenditures 135,000 400,000
--------- ---------
Free Cash Flow 346,507 338,022
--------- ---------
</TABLE>
Note: The Company's overhead expense has been allocated based on the revenue
contribution of each business segment. Assumptions regarding the allocation of
Depreciation & Amortization, Changes in Working Capital and Capital Expenditures
are based on growth expectations for each business. The tax assumptions used are
the effective tax dollars as provided by the Company.
Page 33
<PAGE> 35
ANALYSIS OF DISCOUNTED CASH FLOW
WORKERS' COMPENSATION BUSINESS
CALCULATION OF WEIGHTED AVERAGE COST OF CAPITAL
Determined a required rate of return (cost of equity) using the build-up method
above.
Calculated a range of weighted average costs of capital (WACC) using various:
- - required equity rates of return; and
- - capital structures
- - after tax cost of debt COST OF DEBT
------------
Prime Rate: 8.00%
After Tax Cost of Debt: 6.72%
<TABLE>
<CAPTION>
RANGE OF WEIGHTED AVERAGE COST OF CAPITAL
DEBT AS REQUIRED RATE OF RETURN ON EQUITY
PERCENT OF 27.0% 28.0% 29.0% 30.0% 31.0% 32.0% 33.0%
EQUITY
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5.0% 26.0% 26.9% 27.9% 28.8% 29.8% 30.7% 31.7%
10.0% 25.0% 25.9% 26.8% 27.7% 28.6% 29.5% 30.4%
15.0% 24.0% 24.8% 25.7% 26.5% 27.4% 28.2% 29.1%
20.0% 22.9% 23.7% 24.5% 25.3% 26.1% 26.9% 27.7%
25.0% 21.9% 22.7% 23.4% 24.2% 24.9% 25.7% 26.4%
</TABLE>
Page 34
<PAGE> 36
ANALYSIS OF DISCOUNTED CASH FLOW
WORKERS' COMPENSATION BUSINESS
CALCULATION OF TOTAL ENTERPRISE VALUE
Discounted the Company's projected free cash flows at the WACC using the 1999
through 2000 forecasts prepared by management.
Derived a range of Implied Enterprise Values using various:
- - required rates of return; and
- - perpetual growth rate assumptions
RANGE OF CALCULATED TOTAL ENTERPRISE VALUES
<TABLE>
<CAPTION>
TERMINAL VALUE WEIGHTED AVERAGE COST OF CAPITAL
GROWTH RATES 24.0% 24.8% 25.7% 26.5% 27.4% 28.2% 29.1%
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0.5% 9,832,828 9,488,662 9,167,861 8,868,132 8,587,472 8,324,123 8,076,539
1.0% 10,026,955 9,668,697 9,335,248 9,024,126 8,733,168 8,460,484 8,204,410
1.5% 10,229,726 9,856,455 9,509,563 9,186,357 8,884,499 8,601,950 8,336,921
</TABLE>
Page 35
<PAGE> 37
ANALYSIS OF DISCOUNTED CASH FLOW
STAFFING BUSINESS
CALCULATION OF WEIGHTED AVERAGE COST OF CAPITAL
Determined a required rate of return (cost of equity) for a financial buyer
using the build-up method above.
Calculated a range of weighted average costs of capital (WACC) using various:
- - required equity rates of return; and
- - capital structures COST OF DEBT
- - after tax cost of debt Prime Rate: 8.00%
After Tax Cost of Debt: 5.04%
<TABLE>
<CAPTION>
RANGE OF WEIGHTED AVERAGE COST OF CAPITAL
Debt as Required Rate of Return on Equity
Percent of 17.0% 18.0% 19.0% 20.0% 21.0% 22.0% 23.0%
Equity
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30.0% 13.4% 14.1% 14.8% 15.5% 16.2% 16.9% 17.6%
35.0% 12.8% 13.5% 14.1% 14.8% 15.4% 16.1% 16.7%
40.0% 12.2% 12.8% 13.4% 14.0% 14.6% 15.2% 15.8%
45.0% 11.6% 12.2% 12.7% 13.3% 13.8% 14.4% 14.9%
50.0% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% 14.0%
</TABLE>
Page 36
<PAGE> 38
ANALYSIS OF DISCOUNTED CASH FLOW
STAFFING BUSINESS
CALCULATION OF TOTAL ENTERPRISE VALUE
Discounted the Company's projected free cash flows at the WACC using the 1999
through 2000 forecasts prepared by management.
Derived a range of Implied Enterprise Values using various:
- - required rates of return; and
- - perpetual growth rate assumptions
RANGE OF CALCULATED TOTAL ENTERPRISE VALUES
<TABLE>
<CAPTION>
Terminal Value Weighted Average Cost of Capital
Growth Rates 12.2% 12.8% 13.4% 14.0% 14.6% 15.2% 15.8%
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6.0% 7,784,160 7,097,509 6,522,129 6,033,031 5,612,185 5,246,260 4,925,181
7.0% 9,239,934 8,285,001 7,508,860 6,865,637 6,323,914 5,861,452 5,462,064
8.0% 11,386,303 9,965,638 8,859,968 7,975,041 7,250,798 6,647,152 6,136,327
</TABLE>
Page 37
<PAGE> 39
ANALYSIS OF DISCOUNTED CASH FLOW
Calculation of Implied Equity Value
Because the cash flow base and exit assumption in this model do not take into
account servicing debt, discounting these cash flows arrives at an Enterprise
Value. In order to attain an Equity Value, net debt (interest bearing debt less
unrestricted cash) is subtracted from the Total Enterprise Value (TEV).
<TABLE>
<S> <C> <C>
Range of Implied Workers' Comp TEV: $ 8,076,539 to $10,229,726
Range of Implied Staffing TEV: $ 4,925,181 to $11,386,303
------------------------------------
Range of Combined TEV: $13,001,720 to $21,616,029
------------------------------------
Less Net Debt: ($315,654)
------------------------------------
Range of Implied Equity Values: $12,686,066 to $21,300,375
====================================
Shares Outstanding 5,247,085
Implied Share Price $ 2.42 to $ 4.06
</TABLE>
The purchase price of $26,551,079 is at a premium to this range of implied
values.
Page 38
<PAGE> 40
CONCLUSION
Based on the information and analyses set forth in this presentation, we are of
the opinion that as of the date hereof, the financial terms of the consideration
to be paid to the Shareholders in conjunction with the self tender, taken as a
whole, are fair from a financial point of view to the Shareholders. Advest did
not assign relative weights to any of its analyses in preparing its opinion.
No company or transaction used in the above analyses as a comparison is directly
comparable to PEGI or the contemplated Transaction. The analyses were prepared
solely for purposes of Advest providing its opinion to the Board of Directors as
to the fairness, from a financial point of view, of the consideration to be
received by the Shareholders pursuant to the self tender and do not purport to
be appraisals or necessarily reflect the prices at which businesses or
securities may actually be sold.
Page 39
<PAGE> 41
ADVEST INVESTMENT BANKING GROUP
<TABLE>
<S> <C> <C> <C>
100 Federal Street 311 South Wacker Drive 90 State House Square One Rockefeller Center
Boston, MA 02110 Chicago, IL 60606 Hartford, CT 06103 New York, NY 10020
(617)423-0003 (847)842-9111 (860)509-2064 (212)584-4270
</TABLE>
<PAGE> 1
OFFER TO PURCHASE FOR CASH
BY
PREFERRED EMPLOYERS HOLDINGS, INC.
ALL OUTSTANDING SHARES OF ITS COMMON STOCK, $.01 PAR VALUE PER SHARE,
AT
$5.00 NET PER SHARE
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 PM,
NEW YORK CITY TIME, ON NOVEMBER 3, 1999 UNLESS THE OFFER IS EXTENDED.
Preferred Employers Holdings, Inc., a Delaware corporation (the "Company"),
hereby offers to purchase all of its issued and outstanding shares of common
stock, $.01 par value per share (the "Shares"), at a price of $5.00 per Share,
net to the seller in cash (the "Offer Price"), without interest thereon, upon
the terms and subject to the conditions set forth in this Offer to Purchase,
dated September 17, 1999 (the "Offer to Purchase"), and in the related Letter of
Transmittal dated September 17, 1999 (which, together with this Offer to
Purchase, constitutes the "Offer"). The Offer is being made to all holders of
Shares, including Mr. Mel Harris, the Chairman of the Board of Directors
(hereinafter, the "Board of Directors" or the "Board") and Chief Executive
Officer of the Company, Mr. Peter E. Kilissanly, President and Chief Operating
Officer of the Company, and the other executive officers and directors of the
Company listed in Schedule I hereto (collectively, the "Remaining
Stockholders"). The Remaining Stockholders will not be tendering any Shares
pursuant to the Offer. All Shares validly tendered and not withdrawn will be
purchased at the Offer Price upon the terms and subject to the conditions of the
Offer. See "The Tender Offer -- 1. Terms of the Offer; Expiration Date."
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF SUCH TRANSACTION OR THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The Offer is conditioned upon, among other things, the Company obtaining the
Loan (as defined herein). The Offer is not conditioned upon any minimum number
of Shares being tendered. See "Introduction" and "The Tender Offer -- 11.
Certain Conditions of the Offer."
The Shares are currently listed and traded on the Nasdaq National Market
("Nasdaq") and are quoted under the ticker symbol "PEGI". On September 16, 1999,
the last full day of trading prior to the announcement of the Offer, the closing
sale price of the Shares on Nasdaq was $2.75 per share. During the first quarter
of 1999, the closing sale price of the Shares was as high as $11.75 per share.
STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE SHARES AND
REVIEW HISTORICAL MARKET INFORMATION WITH RESPECT TO THE SHARES. See "The Tender
Offer -- 6. Price Range of Shares; Dividends" and "The Tender Offer -- 10.
Effect of the Offer on the Market for the Shares; Quotation and Exchange Act
Registration."
Any stockholder wishing to tender all or any portion of such stockholder's
Shares should either (a) complete and sign a Letter of Transmittal (or a
facsimile thereof) in accordance with the instructions in the Letter of
Transmittal and either mail or deliver it with any required signature guarantee
and any other required documents to American Stock Transfer & Trust Company (the
"Depositary"), and either mail or deliver the stock certificates for such Shares
to the Depositary (with all such other documents) or tender such Shares pursuant
to the procedure for book-entry delivery set forth in "The Tender Offer -- 3.
Procedures for Accepting the Offer and Tendering Shares," or (b) request a
broker, dealer, commercial bank, trust company or other nominee to effect the
transaction for such stockholder. Holders of Shares registered in the name of a
broker, dealer, commercial bank, trust company or other nominee must contact
that broker, dealer, commercial bank, trust company or other nominee if such
stockholder desires to tender such Shares. Any stockholder who desires to tender
Shares and whose certificates for such Shares cannot be delivered to the
Depositary or who cannot comply with the procedure for book-entry delivery or
whose other required documents cannot be delivered to the Depositary, in any
case, by the expiration of the Offer must tender such Shares pursuant to the
guaranteed delivery procedure set forth in "The Tender Offer -- 3. Procedures
for Accepting the Offer and Tendering Shares." STOCKHOLDERS MUST PROPERLY
COMPLETE THE LETTER OF TRANSMITTAL IN ACCORDANCE WITH THE INSTRUCTIONS THEREIN
IN ORDER TO EFFECT A VALID TENDER OF THEIR SHARES.
THE BOARD OF DIRECTORS OF THE COMPANY, BASED ON, AMONG OTHER THINGS, THE
UNANIMOUS RECOMMENDATION OF AN INDEPENDENT COMMITTEE OF NON-EMPLOYEE DIRECTORS
OF THE BOARD, HAS UNANIMOUSLY APPROVED THE OFFER. HOWEVER, NEITHER THE COMPANY
NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY STOCKHOLDER AS TO
WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES AND HAS NOT AUTHORIZED ANY
PERSON TO MAKE ANY SUCH RECOMMENDATION. STOCKHOLDERS ARE URGED TO EVALUATE
CAREFULLY ALL INFORMATION CONTAINED IN THIS OFFER TO PURCHASE AND ACCOMPANYING
DOCUMENTS, CONSULT THEIR OWN INVESTMENT AND TAX ADVISORS AND MAKE THEIR OWN
DECISIONS WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER.
The Information Agent for the Offer is:
MORROW & CO., INC.
September 17, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION................................................ 4
SPECIAL FACTORS............................................. 8
1. PURPOSE AND BACKGROUND OF THE OFFER; CERTAIN EFFECTS
OF THE OFFER; PLANS OF THE COMPANY AFTER THE OFFER.... 8
2. RECOMMENDATION OF THE COMPANY'S BOARD; FAIRNESS OF THE
OFFER................................................. 13
3. OPINION OF ADVEST, INC................................ 16
4. INTERESTS OF CERTAIN PERSONS IN THE OFFER............. 21
5. BENEFICIAL OWNERSHIP OF SHARES........................ 22
6. FEES AND EXPENSES..................................... 23
7. DISSENTERS' RIGHTS.................................... 24
THE TENDER OFFER............................................ 25
1. TERMS OF THE OFFER; EXPIRATION DATE................... 25
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES......... 26
3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING
SHARES................................................. 27
4. WITHDRAWAL RIGHTS..................................... 29
5. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES.......... 29
6. PRICE RANGE OF SHARES; DIVIDENDS...................... 32
7. CERTAIN INFORMATION CONCERNING THE COMPANY............ 32
8. FINANCING OF THE OFFER................................ 37
9. DIVIDENDS AND DISTRIBUTIONS........................... 38
10. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES;
QUOTATION AND EXCHANGE ACT REGISTRATION............... 39
11. CERTAIN CONDITIONS OF THE OFFER....................... 40
12. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS........ 41
13. FEES AND EXPENSES..................................... 42
14. MISCELLANEOUS......................................... 42
SCHEDULE I EXECUTIVE OFFICERS AND DIRECTORS OF THE
COMPANY; REMAINING STOCKHOLDERS................ S-1
SCHEDULE II ADVEST FAIRNESS OPINION........................ S-4
SCHEDULE III ANNUAL REPORT ON FORM 10-KSB OF THE COMPANY FOR
THE YEAR ENDED DECEMBER 31, 1998............... S-7
QUARTERLY REPORT ON FORM 10-Q OF THE
COMPANY FOR THE QUARTERLY PERIODS ENDED
MARCH 31, 1999 AND JUNE 30, 1999
</TABLE>
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<PAGE> 3
IMPORTANT
ANY STOCKHOLDER DESIRING TO TENDER ALL OR ANY PORTION OF SUCH STOCKHOLDER'S
SHARES SHOULD EITHER (1) COMPLETE AND SIGN THE LETTER OF TRANSMITTAL (OR A
FACSIMILE THEREOF) IN ACCORDANCE WITH THE INSTRUCTIONS IN THE LETTER OF
TRANSMITTAL AND EITHER MAIL OR DELIVER IT AND ANY OTHER REQUIRED DOCUMENTS TO
AMERICAN STOCK TRANSFER & TRUST COMPANY (THE "DEPOSITARY") (AT THE DEPOSITARY'S
ADDRESS SET FORTH ON THE BACK COVER OF THIS OFFER TO PURCHASE) AND EITHER
DELIVER THE CERTIFICATE(S) EVIDENCING THE TENDERED SHARES TO THE DEPOSITARY
ALONG WITH THE LETTER OF TRANSMITTAL OR DELIVER SUCH SHARES PURSUANT TO THE
PROCEDURE FOR BOOK-ENTRY TRANSFER SET FORTH IN THIS OFFER TO PURCHASE UNDER "THE
TENDER OFFER-3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES" OR (2)
REQUEST SUCH STOCKHOLDER'S BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR
OTHER NOMINEE TO EFFECT THE TRANSACTION FOR SUCH STOCKHOLDER. ANY STOCKHOLDER
WHOSE SHARES ARE REGISTERED IN THE NAME OF A BROKER, DEALER, COMMERCIAL BANK,
TRUST COMPANY OR OTHER NOMINEE MUST CONTACT SUCH BROKER, DEALER, COMMERCIAL
BANK, TRUST COMPANY OR OTHER NOMINEE IF SUCH STOCKHOLDER DESIRES TO TENDER SUCH
SHARES.
ANY STOCKHOLDER WHO DESIRES TO TENDER SHARES AND WHOSE CERTIFICATES
EVIDENCING SUCH SHARES ARE NOT IMMEDIATELY AVAILABLE, OR WHO CANNOT COMPLY WITH
THE PROCEDURE FOR BOOK-ENTRY TRANSFER ON A TIMELY BASIS, MAY TENDER SUCH SHARES
BY FOLLOWING THE PROCEDURE FOR GUARANTEED DELIVERY SET FORTH IN "THE TENDER
OFFER-3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES."
QUESTIONS OR REQUESTS FOR ASSISTANCE MAY BE DIRECTED TO THE INFORMATION
AGENT AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ON THE BACK COVER OF THIS
OFFER TO PURCHASE. ADDITIONAL COPIES OF THIS OFFER TO PURCHASE, THE LETTER OF
TRANSMITTAL AND THE NOTICE OF GUARANTEED DELIVERY MAY ALSO BE OBTAINED FROM THE
INFORMATION AGENT OR FROM BROKERS, DEALERS, COMMERCIAL BANKS OR TRUST COMPANIES.
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TO THE STOCKHOLDERS OF PREFERRED EMPLOYERS HOLDINGS, INC.:
INTRODUCTION
Preferred Employers Holdings, Inc., a Delaware corporation (the "Company"),
hereby offers to purchase all of its issued and outstanding shares of common
stock, $.01 par value per share (the "Shares"), at a price of $5.00 per Share,
net to the seller in cash (the "Offer Price"), without interest thereon, upon
the terms and subject to the conditions set forth in this Offer to Purchase,
dated September 17, 1999 (the "Offer to Purchase"), and in the related Letter of
Transmittal, dated September 17, 1999 (which, together with this Offer to
Purchase, constitutes the "Offer"). The Offer is being made to all holders of
Shares, including Mr. Mel Harris, the Chairman of the Board of Directors
(hereinafter, the "Board of Directors" or the "Board") and Chief Executive
Officer of the Company, Mr. Peter E. Kilissanly, President and Chief Operating
Officer of the Company, and the other executive officers and directors of the
Company listed in Schedule I hereto (collectively, the "Remaining
Stockholders"). The Remaining Stockholders will not be tendering any Shares
pursuant to the Offer. All Shares validly tendered and not withdrawn will be
purchased at the Offer Price, upon the terms and subject to the conditions of
the Offer. See "The Tender Offer -- 1. Terms of the Offer; Expiration Date."
The Offer Price will be paid net to tendering stockholders in cash for all
Shares purchased. Tendering stockholders will not be obligated to pay brokerage
fees or commissions or, except as otherwise provided in Instruction 6 of the
Letter of Transmittal, stock transfer taxes with respect to the Company's
purchase of the Shares pursuant to the Offer. HOWEVER, ANY TENDERING STOCKHOLDER
OR OTHER PAYEE WHO FAILS TO COMPLETE, SIGN AND RETURN TO THE DEPOSITARY THE
SUBSTITUTE FORM W-9 THAT IS INCLUDED IN THE LETTER OF TRANSMITTAL MAY BE SUBJECT
TO REQUIRED BACKUP FEDERAL INCOME TAX WITHHOLDING. SEE "THE TENDER OFFER-3.
PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES" OF THIS OFFER TO
PURCHASE AND INSTRUCTION 10 OF THE LETTER OF TRANSMITTAL. The Company will pay
all charges and expenses of American Stock Transfer & Trust Company, which is
acting as the depositary for the Offer (the "Depositary"), and Morrow & Co.,
Inc., which is acting as the information agent for the Offer (the "Information
Agent"), incurred in connection with the Offer. See "Special Factors -- 6. Fees
and Expenses" and "The Tender Offer -- 13. Fees and Expenses."
The Offer is conditioned upon, among other things, the Company obtaining
the Loan (as defined herein). The Offer is not conditioned upon any minimum
number of Shares being tendered. See "The Tender Offer -- 11. Certain Conditions
of the Offer," which sets forth in full the conditions of the Offer.
The Shares are currently listed and traded on the Nasdaq National Market
("Nasdaq") under the symbol "PEGI". On September 16, 1999, the last full day of
trading prior to the announcement of the Offer, the closing sale price of the
Shares on Nasdaq was $2.75 per share. During the first quarter of 1999, the
closing sale price of the Shares was as high as $11.75 per share. STOCKHOLDERS
ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE SHARES AND REVIEW
HISTORICAL MARKET INFORMATION WITH RESPECT TO THE SHARES. See "The Tender
Offer -- 6. Price Range of Shares; Dividends" and "The Tender Offer -- 10.
Effect of the Offer on the Market for the Shares; Quotation and Exchange Act
Registration."
THE BOARD OF DIRECTORS OF THE COMPANY, BASED ON, AMONG OTHER THINGS, THE
UNANIMOUS RECOMMENDATION OF AN INDEPENDENT COMMITTEE OF NON-EMPLOYEE DIRECTORS
OF THE BOARD (THE "INDEPENDENT COMMITTEE"), HAS UNANIMOUSLY APPROVED THE OFFER.
HOWEVER, NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION
TO ANY STOCKHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING THEIR
SHARES AND HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY SUCH RECOMMENDATION.
STOCKHOLDERS ARE URGED TO EVALUATE CAREFULLY ALL INFORMATION CONTAINED IN THIS
OFFER TO PURCHASE AND ACCOMPANYING DOCUMENTS, CONSULT THEIR OWN INVESTMENT
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<PAGE> 5
AND TAX ADVISORS AND MAKE THEIR OWN DECISIONS WHETHER TO TENDER SHARES AND, IF
SO, HOW MANY SHARES TO TENDER.
The Independent Committee has reviewed and evaluated the terms of the
Offer. Advest, Inc. ("Advest"), financial advisor to the Board of Directors and
the Independent Committee, has delivered its opinion to the Board of Directors
and the Independent Committee to the effect that the Offer is fair, from a
financial point of view, to the stockholders of the Company. A copy of this
opinion is attached hereto as Schedule II. Stockholders should read the full
text of the Advest opinion for a description of the assumptions made, matters
considered and procedures followed in rendering such opinion. See "Special
Factors -- 2. Recommendation of the Company's Board; Fairness of the Offer" and
"-- 3. Opinion of Advest, Inc." for the various factors considered by the
Independent Committee in approving the Offer and in unanimously recommending
that the Board approve the Offer.
The public trading market for the Shares has recently been characterized by
low prices and low trading volume. As a result, there is a limited market for
the Shares and low trading volumes make it difficult for stockholders to sell
large blocks of Shares. The Company is making the Offer to provide stockholders
who wish to sell their Shares the opportunity to do so at a fair price and at a
premium over recent market prices. The Company believes that its purchase of
Shares pursuant to the Offer represents an attractive long-term investment that
will benefit the Company, the Remaining Stockholders (who are not participating
in the Offer) and the stockholders who elect to not tender their Shares pursuant
to the Offer. The Remaining Stockholders, including Mr. Mel Harris, the Chairman
of the Board and Chief Executive Officer, and Mr. Peter E. Kilissanly, the
President and Chief Operating Officer of the Company, will not be tendering any
Shares pursuant to the Offer and have advised the Company that they wish to
retain their Shares. See "Special Factors -- 1. Purpose and Background of the
Offer; Certain Effects of the Offer; Plans of the Company After the Offer."
Certain Effects of the Offer
As of June 30, 1999, there were (i) 5,247,085 Shares issued and
outstanding, (ii) 529,412 Shares held in the treasury of the Company, (iii)
1,000,000 Shares reserved for future issuance pursuant to outstanding stock
options under the Company's 1996 Stock Option Plan, as amended (the "Stock
Options"), including Stock Options currently exercisable for 818,000 Shares,
(iv) 1,170,556 Shares issuable upon the conversion of the Company's 7%
Convertible Subordinated Notes due May 2003 (the "Notes"), and (v) 373,800
Shares issuable upon the exercise of outstanding warrants. Prior to the
announcement of the Offer, there were approximately 411 holders of record of the
issued and outstanding Shares. As of August 31, 1999, the Remaining Stockholders
beneficially owned 2,278,634 Shares, or approximately 34.1% of the outstanding
Shares on a fully diluted basis (approximately 36.8% of Shares issued and
outstanding) and Mr. Mel Harris, individually, beneficially owned 2,014,706
Shares, or approximately 30.1% of the outstanding Shares on a fully diluted
basis (approximately 36.3% of Shares issued and outstanding).
The Remaining Stockholders, including Mr. Harris, will not be tendering any
Shares pursuant to the Offer. Consequently, after the completion of the Offer,
the Remaining Stockholders, including the directors and executive officers of
the Company, will own a greater percentage of the Company. As a result, after
the completion of the Offer, the Remaining Stockholders will be able to exert
greater control over the business affairs and management of the Company than
that which they were able to exert prior to the Offer. In addition, the higher
percentage of beneficial ownership by the Remaining Stockholders that in all
likelihood will result upon the completion of the Offer will make it more
difficult to remove directors and change the Company's management without the
approval of the Remaining Stockholders. Further, if a sufficient number of
Shares are tendered pursuant to the Offer, Mr. Harris may become the beneficial
owner of in excess of 50% of the outstanding Shares. In such event, Mr. Harris
will have effective control of the Company since he will, acting alone, have the
ability to elect all of the members of the Board.
The tendering of Shares pursuant to the Offer will reduce the number of
Shares that could otherwise be traded publicly and could materially and
adversely affect the liquidity and market value of the remaining Shares held by
the public. The Shares are currently listed and traded on Nasdaq. Although the
Company has
5
<PAGE> 6
no present intention to delist the Shares, the tendering of Shares pursuant to
the Offer could result in a delisting of the Shares from Nasdaq as a result of,
among other reasons, a reduction in the number of stockholders of record or
market capitalization. Nasdaq requires that the Company maintain a minimum of
400 stockholders. As of August 31, 1999, the Company had approximately 411
stockholders of record. Consequently, a delisting of the Shares may occur if
even a small number of stockholders tender pursuant to the Offer. A delisting of
the Shares will further reduce the liquidity of the Shares and, in such event,
there can be no assurances given that the non-tendering stockholders will be
able to find willing buyers for their Shares. See "Special Factors -- 1. Purpose
and Background of the Offer; Certain Effects of the Offer; Plans of the Company
after the Offer" and "The Tender Offer -- 10. Effect of the Offer On the Market
For the Shares; Quotation and Exchange Act Registration."
The Company is required to file periodic reports with the Securities and
Exchange Commission (the "Commission") pursuant to Section 13 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). A reduction in the number
of the Company's stockholders to less than 300 holders may result in the Company
no longer being subject to the Commission's reporting requirements. The Company
has no present intention or plans to apply to the Commission to terminate its
obligations to file periodic reports after the completion of the Offer. However,
no assurances can be given that the Company will not seek to do so in the future
in the event the number of record holders of Shares at any time falls below 300
holders. Termination of the Company's reporting requirements would substantially
reduce the public information available concerning the Company. See "Special
Factors -- 1. Purpose and Background of the Offer; Certain Effects of the Offer;
Plans of the Company after the Offer" and "The Tender Offer -- 10. Effect of the
Offer On the Market For the Shares; Quotation and Exchange Act Registration."
The Company expects to expend a significant amount of its cash and
investments (approximately $16.5 million) and to incur substantial additional
indebtedness (approximately $7.5 million) in connection with the Offer, assuming
all of the Shares, other than the Shares held by the Remaining Stockholders and
all of the Shares issuable upon the conversion of the Notes, are tendered
pursuant to the Offer. As a result, upon the completion of the Offer, the
Company expects that it will have substantially less cash and investments
available for working capital and/or for other uses, including for any possible
acquisitions by the Company. In addition, the Company's debt service
requirements will increase as a result of the additional indebtedness incurred
in connection with the Offer. See "Special Factors -- 1. Purpose and Background
of the Offer; Certain Effects of the Offer; Plans of the Company After the
Offer," "The Tender Offer -- 7. Certain Information Concerning the Company."
Finally, the Offer may affect the Company's ability to qualify for "pooling
of interests" accounting treatment for any acquisition effected within the two
years following the Offer, to the extent such accounting treatment remains
available under applicable regulations.
Description of Business
The Company engages in the following activities:
- it provides temporary registered nurses and other professional medical
personnel primarily to client hospitals;
- it sells, on behalf of others, business insurance, including workers'
compensation, property, liability, casualty, and other types of coverage,
and provides risk management services, including cost containment, safety
management and claims management services, designed for segments of the
franchise industry (particularly fast food restaurants, family-style
restaurants and convenience stores); and
- it provides reinsurance for certain workers' compensation and employers'
liability insurance policies it sells.
Employee Staffing. In March and August 1998, the Company acquired
businesses providing temporary registered nurses and other professional medical
personnel (often referred to as "Travelers") mainly to client
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<PAGE> 7
hospitals. Travelers serve clients for periods ranging from 8 to 52 weeks and
function essentially as permanent hospital staff rather than short-term,
supplemental staff.
Insurance. The Company is engaged in the property and casualty insurance
business and has conducted business as a general agent principally on behalf of
the American International Group of Companies ("AIG"), General Accident
Insurance Company ("General Accident") and Kemper Insurance Companies ("Kemper")
and as a reinsurer for certain workers' compensation insurance policies written
by the Company on behalf of affiliates of AIG. Pursuant to general agency
agreements, the Company is authorized to solicit and bind insurance contracts on
behalf of the insurers, collect and account for premiums on business it writes,
and request cancellation or nonrenewal of any policy it places. The Company has
written workers' compensation insurance since its inception in 1988 and in late
1995 began writing other forms of property and casualty insurance (such other
forms of insurance being hereinafter referred to as "Package") for family style
and fast food restaurants as a general agent for General Accident. In June 1996,
General Accident advised the Company that it would no longer accept Package
insurance risks for fast food restaurants. As a result, the Company became a
general agent for Kemper during March 1997, through which it wrote Package as
well as other forms of property and casualty insurance and workers' compensation
insurance. In September 1998, Kemper advised the Company that it would no longer
accept Package insurance risks for fast food restaurants but retained its
contract with the Company to serve as a program administrator for certain risks.
In June 1999, the Company entered into an agreement with a division of United
States Fidelity and Guaranty Company to provide Package insurance for franchise,
fast-food and family-style restaurants. The Board of Directors has in the past
considered and evaluated a possible sale of all or a significant part of its
insurance business. The Company has determined not to pursue a sale of its
insurance business at this time. However, there can be no assurance given that
the Company will not consider such a sale, or consummate any transaction
involving a significant part of its insurance business, following the
consummation of the Offer.
Reinsurance. Through a wholly-owned Bermuda subsidiary, the Company
entered into a reinsurance agreement with affiliates of AIG pursuant to which it
acts as a reinsurer with respect to certain workers' compensation and employer's
liability insurance policies in force with policy inception dates as of January
1, 1996 and subsequent which are written by the Company on behalf of affiliates
of AIG.
Business Strategy
Management of the Company believes that the Company has substantial
opportunities for growth which include leveraging the Company's capabilities and
expertise in workers' compensation and risk management in employee staffing and
related businesses. In particular, management believes that by combining the
Company's existing expertise in insurance matters with strategic acquisitions of
employee staffing businesses, the Company believes it can reduce the operating
expenses typically associated with these operations and increase the products
the Company offers its existing clients and staffing employees.
The Company's current strategy for growth includes:
- seeking to enter additional segments of the staffing industry through
selective acquisitions of employee staffing operations;
- utilizing the Company's core competencies to improve the efficiency and
profitability of staffing companies the Company acquires;
- focusing the Company's employee staffing operations on industry specific
segments without regard to geographic boundaries;
- continuing to capitalize on the Company's business of selling business
insurance and providing risk management services to franchise and related
companies; and
- growing the Company's existing insurance business by offering workers'
compensation and other business insurance products, along with risk
management services, to select industries.
With regard to the Company's employee staffing business, the Company is not
seeking to become a staffing generalist. The Company is seeking to provide
highly compensated professionals to target industries
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<PAGE> 8
which are not sensitive to significant changes in economic conditions, where
professionals serving the industry are more highly compensated, where there is a
shortage of technical professionals to fill high demand, where the industry
imbalance of supply and demand is expected to continue into the future and where
the Company can manage workers' compensation and healthcare risks at a
profitable rate.
The Company's ability to implement its growth strategy, including its
acquisition strategy, may be materially and adversely affected by the
consummation of the Offer as a result of, among other reasons, the expected use
of a substantial amount of the Company's cash, and the substantial additional
indebtedness that is expected to be incurred in connection with the Offer. In
addition, the Shares may be delisted from Nasdaq upon the completion of the
Offer which will adversely affect the Company's ability to use its Shares in
connection with any possible acquisitions in the future. See "Special
Factors -- 1. Purpose and Background of the Offer; Certain Effects of the Offer;
Plans of the Company After the Offer" and "The Tender Offer -- 8. Financing of
the Offer."
Other Information
The Company has filed with the Commission, pursuant to the Exchange Act, an
Issuer Tender Offer Statement on Schedule 13E-4 ("Schedule 13E-4") and a Rule
13E-3 Transaction Statement on Schedule 13E-3. The term, "Expiration Date,"
means 5:00 p.m., New York City time, on November 3, 1999, unless and until the
Company, in its sole discretion, shall have extended the period during which the
Offer is open, in which event the term "Expiration Date" shall mean the latest
time and date at which the Offer, as so extended by the Company, shall expire.
See "The Tender Offer -- 1. Terms of the Offer; Expiration Date."
This Offer to Purchase and the accompanying documents contain information
required to be disclosed by the Exchange Act and the rules and regulations
promulgated thereunder, including financial information regarding the Company, a
description of the terms, conditions and background of the Offer, and the
procedures for tendering Shares for purchase.
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION THAT SHOULD BE READ BEFORE ANY DECISION IS MADE WITH
RESPECT TO THE OFFER.
SPECIAL FACTORS
1. PURPOSE AND BACKGROUND OF THE OFFER; CERTAIN EFFECTS OF THE OFFER; PLANS OF
THE COMPANY AFTER THE OFFER
Purpose of the Offer. The public trading market for the Shares has
recently been characterized by low prices and low trading volume. As a result,
there is a limited market for the Shares and low trading volumes make it
difficult for stockholders to sell large blocks of Shares. The Company is making
the Offer to provide stockholders who wish to sell their Shares the opportunity
to do so at a fair price and at a premium over recent market prices. The Company
believes that its purchase of Shares pursuant to the Offer represents an
attractive long-term investment that will benefit the Company, the Remaining
Stockholders (who are not participating in the Offer) and the stockholders who
elect to not tender their Shares pursuant to the Offer.
The Offer will enable stockholders, if they so desire, to sell a portion of
their Shares while retaining a continuing equity interest in the Company. The
Offer may provide stockholders who are considering a sale of all or a portion of
their Shares the opportunity to sell those Shares for cash without the usual
transaction costs associated with open-market sales. The purchase of Shares in
the Offer will reduce the number of stockholders of record of the Company. A
reduction in the number of stockholders of the Company may result in the
delisting of the Shares from Nasdaq and may result in the termination of the
Company's reporting obligations under the Exchange Act. See "-- Certain Effects
of the Offer; Plans of the Company After the Offer" and "The Tender Offer -- 10.
Effect of the Offer on the Market for the Shares; Quotation and Exchange Act
Registration."
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For stockholders who do not tender, there is no assurance that the price of
the Shares will not trade below the price currently being offered by the Company
pursuant to the Offer. For stockholders who do tender, the trading price of
Shares may increase as a result of the Offer or an unexpected offer and/or
acquisition by a third party.
THE BOARD OF DIRECTORS, BASED ON, AMONG OTHER THINGS, THE UNANIMOUS
RECOMMENDATION OF THE INDEPENDENT COMMITTEE, HAS UNANIMOUSLY APPROVED THE OFFER.
HOWEVER, NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION
TO ANY STOCKHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY OR ALL
OF SUCH STOCKHOLDER'S SHARES AND HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY SUCH
RECOMMENDATION. STOCKHOLDERS ARE URGED TO EVALUATE CAREFULLY ALL INFORMATION
CONTAINED IN THIS OFFER TO PURCHASE AND ACCOMPANYING DOCUMENTS, CONSULT THEIR
OWN INVESTMENT AND TAX ADVISORS AND MAKE THEIR OWN DECISIONS WHETHER TO TENDER
SHARES AND, IF SO, HOW MANY SHARES TO TENDER.
Shares the Company acquires pursuant to the Offer will be held in the
Company's treasury and will be available for the Company to issue without
further stockholder action (except as required by applicable law). Such Shares
could be issued without stockholder approval for such purposes as, among others,
the acquisition of other businesses or the raising of additional capital.
Background to the Offer. The Company completed an initial public offering
of its common stock in February 1997. During 1997, the Company announced a
business plan, which included growth and acquisition strategies aimed at
enhancing stockholder value by seeking to diversify into other business
operations that would complement the Company's existing insurance operations and
allow the Company to leverage its core insurance competencies. In an effort to
implement its growth strategy, the Company considered acquiring professional
employer organizations ("PEOs"), which provide integrated human resource
administration and risk management services, and leveraging the Company's
experience in workers' compensation and employee benefits. However, the Company
subsequently concluded that the acquisition of PEOs would in all likelihood
result in low profit margins and high risk, which made pursuit of this strategy
impracticable.
In 1998, the Company continued to focus on increasing stockholder value
through acquisitions, shifting its focus from acquiring PEOs to acquiring
professional employee staffing companies. In March 1998, the Company purchased
substantially all of the assets of HSSI Travel Nurse Operations, Inc., a
professional healthcare staffing company. In August 1998, the Company
consummated the merger of National Explorers and Travelers Healthcare, Inc.
("NET Healthcare") with and into Preferred Healthcare Staffing, Inc., a Delaware
corporation and a wholly-owned subsidiary of the Company ("Preferred Staffing").
During the latter part of 1998 and 1999, the Company expanded the scope of its
staffing acquisition strategy, analyzing over thirty potential target companies
and executing several letters of intent to acquire staffing companies in Texas
and California. In each instance, however, the Company concluded that, in light
of market conditions at the time, it would not be prudent to consummate such
transactions.
The Company believes that its inability to fully implement its previously
announced growth and acquisition strategies resulted in a loss of market support
for the Company. The Company believes that such a loss of support was the
primary reason for the recent significant decline in the Company's stock trading
price. As a result, the Company considered numerous alternatives aimed at
regaining market support and enhancing stockholder value. Since February 1999,
the Company considered and evaluated various alternatives to enhance stockholder
value such as a reverse stock split and a spinoff of the Company's insurance
business. During this period, members of the Company's management received
requests from certain stockholders that the Company furnish such stockholders
with the ability to liquidate their investment in the Company at a fair price
(which had not been reflected in the Company's trading price).
The Company elected to not pursue a reverse stock split because it
concluded that it would not necessarily have the desired effect of enhancing
stockholder value and enabling stockholders to liquidate their investment in the
Company at a fair price if they so desired. Specifically, the Company
considered, among other things, the small float for the Shares and the number of
record holders, and determined that such
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<PAGE> 10
factors, among others would make it difficult for such a transaction to have a
meaningful positive impact on the trading price of, and market for, the Shares.
Consequently, the Company concluded that such a transaction would not achieve
the desired results.
Similarly, the Company elected not to pursue a spinoff of its insurance
operations because it believed that the decreased operations of the Company,
after giving effect to the transaction, would make it difficult for the Company
to meet its stated business objectives, including its earnings and other
financial objectives. The Company thus concluded that the benefits of completing
a spinoff were too uncertain and would not necessarily achieve the Company's
desired results of enhancing stockholder value, or otherwise positively affect
the market for the Shares and enable the Company's stockholders to liquidate
their investment at a fair price. The Company also considered and evaluated the
possible sale of all or a significant part of its insurance business, but
ultimately determined not to pursue such a sale due to the market conditions at
that time affecting the workers' compensation insurance business in which the
Company principally operates.
In light of the foregoing and on the basis of communications by the Company
with its stockholders, including those unaffiliated with the Remaining
Stockholders, in which such stockholders requested that the Company consider
ways in which it could enhance stockholder value and/or furnish such
stockholders with the ability to liquidate their investment in the Company at a
fair price, the Company's founder, Chairman of the Board, Chief Executive
Officer and principal stockholder, Mr. Mel Harris, decided to investigate the
feasibility of causing the Company to purchase all of the Company's Shares not
held by Mr. Harris and the other directors and executive officers of the
Company. Mr. Peter E. Kilissanly, President and Chief Operating Officer of the
Company and the other members of management participated in evaluating this
alternative.
On August 31, 1999, at a Special Meeting of the Board of Directors, the
proponents of the Offer, including Mr. Harris, presented the Board with the
proposed Offer for consideration. At such Special Meeting, the Board of
Directors appointed three independent directors to serve as the Independent
Committee and charged them with the responsibility of reviewing and considering
the terms of the Offer. The Independent Committee was asked to make a
determination regarding whether the Offer was fair to the stockholders of the
Company. See "Special Factors -- 2. Recommendation of the Company's Board;
Fairness of the Offer."
On September 1, 1999, the Company contacted City National Bank of Florida
("City National"), the lender to one of its subsidiaries, regarding the
availability of financing for the Offer.
On September 1, 1999, the Board engaged Advest as the independent financial
advisor for the Board and the Independent Committee for the purpose of
evaluating the fairness of the Offer, from a financial point of view, to the
unaffiliated stockholders of the Company. On September 1, 1999, the Independent
Committee also engaged Baer Marks & Upham LLP as its legal counsel for the
purpose of advising the Independent Committee regarding its duties and
responsibilities with respect to the Offer. Baer Marks & Upham LLP has acted as
counsel for the Company and Mr. Harris in the past and may provide legal
services to the Company and Mr. Harris in the future.
On September 9, 1999, the Independent Committee held a meeting to discuss
the proposed terms of the Offer and possible alternative transactions.
Representatives for Advest and Baer Marks & Upham LLP attended the meeting.
On September 10, 1999, City National furnished the Company with a
commitment (subject to completion of its due diligence) to loan the Company $7.5
million in connection with the Offer. See "The Tender Offer -- 8. Financing of
the Offer."
On September 13, 1999, the Independent Committee held a meeting, approved
the Offer and determined that the consideration to be received by the
stockholders pursuant to the Offer was fair to the stockholders. The Independent
Committee unanimously recommended that the Board approve the Offer.
On September 13, 1999, the Board of Directors held a meeting and
unanimously approved the Offer.
On October 12, 1999, the Company and City National executed a definitive
loan and security agreement whereby City National agreed to extend credit to the
Company in the original principal amount of $7.5 million, subject to certain
conditions. See "The Tender Offer -- 8. Financing of the Offer."
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Certain Effects of the Offer; Plans of the Company after the Offer
Impact on Tendering Stockholders. Stockholders who sell Shares to the
Company in response to the Offer will receive the Offer Price in cash. The sale
of Shares in response to the Offer will have federal income tax consequences to
the selling stockholders and may have tax consequences under applicable state,
local and other tax laws. See "The Tender Offer -- 5. Certain U.S. Federal
Income Tax Consequences."
Impact on Non-Tendering Stockholders. The purchase of Shares as a result
of the Offer will decrease the Company's stockholders' equity per Share because
the Offer Price will be greater than the Company's stockholders' equity per
Share of $2.62 at June 30, 1999. The Shares purchased by the Company pursuant to
the Offer will be held in the Company's treasury and will constitute authorized
but unissued Shares.
The tendering of Shares pursuant to the Offer will reduce the number of
Shares that could otherwise be traded publicly and could materially and
adversely affect the liquidity and market value of the remaining Shares held by
the public. The Shares are currently listed and traded on Nasdaq. Although the
Company has no present intention to delist the Shares, the consummation of the
Offer could result in a delisting of the shares from Nasdaq as a result of,
among other reasons, a reduction in the number of stockholders of record or
market capitalization. Nasdaq requires that the Company maintain a minimum of
400 stockholders. As of August 31, 1999, the Company had approximately 411
stockholders of record. Consequently, a delisting of the Shares may occur if
even a small number of stockholders tender pursuant to the Offer. A delisting of
the Shares will further reduce the liquidity of the Shares and, in such event,
there can be no assurances given that stockholders of the Company will be able
to find willing buyers for their Shares. See "The Tender Offer -- 10. Effect of
the Offer On the Market For the Shares; Quotation and Exchange Act
Registration."
The Company is required to file periodic reports with the Commission
pursuant to Section 13 of the Exchange Act. A reduction in the number of the
Company's stockholders to less than 300 holders may result in the Company no
longer being subject to such reporting requirements. The Company has no present
intention or plans to apply to the Commission to terminate its duty to file
periodic reports after the completion of the Offer. However, no assurances can
be given that the Company will not seek to do so in the future in the event the
number of record holders of Shares at any time falls below 300 holders.
Termination of the Company's reporting requirements would substantially reduce
the public information available concerning the Company. See "The Tender
Offer -- 10. Effect of the Offer On the Market For the Shares; Quotation and
Exchange Act Registration."
The purchase of Shares by the Company will increase the percentage
ownership of Shares held by non-tendering stockholders, including the Remaining
Stockholders. See "Schedule I -- Directors and Executive Officers; Remaining
Stockholders." Therefore, the Remaining Stockholders, which include the current
officers and directors of the Company, will be able to exert greater control
over the business affairs and management of the Company than that which they
were able to exert prior to the consummation of the Offer. After completion of
the Offer, it may be more difficult to remove directors and change the Company's
management without the approval of the Remaining Stockholders. Further, if a
sufficient number of Shares are tendered pursuant to the Offer, Mr. Mel Harris,
Chairman of the Board and Chief Executive Officer of the Company, may become the
beneficial owner of in excess of 50% of the outstanding Shares. In such event,
Mr. Harris will have effective control of the Company since he will, acting
alone, have the ability to elect all of the members of the Board.
The Company has never declared nor paid any cash dividends on its common
stock and does not anticipate paying cash dividends in respect of its common
stock in the foreseeable future. Any payment of cash dividends in the future
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, its earnings (if any), financial condition, cash
flows, capital requirements and other relevant considerations, including
applicable contractual restrictions and governmental regulations with respect to
the payment of dividends. The Company does not anticipate any change to the
current dividend policy. See "The Tender Offer -- 9. Dividends and
Distributions".
Impact on the Company. The Company expects to expend a significant amount
of its cash and investments (approximately $16.5 million) and to incur
substantial additional indebtedness (approximately
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$7.5 million) in connection with the Offer. As a result, upon the completion of
the Offer, the Company expects that it will have substantially less cash and
investments available for working capital and for other uses, including for any
possible acquisitions by the Company. In addition, the Company's debt service
requirements will increase as a result of the additional indebtedness incurred
by the Company in connection with the Offer. See "The Tender Offer -- 7. Certain
Information Concerning the Company."
The Offer may affect the Company's ability to qualify for "pooling of
interests" accounting treatment for any acquisition effected within the two
years following the Offer, to the extent such accounting treatment remains
available under applicable regulations.
The reduction in the number of outstanding Shares pursuant to the Offer
will trigger an adjustment under the Company's 1996 Stock Option Plan in the
maximum number and kind of Shares available for issuance under the 1996 Stock
Option Plan, and the number, kind, and price for each Share subject to any then-
outstanding options under the 1996 Stock Option Plan to account for the
resulting reduction in the number of issued and outstanding Shares. However,
pursuant to the terms of the 1996 Stock Option Plan, no such adjustment will be
made if such adjustment would (i) cause the 1996 Stock Option Plan to be
noncompliant with Section 422 of the Internal Revenue Code (the "Code") or with
Rule 16b-3 of the Exchange Act (if applicable); or (ii) be considered as an
adoption of a new stock option plan requiring the approval of the Company's
stockholders.
Plans for the Company After the Offer. It is expected that following the
Offer, the business and operations of the Company will be continued by the
Company substantially as they are currently being conducted by management. The
Company's growth strategy includes entering into additional segments of the
staffing industry through selective acquisitions of employee staffing
operations. The Company's ability to implement its growth strategy, including
its acquisition strategy, may be materially and adversely affected by the
consummation of the Offer as a result of, among other reasons, the delisting of
the Shares from Nasdaq, the use by the Company of a significant amount of its
cash, and the Company's incurrence of substantial additional indebtedness. In
addition, the consummation of the Offer will in all likelihood have a material
and adverse effect on the liquidity of the Shares which will, in turn,
materially and adversely affect the Company's ability to use the Shares in
connection with any possible future acquisitions. See "Introduction," "The
Tender Offer -- 8. Financing of the Offer" and "The Tender Offer -- 10. Effect
of the Offer on the Market for the Shares; Quotation and Exchange Act
Registration."
Except for the Offer and as otherwise described in this Offer to Purchase,
the Company does not have any present plans or proposals which relate to or
would result in an extraordinary corporate transaction, such as a merger,
reorganization, liquidation, relocation of any operations of the Company or sale
or transfer of a material amount of assets involving the Company or any of its
subsidiaries, or any changes in the Company's capitalization or any other change
in the Company's corporate structure or business or the composition of its
management, or any change in the Company's certificate of incorporation, bylaws
or any other actions which may impede the acquisition of control of the Company
by any person. However, the Company will continue to review its business plan
and strategic direction and in such process may develop additional strategies
for internal growth through expansion of products and services or growth through
acquisitions.
The Board of Directors has in the past considered and evaluated a possible
sale of all or a significant part of its insurance business. Although the
Company has determined not to pursue such a sale at this time, there can be no
assurance given that the Company will not consider such a sale, or consummate
any transaction involving a significant part of its insurance business,
following the consummation of the Offer.
The Company has filed with the Commission pursuant to the Exchange Act, a
Schedule 13E-4 and a Rule 13e-3 Transaction Statement on Schedule 13E-3. The
term "Expiration Date" means 5:00 p.m., New York City time, on November 3, 1999,
unless and until the Company, in its sole discretion, shall have extended the
period during which the Offer is open, in which event the term "Expiration Date"
shall mean the latest time and date at which the Offer, as so extended by the
Company, shall expire. See "The Tender Offer -- 1. Terms of the Offer;
Expiration Date."
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Following completion of the Offer, the Company may repurchase additional
Shares in the open market, in privately negotiated transactions or otherwise.
Any such purchases may be on the same terms or on terms which are more or less
favorable to stockholders than the terms of the Offer. Rule 13e-4 under the
Exchange Act prohibits the Company and its affiliates from purchasing any
Shares, other than pursuant to the Offer, until at least ten business days after
the Expiration Date. Any possible future purchases by the Company will depend on
many factors, including the market price of the Shares, the results of the
Offer, the Company's business and financial position and general economic and
market conditions.
It is expected that following the consummation of the Offer, the Company's
current management, under the general direction of the Company's Board of
Directors, will continue to manage the Company as an ongoing business.
2. RECOMMENDATION OF THE COMPANY'S BOARD; FAIRNESS OF THE OFFER
Recommendation of the Board and the Independent Committee. On September
13, 1999, the Independent Committee determined that the Offer is fair to the
stockholders of the Company and approved the Offer. On September 13, 1999, the
Board of Directors also unanimously determined that the Offer is fair to the
stockholders of the Company. However, the Board of Directors and the Independent
Committee will not make any recommendation to stockholders as to whether to
tender or refrain from tendering any Shares pursuant to the Offer.
Fairness of the Offer. The Board and the Independent Committee considered,
relied upon and adopted the analyses of Advest described below under the caption
"-- 3. Opinion of Advest, Inc." in connection with their evaluation of the
Offer. In doing so, the Board and the Independent Committee considered, among
others, the following factors, each of which supported such determinations:
a. the current market prices and the historical market prices of the
Shares;
b. the low trading volume and the lack of market support for the
Shares and the Company's failure to fully execute its previously announced
growth strategy and marketing plans;
c. the written and oral presentations of Advest and its opinion
furnished to the Board and the Independent Committee that the consideration
to be offered to the stockholders is fair to such stockholders from a
financial point of view and the report and analyses presented by Advest,
which included the following analyses: a historical trading and premiums
paid analysis, a comparable public company analysis, a historical
transaction analysis and a discounted cash flow analysis, which valued the
Company as a going concern;
d. the intention of the Remaining Stockholders to continue the
business as a going concern, which makes any consideration of liquidation
highly unlikely;
e. other potential alternatives to the Company, such as a reverse
stock split and a spinoff;
f. the indication by the principal stockholder of the Company that he
would not vote in favor of a sale of the Company as a going concern, which
would make any such sale difficult to achieve, even if the Company could
find a suitable purchaser; and
g. the structure of the Offer, which was designed, among other things,
to provide for a voluntary transaction in which stockholders of the Company
may or may not participate in the Offer and, if they elect to so
participate, they could receive cash consideration for their Shares at a
substantial premium over current market prices at the earliest practicable
time without any brokerage fees.
Current Market Prices and Historical Market Prices. In reaching their
determination that the consideration offered to unaffiliated security
holders constitutes fair value, the Board and the Independent Committee
adopted the analyses of Advest and further considered, in relation to
current market prices, (i) the $5.00 net per Share cash consideration to be
paid to the stockholders in the Offer, which represents a premium of
approximately 74% per Share over the closing sales price on September 7,
1999, and a premium of approximately 74% over the closing sales price two
weeks preceding such date. In
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addition, the Board and the Independent Committee concluded that the
current market prices of the Shares were undervalued in the public markets
primarily as a result of, among other reasons, (i) the Company's failure to
meet certain financial estimates prepared by analysts, (ii) the Company's
failure to fully execute its previously announced growth strategy and
marketing plans, (iii) the low trading volume and public float of the
Shares, (iv) the market's negative reaction to the Company engaging in
seemingly different lines of business (i.e. insurance/reinsurance business
and the employee staffing business), and (v) inadequate analyst coverage
and market support for the Company's Shares. The Board and the Independent
Committee concluded that the foregoing factors resulted in a recent trading
price per Share that does not reflect the actual value of the Shares or the
actual financial performance and future prospects of the Company. As a
result, the Board and the Independent Committee determined that, while
current trading prices were of limited value for the purpose of evaluating
the intrinsic value of the Shares, such prices were relevant for the
purpose of evaluating the fairness of the Offer as it provided tendering
stockholders with liquidity at a premium over such market prices.
With respect to the historical market prices of the Shares, the Board
and the Independent Committee determined that such prices were not an
accurate indicator of the intrinsic value of the Company or the fairness of
the Offer. The Company believes that such historical market prices factored
into account the Company's previously announced growth and acquisition
strategies and the initial implementation of such strategies. The Company
has since failed to continue to successfully implement such strategies. The
Company believes that any determination regarding the intrinsic value of
the Shares must necessarily take into account the actual experiences of the
Company in implementing its business plan, and whether in fact the Company
has been able to achieve its stated business objectives. The Board and the
Independent Committee believed that historical trading prices based, as
they were, on conditions that no longer exist, should be discounted and are
of limited value in evaluating the fairness of the Offer, including the
Offer Price.
Net Book Value. The Board and the Independent Committee did not take
into consideration the book value of the Company because it believed that
book value did not reflect the fair value of the Company because the
Company is primarily in a service business with limited tangible assets.
The Company's net book value was also substantially lower than the values
resulting from any of the analyses of Advest.
Going Concern Value. The Board, the Independent Committee and the
Remaining Stockholders also considered and adopted Advest's valuation
analysis of the Company, which included three separate valuation
methods -- Selected Comparable Public Company Analysis, Comparable
Transactions Analysis and Discounted Cash Flow Analysis -- that are driven
by earnings and based upon the going concern value of the Company. See
"-- 3. Opinion of Advest, Inc." The Board and the Independent Committee
felt that these analyses, as well as the premiums over current market
price, were the principal elements of the fairness of the Offer, including
the Offer Price.
Liquidation Value. The Board, the Independent Committee and the
Remaining Stockholders have determined that evaluating the fairness of the
Offer Price on the basis of the liquidation value of the Company is
inappropriate given that (i) a significant portion of the Company's overall
business is in the service sector (i.e., the employee staffing business)
which has limited tangible assets; and (ii) such a liquidation value
approach would therefore not accurately reflect the true value of the
Company as a whole. Advest has advised the Board of its agreement with the
Company that a determination of the fairness of the Offer Price on the
basis of the liquidation value of the Company would be inappropriate.
Further, the Board, the Independent Committee and the Remaining
Stockholders considered the intention of the Remaining Stockholders to
continue the business as a going concern, which made any consideration of
liquidation irrelevant for the present. As a result of the foregoing, the
Board, the Independent Committee and the Remaining Stockholders rejected
the liquidation value of the Company as a basis for evaluating the fairness
of the Offer, including the Offer Price.
Other Alternatives. The Board and the Independent Committee also
considered other potential alternatives to the Offer such as a reverse
stock split and a spinoff, but such alternatives were believed to
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<PAGE> 15
be impractical. See "-- 1. Purpose and Background of the Offer; Certain
Effects of the Offer; Plans of the Company After the Offer." It should be
noted, however, that the Board and the Independent Committee did not
consider a sale of the Company to a third party in light of the position of
the principal stockholder that he would not support or vote in favor of a
sale of the Company.
The Board and the Independent Committee also considered the average trading
volume of the Shares, and the fact that the Offer Price would be payable in cash
and without any brokerage fees, thus eliminating any uncertainties in valuing
the consideration to be received by the Company's stockholders.
The Board and the Independent Committee evaluated the various factors
listed above in light of their knowledge of the business, financial condition
and prospects of the Company and considered and adopted the opinion and analyses
of Advest. In light of the number and variety of factors that the Board and the
Independent Committee considered in connection with their evaluation of the
Offer, the Board and the Independent Committee did not find it practicable to
assign relative weights to the foregoing factors, and, accordingly, the Board
and the Independent Committee did not do so. The Board and the Independent
Committee, however, gave significant weight to the recent current market prices
of the Shares and the going concern analyses of Advest, and the other factors
specified in clauses (a) through (g), inclusive, above.
The Board, the Independent Committee and the Remaining Stockholders also
determined that the Offer is procedurally fair to the stockholders of the
Company because, among other things (i) the Independent Committee was charged
with the responsibility of reviewing and evaluating the terms of the Offer on
behalf of the stockholders, (ii) the Board retained Advest to render a fairness
opinion to the Board and the Independent Committee with respect to the Offer,
(iii) the Independent Committee engaged separate legal counsel (Baer Marks &
Upham LLP) and were advised by Baer Marks & Upham LLP regarding their duties and
responsibilities with respect to the Offer, and (iv) there were deliberations
pursuant to which the Independent Committee evaluated the Offer.
The Offer does not require the approval of a majority of unaffiliated
security holders. The Independent Committee did not retain an unaffiliated
representative other than Advest which advised all of the directors including
the Independent Committee. The Board and the Independent Committee nevertheless
believe that the Offer is procedurally fair to the stockholders of the Company
for the reasons specified in clauses (i) through (iv), inclusive, above. All
directors of the Company, including the Independent Committee who are not
employees of the Company, have approved the Offer.
On September 9, 1999, the Independent Committee held a meeting to discuss
the proposed terms of Offer and possible alternative transactions.
Representatives for Advest and Baer Marks & Upham LLP attended the meeting. As
part of its deliberations, members of the Independent Committee questioned
Advest and Baer Marks & Upham LLP with respect to the Advest Opinion, including
the assumptions, projections and data used by Advest in arriving at its
conclusion. On September 13, 1999, the Independent Committee held a meeting,
approved the Offer and determined that the consideration to be received by the
stockholders pursuant to the Offer was fair to the stockholders.
On September 13, 1999, the Board held a meeting at which the Independent
Committee advised the Board of its recommendation to approve the Offer and the
Board unanimously approved the Offer.
The Remaining Stockholders have advised the Company that they will not
tender Shares pursuant to the Offer. The Company expects the Remaining
Stockholders to retain their current positions as officers and/or directors of
the Company after the completion of the Offer. Because the Remaining
Stockholders may be deemed under applicable regulations to be "affiliates
engaged in the transaction," the Company has requested the Remaining
Stockholders to make certain disclosures contained in this Offer to Purchase,
including furnishing a statement regarding whether each such person believes
that the Offer is fair to unaffiliated security holders of the Company. The
Remaining Stockholders, including those that are not directors of the Company,
have been given access to the Advest Opinion and other materials prepared by
Advest that are described in this Offer to Purchase and that were prepared
specifically for the purpose of evaluating the fairness of the Offer. Each of
the Remaining Stockholders has expressly adopted the analyses of the Board, the
Independent Committee and Advest in evaluating the fairness of the Offer. In
addition, the Remaining
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Stockholders have each been apprised of the deliberations of the Board and the
Independent Committee described in this Offer to Purchase. Each of the Remaining
Stockholders has confirmed to the Company such person's belief that the Offer is
fair to unaffiliated security holders. Each of the Remaining Stockholders has
also confirmed to the Company such person's belief that the Offer is
procedurally fair to unaffiliated stockholders for the reasons specified in
clauses (i) through (iv), inclusive, above. The Remaining Stockholders believe
that the information and analyses provided to them support their determination
that the Offer, including the Offer Price, is fair to unaffiliated security
holders.
In light of the number and variety of factors that the Remaining
Stockholders considered in connection with their evaluation of the Offer, the
Remaining Stockholders did not find it practicable to assign relative weights to
any such factors. However, in evaluating the fairness of the Offer, the
Remaining Stockholders gave significant weight to (i) the recent market prices
of the Shares and the fact that the Offer enabled stockholders to liquidate
their investment in the Company at a premium over such prices and (ii) the going
concern analyses conducted by Advest and the conclusion by Advest that the Offer
Price was fair, from a financial point of view.
3. OPINION OF ADVEST, INC.
On September 9, 1999, Advest rendered its opinion (the "Advest Opinion") to
the Independent Committee to the effect that, as of the date of such opinion,
the Offer Price of $5.00 per share to be received by the holders of Shares is
fair, from a financial point of view, to the Company's stockholders.
A COPY OF THE ADVEST OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY ADVEST,
IS ATTACHED AS SCHEDULE II HERETO. THE ADVEST OPINION IS DIRECTED ONLY TO THE
FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CASH CONSIDERATION OF $5.00 PER
SHARE TO BE RECEIVED BY THE HOLDERS OF SHARES IN THE OFFER. THE ADVEST OPINION
WAS PROVIDED AT THE REQUEST AND FOR THE INFORMATION OF THE COMPANY'S BOARD OF
DIRECTORS AND THE INDEPENDENT COMMITTEE IN EVALUATING THE OFFER PRICE AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER CONCERNING WHETHER TO ELECT
TO TENDER SHARES PURSUANT TO THE OFFER. THE SUMMARY OF THE ADVEST OPINION SET
FORTH IN THIS OFFER TO PURCHASE DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE ADVEST OPINION ATTACHED AS
SCHEDULE II HERETO. STOCKHOLDERS OF THE COMPANY SHOULD READ THE ADVEST OPINION
CAREFULLY IN ITS ENTIRETY FOR INFORMATION WITH RESPECT TO THE PROCEDURES
FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY ADVEST IN RENDERING ITS OPINION. ADVEST HAS CONSENTED TO THE
REFERENCES TO ADVEST AND THE ADVEST OPINION IN THIS OFFER TO PURCHASE, AND TO
THE ATTACHMENT OF THE ADVEST OPINION TO THIS OFFER TO PURCHASE AS A SCHEDULE
HERETO.
During the course of its engagement, Advest prepared discussion materials
which it utilized in its meeting with the Independent Committee on September 9,
1999. Such materials summarize the findings of Advest regarding the fairness of
the consideration to be received by stockholders pursuant to the Offer that are
more specifically discussed in the Advest Opinion. With the exception of such
discussion materials and the Advest Opinion, Advest did not prepare any other
analysis or report or deliver any opinion in connection with its engagement. A
copy of Advest's discussion materials is available for inspection and copying at
the principal executive offices of the Company during its regular business hours
by any interested stockholder of the Company or any representative of such
stockholder who has been so designated in writing. A copy of such discussion
materials will be transmitted by the Company to any such stockholder or
representative upon written request and at the expense of the requesting
stockholder.
In arriving at the Advest Opinion, Advest, among other things: (i) reviewed
the Company's audited financial statements, as filed with the Commission, for
the fiscal years ended December 31, 1997 and 1998;
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(ii) reviewed the Company's unaudited financial statements, as filed with the
Commission for the quarters ended March 31, 1999 and June 30, 1999; (iii)
reviewed audited statutory financial statements of PEG Reinsurance Company, Ltd.
(a wholly owned subsidiary of the Company) for the year ended December 31, 1998
(iv) reviewed the Company's final prospectus dated December 23, 1998 regarding
the sale of the Shares issuable upon conversion of the Company's Notes; (v)
reviewed preliminary drafts of the documents that will be filed with the
Commission in connection with the Offer, including the Schedule 13E-3 (Rule
13E-3 Transaction Statement) and the Schedule 13E-4 (Issuer Tender Offer
Statement); (vi) reviewed certain interim financial analyses and forecasts
prepared by management of the Company; (vii) held discussions with management of
the Company regarding the business, operations and prospects of the Company;
(viii) performed various financial analyses, as Advest deemed appropriate, of
the Company using generally accepted analytical methodologies, including: (a) an
analysis of premiums paid in public merger and acquisition transactions and a
review of the historical trading prices and volume of the Shares on Nasdaq; (b)
the application of the public trading multiples of companies, which Advest
deemed comparable to the Company, to the financial results of the Company; (c)
the application of the multiples reflected in recent public mergers and
acquisitions for businesses which Advest deemed comparable to the Company, to
the financial results of the Company; and (d) a discounted projected cash flow
analysis; and (ix) reviewed such other materials and performed such other
financial studies, analyses, inquiries and investigations as Advest deemed
appropriate.
Advest assumed and relied, without independent verification, upon the
accuracy and completeness of all the information supplied or otherwise made
available to Advest by the Company or from other sources, and upon the assurance
of the Company's management that they were not aware of any information or facts
that would make the information provided to Advest incomplete or misleading.
Advest did not undertake an independent appraisal of the assets or liabilities
(contingent or otherwise) of the Company, nor was Advest furnished with any such
appraisals. With respect to the projected financial statements referenced in the
preceding paragraph, Advest was advised by the Company, and assumed without
independent investigation, that they were reasonably prepared and reflected the
best currently available estimates and judgments of the future results of
operations and financial condition at and for the periods specified therein, and
Advest expressed no opinion with respect to such financial statements.
No limitations were imposed by the Company on the scope of Advest's
investigation or the procedures to be followed by Advest in rendering the Advest
Opinion. The Advest Opinion was necessarily based upon financial, economic,
market and other conditions as they existed and could be evaluated by Advest on
the date of the Advest Opinion. Advest disclaimed any undertaking or obligation
to advise any person of any change in any fact or matter affecting the Advest
Opinion which might come or be brought to Advest's attention after the date of
the Advest Opinion. The Advest Opinion did not constitute a recommendation as to
any action taken by the Board of Directors or the Company and did not constitute
a recommendation to any stockholder with respect to whether to tender any Shares
pursuant to the Offer, and should not be relied upon by any stockholder as such.
Advest and the Company entered into a letter-form engagement agreement dated
September 1, 1999 (the "Engagement Agreement"), pursuant to which Advest was
retained to render the Advest Opinion. The Advest Opinion stated Advest's
understanding that such opinion would be used by the Company's Board of
Directors solely in connection with its consideration of the fairness of the
Offer Price to be received in the Offer by the stockholders of the Company and
for no other purpose, and that in rendering the Advest Opinion, Advest
specifically disclaims being engaged as an agent or fiduciary of the Company's
stockholders or any third party.
By virtue of the foregoing provisions of the Engagement Agreement and the
inclusion of such disclaimer in the Advest Opinion, Advest believes that the
Company's stockholders cannot rely upon the Advest Opinion to support any claims
against Advest arising under applicable state law. The availability of any such
defense will, however, be resolved by a court of competent jurisdiction applying
applicable state law to the relevant facts, and the resolution of the question
of the availability of any such defense will have no effect on the rights and
responsibilities of the Company's Board of Directors under applicable state law.
Furthermore, the availability of such a state law defense to Advest would have
no effect on the rights and responsibilities of either Advest or the Company's
Board of Directors under the federal securities laws.
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The Advest Opinion related solely to the fairness, from a financial point
of view, of the $5.00 Offer Price per Share to be received by the stockholders
pursuant to the Offer, and Advest expressed no opinion as to the structure,
terms or effect of any other aspect of the Offer.
The following is a summary of all of the material financial analyses
performed by Advest in arriving at the Advest Opinion and was provided by Advest
for inclusion herein.
STOCK TRADING HISTORY. Advest reviewed the history of the trading prices
and trading volume of the Shares since September 5, 1997 and the relative
trading price of the Shares over the prior twelve month, six month, three month
and one month periods, respectively, in relation to the market prices of (i) the
Standard & Poor's Small Cap Healthcare Index (the "S&P Healthcare"), (ii) the
Standard & Poor's Insurance Sector (P&C) Index (the "S&P Insurance") and (iii)
the Russell 2000 Index (the "Russell 2000"). Such analysis showed that the
Shares underperformed the Russell 2000, S&P Healthcare and S&P Insurance over
all measurement periods. As noted below, in arriving at its opinion, Advest
considered the results of all of its analyses as a whole and did not attribute
any particular weight to any analysis, factor or ratio considered.
THE PREMIUMS PAID ANALYSIS. The premiums paid analysis performed by Advest
was based upon published studies of premiums paid in merger and acquisition
transactions including, overall transactions, transactions less than $25.0
million, cash transactions, transactions with stock prices under $10, insurance
transactions and health services transactions. These comparisons reflected an
implied value of between $2.42 and $4.06 per Share of the Company based upon the
price of Shares on September 7, 1999, prior to the public announcement of the
Offer. As noted below, in arriving at its opinion, Advest considered the results
of all of its analyses as a whole and did not attribute any particular weight to
any analysis, factor or ratio considered.
SELECTED COMPARABLE PUBLIC COMPANY ANALYSIS. Advest compared selected
financial and operating data of the Company to the corresponding data of a group
of publicly traded companies that Advest deemed to be similar to the Company. In
determining the appropriate comparable company universe for the Company, Advest
considered a variety of factors including market capitalization, revenues, cash
flow and business focus. Throughout this analysis, the Company's Market Value of
Equity is calculated as the $5.00 Offer Price per Share multiplied by the
current shares outstanding and the Company's Total Enterprise Value is
calculated at the Company Market Value of Equity plus total debt less
unrestricted cash, as calculated by management.
When evaluating the workers' compensation insurance business, these
companies included: Argonaut Group, Donegal Group, Fremont General Corporation,
Meadowbrook Insurance Group and Paula Financial (collectively, the "Insurance
Comparable Companies"). When evaluating the staffing business, these companies
included: Modis Professional Services, CDI Corporation, On Assignment, RCM
Technologies, and Westaff (collectively, the "Staffing Comparable Companies").
For the Insurance Comparable Companies, Advest calculated multiples of Market
Value of Equity (defined as outstanding shares multiplied by current share
price) to the latest twelve months ("LTM") earnings per share ("EPS"). Advest
also calculated multiples of Market Value of Equity to book value and to
estimated EPS for the year ending December 31, 1999 based on information
provided by a variety of sources including analyst research reports and
information published by First Call (an on-line data service which compiles
estimates developed by research analysts). For the Staffing Comparable
Companies, Advest calculated multiples of Enterprise Value (defined as market
value plus total debt less cash and cash equivalents), to the LTM revenues and
LTM earnings before interest, taxes, depreciation, and amortization ("EBITDA").
Advest also calculated multiples of the Market Value of Equity to book value,
LTM EPS, and estimated 1999 EPS based on information provided by a variety of
sources including analyst research reports and information published by First
Call.
For the Insurance Comparable Companies, the multiples of LTM EPS ranged
from 5.0x to 17.3x with average and median multiples of 10.8x and 10.3x,
respectively (as compared to 14.4x for the Company), implying a value of $3.57
per Share for the Company based upon the median of the multiples for the
Insurance Comparable Companies. The multiples of estimated 1999 EPS ranged from
6.0x to 18.2x with average and median multiples of 12.4 and 10.1, respectively
(as compared to 8.3x for the Company), implying a value of $6.06 per share for
the Company based upon the median of the multiples for the Insurance Comparable
Companies. The multiples of book value ranged from 0.6x to 0.9x (as compared to
2.2x for the Company) implying a value of $1.90 per share for the Company on a
similar basis.
18
<PAGE> 19
For the Staffing Comparable Companies, the multiples of LTM revenue ranged
from 0.3x to 2.1x, with mean and median multiples of .8x and .7x, respectively
(as compared to .7x for the Company), implying a value of $5.00 per share for
the Company based upon the median of the multiples for the comparable companies.
The multiples of LTM EBITDA ranged from 4.6x to 14.3x, with mean and median
multiples of 7.9x and 7.2x, respectively (as compared to 6.8x for the Company),
implying a value of $5.34 per share for the Company on a similar basis. The
multiples of book value ranged from 1.3x to 5.3x, with mean and median multiples
of 2.2x and 1.4x, respectively (as compared to 2.1x for the Company), implying a
value of $3.36 per share for the Company on a similar basis. The multiples of
LTM EPS ranged from 6.9x to 25.9x, with mean and median multiples of 14.9x and
11.3x, respectively (as compared to 14.4x for the Company), implying a value of
$3.91 per share for the Company on a similar basis. The multiples of 1999 EPS
ranged from 6.6x to 22.3x, with mean and median multiples of 12.3x and 10.5x,
respectively (as compared to 8.3x for the Company), implying a value of $6.30
per share for the Company on a similar basis.
As noted below, in arriving at the Advest Opinion, Advest considered the
results of all of its analyses as a whole and did not attribute any particular
weight to any analysis, factor or ratio considered by Advest.
COMPARABLE TRANSACTION ANALYSIS. Advest considered the terms, to the
extent publicly available, of selected merger and acquisition transactions
comparable to the Offer, both in the insurance industry (the "Comparable
Insurance Transactions") and the staffing industry (the "Comparable Staffing
Transactions") and sought to compare the $5.00 Offer Price per Share with the
considerations involved in such transactions.
The Comparable Insurance Transactions were as follows: the completed
acquisition of First Reinsurance Co. by Gryphon Holdings Inc., the completed
acquisition of Utah Farm Bureau Insurance Co. by Farm Bureau Mutual Insurance
Co., the completed acquisition of CAT Ltd. by ACE Ltd., the completed
acquisition of Mountbatten Inc. by Zurich Allied AG, the completed acquisition
of Summit Holding Southeast Inc. by Liberty Mutual Insurance Co., the completed
acquisition of Folksamerica Holding Co. by Fund American Enterprise Holdings,
Inc., the completed acquisition of National Information Group by First American
Financial Corp., the acquisition of CalFarm Insurance Co. by Nationwide Mutual
Insurance Co., and the announced acquisition of Chartwell Re Corp by Trenwick
Group Inc. For each of the Insurance Comparable Transactions, Advest reviewed
the multiples of (i) Transaction Value (defined as the purchase price paid for
the company) to Book Value and (ii) Transaction Value to Net Income. The
multiples of Book Value ranged from 0.7x to 4.4x with average and median
multiples of 1.9x and 1.3x, respectively (as compared to 2.1x for the Company),
implying a value of $3.12 per share for the Company based upon the median of the
multiples on a similar basis. The multiples of net income ranged from 6.1x to
50.1x with average and median multiples of 22.6x and 21.2x, respectively (as
compared to 14.4x for PEGI), implying a value of $7.34 per share for the Company
based upon the median of the multiples on a similar basis.
The Comparable Staffing Transactions were as follows: the completed
acquisition of the staffing business of FPA Medical Management by Coastal
Physician Group, the completed acquisition of the Team Health subsidiary of
MedPartners by a private investor group, the completed acquisition of Vincam
Group by Automatic Data Processing, the completed acquisition of Personnel
Management by Linsalata Capital Partners, the completed acquisition of Staffing
Edge by ACSYS Inc., the completed acquisition of StarMed Staffing by RehabCare
Group, the completed acquisition of Corestaff by Corporate Services Group, the
completed acquisition of Source Services Corp. by Romac International and the
completed acquisition of Aspen Consulting Group by TEAM America Corp. For each
of the Staffing Comparable Transactions, Advest reviewed the multiples of (i)
Total Enterprise Value to Revenue and (ii) Total Enterprise Value to EBITDA. The
multiples of Revenue ranged from 0.2x to 1.5x with average and median multiples
of 10.7x and 0.6x, respectively (as compared to 0.4x for the Company), implying
a value of $7.06 per share for the Company based upon the median of the
multiples on a similar basis. The multiples of EBITDA ranged from 6.5x to 20.0x
with average and median multiples of 14.4x and 9.4x, respectively (as compared
to 6.8x for the Company), implying a value of $6.99 per share for the Company
based upon the median of the multiples on a similar basis. As noted above and
below, however, Advest considered the results of all of its analyses as a whole
and did not attribute any particular weight to any analysis, factor or ratio
considered by Advest.
19
<PAGE> 20
DISCOUNTED CASH FLOW ANALYSIS. Advest performed discounted cash flow
analyses of the projected free cash flows of the Company for the third and
fourth quarters of 1999 through 2000 based on projections prepared by
management. Advest performed separate discounted cash flow analyses for the
insurance operations of the Company ("Insurance DCF") and the Staffing
operations of the Company ("Staffing DCF").
The Insurance DCF was determined by adding (a) the present value of the
projected free cash flows of the Company's insurance business and (b) the
present value of the estimated terminal value of the insurance business at the
end of 2000. For the insurance business, the range of estimated terminal values
at the end of the five-year period was calculated by applying perpetual growth
rates varying from 0.5% to 1.5% to the free cash flow at the end of 2000.
Estimated cash flows and terminal values were discounted to present value using
discount rates ranging from 24.0% to 29.1%. Based on such terminal value
assumptions and discount rates, the sum of the present values of projected cash
flows resulted in total enterprise value ranges for the insurance operations of
between $8.1 million and $10.2 million.
The Staffing DCF was determined by adding (a) the present value of the
projected free cash flows of the Company's staffing business and (b) the present
value of the estimated terminal value of the staffing business at the end of
2000. For the staffing business, the range of estimated terminal values at the
end of the five-year period was calculated by applying perpetual growth rates
varying from 6.0% to 8.0% to the free cash flow at the end of 2000. Estimated
cash flows and terminal values were discounted to present value using discount
rates ranging from 12.2% to 15.8%. Based on such terminal value assumptions and
discount rates, the sum of the present values of projected cash flows resulted
in total enterprise value ranges for the staffing operations of between $4.9
million and $11.4 million.
The implied equity value for the Company was determined by (a) summing the
total enterprise values from the Insurance DCF and the Staffing DCF and (b)
subtracting the current net debt outstanding of the Company. This resulted in a
range of equity values of between $12,686,066 and $21,300,375, which imply a
range value between $2.42 and $4.06 per share for the Company. As noted above
and below, however, Advest considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis, factor or
ratio considered by Advest.
The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant quantitative and
qualitative methods of financial analysis and the application of those methods
to the particular circumstances and, therefore, is not readily susceptible to
partial analysis or summary description. In arriving at its opinion, Advest
considered the results of all its analyses as a whole and did not attribute any
particular weight to any analysis, factor or ratio considered by it. Subject to
the matters set forth in the Advest Opinion, the judgments made by Advest as to
its analyses and the factors considered by Advest caused Advest to be of the
opinion, as of the date of the Advest Opinion, that the Offer Price was fair,
from a financial point of view, to the holders of the Shares. Advest's analyses
must be considered as a whole; considering any portion of such analyses and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the Advest
Opinion. In performing its analyses, Advest made numerous assumptions with
respect to the industry performance, general business and economic conditions
and other matters, many of which are beyond the control of the Company. Any
estimates contained in Advest's analyses were not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than as set forth therein. Estimated values
do not purport to be appraisals or to reflect the prices at which businesses or
companies may be sold in the future and such estimates are inherently subject to
uncertainty.
Advest is a nationally-recognized investment banking firm with experience
in the valuation of businesses and their securities in connection with mergers,
acquisitions, sales and distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes. The extensive
experience of Advest's investment banking group in providing corporate finance
and advisory services to companies was a significant factor in the Company's
decision to select Advest to provide the fairness opinion for the Offer.
In the ordinary course of business, Advest provides research coverage and
actively trades the securities of the Company for its own account and the
accounts of its customers and, accordingly, may at any time hold a
20
<PAGE> 21
long or a short position in such securities. In April 1999, Advest issued a
"buy" recommendation for the Shares with a target price of $11.00 per Share. In
August 1999, Advest issued a "buy" recommendation for the Shares with a target
price of $7.00 per Share. In each case, Advest also advised that a purchase of
Shares by a prospective investor would involve a "high market risk." Advest's
recommendations were based on the Company's projected earnings for 1999 and the
year 2000, respectively. Advest may provide investment banking or financial
advisory services to the Company in the future.
Pursuant to the Engagement Letter, the Company paid Advest a fee of
$100,000 in connection with its opinion. The Company has also agreed to
reimburse Advest for certain of its out-of-pocket expenses incurred by it in
connection with its engagement. In addition, the Company has agreed to indemnify
Advest against certain expenses and liabilities in connection with its
engagement.
4. INTERESTS OF CERTAIN PERSONS IN THE OFFER
In considering the recommendation of the Board and the Independent
Committee with respect to the Offer and the fairness of the consideration to be
received in the Offer, stockholders should be aware that certain officers and
directors of the Company have interests described below which may present them
with certain potential conflicts of interest. As of August 31, the Company's
directors and executive officers as a group beneficially owned an aggregate of
2,278,634 Shares, or approximately 34.1% of the outstanding Shares on a fully
diluted basis (approximately 36.8% of Shares issued and outstanding). As of
August 31, 1999, such ownership includes 2,014,706 Shares, representing
approximately 30.1% of the Shares on a fully diluted basis (approximately 36.3%
of Shares issued and outstanding) held by Mr. Mel Harris, the Chairman of the
Board and Chief Executive Officer of the Company. The Remaining Stockholders,
including Mr. Harris, will not be tendering any Shares pursuant to the Offer as
they have not been included in the Offer. Consequently, the tendering of Shares
pursuant to the Offer will increase the ownership interest of the Remaining
Stockholders in the Company in proportion to the reduction of the number of
Shares outstanding. If a sufficient number of Shares are tendered pursuant to
the Offer, Mr. Harris may become the beneficial owner of in excess of 50% of the
outstanding Shares. In such event, Mr. Harris will have effective control of the
Company since he will, acting alone, have the ability to elect all of the
members of the Board. See "The Tender Offer -- 5. Beneficial Ownership of
Shares."
The Board was aware of these actual and potential conflicts of interest and
considered them along with the other matters described under "Special
Factors -- 2. Recommendation of the Company's Board; Fairness of the Offer."
Under the Delaware General Corporation Law (the "DGCL"), corporations
organized under the laws of the State of Delaware are permitted to indemnify
their current and former directors, officers, employees and agents under certain
circumstances against certain liabilities and expenses incurred by them by
reason of their serving in such capacities. The Company's certificate of
incorporation provides that the Company shall indemnify and advance expenses to
each director and officer of the Company, to the fullest extent permitted by
Section 145 of the DGCL. As a result, each director and officer of the Company
will be indemnified by the Company against, among other things, liabilities and
expenses incurred in connection with any threatened, pending or completed legal
action or proceeding to which he or she may be made a party or threatened to be
made a party by reason of being a director or officer of the Company or serving
any other enterprise as a director or officer at the request of the Company.
Under Section 102(b)(7) of the DGCL, the directors of the Company are not
personally liable for monetary damages for breach of fiduciary duties other than
for, among other things, a breach of any such director's duty of loyalty to the
Company or its stockholders or acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law. The Company has
purchased directors' and officers' liability insurance for the benefit of its
directors and officers.
Neither the Company, nor any subsidiary of the Company nor, to the best of
the Company's knowledge, any of the Company's directors or executive officers,
nor any affiliates of any of the foregoing, had any transactions involving the
Shares during the 40 business days prior to the date hereof.
Except for outstanding Stock Options to purchase Shares granted from time
to time over recent years to participants in the Company's 1996 Stock Option
Plan, including certain employees, executive officers and
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<PAGE> 22
directors of the Company, and except as otherwise described herein, neither the
Company nor, to the best of the Company's knowledge, any of its directors or
executive officers, is a party to any contract, arrangement, understanding or
relationship with any other person relating, directly or indirectly, to the
Offer including, but not limited to, any contract, arrangement, understanding or
relationship concerning the transfer or the voting of any such securities, joint
ventures, loan or option arrangements, puts or calls, guaranties of loans,
guaranties against loss or the giving or withholding of proxies, consents or
authorizations.
5. BENEFICIAL OWNERSHIP OF SHARES
The following table sets forth certain information, as of August 31, 1999,
regarding the ownership of Shares by each person known by the Company to be the
beneficial owner of more than 5% of the outstanding Shares, each director of the
Company, the Chief Executive Officer of the Company, the other executive
officers of the Company, and all executive officers and Directors of the Company
as a group:
<TABLE>
<CAPTION>
NUMBER OF
NAME AND ADDRESS OF DIRECTORS AND OFFICERS AND OTHER BENEFICIAL OWNERS(2) OUTSTANDING SHARES PERCENTAGE
- ------------------------------------------------------------------------- ------------------ ----------
<S> <C> <C>
Mel Harris(1)(3)................................................. 2,014,706 30.1%
Peter E. Kilissanly(1)(5)........................................ 103,177 1.5
William R. Dresback(1)(6)........................................ 50,000 *
Jose Menendez(1)(7).............................................. 9,000 *
Jack D. Burstein(8).............................................. 36,250 *
Stuart J. Gordon(9).............................................. 11,250 *
Alexander M. Haig, Jr.(10)....................................... -- *
Maxwell M. Rabb(11).............................................. 11,250 *
All directors and executive officers as a group(9 persons)(12)... 2,278,634 34.1
Howard Odzer(4).................................................. 411,765 6.2
Putnam Investments, Inc.(13)..................................... 529,004 7.9
</TABLE>
- ---------------
* Represents less than 1% of outstanding Shares.
(1) The business address of each such person is Preferred Employers Holdings,
Inc., 10800 Biscayne Boulevard, Miami, Florida 33161.
(2) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to the Shares
beneficially owned by them. In accordance with Rule 13d-3 under the
Exchange Act, a person is deemed to be the beneficial owner of securities
that can be acquired by such person within sixty days from the date of
determination upon the exercise of warrants or options. Each beneficial
owner's number of Shares and percentage ownership as set forth above is
determined by assuming that the convertible securities that are held by
such person (but not those held by any other person) which are exercisable
within sixty days from the date listed above have been exercised or
converted, as the case may be.
(3) Includes (i) 1,340,000 Shares held of record by Mr. Harris, (ii) 300,000
Shares over which Mr. Harris has shared investment and voting power
subject to the Share Escrow Agreement by and among the Company, Mr. Odzer
and the escrow agent (the "Share Escrow Agreement"), (iii) 88,235 Shares
held of record by Francine Harris, the wife of Mr. Harris, (iv) 88,235
Shares held of record by Ms. Harris, as custodian for Jamie Jo Harris, the
daughter of Mr. and Ms. Harris, and (v) options to purchase 110,000 Shares
issued pursuant to the 1996 Stock Option Plan which are exercisable within
60 days of August 31, 1999. Mr. Harris may be deemed to have voting
control over such Shares and may be deemed to be the beneficial owner
thereof. Mr. Harris disclaims beneficial ownership of (a) 88,235 Shares
held of record by Ms. Harris, and (b) 88,235 Shares held of record by Ms.
Harris, as custodian for Jamie Jo Harris. Does not include options to
purchase 165,000 Shares which vest over a three year period ending August
2002 pursuant to the Company's 1996 Stock Option Plan. The Compensation
Committee of the Company's Board has investment and voting power over the
300,000 Shares placed in escrow under the Share Escrow Agreement. Mr.
Harris is a member of the Company's Compensation Committee.
(4) Does not include 300,000 Shares held of record by Mr. Odzer, which have
been placed in escrow pursuant to the terms of the Share Escrow Agreement.
The Compensation Committee of the Company's Board has investment and
voting power over the 300,000 Shares placed in escrow under the Share
Escrow Agreement. Mr. Harris is a member of the Compensation Committee.
Mr. Odzer's address is 1399 N.E. 103rd Street, Miami Shores, Florida
33138.
(5) Assumes conversion of the outstanding principal balance of $700,000
pursuant to the Company's Notes issued to Mr. Kilissanly in May 1998.
Includes (i) 100 Shares held of record by Ms. Odalys Kilissanly, the wife
of Mr. Kilissanly, (ii) 100 Shares held of record by Ms. Kilissanly, as
custodian for Anthony Kilissanly, the minor son of Mr. and Mrs.
Kilissanly, (iii) 100 Shares held of record by Ms. Kilissanly, as
custodian for Megan Kilissanly, the minor daughter of Mr. and Ms.
Kilissanly, (iv) 100 Shares held of record by Ms. Kilissanly, as custodian
for Lauren Ibarria, the minor daughter of Mr. Kilissanly and (v) options
to purchase 25,000 Shares. Does not include (i) options to purchase an
additional 50,000 Shares, pursuant to the Company's 1996 Stock Option
Plan, at an exercise price of $8.13 per share, vesting equally over a
period of two years beginning on March 30, 2000 and (ii) options to
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<PAGE> 23
purchase 75,000 Shares, pursuant to the Company's 1996 Stock Option Plan,
at an exercise price of $8.50 per share, vesting equally over a period of
five years beginning on July 22, 1999. Pursuant to each option agreement,
options to purchase one-half of the number of Shares in each year are
subject to the Company meeting 80% of its budgeted pre-tax profits in each
year.
(6) Represents (a) options to purchase 25,000 Shares issued pursuant to the
Company's 1996 Stock Option Plan and (b) options to purchase 25,000 Shares
issued pursuant to the Share Escrow Agreement, all exercisable within 60
days of August 31, 1999. Does not include (a) options to purchase 5,000
Shares pursuant to the Company's 1996 Stock Option Plan which vest in
February 2000, and (b) options to purchase 20,000 Shares which were
granted in July 1998 and vest over a four year period commencing July 2000
and ending July 2003 pursuant to the Company's 1996 Stock Option Plan.
(7) Represents options to purchase 9,000 Shares issued pursuant to the
Company's 1996 Stock Option Plan exercisable within 60 days of August 31,
1999. Does not include options to purchase 36,000 Shares pursuant to the
Company's 1996 Stock Option Plan which were granted in July 1998 and vest
over a four year period commencing July 2000 and ending July 2003 pursuant
to the Company's 1996 Stock Option Plan.
(8) Represents (a) options to purchase 5,000 Shares issued pursuant to the
Company's 1996 Stock Option Plan, (b) options to purchase 6,250 Shares
issued pursuant to the Share Escrow Agreement and (c) warrants to purchase
an aggregate of 25,000 Shares issued to Strategica Group, all exercisable
within 60 days of August 31, 1999. Mr. Burstein's business address is c/o
Strategica Capital Corp., 1221 Brickell Avenue, Suite 2600, Miami, Florida
33131.
(9) Represents (a) options to purchase 5,000 Shares issued pursuant to the
Company's 1996 Stock Option Plan and (b) options to purchase 6,250 Shares
issued pursuant to the Share Escrow Agreement, all exercisable within 60
days of August 31, 1999. Mr. Gordon's business address is c/o Duane Morris
and Heckscher, 1667 K Street, N.W., Suite 700, Washington D.C. 20006.
(10) Does not include (i) options to purchase 100,000 Shares, pursuant to the
Company's 1996 Stock Option Plan, at an exercise price of $9.25 per share,
vesting equally over a period of three years beginning on January 22,
2000, and (ii) options to purchase 25,000 Shares, pursuant to the
Company's 1996 Stock Option Plan, at an exercise price of $9.25 per share,
vesting equally over a period of five years beginning on January 22, 2000.
The options to purchase 100,000 Shares were granted to General Haig in
connection with his consulting services to the Company. The options to
purchase 25,000 Shares were granted to General Haig in connection with his
services as a director of the Company. General Haig's business address is
World Wide Associates, Inc., 1155 15th Street, N.W., Suite 800, Washington
D.C. 20005.
(11) Represents (a) options to purchase 5,000 Shares issued pursuant to the
Company's 1996 Stock Option Plan and (b) options to purchase 6,250 Shares
issued pursuant to the Share Escrow Agreement, all exercisable within 60
days of August 31, 1999. Mr. Rabb's business address is c/o Kramer, Levin,
Naftalis & Frankel, 919 3rd Avenue, 40th Floor, New York, New York 10022.
(12) Includes the beneficial ownership of Shares by all directors and executive
officers named in this table, including Shares subject to options,
warrants and Notes as specified above. Also includes 25,000 Shares owned
by Ms. Nancy Ryan, and options to purchase 8,000 and 10,000 Shares, issued
to Ms. Ryan pursuant to the 1996 Stock Option Plan and the Share Escrow
Agreement, respectively.
(13) Outstanding Shares includes and assumes the conversion by Putnam
Investments, Inc. of $2 million principal amount of the Company's Notes.
The business address of Putnam Investments, Inc. is 1 Post Office Square,
Boston, Massachusetts 02109.
Share Escrow Agreement. Pursuant to a Share Escrow Agreement dated
February 5, 1997, Mr. Odzer placed 300,000 Shares owned by him in escrow for
issuance upon the exercise of stock options granted to certain directors,
executives and other officers of the Company, as designated by the Compensation
Committee of the Company's Board of Directors. As of August 31, 1999, options to
purchase an aggregate of 220,000 Shares were outstanding under the Share Escrow
Agreement. The Compensation Committee of the Board of Directors has investment
and voting power over the 300,000 Shares placed in escrow under the Share Escrow
Agreement.
NET Healthcare Escrow Agreement. In August 1998, the Company acquired
through a "pooling of interests" all of the outstanding capital stock of NET
Healthcare. Under the terms of the Stock Purchase Agreement relating to the NET
Healthcare acquisition (the "NET Purchase Agreement"), the Sellers (as defined
therein) deposited with City National Bank, as escrow agent, 51,708 Shares as
security for the indemnification obligations of the Sellers arising under the
NET Purchase Agreement. The Company expects that the Shares held in escrow will
be tendered pursuant to the Offer and will be substituted with the cash proceeds
therefrom.
6. FEES AND EXPENSES
The Company has retained Morrow & Co., Inc. to act as Information Agent and
American Stock Transfer & Trust Company to act as Depositary in connection with
the Offer. The Information Agent may contact holders of Shares by mail,
telephone, telegraph and personal interviews and may request brokers, dealers
and other nominee stockholders to forward materials relating to the Offer to
beneficial owners. The Information Agent and the Depositary will each receive
reasonable and customary compensation for their
23
<PAGE> 24
respective services and will be reimbursed by the Company for certain reasonable
out-of-pocket expenses, including attorneys' fees.
No fees or commissions will be payable to brokers, dealers or other persons
(other than fees to the Information Agent and the Depositary as described above)
for soliciting tenders of Shares pursuant to the Offer. The Company will,
however, upon request, reimburse brokers, dealers and commercial banks for
customary mailing and handling expenses incurred by such persons in forwarding
the Offer to Purchase and related materials to the beneficial owners of Shares
held by any such person as a nominee or in a fiduciary capacity. No broker,
dealer, commercial bank or trust company has been authorized to act as the agent
of the Company, the Information Agent or the Depositary for purposes of the
Offer. The Company will pay or cause to be paid all stock transfer taxes, if
any, on its purchase of Shares except as otherwise provided in Instruction 6 of
the Letter of Transmittal.
The following is an estimate of expenses incurred or to be incurred in
connection with the Offer. Also see "The Tender Offer -- 13. Fees and Expenses."
<TABLE>
<S> <C>
Legal Fees (including fees of counsel for the Independent
Committee).................................................. $215,000
Printing and Mailing........................................ 25,000
Filing Fees................................................. 3,000
Depositary Fees and Expenses................................ 7,500
Information Agent Fees and Expenses......................... 6,500
Investment Bankers' Fees.................................... 100,000
Accountants' Fees........................................... 5,000
Financing Fees.............................................. 10,000
Miscellaneous............................................... 3,000
--------
Total............................................. $375,000
========
</TABLE>
The Company will be responsible for all expenses incurred in connection
with the Offer, whether or not the Offer is consummated.
7. DISSENTERS' RIGHTS
No dissenters' rights are available to stockholders in connection with the
Offer under applicable Delaware law.
24
<PAGE> 25
THE TENDER OFFER
1. TERMS OF THE OFFER; EXPIRATION DATE
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of such extension or
amendment), the Company will accept for payment, and will pay for, all Shares
validly tendered prior to the Expiration Date (as hereinafter defined) and not
withdrawn as permitted by "The Tender Offer -- 4. Withdrawal Rights." The term
"Expiration Date" means 5:00 p.m., New York City time, on November 3, 1999,
unless and until the Company, in its sole discretion, shall have extended the
period during which the Offer is open, in which event the term "Expiration Date"
shall mean the latest time and date at which the Offer, as so extended by the
Company, shall expire.
The Company expressly reserves the right, in its sole discretion, at any
time and from time to time, to extend for any reason the period of time during
which the Offer is open, including the occurrence of any of the conditions
specified in "The Tender Offer -- 11. Certain Conditions of the Offer," by
giving oral or written notice of such extension to the Depositary. During any
such extension, all Shares previously tendered and not withdrawn will remain
subject to the Offer, subject to the rights of a tendering stockholder to
withdraw such stockholder's Shares. See "The Tender Offer -- 4. Withdrawal
Rights."
Subject to the applicable regulations of the Commission, the Company also
expressly reserves the right, in its sole discretion, at any time and from time
to time, (i) to delay acceptance for payment of, or, regardless of whether such
Shares were theretofore accepted for payment, payment for, any Shares, pending
receipt of any regulatory approvals specified in "The Tender Offer -- 12.
Certain Legal Matters and Regulatory Approvals," (ii) to terminate the Offer and
not accept for payment any Shares upon the occurrence of any of the conditions
specified in "The Tender Offer -- 11. Certain Conditions of the Offer" and (iii)
to waive any condition, extend the offer period or otherwise amend the Offer in
any respect, by giving oral or written notice of such delay, termination, waiver
or amendment to the Depositary and by making a public announcement thereof. The
Company acknowledges that (i) Rule 13e-4(f) under the Exchange Act requires the
Company to pay the consideration offered or return the Shares tendered promptly
after the termination or withdrawal of the Offer and (ii) the Company may not
delay acceptance for payment of, or payment for (except as provided in clause
(i) of the first sentence of this paragraph), any Shares upon the occurrence of
any of the conditions specified in "The Tender Offer -- 11. Certain Conditions
of the Offer" without extending the period of time during which the Offer is
open.
Any such extension, delay, termination, waiver or amendment will be
followed as promptly as practicable by public announcement thereof, such
announcement in the case of an extension to be made promptly on the next
business day after the previously scheduled Expiration Date.
If the Company makes a material change in the terms of the Offer or other
information concerning the Offer, or if it waives a material condition of the
Offer, the Company will extend the Offer to the extent required by Rules
13e-3(e)(2), 13e-4(e)(2) and 13e-4(f) under the Exchange Act.
If, prior to the Expiration Date, the Company should decide to decrease the
number of Shares being sought or to increase or decrease the consideration being
offered in the Offer, such decrease in the number of Shares being sought or such
increase or decrease in the consideration being offered will be applicable to
all stockholders whose Shares are accepted for payment pursuant to the Offer
and, if at the time notice of any such decrease in the number of Shares being
sought or such increase or decrease in the consideration being offered is first
published, sent or given to holders of such Shares, the Offer is scheduled to
expire at any time earlier than the period ending on the tenth business day from
and including the date that such notice is first so published, sent or given,
the Offer will be extended at least until the expiration of such ten business
day period. For purposes of this Offer, a "business day" means any day other
than a Saturday, Sunday or federal holiday and consists of the time period from
12:01 a.m. through 12:00 midnight, New York City time.
This Offer to Purchase and the related Letter of Transmittal will be mailed
to record holders of Shares whose names appear on the Company's stockholder list
as of September 17, 1999 and will be furnished, for subsequent transmittal to
beneficial owners of Shares, to brokers, dealers, commercial banks, trust
companies
25
<PAGE> 26
and similar persons whose names, or the names of whose nominees, appear on the
stockholder list or, if applicable, who are listed as participants in a clearing
agency's security position listing.
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment), the Company will accept for payment, and will pay for promptly
after the Expiration Date, all Shares validly tendered prior to the Expiration
Date and not properly withdrawn in accordance with "The Tender Offer -- 11.
Certain Conditions of the Offer." Subject to applicable rules of the Commission,
the Company expressly reserves the right to delay acceptance for payment of, or
payment for, Shares pending receipt of any regulatory approvals specified in
"The Tender Offer -- 12. Certain Legal Matters and Regulatory Approvals" or in
order to comply in whole or in part with any other applicable law.
In all cases, payment for Shares tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of (i) the
certificates evidencing such Shares (the "Share Certificates") or timely
confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such
Shares into the Depositary's account at Depositary Trust Company (hereinafter
referred to as the "Book-Entry Transfer Facility") pursuant to the procedures
set forth in "The Tender Offer -- 3. Procedures for Accepting the Offer and
Tendering Shares," (ii) the Letter of Transmittal (or a facsimile thereof),
properly completed and duly executed, with any required signature guarantees or,
in the case of a book-entry transfer, an Agent's Message (as defined below) in
lieu of the Letter of Transmittal, and (iii) any other documents required under
the Letter of Transmittal.
For purposes of the Offer, the Company will be deemed to have accepted for
payment (and thereby purchased) Shares validly tendered and not properly
withdrawn as, if and when the Company gives oral or written notice to the
Depositary of the Company's acceptance for payment of such Shares pursuant to
the Offer. Upon the terms and subject to the conditions of the Offer, payment
for Shares accepted for payment pursuant to the Offer will be made by deposit of
the purchase price therefor with the Depositary, which will act as agent for
tendering stockholders for the purpose of receiving payments from the Company
and transmitting such payments to tendering stockholders whose Shares have been
accepted for payment. Under no circumstances will interest on the purchase price
for Shares be paid, regardless of any delay in making such payment.
If any tendered Shares are not accepted for payment for any reason pursuant
to the terms and conditions of the Offer, or if Share Certificates are submitted
evidencing more Shares than are tendered, Share Certificates evidencing
unpurchased Shares will be returned, without expense and without the payment of
interest to the tendering stockholder (or, in the case of Shares tendered by
book-entry transfer into the Depositary's account at a Book-Entry Transfer
Facility pursuant to the procedure set forth in "The Tender Offer -- 3.
Procedures for Accepting the Offer and Tendering Shares," such Shares will be
credited to an account maintained at such Book-Entry Transfer Facility), as
promptly as practicable following the expiration or termination of the Offer.
If, prior to the Expiration Date, the Company increases the consideration
offered to any holders of Shares pursuant to the Offer, such increased
consideration will be paid to all holders of Shares that are purchased pursuant
to the Offer, whether or not, such Shares were tendered prior to such increase
in consideration.
The Company reserves the right to transfer or assign, in whole or from time
to time in part, to one or more of its affiliates, the right to purchase all or
any portion of the Shares tendered pursuant to the Offer, but any such transfer
or assignment will not relieve the Company of its obligations under the Offer
and will in no way prejudice the rights of tendering stockholders to receive
payment for Shares validly tendered and accepted for payment pursuant to the
Offer.
26
<PAGE> 27
3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES
In order for a holder of Shares to validly tender Shares pursuant to the
Offer, the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, together with any required signature guarantees (or, in the
case of a book-entry transfer, an Agent's Message (as defined below) in lieu of
the Letter of Transmittal) and any other documents required by the Letter of
Transmittal, must be received by the Depositary at one of its addresses set
forth on the back cover of this Offer to Purchase and either (i) the Share
Certificates evidencing tendered Shares must be received by the Depositary at
such address or such Shares must be tendered pursuant to the procedure for
book-entry transfer described below and a Book-Entry Confirmation must be
received by the Depositary (including an Agent's Message if the tendering
stockholder has not delivered a Letter of Transmittal), in each case prior to
the Expiration Date, or (ii) the tendering stockholder must comply with the
guaranteed delivery procedures described below. The term "Agent's Message" means
a message, transmitted by a Book-Entry Transfer Facility to, and received by,
the Depositary and forming a part of a Book-Entry Confirmation, which states
that such Book-Entry Transfer Facility has received an express acknowledgment
from the participant in such Book-Entry Confirmation, that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal and
that the Company may enforce such agreement against such participant.
THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED
DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT
THE OPTION AND RISK OF THE TENDERING STOCKHOLDER, AND THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN SUCH DOCUMENTS ARE ACTUALLY RECEIVED BY THE DEPOSITARY. IF
DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
Book-Entry Transfer. The Depositary will establish accounts with respect
to the Shares at the Book-Entry Transfer Facilities for purposes of the Offer
within two (2) business days after the date of this Offer to Purchase. Any
financial institution that is a participant in the system of Book-Entry Transfer
Facility may make a book-entry delivery of Shares by causing such Book-Entry
Transfer Facility to transfer such Shares into the Depositary's account at such
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for such transfer. However, although delivery of Shares
may be effected through book-entry transfer at a Book-Entry Transfer Facility,
either the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, together with any required signature guarantees, or an
Agent's Message in lieu of the Letter of Transmittal, and any other required
documents, must, in any case, be received by the Depositary at one of its
addresses set forth on the back cover of this Offer to Purchase prior to the
Expiration Date, or the tendering stockholder must comply with the guaranteed
delivery procedure described below. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY
TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
Signature Guarantees. Signatures on all Letters of Transmittal must be
guaranteed by a firm that is a member of the Medallion Signature Guarantee
Program, or by any other "eligible guarantor institution," as such term is
defined in Rule l7Ad-15 under the Exchange Act (each of the foregoing referred
to as an "Eligible Institution"), except in cases where Shares are tendered (i)
by a registered holder of Shares who has not completed either the box entitled
"Special Payment Instructions" or the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. If a Share Certificate is registered in the name of a
person other than the signer of the Letter of Transmittal, or if payment is to
be returned, to a person other than the registered holder(s), then the Share
Certificate must be endorsed or accompanied by appropriate stock powers, in
either case signed exactly as the name(s) of the registered holder(s) appears on
the Share Certificate, with the signature(s) on such Share Certificate or stock
powers guaranteed by an Eligible Institution. See Instructions 1 and 5 of the
Letter of Transmittal.
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<PAGE> 28
Guaranteed Delivery. If a stockholder desires to tender Shares pursuant to
the Offer and the Share Certificates evidencing such stockholder's Shares are
not immediately available or such stockholder cannot deliver the Share
Certificates and all other required documents to the Depositary prior to the
Expiration Date, or such stockholder cannot complete the procedure for delivery
by book-entry transfer on a timely basis, such Shares may nevertheless be
tendered, provided that all the following conditions are satisfied:
i. such tender is made by or through an Eligible Institution;
ii. a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form made available by the Company is
received prior to the Expiration Date by the Depositary as provided below;
and
iii. the Share Certificates (or a Book-Entry Confirmation) evidencing
all tendered Shares, in proper form for transfer, in each case together
with the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, with any required signature guarantees, and any other
documents required by the Letter of Transmittal are received by the
Depositary within three (3) Nasdaq trading days after the date of execution
of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or mail or
transmitted by telegram or facsimile transmission to the Depositary and must
include a guarantee by an Eligible Institution in the form set forth in the form
of Notice of Guaranteed Delivery made available by the Company.
In all cases, payment for Shares tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of the
Share Certificates evidencing such Shares, or a Book-Entry Confirmation of the
delivery of such Shares, and the Letter of Transmittal (or a facsimile thereof),
properly completed and duly executed, with any required signature guarantees,
and any other documents required by the Letter of Transmittal.
Determination of Validity. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance for payment of any tender
of Shares will be determined by the Company in its sole discretion, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance for payment of which may, in the opinion of its
counsel, be unlawful. The Company also reserves the absolute right to waive any
condition of the Offer or any defect or irregularity in the tender of any Shares
of any particular stockholder, whether or not similar defects or irregularities
are waived in the case of other stockholders. No tender of Shares will be deemed
to have been validly made until all defects and irregularities have been cured
or waived. Neither the Company, the Depositary, the Information Agent nor any
other person will be under any duty to give notification of any defects or
irregularities in tenders or will incur any liability for failure to give any
such notification. The Company's interpretation of the terms and conditions of
the Offer (including the Letter of Transmittal and the instructions thereto)
will be final and binding.
Other Requirements. By executing the Letter of Transmittal as set forth
above, a tendering stockholder irrevocably appoints designees of the Company as
such stockholder's proxies, each with full power of substitution, in the manner
set forth in the Letter of Transmittal, to the full extent of such stockholder's
rights with respect to the Shares tendered by such stockholder and accepted for
payment by the Company. All such proxies shall be considered coupled with an
interest in the tendered Shares. Such appointment will be effective when, and
only to the extent that, the Company accepts such Shares for payment. Upon such
acceptance for payment, all prior proxies given by such stockholder with respect
to such Shares (and such other Shares and securities) will be revoked without
further action, and no subsequent proxies may be given nor any subsequent
written consent executed by such stockholder (and, if given or executed, will
not be deemed to be effective) with respect thereto. The designees of the
Company will, with respect to the Shares for which the appointment is effective,
be empowered to exercise all voting and other rights of such stockholder as they
in their sole discretion may deem proper at any annual or special meeting of the
Company's stockholders or any adjournment or postponement thereof, by written
consent in lieu of any such meeting or otherwise.
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<PAGE> 29
The acceptance for payment by the Company of Shares pursuant to any of the
procedures described above will constitute a binding agreement between the
tendering stockholder and the Company upon the terms and subject to the
conditions of the Offer.
TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENT TO
CERTAIN STOCKHOLDERS OF THE PURCHASE PRICE OF SHARES PURCHASED PURSUANT TO THE
OFFER, EACH SUCH STOCKHOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH STOCKHOLDER'S
CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT SUCH STOCKHOLDER IS NOT
SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY COMPLETING THE SUBSTITUTE
FORM W-9 IN THE LETTER OF TRANSMITTAL. IF BACKUP WITHHOLDING APPLIES WITH
RESPECT TO A STOCKHOLDER, THE DEPOSITARY IS REQUIRED TO WITHHOLD 31% OF ANY
PAYMENTS MADE TO SUCH STOCKHOLDER. SEE INSTRUCTION 10 OF THE LETTER OF
TRANSMITTAL.
4. WITHDRAWAL RIGHTS
Tenders of Shares made pursuant to the Offer are irrevocable except that
such Shares may be withdrawn at any time prior to the Expiration Date and,
unless theretofore accepted for payment by the Company pursuant to the Offer,
may also be withdrawn at any time after November 15, 1999. If the Company
extends the Offer, is delayed in its acceptance for payment of Shares or is
unable to accept Shares for payment pursuant to the Offer, the Depositary may,
nevertheless, on behalf of the Company, retain tendered Shares, and such Shares
may not be withdrawn except to the extent that tendering stockholders are
entitled to withdrawal rights as described in this Section 4.
For a withdrawal to be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Depositary at
one of its addresses set forth on the back cover page of this Offer to Purchase.
Any such notice of withdrawal must specify the name of the person who tendered
the Shares to be withdrawn, the number of Shares to be withdrawn and the name of
the registered holder of such Shares, if different from that of the person who
tendered such Shares. If Share Certificates evidencing Shares to be withdrawn
have been delivered or otherwise identified to the Depositary, then, prior to
the physical release of such Share Certificates, the serial numbers shown on
such Share Certificates must be submitted to the Depositary and the signature(s)
on the notice of withdrawal must be guaranteed by an Eligible Institution,
unless such Shares have been tendered for the account of an Eligible
Institution. If Shares have been tendered pursuant to the procedure for
book-entry transfer as set forth in the "The Tender Offer -- 3. Procedures for
Accepting the Offer and Tendering Shares," any notice of withdrawal must specify
the name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Shares.
All questions as to the form and validity (including the time of receipt)
of any notice of withdrawal will be determined by the Company, in its sole
discretion, whose determination will be final and binding. Neither the Company,
the Information Agent nor any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification.
Any Shares properly withdrawn will thereafter be deemed not to have been
validly tendered for purposes of the Offer. However, withdrawn Shares may be
re-tendered at any time prior to the Expiration Date by following one of the
procedures described in "The Tender Offer -- 3. Procedures for Accepting the
Offer and Tendering Shares."
5. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
A sale of Shares by a stockholder pursuant to the Offer will be a taxable
transaction for Federal income tax purposes and may also be a taxable
transaction under applicable state, local, foreign and other tax laws. The
Federal income tax consequences to a stockholder may vary depending upon the
stockholder's particular facts and circumstances. In addition, the Federal
income tax consequences described below may not apply to a stockholder subject
to special tax rules (including broker-dealers, stockholders who acquired Shares
pursuant
29
<PAGE> 30
to the exercise of employee stock options or otherwise as compensation,
individuals who are not citizens or residents of the United States or foreign
corporations).
Under section 302 of the Code, a sale of Shares for cash pursuant to the
Offer will be treated as an exchange, and thus, as described below, as a
transaction on which gain or loss is recognized, if the redemption of Shares (a)
is "substantially disproportionate" with respect to the stockholder, (b) results
in a "complete termination" of the stockholder's interest in the Company or (c)
is "not essentially equivalent to a dividend" with respect to the stockholder.
In determining whether any of those three tests under section 302 of the Code is
satisfied, a stockholder must take into account not only the Shares he actually
owns, but also any Shares he is deemed to own pursuant to the constructive
ownership rules of section 318 of the Code. Pursuant to those constructive
ownership rules, a stockholder is deemed to own Shares actually owned, and in
some cases constructively owned, by certain related individuals or entities and
any Shares that the stockholder has the right to acquire by exercise of an
option or by conversion or exchange of a security.
A sale of Shares pursuant to the Offer will be a "substantially
disproportionate" redemption with respect to a stockholder if the percentage of
the outstanding Shares that the stockholder actually and constructively owns
immediately following the sale of Shares pursuant to the Offer (treating as no
longer outstanding all Shares purchased pursuant to the Offer) is less than 80%
of the percentage of the outstanding Shares that the stockholder actually and
constructively owns immediately before the sale of Shares pursuant to the Offer
(treating as outstanding all Shares purchased pursuant to the Offer). A
stockholder should consult his tax adviser with respect to the application of
the "substantially disproportionate" test to his particular facts and
circumstances.
A sale of Shares pursuant to the Offer will result in a "complete
redemption" of a stockholder's interest in the Company if either (a) all of the
Shares that the stockholder actually and constructively owns are sold pursuant
to the Offer or otherwise, or (b) all of the Shares that the stockholder
actually and constructively owns are sold pursuant to the Offer or otherwise,
other than Shares constructively owned by reason of the family attribution rule,
and the stockholder is eligible to waive and effectively does waive attribution
of all Shares constructively owned by reason of the family attribution rule in
accordance with section 302(c)(2) of the Code.
Even if a stockholder's redemption of Shares pursuant to the Offer fails to
satisfy the "substantially disproportionate" test or the "complete termination"
test, a sale of Shares pursuant to the Offer nevertheless may satisfy the "not
essentially equivalent to a dividend" test if the stockholder's sale of Shares
pursuant to the Offer results in a "meaningful reduction" in the stockholder's
proportionate interest in the Company. Whether a redemption will be "not
essentially equivalent to a dividend" will depend upon the individual
stockholder's facts and circumstances. In certain circumstances, even a small
reduction in a stockholder's proportionate interest in the Company may satisfy
this test. For example, the Internal Revenue Service ("IRS") in Revenue Ruling
76-385 concluded that a 3.3% reduction in the proportionate interest of a
stockholder whose relative stock interest in a publicly held corporation was
minimal (substantially less than 1%) and who exercised no control over corporate
affairs constituted a "meaningful reduction." A stockholder expecting to rely
upon the "not essentially equivalent to a dividend" test should consult his own
tax adviser as to its application in his particular situation.
If any of the three tests in section 302 of the Code is satisfied, a
tendering stockholder will recognize gain or loss equal to the difference
between the amount of cash the stockholder receives pursuant to the Offer and
the stockholder's tax basis in the Shares sold pursuant to the Offer. Recognized
gain or loss will be capital gain or loss, assuming the Shares are held as
capital assets, and will be long-term capital gain or loss if the Shares are
held for more than one year. Net capital gain recognized by certain noncorporate
taxpayers, that is, the excess of the taxpayer's net long-term capital gain for
a taxable year over net short-term capital loss for that year, is subject to
Federal income tax at a maximum rate of 20 percent, while capital gain
recognized on a disposition of Shares held for one year or less will be subject
to tax at ordinary income tax rates. Capital gain recognized by a corporation is
not subject to any preferential rate of tax. The deductibility of capital losses
is subject to limitations.
30
<PAGE> 31
If none of the three tests under section 302 is satisfied, then, to the
extent the Company has sufficient earnings and profits, the tendering
stockholder will be treated as having received a dividend includible in gross
income (and treated as ordinary income) in an amount equal to the entire amount
of cash received by the stockholder pursuant to the Offer (without regard to
gain or loss, if any).
In the case of a corporate stockholder, if the cash paid is treated as a
dividend, the dividend income may be eligible for the 70% dividends-received
deduction. The dividends-received deduction is subject to certain limitations,
and it may not be available if the corporate stockholder does not satisfy
certain holding period requirements with respect to the Shares or if the Shares
are treated as "debt financed portfolio stock" within the meaning of section
246A(c) of the Code. However, even if a dividends-received deduction is
available, it is expected that the dividend will be treated as an "extraordinary
dividend" under section 1059(a) of the Code, in which case the corporate
stockholder's tax basis in Shares retained by the stockholder will be reduced,
but not below zero, by the amount of the nontaxed portion of the dividend. Any
amount of the nontaxed portion of the dividend in excess of the stockholder's
basis generally will be treated as capital gain and will be recognized in the
taxable year in which the extraordinary dividend is received. If a redemption of
Shares from a corporate stockholder pursuant to the Offer is treated as a
dividend as a result of the stockholder's constructive ownership of other Shares
that it has an option or other right to acquire, the portion of the
extraordinary dividend not otherwise taxed because of the dividends-received
deduction will reduce the stockholder's adjusted tax basis only in its Shares
sold pursuant to the Offer, and any excess of the non-taxed portion over basis
will be taxable currently as gain on the sale of the Shares. A corporate
stockholder should consult its tax adviser as to the availability of a
dividends-received deduction and the application of section 1059 of the Code.
"Backup withholding" at a rate of 31% will apply to payments made to
certain stockholders pursuant to the Offer unless the stockholder has furnished
his taxpayer identification number in the manner prescribed in applicable
Treasury regulations, has certified that that number is correct, has certified
as to no loss of exemption from backup withholding and meets certain other
conditions. Any amounts withheld under the backup withholding rules generally
will be allowed as a refund or a credit against the stockholder's U.S. federal
income tax liability, provided the required information is furnished to the IRS.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED UPON PRESENT LAW. STOCKHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISERS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE
OFFER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF THE ALTERNATIVE MINIMUM
TAX, AND STATE, LOCAL AND FOREIGN TAX LAWS.
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<PAGE> 32
6. PRICE RANGE OF SHARES; DIVIDENDS
Market Information. The Company's common stock is currently listed on the
Nasdaq National Market under the trading symbol "PEGI." The Company first listed
its common stock on the Nasdaq SmallCap Market in February 1997. During the
period from February 1997 to August 1997, the Company's common stock was also
listed on the Boston Stock Exchange. In May 1999, the Company listed its common
stock on the Nasdaq National Market. The following table sets forth the high and
low closing sale prices of its common stock as reported on the Nasdaq SmallCap
Market, the Boston Stock Exchange and Nasdaq National Market, respectively, for
each calendar quarter commencing in February 1997 through June 30, 1999 (through
August 1997 in the case of the Boston Stock Exchange).
<TABLE>
<CAPTION>
NASDAQ SMALLCAP MARKET
CLOSING SALE PRICES
-----------------------
YEAR PERIOD HIGH LOW
- ---- ------ -------- -------
<C> <S> <C> <C>
1997 First Quarter (Commencing February 6, 1997)................. $ 8.875 $ 7.625
Second Quarter.............................................. 7.703 6.00
Third Quarter............................................... 11.00 7.00
Fourth Quarter.............................................. 10.75 7.00
1998 First Quarter............................................... 8.50 7.00
Second Quarter.............................................. 9.75 7.62
Third Quarter............................................... 9.25 6.25
Fourth Quarter.............................................. 10.375 5.00
1999 First Quarter............................................... 11.75 8.50
Second Quarter (through May 6, 1999)........................ 9.69 7.38
</TABLE>
<TABLE>
<CAPTION>
NASDAQ NATIONAL MARKET
CLOSING SALE PRICES
-----------------------
YEAR PERIOD HIGH LOW
- ---- ------ ------- -------
<C> <S> <C> <C>
1999 Second Quarter (Commencing May 7, 1999)..................... $8.00 $2.75
</TABLE>
<TABLE>
<CAPTION>
BOSTON STOCK EXCHANGE
CLOSING SALE PRICES
---------------------
YEAR PERIOD HIGH LOW
- ---- ------ ------ ------
<C> <S> <C> <C>
1997 First Quarter (Commencing February 6, 1997)................. $8.38 $7.13
Second Quarter.............................................. 7.14 6.00
Third Quarter............................................... 7.75 6.50
</TABLE>
As of August 31, 1999, the closing sale price of the Company's common stock
on the Nasdaq National Market was $3.00 per share. As of August 31, 1999, there
were approximately 411 holders of record of the Shares. A high percentage of the
Shares held of record is registered in the names of brokerage firms and
depositaries.
On September 16, 1999, the last full day of trading prior to the
announcement of the Offer, the closing price per Share as reported on the Nasdaq
National Market was $2.75 per Share. Stockholders are urged to obtain a current
market quotation for the Shares.
Dividend Policy. The Company has never declared nor paid any cash
dividends on its common stock and does not anticipate paying cash dividends in
respect of its common stock in the foreseeable future. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, its earnings (if any),
financial condition, cash flows, capital requirements and other relevant
considerations, including applicable contractual restrictions and governmental
regulations with respect to the payment of dividends.
7. CERTAIN INFORMATION CONCERNING THE COMPANY
Except as otherwise set forth herein, the information concerning the
Company contained in this Offer to Purchase, including financial information,
has been furnished by the Company.
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<PAGE> 33
General. The Company is a Delaware corporation with its principal
executive offices located at 10800 Biscayne Boulevard, Miami, Florida 33161. The
Company, founded in 1988, provides temporary registered nurses and other
professional medical personnel primarily to client hospitals; sells, on behalf
of others, business insurance, including workers' compensation, property,
liability, casualty, and other types of coverages, and provides risk management
services, including cost containment, safety management and claims management
services designed for segments of the franchise industry (particularly fast food
restaurants, family-style restaurants and convenience stores); and provides
reinsurance for certain workers' compensation and employer's liability insurance
policies sold by the Company.
Recent Developments. For the quarter ended June 30, 1999, the Company's
total revenues were $16,334,000 as compared to $14,449,000 for the 1998
comparable period, representing a net increase of $1,885,000. For the quarter
ended June 30, 1998, the Company's total revenues were $14,449,000 as compared
to total revenues of $6,191,000 for the 1997 comparable period, representing a
net increase of $8,258,000. For the quarter ended June 30, 1999, approximately
69%, 29% and 2% of the Company's total revenues were derived from its staffing,
reinsurance captive and general agency businesses, respectively. For the quarter
ended June 30, 1998, approximately 62%, 34% and 4% of the Company's total
revenues were derived from its staffing, reinsurance captive and general agency
businesses, respectively. For the quarter ended June 30, 1997, approximately
39%, 53% and 8% of the Company's total revenues were derived from its staffing,
reinsurance captive and general agency businesses, respectively.
For the six months ended June 30, 1999, the Company's total revenues were
$31,880,000 compared to $24,506,000 for the 1998 comparable period, representing
a net increase of $7,374,000. For the six months ended June 30, 1998, the
Company's total revenues were $24,506,000 as compared to total revenues of
$11,473,000 for the 1997 comparable period, representing a net increase of
$13,033,000. For the six months ended June 30, 1999, approximately 70%, 28% and
2% of the Company's total revenues were derived from its staffing, reinsurance
captive and general agency business, respectively. For the six months ended June
30, 1998, approximately 61%, 35% and 4% of the Company's total revenues were
derived from its staffing, reinsurance captive and general agency business,
respectively. For the six months ended June 30, 1997, approximately 41%, 49% and
10% of the Company's total revenues were derived from its staffing, reinsurance
captive and general agency businesses, respectively.
Historically, the Company's employee staffing business has been seasonal
with the demand for Travelers being the highest in fourth and first quarters of
the calendar year (September through March), due largely to increased demand
particularly during the peak tourist and winter home period in Florida.
Financial Information. Set forth below is certain selected financial
information relating to the Company which has been excerpted or derived from the
audited financial statements contained in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998 (the "Form 10-KSB") and the
unaudited financial statements contained in the Company's quarterly report on
Form 10-Q for the quarterly period ended June 30, 1999 (the "Form 10-Q"). More
comprehensive financial information is included in the Form 10-KSB and Form 10-Q
(including management's discussion and analysis of financial condition and
results of operations) and other documents filed by the Company with the
Commission. The financial information that follows is qualified in its entirety
by reference to such reports and other documents, including the financial
statements and related notes contained therein. Such reports and other documents
may be examined and copies may be obtained from the offices of the Commission in
the manner set forth below. In addition, Schedule III attached hereto sets forth
the Form 10-KSB and Form 10-Q.
The Company is subject to the informational filing requirements of the
Exchange Act and, in accordance therewith, is required to file periodic reports,
proxy statements and other information with the Commission relating to its
business, financial condition and other matters. Information as of particular
dates concerning the Company's directors and officers, their remuneration, stock
options granted to them, the principal holders of the Company's securities and
any material interest of such persons in transactions with the Company is
required to be disclosed in proxy statements distributed to the Company's
stockholders and filed with the Commission. Such reports, proxy statements and
other information should be available for inspection at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington,
33
<PAGE> 34
D.C. 20549, and also should be available for inspection at the Commission's
regional offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may also be obtained by mail,
upon payment of the Commission's customary fees, by writing to its principal
office at 450 Fifth Street, N.W., Washington, D.C. 20549. These materials filed
by the Company with the Commission are also available at the web site of the
Commission at "http://www.sec.gov." The information is also available for
inspection at the Nasdaq Stock Market, 33 Whitehall Street, New York, New York
10004.
34
<PAGE> 35
SELECTED FINANCIAL INFORMATION
In March 1998, the Company purchased certain of the assets of HSSI Travel
Nurse Operations, Inc. ("Travel Nurse"). In August 1998, the Company acquired
NET Healthcare through a business combination that was accounted for as a
"pooling of interests." As a result, the income statement data of the Company
set forth in this Offer to Purchase includes the accounts and results of
operations of (i) Travel Nurse from March 7, 1998 and (ii) NET Healthcare from
January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------- -------------------------
1998 1997 1999 1998
-------- -------- --------------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Staffing income..................................... $34,462 $11,594 $22,172 $14,863
Insurance income (1)................................ 17,557 14,034 8,605 8,487
Net investment income............................... 1,821 1,395 892 892
Other income........................................ 471 570 211 264
------- ------- ------- -------
Total revenue............................... 54,311 27,593 31,880 24,506
------- ------- ------- -------
Expenses:
Staffing costs...................................... 27,140 9,611 17,061 11,597
Insurance costs (2)................................. 13,052 10,419 6,945 6,450
Other operating expenses............................ 9,814 6,081 6,327 4,520
------- ------- ------- -------
Total expenses.............................. 50,006 26,111 30,333 22,567
------- ------- ------- -------
Operating income before income taxes.................. 4,305 1,482 1,547 1,938
------- ------- ------- -------
Interest expense...................................... 1,077 664 537 458
Other nonoperating expenses........................... 649 -- 139 239
------- ------- ------- -------
Total nonoperating expenses................. 1,726 664 676 697
------- ------- ------- -------
Income before income taxes............................ 2,579 818 871 1,241
Income taxes.......................................... 376 209 149 142
------- ------- ------- -------
Net income............................................ $ 2,203 $ 609 $ 722 $ 1,099
======= ======= ======= =======
Basic earnings per share.............................. $ .42 $ .12 $ .14 $ .21
======= ======= ======= =======
Diluted earnings per share............................ $ .42 $ .12 $ .14 $ .21
======= ======= ======= =======
Ratio of earnings to fixed charges.................... 3.39 2.23 2.62 3.71
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------- -------------------------
1998 1997 1999 1998
--------- --------- --------------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................................... $56,407 $32,244 $62,991 $57,119
======= ======= ======= =======
Notes Payable......................................... $12,430 $ 2,440 $11,021 $15,020
======= ======= ======= =======
Shareholders' equity.................................. $12,977 $10,774 $13,744 $11,551
======= ======= ======= =======
Shareholders' equity per basic share outstanding...... $ 2.48 $ 2.14 $ 2.62 $ 2.20
======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes premiums earned and net commission income.
(2) Includes losses and loss adjustment expenses incurred and amortization of
deferred acquisition costs.
35
<PAGE> 36
Summary Unaudited Pro Forma Financial Information. The following unaudited
pro forma financial information of the Company as of and for the year ended
December 31, 1998 and as of and for the six months ended June 30, 1999 give
effect to the Offer and are based on the estimates and assumptions set forth in
the notes to such financial information. The balance sheet data give effect to
the Offer as if it had occurred at the beginning of each relevant period. The
pro forma financial information should be read in conjunction with the financial
statements and related notes thereto included in the Form 10-KSB and the Forms
10-Q attached as Schedule III hereto. The pro forma financial data may not be
indicative of actual results that would have been achieved if the Offer had
occurred on the dates indicted or the results that may be realized in the
future.
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF JUNE 30, 1999
----------------------------------------------- -----------------------------------------------
DEBIT CREDIT DEBIT CREDIT
ACTUAL ADJUSTMENTS ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
------- ----------- ----------- --------- ------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and investments
(includes restricted cash
of $13,774 and $12,955 at
December 31, 1998 and
June 30, 1999,
respectively)............ $34,459 $ 7,500(1) $23,676(2) $ 16,885 $39,513 $ 7,500(1) $23,676(2) $ 22,718
582(3) 750(3) 487(3) 375(3)
375(1) 375(1)
855(3) 356(3)
Accrued investment
income................... 409 409 471 471
Receivables, net........... 11,201 11,201 11,899 11,899
Deferred policy acquisition
costs.................... 1,808 1,808 2,083 2,083
Property and equipment,
net...................... 898 898 939 939
Deposits................... 344 344 437 437
Goodwill and other
intangible assets, net... 4,806 4,806 4,689 4,689
Other assets............... 2,482 375(1) 864(2) 1,918 2,959 375(1) 864(2) 2,433
75(3) 38(3)
------- ------- ------- -------- ------- ------- ------- --------
Total assets....... $56,407 $ 8,457 $28,594 $ 38,270 $62,990 $ 8,362 $25,683 $ 45,669
======= ======= ======= ======== ======= ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable............ $12,430 $10,535(2) $ 7,500(1) $ 9,395 $11,021 $10,535(2) $ 7,500(1) $ 7,986
Unpaid losses and loss
adjustment expenses.... 13,879 13,879 18,113 18,113
Insurance balances
payable................ 7,176 7,176 7,243 7,243
Unearned premiums........ 5,463 5,463 6,295 6,295
Accounts payable and
accrued expenses....... 1,588 1,588 2,124 2,124
Other liabilities........ 2,894 217(3) 1,557(2) 4,234 4,450 25(3) 1,557(2) 5,982
------- ------- ------- -------- ------- ------- ------- --------
Total liabilities...... 43,430 10,752 9,057 41,735 49,246 10,560 9,057 47,743
------- ------- ------- -------- ------- ------- ------- --------
Shareholders' equity:
Common stock............. 58 58 58 58
Additional paid-in
capital................ 9,892 9,892 9,937 9,937
Retained earnings........ 3,533 881(3) 2,651(2) 5,303 4,255 257(3) 2,651(2) 6,649
------- ------- ------- -------- ------- ------- ------- --------
Total shareholders'
equity................. 13,483 881 2,651 15,253 14,250 257 2,651 16,644
Treasury stock, at
cost................... (506) 18,212(2) (18,718) (506) 18,212(2) (18,718)
------- ------- ------- -------- ------- ------- ------- --------
Net shareholders'
equity................. 12,977 19,092 2,651 (3,465) 13,744 18,469 2,651 (2,074)
------- ------- ------- -------- ------- ------- ------- --------
Total liabilities and
shareholders'
equity............... $56,407 $29,845 $11,708 $ 38,270 $62,990 $29,029 $11,708 $ 45,669
======= ======= ======= ======== ======= ======= ======= ========
Book value per share....... $ 2.47 $ (2.16) $ 2.62 $ (1.29)
======= ======== ======= ========
</TABLE>
- ---------------
(1) Records the Loan and expenses related to the Offer of $375,000.
(2) Records purchase of 3,642,379 publicly held Shares and 1,092,778 Shares
issuable upon conversion of the Company's Notes.
(3) Reflects pro forma operating adjustments.
36
<PAGE> 37
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 SIX MONTHS ENDED JUNE 30, 1999
--------------------------------- ---------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- --------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues...................................... $54,311 $ (855)(1) $53,456 $31,880 (356)(1) $31,524
Total expenses...................................... $50,007 $ 0 $50,007 $30,333 $ 0 $30,333
------- ------- ------- ------- ------- -------
Operating income before income taxes................ $ 4,304 $ (855) $ 3,449 $ 1,547 $ (356) $ 1,191
------- ------- ------- ------- ------- -------
Interest expense.................................... $ 1,077 $ (582)(2) $ 537 $ (487)(2)
$ 750(3) $ 1,245 $ 375(3) $ 425
Other non-operating expenses........................ $ 649 $ 75(4) $ 724 139 $ 38(4) $ 177
------- ------- ------- ------- ------- -------
Total non-operating expenses................ $ 1,726 $ 243 $ 1,969 $ 676 $ (75) $ 602
------- ------- ------- ------- ------- -------
Income before income taxes.......................... $ 2,578 $(1,098) $ 1,480 $ 871 $ (282) $ 589
Income taxes........................................ $ 376 $ (217)(5) $ 158 $ 149 $ (25)(5) $ 124
------- ------- ------- ------- ------- -------
Net income before extraordinary item................ $ 2,202 $ (881) $ 1,322 $ 722 $ (257) $ 465
Extraordinary item, net of income tax............... $ 0 $ 2,651(6) $ 2,651 $ 0 $ 2,651(6) $ 2,651
------- ------- ------- ------- ------- -------
Net income.......................................... $ 2,202 $ 1,770 $ 3,973 $ 722 $ 2,394 $ 3,116
======= ======= ======= ======= ======= =======
Net income before extraordinary item -- basic....... $ 2,202 $ (881) $ 1,322 $ 722 $ (257) $ 465
Impact of convertible notes......................... $ 407 $ (407) $ 0 $ 306 $ (306) $ 0
------- ------- ------- ------- ------- -------
Net income before extraordinary item -- diluted..... $ 2,609 $(1,288) $ 1,322 $ 1,028 $ (563) $ 465
======= ======= ======= ======= ======= =======
Extraordinary item, net of income tax............... $ 0 $ 2,651 $ 2,651 $ 0 $ 2,651 $ 2,651
======= ======= ======= ======= ======= =======
Weighted average shares outstanding -- basic........ 5,242 (3,637) 1,605 5,247 (3,642) 1,605
Impact of convertible notes......................... 737 (737) 0 1,170 (1,170) 0
------- ------- ------- ------- ------- -------
Weighted average shares outstanding -- diluted...... 5,979 (4,374) 1,605 6,417 (4,812) 1,605
======= ======= ======= ======= ======= =======
Net basic earnings per share before extraordinary
item.............................................. $ 0.42 $ 0.82 $ 0.14 $ 0.29
======= ======= ======= =======
Net diluted earnings per share before extraordinary
item.............................................. $ 0.42 $ 0.82 $ 0.14 $ 0.29
======= ======= ======= =======
Extraordinary item earnings per share -- basic...... $ 0.00 $ 1.65 $ 0.00 $ 1.65
======= ======= ======= =======
Extraordinary item earnings per share -- diluted.... $ 0.00 $ 1.65 $ 0.00 $ 1.65
======= ======= ======= =======
Ratio of earnings to fixed charges.................. 3.39 2.19 2.62 2.39
======= ======= ======= =======
</TABLE>
- ---------------
(1) Reflects reduction of net investment income related to use of Company funds
in connection with the Offer.
(2) Eliminates interest expense related to Notes. Assumes conversion of all
unaffiliated outstanding Notes at or prior to the expiration of the Offer.
(3) Records interest expense associated with the Loan.
(4) Records amortization of estimated expenses associated with the Offer and the
Loan.
(5) Records income tax effects on the above adjustments.
(6) Records gain on conversion of Notes, net of income tax effects.
Forward-Looking Statements. This Offer to Purchase and certain documents
referenced herein includes forward-looking statements. The Company has based
these forward-looking statements largely on its expectations. Forward-looking
statements are subject to a number of risks and uncertainties, certain of which
are beyond its control. Actual results could differ materially from those
anticipated as a result of numerous factors, including among other things: (1)
economic, business and competitive conditions in the employee staffing and
insurance industry and the economy in general and innovations of new insurance
products; (2) the enactment of new laws and regulations, and the amendment of
existing laws and regulations which could affect the Company's business; (3)
changes in the Company's business strategy or development plan; (4) the
Company's ability to obtain financing on acceptable terms when needed; (5) the
Company's ability to continue to attract and retain personnel qualified to meet
the staffing requirements of clients; and (6) the Company's ability to identify
appropriate acquisition candidates, complete such acquisitions and successfully
integrate acquired businesses.
8. FINANCING OF THE OFFER
The total amount of funds required by the Company to consummate the Offer
(and to pay related fees and expenses estimated to be approximately $375,000),
assuming that all of the Shares held by the stockholders of the Company, other
than the Remaining Stockholders, or 3,642,379 Shares in the aggregate, and all
of the Shares underlying the Notes, or 1,092,778 Shares in the aggregate, are
validly tendered and not
37
<PAGE> 38
withdrawn, is approximately $24 million. The Company expects to utilize up to
$16.5 million of its unrestricted cash to consummate the Offer. As of June 30,
1999, on a pro forma basis, after giving effect to the Offer, assuming all of
the Shares (other than Shares held by the Remaining Stockholders) and all of the
unaffiliated Shares issuable upon the conversion of the Notes are tendered, the
Company would have an unrestricted cash balance of approximately $9.8 million.
The Company plans to finance the Offer through borrowings from City
National under a $7.5 million line of credit facility, pursuant to a Loan and
Security Agreement, dated October 12, 1999 (the "Loan").
The borrower under the Loan is the Company. The Company plans to repay the
Loan when due through internally generated funds.
The Loan is a secured line of credit in a maximum principal amount of $7.5
million. As collateral for the Loan, the Company has granted to City National a
first priority security interest in (i) all of the issued and outstanding shares
of common stock of Preferred Staffing, and (ii) all of Preferred Staffing's
accounts receivable.
The Loan matures on October 10, 2000. Interest on the Loan is due and
payable monthly until May 12, 2000 (the "Interest-Only Period"). After the
Interest-Only Period, commencing on May 12, 2000 (the "Adjustment Date"), the
Loan shall be repaid in monthly installments of principal based on a three-year
amortization plus accrued interest. As of the Adjustment Date, the Loan will no
longer be considered a line of credit facility, and the Company will not have
the right to borrow any additional sums under the Loan.
Interest on the Loan shall accrue at a variable interest rate of two
percent (2%) per annum in excess of City National's base rate of interest
announced from time to time. The Company shall also pay a commitment fee of
$30,000 for the Loan, and a fee equal to one percent (1%) of each advance made
under the Loan in excess of $3.0 million.
The Loan contains restrictive covenants which impose limitations on the
Company on, among other things: (i) the creation of mortgages, security
interests and other liens in excess of $250,000 (exclusive of employment
agreements and all leases); (ii) indebtedness for borrowed money in excess of
$250,000; (iii) the sale or other disposition of accounts receivable at less
than face value; (iv) a change in control of the Company; and (v) the payment by
the Company of dividends. The Loan also contains various event of default
provisions, including default in payment of principal or interest of the Loan,
default in compliance with other terms of the Loan, bankruptcy, replacement,
removal or resignation of Mr. Mel Harris as Chief Executive Officer of the
Company, sale or assignment by Mr. Mel Harris of any Shares owned by him, and in
the event that the Company's earnings before interest, taxes, depreciation and
amortization for any quarterly period commencing with the fourth quarter of 1999
falls below $1,000,000.
9. DIVIDENDS AND DISTRIBUTIONS
If, on or after September 17, 1999, the Company declares or pays any
dividend on the Shares or makes any other distribution (including the issuance
of additional shares of capital stock pursuant to a stock dividend or stock
split, the issuance of other securities or the issuance of rights for the
purchase of any securities) with respect to the Shares that is payable or
distributable to stockholders of record on a date prior to the transfer to the
name of the Company on the Company's stock transfer records of the Shares
purchased pursuant to the Offer, then, without prejudice to the Company's rights
under "The Tender Offer -- 11. Certain Conditions of the Offer," (i) the
purchase price per Share payable by the Company pursuant to the Offer will be
reduced to the extent any such dividend or distribution is payable in cash; and
(ii) any non-cash dividend, distribution or right will be received and held by
the tendering stockholder for the account of the Company and will be required to
be promptly remitted and transferred by each tendering stockholder to the
Depositary for the account of the Company, accompanied by appropriate
documentation of transfer. The Company does not anticipate declaring or paying
any such dividends or making any such distributions.
38
<PAGE> 39
10. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; QUOTATION AND
EXCHANGE ACT REGISTRATION
The purchase of Shares by the Company pursuant to the Offer will reduce the
number of Shares that might otherwise trade publicly and will reduce the number
of holders of record of the Shares, which could materially and adversely affect
the liquidity and market value of the remaining Shares held by the public. If
consummated, the Offer would also result in a change in the capitalization of
the Company. The Shares are currently traded and listed on Nasdaq. As of August
31, 1999, there were 5,247,085 Shares issued and outstanding and approximately
411 holders of record of the outstanding Shares. Pursuant to Nasdaq's published
guidelines, shares of common stock are not eligible to be included for listing
if, among other things, the number of shares publicly held falls below 750,000,
the number of record holders falls below 400 or the aggregate market value of
such publicly held shares is less than $5 million. As a result, a delisting of
the Shares may occur if even a small number of stockholders tender pursuant to
the Offer.
In addition, under Section 12(g) of the Exchange Act, registration under
the Exchange Act may be terminated by an issuer if there are fewer than 300
holders of record of a class of security. The consummation of the Offer may
result in (a) delisting of the Shares from Nasdaq because of the Company's
failure to meet the maintenance requirements and (b) the termination of
registration of the Shares under the Exchange Act. Shares held directly or
indirectly by an officer or director of the issuer or by any beneficial owner of
more than 10% of the shares of the issuer will ordinarily not be considered as
being publicly held for this purpose. In the event the Shares were no longer
listed on Nasdaq, price quotations might still be available from other sources,
including the OTC Electronic Bulletin Board of the over-the-counter market. The
extent of the public market for the Shares and the availability of such
quotations would, however, depend upon the number of record holders of the
Shares after the consummation of the Offer, the interest in maintaining a market
in the Shares on the part of securities firms, the termination of registration
under the Exchange Act as described below and other factors.
The Shares are currently "margin securities" under the rules of the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"). Among
other things, this has the effect of allowing brokers to extend credit on the
collateral of such Shares. Depending upon factors similar to those described
above regarding listing and market quotations, it is possible that, following
the consummation of the Offer, the Shares will no longer constitute "margin
securities" for purposes of the Federal Reserve Board's margin regulations. In
such event, Shares could no longer be used as collateral for margin loans made
by brokers.
The Shares are currently registered under the Exchange Act, which requires,
among other things, that the Company furnish certain information to its
stockholders and the Commission and comply with the Commission's proxy rules in
connection with meetings of the Company's stockholders. The Company has no
present intention or plans to apply to the Commission to suspend its duty to
file periodic reports after the completion of the Offer. However, registration
of the Shares under the Exchange Act will likely be terminated upon application
by the Company to the Commission if the Shares are at any time not listed on a
national securities exchange and there are fewer than 300 holders of record of
the Shares.
The termination of the registration of the Shares under the Exchange Act
would substantially reduce the information required to be furnished by the
Company to its stockholders and the Commission and would render inapplicable
certain provisions of the Exchange Act, including requirements that the Company
file periodic reports (including financial statements), requirements of Rule
13e-3 under the Exchange Act with respect to "going private" transactions,
requirements that the Company's officers, directors and ten-percent stockholders
file certain reports concerning ownership of the Company's equity securities and
provisions that any profit by such officers, directors and stockholders realized
through purchases and sales of the Company's equity securities within any
six-month period may be recaptured by the Company. In addition, the liquidity
and market value of the remaining Shares held by the public will be materially
and adversely affected and the ability of "affiliates" of the Company and other
persons to dispose of Shares which are "restricted securities" under Rule 144
under the Securities Act may be materially impaired or eliminated. If
registration of the Shares under the Exchange Act were terminated, the Shares
would no longer be "margin securities" or eligible for listing on Nasdaq.
39
<PAGE> 40
Except for the Offer and as otherwise described in this Offer to Purchase,
the Company has no other present plans or proposals that relate to or would
result in (i) the acquisition by any person of additional securities of the
Company, or the disposition of securities of the Company, (ii) any extraordinary
corporate transaction, such as a merger, reorganization, liquidation, relocation
of any operations of the Company or sale or transfer of a material amount of
assets involving the Company or any of its subsidiaries, (iii) any material
change in the present dividend policy or indebtedness or capitalization of the
Company, (iv) any other material change in the Company's corporate structure or
business or the composition of management, or (v) any change in the Company's
certificate of incorporation, by-laws or instruments corresponding thereto or
any other actions which may impede the acquisition of control of the Company by
any person. However, the Company will continue to review its business plan and
strategic direction and in such process may develop strategies for internal
growth through expansion of products and services or growth through
acquisitions.
The Board of Directors has in the past considered and evaluated a possible
sale of all or a significant part of its insurance business. Although the
Company has determined not to pursue such a sale at this time, there can be no
assurance given that the Company will not consider such a sale, or consummate
any transaction involving a significant part of its insurance business,
following the consummation of the Offer.
11. CERTAIN CONDITIONS OF THE OFFER
Notwithstanding any other provision of the Offer as described herein, the
Company shall not be required to accept for payment or pay for any Shares
tendered pursuant to the Offer, and may terminate or amend the Offer and may
postpone the acceptance for payment of, and payment for, Shares tendered if,
prior to the Expiration Date, the Company reasonably determines that any of the
following conditions exist:
a. the Company shall not have received the proceeds from the Loan
sufficient to finance a portion of the Offer; or
b. there shall have been threatened, instituted or pending any action
or proceeding by any government or governmental, regulatory or
administrative agency or authority or tribunal or any other person,
domestic or foreign, or before any court or governmental, regulatory or
administrative authority or agency or tribunal, domestic or foreign, which:
(1) challenges the making of the Offer, the acquisition of Shares pursuant
to the Offer or otherwise relates in any manner to the Offer or (2) in the
Company's reasonable judgment, could materially affect the business,
condition (financial or other), income, operations or prospects of the
Company and its subsidiaries, taken as a whole, or otherwise materially
impair in any way the contemplated future conduct of the business of the
Company or any of its subsidiaries or materially impair the Offer's
contemplated benefits to the Company; or
c. there shall have been any claim, action or proceeding threatened,
pending or taken, or any consent, license, authorization, permit or
approval withheld, or any law, statute, rule, regulation, judgment, order
or injunction threatened, proposed, sought, promulgated, enacted, entered,
enforced or deemed to be applicable to the Offer or the Company, by or
before any court or any government or governmental, regulatory or
administrative agency or authority (federal, state, local or foreign) or
tribunal, domestic or foreign, which, in the reasonable judgment of the
Company, could or might directly or indirectly (i) make the acceptance for
payment of, or payment for, some or all of the Shares illegal or otherwise
restrict or prohibit the consummation of the Offer, (ii) delay or restrict
the ability of the Company, or render the Company unable, to accept for
payment or pay for some or all of the Shares, (iii) materially affect the
business, condition (financial or other), income, operations or prospects
of the Company and its subsidiaries, taken as a whole, or otherwise
materially impair in any way the contemplated future conduct of the
business of the Company or any of its subsidiaries, or (iv) materially
impair the contemplated benefits of the Offer to the Company; or
d. there shall have occurred any of the following events: (i) the
commencement of any state of war, international crisis or national
emergency; (ii) the declaration of any banking moratorium or suspension of
payments by banks in the United States or any limitation on the extension
of credit by lending institutions in the United States; (iii) any general
suspension of trading or limitation of prices for securities on any
securities exchange or in the over-the-counter market in the United States;
(iv) any
40
<PAGE> 41
significant adverse change in the market price of the Shares or any change
in the general political, market, economic or financial conditions in the
United States or abroad that could have a material adverse effect upon the
trading of the Shares; (v) in the case of any of the foregoing existing at
the time of the commencement of the Offer, in the reasonable judgment of
the Company, a material acceleration or worsening effect thereof; or (vi)
any decline in either the Dow Jones Industrial Average or the Standard and
Poor's Index of 500 Industrial Companies by an amount in excess of 10%
measured from the close of business on September 10, 1999; or
e. a tender or exchange offer with respect to some or all of the
Shares (other than the Offer), or a merger or acquisition proposal for the
Company, shall have been proposed, announced or made by another person or
shall have been publicly disclosed, or the Company shall have learned that
any person or "group" (within the meaning of Section 13(d)(3) of the
Exchange Act) shall have acquired or proposed to acquire beneficial
ownership of more than five percent of the outstanding Shares (other than
as a result of the Offer), or any new group shall have been formed that
beneficially owns more than five percent of the outstanding Shares; or
f. there shall have occurred any event which, in the reasonable
judgment of the Company, has resulted in an actual or threatened material
adverse change in the business, financial condition, assets, income,
operations, prospects or stock ownership of the Company or which may
adversely affect the value of the Shares; and, in the reasonable judgment
of the Company, such event makes it inadvisable to proceed with the Offer
or with acceptance for payment of or payment for any Shares; or
g. the Company shall have agreed that it shall terminate the Offer or
postpone the acceptance for payment of or payment for Shares thereunder;
which, in the reasonable judgment of the Company in any such case, and
regardless of the circumstances giving rise to any such condition, makes it
inadvisable to proceed with such acceptance for payment or payment.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right; the waiver of any such right with respect to particular facts
and other circumstances shall not be deemed a waiver with respect to any other
facts and circumstances; and each such right shall be deemed an ongoing right
that may be asserted at any time and from time to time.
12. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS
General. The Company is not aware of any license or other regulatory
permit that appears to be material to the business of the Company that might be
adversely affected by the acquisition of Shares by the Company pursuant to the
Offer. Should any such approval or other action be required, it is the Company's
present intention to seek such approval or action. There can be no assurance
that any such approval or other action, if needed, would be obtained without
substantial conditions or that adverse consequences might not result to the
business of the Company, or that certain parts of the businesses of the Company
might not have to be disposed of or held separate or other substantial
conditions complied with in order to obtain such approval or other action or in
the event that such approval was not obtained or such other action was not
taken. The Company's obligation under the Offer to accept for payment and pay
for Shares is subject to certain conditions. See "The Tender Offer -- Section
11. Certain Conditions of the Offer."
The consummation of the Offer may result in a delisting of the Shares from
Nasdaq and in the termination of the Company's reporting obligations under the
Exchange Act. See "The Tender Offer -- 10. Effect of the Offer on the Market for
the Shares; Quotation and Exchange Act Registration."
Litigation. To the best knowledge of the Company, no lawsuits have been
filed relating to the Offer since September 17, 1999, the date of the
announcement by the Company that it proposed to acquire the Shares pursuant to
the Offer.
41
<PAGE> 42
13. FEES AND EXPENSES
Except as set forth below, the Company will not pay any fees or commissions
to any broker, dealer or other person for soliciting tenders of Shares pursuant
to the Offer.
The Company has retained Morrow & Co., Inc., as the Information Agent, and
American Stock Transfer & Trust Company, as the Depositary, in connection with
the Offer. The Information Agent may contact holders of Shares by mail,
telephone, telecopy, telegraph and personal interview and may request banks,
brokers, dealers and other nominee stockholders to forward materials relating to
the Offer to beneficial owners.
As compensation for acting as Information Agent in connection with the
Offer, Morrow & Co., Inc. will be paid estimated fees and expenses of
approximately $6,500. The Information Agent will also be reimbursed for certain
of its out-of-pocket expenses and may be indemnified against certain liabilities
and expenses in connection with the Offer, including certain liabilities under
the Federal securities laws. The Company has estimated that it will pay the
Depositary fees and expenses of approximately $7,500 for its services in
connection with the Offer, plus reimbursement for its out-of-pocket expenses,
and will indemnify the Depositary against certain liabilities and expenses in
connection therewith, including certain liabilities under the federal securities
laws. Brokers, dealers, commercial banks and trust companies will be reimbursed
by the Company for customary handling and mailing expenses incurred by them in
forwarding material to their customers.
14. MISCELLANEOUS
The Company is not aware of any jurisdiction in which the making of the
Offer is prohibited by any administrative or judicial action pursuant to any
valid state statute. If the Company becomes aware of any valid state statute
prohibiting the making of the Offer or the acceptance of Shares pursuant
thereto, the Company will make a good faith effort to comply with any such state
statute. If, after such good faith effort, the Company cannot comply with any
such state statute, the Offer will not be made to (nor will tenders be accepted
from or on behalf of) the holders of Shares in such state. In any jurisdiction
where the securities, blue sky or other laws require the Offer to be made by a
licensed broker or dealer, the Offer shall be deemed to be made on behalf of the
Company by one or more registered brokers or dealers licensed under the laws of
such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF THE COMPANY NOT CONTAINED IN THIS OFFER TO PURCHASE
OR IN THE LETTER OF TRANSMITTAL, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
Pursuant to Rule 13e-3 and Rule 13e-4 of the General Rules and Regulations
under the Exchange Act, the Company has filed with the Commission Schedule 13E-3
and Schedule 13E-4 together with exhibits, furnishing additional information
with respect to the Offer and may file amendments thereto. Such statements,
including exhibits and any amendments thereto, which furnish certain additional
information with respect to the Offer, may be inspected at, and copies may be
obtained from, the same places and in the same manner as set forth in "The
Tender Offer -- 7. Certain Information Concerning the Company" (except that they
will not be available at the regional offices of the Commission).
PREFERRED EMPLOYERS HOLDINGS, INC.
September 17, 1999
42
<PAGE> 43
SCHEDULE I
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY; REMAINING STOCKHOLDERS
EXECUTIVE OFFICERS
The following table sets forth the names and ages of the executive officers
of the Company as of August 31, 1999 and the year in which they were first
elected. Each executive officer of the Company serves at the pleasure of the
Board of Directors. The business address for each executive officer is 10800
Biscayne Boulevard, Miami, Florida 33161. Each individual listed below is a
citizen of the United States.
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE POSITION ELECTED
---- --- -------- ----------
<S> <C> <C> <C>
Mel Harris............................ 58 Chairman of the Board and 1988
Chief Executive Officer 1993
Peter E. Kilissanly................... 52 President, Chief Operating Officer 1999
and Director
William R. Dresback................... 51 Chief Financial Officer and 1993
Senior Vice President 1997
Jose Menendez......................... 38 Vice President, General Counsel and 1998
Assistant Secretary 1999
Nancy Ryan............................ 43 Secretary and 1999
Vice President 1992
</TABLE>
DIRECTORS
The following sets forth the names and ages of the members of the Board of
Directors as of August 31, 1999 and the year in which they were first elected
directors of the Company. All directors of the Company hold office until the
next Annual Meeting of the Stockholders and until the election and qualification
of their successors. Each individual listed below is a citizen of the United
States.
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE YEAR BECAME A DIRECTOR
---------------- --- ----------------------
<S> <C> <C>
Mel Harris.................................................. 58 1988
Peter E. Kilissanly......................................... 52 1999
Jack D. Burstein............................................ 53 1997
Stuart J. Gordon............................................ 68 1995
Alexander M. Haig, Jr....................................... 74 1999
Maxwell M. Rabb............................................. 88 1997
</TABLE>
BIOGRAPHICAL INFORMATION
Certain information about the executive officers and the directors of the
Company is set forth below. This information has been furnished to the Company
by the individuals named.
Mel Harris has been a director of the Company since its inception in 1988
and has been its Chairman of the Board of Directors and Chief Executive Officer
since April 1993. From May 1998 to January 1999, Mr. Harris served as the
Company's President. Mr. Harris served as Vice Chairman of Jardine Insurance
Brokers New York, Inc. from February 1992 until January 1994. From 1988 until
February 1992, Mr. Harris served as Vice Chairman of Alexander & Alexander of
New York, Inc. (a wholly-owned subsidiary of A&A Services, Inc.), a global
insurance brokerage organization. Mr. Harris currently serves as President of
International Insurance Group, Inc., an insurance brokerage company located in
Miami, Florida and New York, New York. Mr. Harris is also a director and
shareholder of Strategica Capital Corp., a merchant banking firm ("Strategica
Capital"). Mr. Jack D. Burstein, a director of the Company, is the President of
S-1
<PAGE> 44
Strategica Capital. Mr. Harris has agreed to devote such time as is necessary,
and in any event no less than 80% of his business time, to the affairs of the
Company.
Peter E. Kilissanly has been President, Chief Operating Officer and a
director of the Company since January 1999 and has been the President, Chief
Executive Officer and a director of Preferred Healthcare Staffing, Inc., a
wholly-owned subsidiary of the Company ("Preferred Staffing"), since March 1998.
Prior to his employment with Preferred Staffing, from December 1986 to September
1997, Mr. Kilissanly served as President and Chief Operating Officer of
Physician Corporation of America. In 1986, he served as Senior Vice President of
Corporate Marketing and Communications of Equicor Health Plans. From 1984 to
1986, Mr. Kilissanly served as Senior Vice President of Corporate Marketing and
Communications of HCA Health Plans.
William R. Dresback has been the Chief Financial Officer of the Company
since May 1993 and a Senior Vice President since February 1997. From May 1993 to
January 1999, Mr. Dresback was the Secretary of the Company. From 1986 to 1992,
Mr. Dresback served as Chief Financial Officer of Cobb Partners Financial, Inc.
(previously a wholly-owned subsidiary of The Walt Disney Company), a national
financial services company primarily involved in the mortgage banking,
construction and real estate development businesses. From 1981 to 1986, Mr.
Dresback served as Senior Vice President and Chief Financial Officer of
International Financial Services, Inc. (a subsidiary of The Torchmark
Corporation), an international financial services company primarily involved in
the financial planning, life insurance and securities brokerage businesses. From
1969 to 1981, Mr. Dresback was employed by KPMG, LLP where he was responsible
for managing the firm's South Florida Insurance Practice.
Jose Menendez has been Vice President and General Counsel of the Company
since joining the Company in April 1998. Mr. Menendez was appointed as Assistant
Secretary in January 1999. From 1997 to April 1998, Mr. Menendez was Senior Vice
President, General Counsel and Secretary of Physician Corporation of America
("PCA") and was responsible for all legal matters of PCA and its subsidiaries.
From 1991 to 1997, Mr. Menendez was Vice President of Legal Affairs for PCA.
Nancy Ryan has been a Vice President of the Company since July 1992 and in
January 1999 Ms. Ryan was appointed as Secretary of the Company. From July 1992
to January 1999, Ms. Ryan was an Assistant Secretary of the Company. Ms. Ryan
has over 12 years of experience in the commercial insurance industry. Ms. Ryan
served as a Vice President of Jardine Insurance Brokers New York, Inc. from
February 1992 until January 1994. From 1988 until February 1992, she served as a
Vice President of Alexander & Alexander of New York, Inc. (a wholly-owned
subsidiary of A&A Services, Inc.), a global insurance brokerage organization.
Since 1984, Ms. Ryan has also served as a Vice President of International
Insurance Group, Inc. Ms. Ryan has agreed to devote at least 80% of her business
time to the affairs of the Company.
Jack D. Burstein has been a director of the Company since January 1997. Mr.
Burstein has been the Chairman and President of each of Strategica Group, Inc.,
a merchant bank ("Strategica Group") and Strategica Capital, an affiliate of
Strategica Group and a merchant bank, since 1992. Mr. Harris, the Company's
Chairman of the Board and Chief Executive Officer, is a director and shareholder
of Strategica Capital. From 1984 to present, Mr. Burstein has served as Chief
Executive Officer and President of American Capital Corp., a savings and loan
holding corporation, and as Chief Executive Officer of TransCapital Financial
Corporation, a savings and loan holding corporation. Prior to such time, Mr.
Burstein was a senior partner and employee, respectively, in the accounting
firms of Schecter Beame Burstein Price & Co. and Seidman & Seidman.
Stuart J. Gordon has been a director of the Company since 1995. From March
1997 until August 1999, Mr. Gordon was of counsel to the law firm of Duane,
Morris and Heckscher since March 1997. From 1989 until March 1997, Mr. Gordon
was a partner at the law firm of Metzger, Hollis, Gordon & Alprin. Previously,
Mr. Gordon served as the Special Assistant to the Comptroller of the Currency,
Deputy Chairman and Treasurer of the United States Senate campaign of Daniel
Patrick Moynihan, the First Administrative Assistant and Chief of Staff to
Senator Moynihan (in Washington, D.C.) and Deputy Finance Chairman of the
presidential campaign of Senator John Glenn. Mr. Gordon was appointed by the
Governor of the State of Maryland to the Foster Care Review Board and served as
a member of the Board of Governors of Daytop
S-2
<PAGE> 45
Village. Mr. Gordon serves as a member of the Board of Advisors of the
Independent College Fund of New York.
Alexander M. Haig, Jr. has been a director of the Company since January
1999. Since August 1982, General Haig has been Chairman and President of
Worldwide Associates, Inc., a business adviser to both U.S. and foreign
companies in connection with international marketing and venture capital
activities. From January 1981 until July 1982, General Haig served as Secretary
of State of the United States. From December 1979 until January 1981, General
Haig was President and Chief Operating Officer of United Technologies Corp. and
is currently a senior consultant to such corporation. From 1974 through 1979,
General Haig was the Supreme Allied Commander of NATO. Prior to that, he was
White House Chief of Staff under the Nixon and Ford Administrations. General
Haig currently serves on the Board of Directors of America Online, Inc.,
Interneuron Pharmaceuticals, Inc., MGM Grand, Inc. and Metro Goldwyn Mayer Inc.
Maxwell M. Rabb has been a director of the Company since January 1997. Mr.
Rabb has been of counsel to the law firm of Kramer, Levin, Naftalis & Frankel
since 1991 and was a partner in the law firm of Stroock, Stroock & Lavan from
1958 to 1981 and from 1989 to 1991. Mr. Rabb served as the United States
Ambassador to Italy from 1981 to 1989. In addition, Mr. Rabb serves as a
director of the Sterling National Bank, MIC Industries, Inc., Liberty Cable
Company, Inc., Black Hole Technologies, Inc., Data Software and Systems, Inc.
and CompuTower.
All of the Company's directors serve until the next annual meeting of
stockholders or until their successors are duly elected and qualified. All of
the Company's officers serve at the discretion of the Board of Directors,
subject to rights, if any, under contracts of employment with the Company. There
are no family relationships among the Company's directors and executive
officers.
S-3
<PAGE> 46
SCHEDULE II
ADVEST FAIRNESS OPINION
ADVEST INVESTMENT BANKING
100 Federal Street
29th Floor
ADVEST, INC. Boston, MA 02110
A Subsidiary of The Advest Group, Inc. (617) 423-0003
Serving Investors Since 1898 Fax: (617) 423-7190
- --------------------------------------------------------------------------------
September 10, 1999
The Board of Directors and the Independent Committee
Preferred Employers Holdings, Inc.
10800 Biscayne Boulevard, 10(th) Floor
Miami, FL 33161-7487
Dear Members of Board of Directors and the Independent Committee:
We understand that Preferred Employers Holdings, Inc. ("PEGI" or the
"Company") proposes to purchase all of its issued and outstanding shares of
common stock, $.01 par value per share, through a tender offer (the "Tender
Offer"). The Tender Offer amount is $5.00 in cash per share (the
"Consideration") and is being made to all shareholders of the Company, other
than Mel Harris, the Chairman of the Board of Directors and Chief Executive
Officer of the Company, and certain other principal stockholders of the Company
(collectively, the "Remaining Stockholders").
You have requested our opinion, as investment bankers, as to the
fairness, from a financial point of view, of the Consideration to be received by
the holders of Shares in the Tender Offer (this "Opinion"). It is understood
that this Opinion shall be used by you solely in connection with your
deliberation in regards to the fairness of the Consideration to be received by
holders of Shares and for no other purpose, and that the Company will not
furnish this Opinion or any other material prepared by Advest, Inc. ("Advest")
to any other person or persons or use or refer to this Opinion for any other
purpose without Advest's prior written approval. Advest understands and agrees
that this Opinion may be referred to and reproduced in any proxy statement of
the Company filed with the Securities and Exchange Commission in connection with
the Tender Offer.
Advest, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements and valuations for estate, corporate
and other purposes.
In connection with this opinion set forth herein, we have, among other
things:
(i) reviewed the Company's audited financial statements, as filed with
the Securities and Exchange Commission, for the fiscal years ended
December 31, 1997 and 1998;
(ii) reviewed the Company's unaudited financial statements, as filed
with the Securities and Exchange Commission, for the quarters
ended March 31, 1999 and June 30, 1999;
(iii) reviewed certain interim financial analyses and forecasts for PEGI
prepared by management of the Company;
Member: New York, American and Other Principal Stock Exchange. Member: SIPC
S-4
<PAGE> 47
ADVEST
Preferred Employers Holdings, Inc.
September 10, 1999
(iv) reviewed audited statutory financial statements of PEG Reinsurance
Company, Ltd. (a wholly owned subsidiary of the Company) for the
year ended December 1998;
(v) reviewed the prospectus dated December 23, 1998 regarding the
Company's 7% convertible subordinated promissory notes due May
2003;
(vi) reviewed preliminary drafts of the documents that will be filed
with the Securities and Exchange Commission, including the
Schedule 13E-3 (Rule 13E-3 Transaction Statement) and the Schedule
13E-4 (Issuer Tender Offer Statement);
(vii) held discussions with management of the Company regarding the
business, operations and prospects of the Company;
(viii) performed various financial analyses, as we deemed appropriate,
of the Company using generally accepted analytical methodologies,
including:
(a) analysis of premium paid in public merger and acquisition
transactions and a review of the historical trading prices
and volume of the Shares on NASDAQ;
(b) the application of the public trading multiples of companies,
which we deemed comparable to the Company, to the financial
results of the Company;
(c) the application of the multiples reflected in recent public
mergers and acquisitions, for businesses which we deemed
comparable to the Company, to the financial results of the
Company;
(d) a discounted projected cash flow analysis; and
(i) reviewed such other materials and performed such other financial
studies, analyses, inquiries and investigations as we deemed
appropriate.
In our review and analysis and in formulating this Opinion, we have
assumed and relied upon the accuracy and completeness of all information
supplied or otherwise made available to us by the Company or obtained by us from
other sources, and upon the assurance of the Company's management that they are
not aware of any information or facts that would make the information provided
to us incomplete or misleading. We have not attempted to independently verify
any of such information. With respect to the projected financial statements
referred to in clause (iii) above, we have been advised by the Company, and we
have assumed, without independent investigation, that they have been reasonably
prepared and reflect the Company's best estimates and judgments of the Company's
future results of operations and financial condition at and for the periods
specified therein, and we express no opinion with respect to such projected
financial statements.
The Company has agreed to pay Advest a fee for delivery of this opinion
letter. Our opinion is necessarily based upon financial, economic, market and
other conditions as they exist and can be evaluated by us on the date hereof. We
disclaim any undertaking or obligation to advise any person of any change in any
fact or matter affecting our opinion which may come or be brought to our
attention after that date of the opinion unless specifically requested to do so.
In the ordinary course of business, Advest provides research coverage and
actively trades the securities of the Company for its own account and the
accounts of its customers and, accordingly, may at any time hold a long or a
short position in such securities. Advest may provide investment banking or
financial advisory services to the Company in the future.
Our opinion does not constitute a recommendation as to any action the
Board of Directors of the Company or any stockholder of the Company should take
in connection with the Tender Offer or any aspect thereof or alternatives
thereto. Without limitation to the foregoing, this letter does not constitute a
S-5
<PAGE> 48
ADVEST
Preferred Employers Holdings, Inc.
September 10, 1999
recommendation to any stockholder with respect to whether to elect to receive
the Consideration or vote in favor of transactions contemplated by the Tender
Offer, and should not be relied upon by any stockholder as such.
In rendering our opinion, we have not been engaged as an agent or
fiduciary of the Company's stockholders or of any other third party. Our opinion
relates solely to the fairness, from a financial point of view, of the
Consideration to be received by the holders of Shares in the Tender Offer. We
express no opinion herein as to the structure, terms or effect of any other
aspect of the transactions contemplated by, or provisions of, the Tender Offer.
Based upon and subject to all the foregoing, we are of the opinion, as
investment bankers, that as of the date hereof, the Consideration to be received
by the holders of Shares pursuant to the Tender Offer is fair, from a financial
point of view, to such holders.
Very truly yours,
Advest, Inc.
/s/ JEFF BARLOW
- ------------------------
Jeffrey G. Barlow
Managing Director
S-6
<PAGE> 1
LETTER OF TRANSMITTAL
TO TENDER SHARES OF COMMON STOCK
OF
PREFERRED EMPLOYERS HOLDINGS, INC.
PURSUANT TO THE OFFER TO PURCHASE DATED SEPTEMBER 17, 1999
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON NOVEMBER 3, 1999, UNLESS THE OFFER IS EXTENDED.
The Depositary For The Offer Is:
AMERICAN STOCK TRANSFER AND TRUST COMPANY
(THE "DEPOSITARY")
<TABLE>
<S> <C> <C>
By Mail By Facsimile Transmission By Hand/
40 Wall Street, 46(th) Floor (For Eligible Institutions Overnight Delivery
New York, NY 10005 Only): 40 Wall Street, 46(th) Floor
(718) 234-5001 New York, NY 10005
</TABLE>
Confirm by Telephone:
(718) 921-8200
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE DEPOSITARY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be completed by stockholders either if
certificates evidencing Shares (as defined below) are to be forwarded herewith
or if delivery of Shares is to be made by book-entry transfer to the
Depositary's account at Depositary Trust Company (hereinafter referred to as the
"Book-Entry Transfer Facility") pursuant to the book-entry transfer procedure
described in "The Tender Offer" -- 3. Procedures for Accepting the Offer and
Tendering Shares" of the Offer to Purchase (as defined below). DELIVERY OF
DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO
THE DEPOSITARY.
Stockholders whose certificates evidencing Shares ("Share Certificates")
are not immediately available or who cannot deliver their Share Certificates of
the book-entry transfer of the Shares into the Depositary's Account at the
Book-Entry Transfer Facility ("Book-Entry Confirmation") and all other documents
required hereby to the Depositary prior to the Expiration Date (as defined in
"The Tender Offer -- 1. Terms of the Offer; Expiration Date" of the Offer to
Purchase) and who wish to tender their Shares must do so pursuant to the
guaranteed delivery procedure described in "The Tender Offer -- 3. Procedures
for Accepting the Offer and Tendering Shares" of the Offer to Purchase. (See
Instruction 2).
<PAGE> 2
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
DESCRIPTION OF SHARES TENDERED
- ---------------------------------------------------------------------------------------------------
NUMBER OF
TOTAL SHARES
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) NUMBER OF SHARE TENDERED**
(PLEASE FILL IN BLANK EXACTLY AS NAME(S) APPEAR(S) SHARES CERTIFICATE BY SHARE
ON SHARE CERTIFICATES*) EVIDENCED NUMBER(S) CERTIFICATE(S)
- ---------------------------------------------------------------------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
- ---------------------------------------------------------------------------------------------------
* Need not be completed by Stockholders delivering Shares by book-entry transfer.
** If you desire to tender fewer than all Shares evidenced by any certificates listed above,
please indicate in this column the number of Shares you wish to tender. Otherwise, all Shares
evidenced by such certificates will be deemed to have been tendered. (See Instruction 4.)
- ---------------------------------------------------------------------------------------------------
</TABLE>
[ ] CHECK HERE IF ANY OF THE SHARE CERTIFICATES THAT YOU OWN AND WISH TO
SURRENDER HAVE BEEN LOST, DESTROYED OR STOLEN. (See Instruction 9.)
[ ] Check here if Shares are being delivered by book-entry transfer to the
Depositary's account at the book-entry transfer facility and complete the
following:
Name of Tendering Institution:
----------------------------------------------------------------------------
Account Number:
-----------------------------------------------------------------------------
Transaction Code Number:
-----------------------------------------------------------------------------
[ ] Check if Shares are being tendered pursuant to a notice of guaranteed
delivery previously sent to the Depositary and complete the following:
Name(s) of Registered Holder(s):
---------------------------------------------------------------------------
Window Ticket Number (if any):
----------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
-------------------------------------------------------
Name of Institution which Guaranteed Delivery:
------------------------------------------------------------
If delivery is book-entry transfer, give the following:
---------------------------------------------------------
Book-Entry Transfer Facility Account Number:
-------------------------------------------------------------
Transaction Code Number:
-----------------------------------------------------------------------------
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE INSTRUCTIONS SET FORTH
IN THIS LETTER OF TRANSMITTAL CAREFULLY.
2
<PAGE> 3
Ladies and Gentlemen:
The undersigned hereby tenders to Preferred Employers Holdings, Inc., a
Delaware corporation (the "Company"), the above-described shares of common
stock, $.01 par value per share, of the Company (all such shares of common
stock, $.01 par value per share, including shares held by the executive officers
and directors of the Company, collectively, the "Shares") pursuant to the
Company's offer to purchase all Shares, at $5.00 per Share, net to the seller in
cash, upon the terms and subject to the conditions set forth in the Offer to
Purchase, dated September 17, 1999 (the "Offer to Purchase"), receipt of which
is hereby acknowledged, and in this Letter of Transmittal (which, together with
the Offer to Purchase, constitute the "Offer").
Subject to, and effective upon, acceptance for payment of the Shares
tendered herewith, in accordance with the terms of the Offer, the undersigned
hereby sells, assigns and transfers to the Company all right, title and interest
in and to all the Shares that are being tendered hereby and all dividends,
distributions (including, without limitation, distributions of additional
Shares) and rights declared, paid or distributed in respect of such Shares on or
after September 17, 1999 (collectively, "Distributions") and irrevocably
appoints the Depositary the true and lawful agent and attorney-in-fact of the
undersigned with respect to such Shares and all Distributions, with full power
of substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest) to (i) deliver Share Certificates evidencing such
Shares and all Distributions, or transfer ownership of such Shares and all
Distributions on the account books maintained by the Book-Entry Transfer
Facility, together, in either case, with all accompanying evidences of transfer
and authenticity, to or upon the order of the Company, (ii) present such Shares
and all Distributions for transfer on the books of the Company, and (iii)
receive all benefits and otherwise exercise all rights of beneficial ownership
of such Shares and all Distributions, all in accordance with the terms of the
Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Shares
tendered hereby and all Distributions, that when such Shares are accepted for
payment by the Company, the Company will acquire good, marketable and
unencumbered title thereto and to all Distributions, free and clear of all
liens, restrictions, charges and encumbrances, and that none of such Shares and
Distributions will be subject to any adverse claim. The undersigned, upon
request, shall execute and deliver all additional documents deemed by the
Depositary or the Company to be necessary or desirable to complete the sale,
assignment and transfer of the Shares tendered hereby and all Distributions. In
addition, the undersigned shall remit and transfer promptly to the Depositary
for the account of the Company all Distributions in respect of the Shares
tendered hereby, accompanied by appropriate documentation of transfer, and
pending such remittance and transfer or appropriate assurance thereof, the
Company shall be entitled to all rights and privileges as owner of each such
Distribution and may withhold the entire purchase price of the Shares tendered
hereby, or deduct from such purchase price the amount or value of such
Distribution as determined by the Company in its sole discretion.
No authority herein conferred or agreed to be conferred shall be affected
by, and all such authority shall survive, the death or incapacity of the
undersigned. All obligations of the undersigned hereunder shall be binding upon
the heirs, personal representatives, successors and assigns of the undersigned.
Except as stated in the Offer to Purchase, this tender is irrevocable.
The undersigned understands that tenders of Shares pursuant to any one of
the procedures described in the Offer to Purchase under "The Tender Offer -- 3.
Procedures for Accepting the Offer and Tendering Shares" and in the instructions
hereto will constitute the undersigned's acceptance of the terms and conditions
of the Offer. The Company's acceptance of such Shares for payment will
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions of the Offer.
3
<PAGE> 4
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING
INSTRUCTIONS CAREFULLY
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the check for the purchase price of Shares and/or
Share Certificates evidencing Shares not tendered or not accepted for purchase
are to be issued in the name of someone other than the name(s) of the registered
holder(s) appearing above under "Description of Certificates Tendered" or if
Shares tendered hereby and delivered by book-entry transfer which are not
purchased are to be returned by credit to an account at the Book-Entry Transfer
Facility other than that designated above.
Issue check and/or Share Certificate and mail to:
Name ---------------------------------------------------------------
(PLEASE PRINT)
Address ------------------------------------------------------------
--------------------------------------------------------
(INCLUDE ZIP CODE)
--------------------------------------------------------
(TAXPAYER IDENTIFICATION NO. OR SOCIAL SECURITY NO.)
(SEE SUBSTITUTE FORM W-9 BELOW)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the check for the purchase price of Shares and/or
Share Certificates evidencing Shares not tendered or not accepted for purchase
are to be mailed to someone other than to the undersigned or to the address of
the registered Stockholder(s) appearing above under "Description of Share
Certificates Tendered."
Mail or deliver check and/or Share Certificate to:
Name ---------------------------------------------------------------
(PLEASE PRINT)
Address ------------------------------------------------------------
--------------------------------------------------------
(INCLUDE ZIP CODE)
--------------------------------------------------------
(TAXPAYER IDENTIFICATION NO. OR SOCIAL SECURITY NO.)
(SEE SUBSTITUTE FORM W-9 BELOW)
4
<PAGE> 5
Credit Shares delivered by book-entry transfer and not purchased to the account
set forth below:
STOCKHOLDERS SIGN HERE
(PLEASE COMPLETE SUBSTITUTE FORM W-9 BELOW)
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
stock certificate(s) or on a security position listing or by person(s)
authorized to become registered holder(s) by certificates and documents
transmitted herewith. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer of a corporation or other person acting in a
fiduciary or representative capacity, please set forth full title and see
Instruction 5.)
Name(s):
- --------------------------------------------------------------------------------
(Please Print)
Capacity (full title):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone No.:
- --------------------------------------------------------------------------------
Tax Identification or Social Security No.:
- --------------------------------------------------------------------------------
(See Substitute Form W-9 on Reverse Side)
Guarantee of Signature(s) (If required -- See Instructions 1 and 5)
For use by Financial Institutions Only
Financial Institutions: Place Medallion Guarantee in space below
Name of Firm:
- --------------------------------------------------------------------------------
Authorized Signature:
- --------------------------------------------------------------------------------
Name:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
Area Code and Telephone No.:
- ----------------------------------------------------------------------
Dated:
- --------------------------------------------------------------------------------
5
<PAGE> 6
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES. All signatures on this Letter of Transmittal
must be guaranteed by a firm that is a member of the Medallion Signature
Guarantee Program, or by any other "eligible guarantor institution," as such
term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended (each of the foregoing being referred to as an "Eligible Institution"),
unless (i) this Letter of Transmittal is signed by the registered holder(s) of
the Shares (which term, for purposes of this document, shall include any
participant in a Book-Entry Transfer Facility whose name appears on a security
position listing as the owner of Shares) tendered hereby and such holder(s) has
(have) completed neither the box entitled "Special Payment Instructions" nor the
box entitled "Special Delivery Instructions" on the reverse hereof, or (ii) such
Shares are tendered for the account of an Eligible Institution. (See Instruction
5).
2. DELIVERY OF LETTER OF TRANSMITTAL AND SHARE CERTIFICATES. This Letter of
Transmittal is to be used either if Share Certificates are to be forwarded
herewith or if Shares are to be delivered by book-entry transfer pursuant to the
procedure set forth under "The Tender Offer -- 3. Procedures for Accepting the
Offer and Tendering Shares" in the Offer to Purchase. Share Certificates
evidencing all physically tendered Shares, or a confirmation of a book-entry
transfer into the Depositary's account at a Book-Entry Transfer Facility of all
Shares delivered by book-entry transfer as well as a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and any other documents
required by this Letter of Transmittal, must be received by the Depositary at
one of its addresses set forth on the reverse hereof prior to the Expiration
Date (as defined under "The Tender Offer -- 1. Terms of the Offer; Expiration
Date" in the Offer to Purchase). If Share Certificates are forwarded to the
Depositary in multiple deliveries, a properly completed and duly executed Letter
of Transmittal must accompany each such delivery.
Stockholders whose Share Certificates are not immediately available, who
cannot deliver their Share Certificates and all other required documents to the
Depositary prior to the Expiration Date or who cannot complete the procedure for
delivery by book-entry transfer on a timely basis may tender their Shares
pursuant to the guaranteed delivery procedure described under "The Tender
Offer -- 3. Procedures for Accepting the Offer and Tendering Shares" in the
Offer to Purchase. Pursuant to such procedure: (i) such tender must be made by
or through an Eligible Institution, (ii) a properly completed and duly executed
Notice of Guaranteed Delivery, substantially in the form made available by the
Company, must be received by the Depositary prior to the Expiration Date, and
(iii) the Share Certificates evidencing all physically delivered Shares in
proper form for transfer by delivery, or a confirmation of a book-entry transfer
into the Depositary's account at a Book-Entry Transfer Facility of all Shares
delivered by book-entry transfer, in each case together with a Letter of
Transmittal (or a facsimile thereof), properly completed and duly executed, with
any required signature guarantees (or, in the case of a book-entry transfer, a
Book-Entry Confirmation (as defined in "The Tender Offer -- 2. Acceptance for
Payment and Payment for Shares" of the Offer to Purchase), and any other
documents required by this Letter of Transmittal, must be received by the
Depositary within three (3) Nasdaq Stock Market ("Nasdaq") trading days after
the date of execution of such Notice of Guaranteed Delivery, all as described
under "The Tender Offer -- 3. Procedures for Accepting the Offer and Tendering
Shares" in the Offer to Purchase.
The method of delivery of this Letter of Transmittal, Share Certificates
and all other required documents is at the option and risk of the tendering
stockholder, including delivery through the Book-Entry Transfer Facility, and
the delivery will be deemed made only when actually received by the Depositary.
If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. In all cases, sufficient time should be
allowed to ensure timely delivery.
No alternative, conditional or contingent tenders will be accepted and no
fractional Shares will be purchased. By execution of this Letter of Transmittal
(or a facsimile hereof), all tendering stockholders waive any right to receive
any notice of the acceptance of their Shares for payment.
3. INADEQUATE SPACE. If the space provided herein under "Description of
Shares Tendered" is inadequate, the Share Certificate numbers, the number of
Shares evidenced by such Share Certificates and
6
<PAGE> 7
the number of Shares tendered should be listed on a separate schedule and
attached hereto.
4. PARTIAL TENDERS. (Not applicable to stockholders who tender by
book-entry transfer). If fewer than all the Shares evidenced by any Share
Certificate delivered to the Depositary herewith are to be tendered hereby, fill
in the number of Shares which are to be tendered in the box entitled "Number of
Shares Tendered." In such cases, new Share Certificate(s) evidencing the
remainder of the Shares that were evidenced by the Share Certificate(s)
delivered to the Depositary herewith will be sent to the person(s) signing this
Letter of Transmittal, unless otherwise provided in the box entitled "Special
Delivery Instructions" on the reverse hereof, as soon as practicable after the
expiration or termination of the Offer. All Shares evidenced by Share
Certificate(s) delivered to the Depositary will be deemed to have been tendered
unless otherwise indicated.
5. SIGNATURES ON LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Shares
tendered hereby, the signature(s) must correspond with the name(s) as written on
the face of the Share Certificate(s) evidencing such Shares without alteration,
enlargement or any other change whatsoever.
If any Shares tendered hereby are owned of record by two or more persons,
all such persons must sign this Letter of Transmittal.
If any of the Shares tendered hereby are registered in the names of
different holders, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal as there are different registrations of such
Shares.
If this Letter of Transmittal is signed by the registered holder(s) of the
Shares tendered hereby, no endorsements of Share Certificates or separate stock
powers are required, unless payment is to be made to, or Share Certificates
evidencing Shares not tendered or not purchased are to be issued in the name of,
a person other than the registered holder(s), in which case, the Share
Certificate(s) evidencing the Shares tendered hereby must be endorsed or
accompanied by appropriate stock powers, in either case signed exactly as the
name(s) of the registered holder(s) appear(s) on such Share Certificate(s).
Signatures on such Share Certificate(s) and stock powers must be guaranteed by
an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Shares tendered hereby, the Share Certificate(s)
evidencing the Shares tendered hereby must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name(s) of the
registered holder(s) appear(s) on such Share Certificate(s). Signatures on such
Share Certificate(s) and stock powers must be guaranteed by an Eligible
Institution.
If this Letter of Transmittal or any Share Certificate or stock power is
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and proper evidence
satisfactory to the Company of such person's authority to so act must be
submitted.
6. STOCK TRANSFER TAXES. Except as otherwise provided in this Instruction
6, the Company will pay all stock transfer taxes with respect to the sale and
transfer of any Shares to it or its order pursuant to the Offer. If, however,
payment of the purchase price of any Shares purchased is to be made to, or Share
Certificate(s) evidencing Shares not tendered or not purchased are to be issued
in the name of, a person other than the registered holder(s), the amount of any
stock transfer taxes (whether imposed on the registered holder(s), such other
person or otherwise) payable on account of the transfer to such other person
will be deducted from the purchase price of such Shares purchased, unless
evidence satisfactory to the Company of the payment of such taxes, or exemption
therefrom, is submitted. Except as provided in this Instruction 6, it will not
be necessary for transfer tax stamps to be affixed to the Share Certificate(s)
evidencing the Shares tendered hereby.
7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If a check for the purchase
price of any Shares tendered herewith is to be issued, or Share Certificate(s)
evidencing Shares not tendered or not purchased are to be issued, in the name of
a person other than the person(s) signing this Letter of Transmittal
7
<PAGE> 8
or if such check or any such Share Certificate is to be sent to someone other
than the person(s) signing this Letter of Transmittal or to the person(s)
signing this Letter of Transmittal but at an address other than that shown in
the box entitled "Description of Shares Tendered" on the reverse hereof, the
appropriate boxes on the reverse of this Letter of Transmittal must be
completed. Stockholders delivering Shares tendered herewith by book-entry
transfer may request that Shares not purchased be credited to such account
maintained at the Book-Entry Transfer Facility as such Stockholders may
designate in the box entitled "Special Payment Instructions" on the reverse
hereof. If no such instructions are given, all such Shares not purchased will be
returned by crediting the account at the Book-Entry Transfer Facility as the
account from which such Shares were delivered.
8. QUESTIONS AND REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions
and requests for assistance may be directed to the Information Agent at its
address or telephone number set forth below. Additional copies of the Offer to
Purchase and the Notice of Guaranteed Delivery may be obtained from the
Information Agent or from brokers, dealers, commercial banks or trust companies.
9. LOST, DESTROYED OR STOLEN CERTIFICATES. If any certificate representing
shares has been lost, destroyed or stolen, the stockholder should promptly
notify either the Depositary or the Transfer Agent. The stockholder will then be
instructed as to the steps that must be taken in order to replace the
certificate. This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost or destroyed certificates have
been followed.
10. SUBSTITUTE FORM W-9. Each tendering stockholder is required to provide
the Depositary with a correct Taxpayer Identification Number ("TIN") on the
Substitute Form W-9, which is provided under "Important Tax Information" below,
and to certify, under penalties of perjury, that such number is correct and that
such stockholder is not subject to backup withholding of federal income tax. If
a tendering stockholder has been notified by the Internal Revenue Service that
such stockholder is subject to backup withholding, such stockholder must cross
out item (2) of the Certification box of the Substitute Form W-9, unless such
stockholder has since been notified by the Internal Revenue Service that such
stockholder is no longer subject to backup withholding. Failure to provide the
information on the Substitute Form W-9 may subject the tendering stockholder to
31% federal income tax withholding on the payment of the purchase price of all
Shares purchased from such stockholder. If the tendering stockholder has not
been issued a TIN and has applied for one or intends to apply for one in the
near future, such stockholder should write "Applied For" in the space provided
for the TIN in Part I of the Substitute Form W-9, and sign and date the
Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is
not provided with a TIN within sixty (60) days, the Depositary will withhold 31%
on all payments of the purchase price to such stockholder until a TIN is
provided to the Depositary.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF) PROPERLY
COMPLETED AND DULY EXECUTED (TOGETHER WITH ANY REQUIRED SIGNATURE GUARANTEES AND
SHARE CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED
DOCUMENTS) OR A PROPERLY COMPLETED AND DULY EXECUTED NOTICE OF GUARANTEED
DELIVERY MUST BE RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE (AS
DEFINED IN "THE TENDER OFFER -- 1. TERMS OF THE OFFER; EXPIRATION DATE" OF THE
OFFER TO PURCHASE).
IMPORTANT TAX INFORMATION
Under the federal income tax law, a stockholder whose tendered Shares are
accepted for payment is required by law to provide the Depositary (as payer)
with such stockholder's correct TIN on Substitute Form W-9 below. If such
stockholder is an individual, the TIN is such stockholder's social security
number. If the Depositary is not provided with the correct TIN, the stockholder
may be subject to a $50 penalty imposed by the Internal Revenue Service and
payments that are made to such stockholder with respect to Shares purchased
pursuant to the Offer may be subject to backup withholding of 31%. In addition,
if a stockholder makes a false statement that results in no imposition of backup
withholding, and there was no reasonable basis for such a statement, a $500
penalty may also be imposed by the Internal Revenue Service.
8
<PAGE> 9
Certain stockholders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements. In order for a foreign individual to qualify as an exempt
recipient, such individual must submit a statement, signed under penalties of
perjury, attesting to such individual's exempt status. Forms of such statements
can be obtained from the Depositary. See the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 for
additional instructions. A stockholder should consult his or her tax advisor as
to such stockholder's qualification for an exemption from backup withholding and
the procedure for obtaining such exemption.
If backup withholding applies, the Depositary is required to withhold 31%
of any payments made to the stockholder. Backup withholding is not an additional
tax. Rather, the tax liability of persons subject to backup withholding will be
reduced by the amount of tax withheld. If withholding results in an overpayment
of taxes, a refund may be obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments that are made to a stockholder
with respect to Shares purchased pursuant to the Offer, the stockholder is
required to notify the Depositary of such stockholder's correct TIN by
completing the form below certifying that (a) the TIN provided on Substitute
Form W-9 is correct (or that such stockholder is awaiting a TIN), and (b) that
(i) such stockholder has not been notified by the Internal Revenue Service that
such stockholder is subject to backup withholding as a result of a failure to
report all interest or dividends, or (ii) the Internal Revenue Service has
notified such stockholder that such stockholder is no longer subject to backup
withholding.
WHAT NUMBER TO GIVE THE DEPOSITARY
The stockholder is required to give the Depositary the social security
number or employer identification number of the record holder of the Shares
tendered hereby. If the Shares are in more than one name or are not in the name
of the actual owner, consult the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 for additional guidance on
which number to report. If the tendering stockholder has not been issued a TIN
and has applied for a number or intends to apply for a number in the near
future, the stockholder should write "Applied For" in the space provided for the
TIN in Part I, and sign and date the Substitute Form W-9. If "Applied For" is
written in Part I and the Depositary is not provided with a TIN within sixty
(60) days, the Depositary will withhold 31% of all payments of the purchase
price to such stockholder until a TIN is provided to the Depositary.
9
<PAGE> 10
PAYER'S NAME: AMERICAN STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PART I -- TAXPAYER IDENTIFICATION NUMBER -- FOR ALL ----------------------------
SUBSTITUTE ACCOUNTS, ENTER YOUR TAXPAYER IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER
FORMW-9 ON THE LINE AT RIGHT. (FOR MOST INDIVIDUALS, THIS IS
YOUR SOCIAL SECURITY NUMBER. IF YOU DO NOT HAVE A OR
NUMBER, SEE OBTAINING A NUMBER IN THE ENCLOSED ----------------------------
GUIDELINES.) CERTIFY BY SIGNING AND DATING BELOW. TAXPAYER IDENTIFICATION NUMBER
NOTE: IF THE ACCOUNT IS IN MORE THAN ONE NAME, SEE (IF AWAITING TIN WRITE
THE CHART IN THE ENCLOSED GUIDELINES TO DETERMINE "APPLIED FOR")
WHICH NUMBER TO GIVE THE PAYER.
----------------------------------------------------------------------------------------
PAYER'S REQUEST FOR PART II -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING, SEE THE ENCLOSED GUIDELINES AND
TAXPAYER IDENTIFICATION COMPLETE
NUMBER (TIN) AS INSTRUCTED THEREIN.
CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
(1) THE NUMBER SHOWN ON THIS FORM IS MY CORRECT TAXPAYER IDENTIFICATION NUMBER (OR I
AM WAITING FOR A NUMBER TO BE ISSUED TO ME), AND
(2) I AM NOT SUBJECT TO BACKUP WITHHOLDING EITHER BECAUSE I HAVE NOT BEEN NOTIFIED BY
THE INTERNAL REVENUE SERVICE (THE "IRS") THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A
RESULT OF FAILURE TO REPORT ALL INTEREST OR DIVIDENDS, OR THE IRS HAS NOTIFIED ME
THAT I AM NO LONGER SUBJECT TO BACKUP WITHHOLDING.
----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
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CERTIFICATE INSTRUCTIONS -- YOU MUST CROSS OUT ITEM (2) ABOVE IF YOU HAVE BEEN
NOTIFIED BY THE IRS THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING BECAUSE OF
UNDERREPORTING INTEREST OR DIVIDENDS ON YOUR TAX RETURN. HOWEVER, IF AFTER BEING
NOTIFIED BY THE IRS THAT YOU WERE SUBJECT TO BACKUP WITHHOLDING YOU RECEIVED
ANOTHER NOTIFICATION FROM THE IRS THAT YOU ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING, DO NOT CROSS OUT ITEM (2). (ALSO SEE INSTRUCTIONS IN THE ENCLOSED
GUIDELINES.)
SIGNATURE __________ DATE __________ , 1999
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31 PERCENT OF PAYMENTS MADE TO YOU PURSUANT TO THIS OFFER. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
Facsimiles of the Letter of Transmittal will be accepted. The Letter of
Transmittal and certificates evidencing Shares and any required documents should
be sent or delivered by each stockholder or his or her broker, dealer,
commercial bank, trust company or other nominee to the Depositary at its address
set forth below. Additional copies of this Offer to Purchase, the Letter of
Transmittal and the Notice of Guaranteed Delivery may be obtained from the
Depositary.
10
<PAGE> 11
IMPORTANT: THIS LETTER OF TRANSMITTAL PROPERLY COMPLETED AND DULY EXECUTED
(TOGETHER WITH ANY REQUIRED SIGNATURE GUARANTEES AND SHARE CERTIFICATES OR
CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED DOCUMENTS) OR A
PROPERLY COMPLETED AND DULY EXECUTED NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE (AS DEFINED IN "THE
TENDER OFFER -- 1. TERMS OF THE OFFER; EXPIRATION DATE" OF THE OFFER TO
PURCHASE).
MANUALLY SIGNED FACSIMILE COPIES OF THE LETTER OF TRANSMITTAL, PROPERLY
COMPLETED AND DULY EXECUTED, WILL BE ACCEPTED. THE LETTER OF TRANSMITTAL,
CERTIFICATES FOR SHARES AND ANY OTHER REQUIRED DOCUMENTS SHOULD BE SENT OR
DELIVERED BY EACH STOCKHOLDER OF THE COMPANY OR HIS OR HER BROKER, DEALER,
COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE TO THE DEPOSITARY AT ONE OF ITS
ADDRESSES SET FORTH ON THE FIRST PAGE.
THE DEPOSITARY FOR THE OFFER IS:
AMERICAN STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
By Mail By Hand/Overnight Delivery By Hand/Overnight Delivery
40 Wall Street, 46th Floor (For Eligible Institutions Only) 40 Wall Street, 46th Floor
New York, NY 10005 (718) 234-5001 New York, NY 10005
Confirm by Telephone
(718)921-8200
</TABLE>
Questions or requests for assistance may be directed to the Information
Agent at its address and telephone number listed below. Additional copies of
this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed
Delivery may be obtained from the Information Agent. A stockholder may also
contact brokers, dealers, commercial banks or trust companies for assistance
concerning the Offer.
THE INFORMATION AGENT FOR THE OFFER IS:
MORROW & CO., INC.
445 PARK AVENUE, 5TH FLOOR
NEW YORK, NEW YORK 10022
BANKS AND BROKERAGE FIRMS CALL: (800) 662-5200
STOCKHOLDERS PLEASE CALL: (800) 566-9061
11
<PAGE> 1
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF SHARES OF COMMON STOCK
OF
PREFERRED EMPLOYERS HOLDINGS, INC.
This Notice of Guaranteed Delivery or a form substantially equivalent
hereto must be used to accept the offer (the "Offer") by Preferred Employers
Holdings, Inc., a Delaware corporation (the "Company"), to purchase for cash all
of its outstanding shares of common stock, $.01 par value per share, including
shares held by the executive officers and directors of the Company (the
"Shares"), (i) if certificates ("Share Certificates") evidencing the Shares are
not immediately available, (ii) if Share Certificates and all other required
documents cannot be delivered to American Stock Transfer & Trust Company, as
Depositary (the "Depositary"), prior to the Expiration Date (as defined in
Section 1 of the Offer to Purchase (as defined below)), or (iii) if the
procedure for delivery by book-entry transfer cannot be completed on a timely
basis. This Notice of Guaranteed Delivery may be delivered by hand or mail or
transmitted by telegram or facsimile transmission to the Depositary. See "The
Tender Offer -- 3. Procedures for Accepting the Offer and Tendering Shares" in
the Offer to Purchase.
THE TENDER OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON NOVEMBER 3, 1999, UNLESS EXTENDED
(THE "EXPIRATION DATE").
The Depositary for the Offer is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(THE "DEPOSITARY")
<TABLE>
<S> <C> <C>
By Mail: By Overnight Courier: By Hand:
40 Wall Street, 46th Floor 40 Wall Street, 46th Floor 40 Wall Street, 46th Floor
New York, NY 10005 New York, NY 10005 New York, NY 10005
</TABLE>
By Facsimile Transmission:
(for Eligible Institutions Only)
(718) 234-5001
Confirm by Telephone:
(718) 921-8200
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR
TRANSMISSION VIA FACSIMILE TRANSMISSION, OTHER THAN AS SET FORTH ABOVE, WILL NOT
CONSTITUTE A VALID DELIVERY.
The Offer is not being made to (nor will the surrender of Share
Certificates be accepted from or on behalf of) stockholders in any jurisdiction
in which the making or acceptance of the Offer would not be in compliance with
the laws of such jurisdiction.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders to Preferred Employers Holdings, Inc., a
Delaware corporation (the "Company"), upon the terms and subject to the
conditions set forth in the Offer to Purchase, dated September 17, 1999 (the
"Offer to Purchase"), and the related Letter of Transmittal (which together
constitute the "Offer"), receipt of each of which is hereby acknowledged, the
number of Shares specified below pursuant to the guaranteed delivery procedure
described under "The Tender Offer -- 3. Procedures for Accepting the Offer and
Tendering Shares" in the Offer to Purchase.
PLEASE SIGN AND COMPLETE
<TABLE>
<S> <C>
Number of Shares Name(s) of Holders
- --------------------------------------------- ---------------------------------------------
---------------------------------------------
---------------------------------------------
---------------------------------------------
(Please Type or Print)
Certificate Nos. (If Available) Address
- --------------------------------------------- ---------------------------------------------
---------------------------------------------
---------------------------------------------
(Include Zip Code)
[ ] Check box if Shares will be delivered by Area Code and Telephone No.
book-entry transfer ---------------------------------------------
Account No. Signature(s) of Holder(s)
- --------------------------------------------- ---------------------------------------------
- ---------------------------------------------
- --------------------------------------------- Dated:
--------------------------------------------- , 1999
</TABLE>
2
<PAGE> 3
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Share Certificates exactly as their name(s) appear(s) on the Share
Certificates or on a security position listing as the owner(s) of the Share
Certificates, or by person(s) authorized to become registered holder(s) by
endorsements and documents transmitted with this Notice of Guaranteed Delivery.
If signature is by a trustee, guardian, attorney-in-fact, officer of a
corporation, executor, administrator, agent or other representative, such person
must provide the following information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
NAME(S):
--------------------------------------
--------------------------------------
CAPACITY:
--------------------------------------
ADDRESS(ES):
--------------------------------------
--------------------------------------
--------------------------------------
3
<PAGE> 4
THE GUARANTEE SET FORTH BELOW MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of the Medallion Signature
Guarantee Program, or another "Eligible Guarantor Institution", as defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, hereby
guarantees that, within three (3) Nasdaq trading days from the date of this
Notice of Guaranteed Delivery, either Share Certificates evidencing the Shares
tendered hereby, in proper form for transfer, or confirmation of book-entry
transfer of such Shares into the Depositary's account at a Book-Entry Transfer
Facility, in each case with delivery of a Letter of Transmittal (or a facsimile
thereof) properly completed and duly executed with any required signature
guarantees or a Book-Entry confirmation (as defined in "The Tender Offer -- 2.
Acceptance for Payment and Payment for Shares" of the Offer to Purchase) in the
case of a book-entry delivery, and any other required documents, will be
deposited by the undersigned with the Depositary at one of its addresses set
forth above.
--------------------------------------
Name of Firm
--------------------------------------
Address (inc. Zip Code)
--------------------------------------
Area Code and Telephone No.
--------------------------------------
Authorized Signature
--------------------------------------
Dated
4
<PAGE> 1
OFFER TO PURCHASE FOR CASH
BY PREFERRED EMPLOYERS HOLDINGS, INC.
ALL OUTSTANDING SHARES OF ITS COMMON STOCK,
$.01 PAR VALUE PER SHARE, AT $5.00 NET PER SHARE
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 PM, NEW YORK CITY TIME,
ON NOVEMBER 3, 1999, UNLESS THE OFFER IS EXTENDED.
September 17, 1999
To Brokers, Dealers, Banks,
Trust Companies and Other Nominees:
We have been appointed by Preferred Employers Holdings, Inc., a Delaware
corporation (the "Company"), to act as Information Agent in connection with the
Company's offer to purchase for cash all outstanding shares of its common stock,
$0.01 per value per share, including shares held by the executive officers and
directors of the Company (the "Shares"), at a price of $5.00 per Share, net to
the seller in cash, upon the terms and subject to the conditions set forth in
the Company's Offer to Purchase, dated September 17, 1999 (the "Offer to
Purchase"), and the related Letter of Transmittal (which, together with the
Offer to Purchase, constitute the "Offer"), enclosed herewith. Please furnish
copies of the enclosed materials to those of your clients for whose accounts you
hold Shares registered in your name or in the name of your nominee.
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THE COMPANY OBTAINING
THE LOAN, AS DEFINED IN THE OFFER TO PURCHASE. SEE "INTRODUCTION" AND "THE
TENDER OFFER -- 11. CERTAIN CONDITIONS OF THE OFFER." OF THE OFFER TO PURCHASE.
THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING TENDERED.
Enclosed for your information and use are copies of the following
documents:
1. Offer to Purchase, dated September 17, 1999;
2. Letter of Transmittal to be used by holders of Shares in accepting the
Offer and tendering Shares;
3. Notice of Guaranteed Delivery to be used to accept the Offer if the
Shares and all other required documents are not immediately available or cannot
be delivered to American Stock Transfer & Trust Company (the "Depositary") by
the Expiration Date or if the procedure for book-entry transfer cannot be
completed by the Expiration Date; or if the procedure for book entry transfer
cannot be completed by the Expiration Date;
4. A letter to stockholders of the Company from the Chairman of the Board
and Chief Executive Officer of the Company;
5. A letter that may be sent to your clients for whose accounts you hold
Shares registered in your name or in the name of your nominee, with space
provided for obtaining such clients' instructions with regard to the Offer;
6. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9; and
7. Return envelope addressed to the Depositary.
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE
THAT THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
NOVEMBER 3, 1999, UNLESS THE OFFER IS EXTENDED.
In all cases, payment for Shares accepted for payment pursuant to the Offer
will be made only after timely receipt by the Depositary of certificates
evidencing such Shares (or a confirmation of a book-entry transfer of such
Shares into the Depositary's account at one of the Book-Entry Transfer
Facilities (as defined in the Offer to Purchase)), a Letter of Transmittal (or
facsimile thereof) properly completed and duly executed and any other required
documents.
<PAGE> 2
If holders of Shares wish to tender, but cannot deliver their certificates
or other required documents, or cannot comply with the procedure for book-entry
transfer, prior to the expiration of the Offer, a tender of Shares may be
effected by following the guaranteed delivery procedure described under "The
Tender Offer -- 3. Procedures for Accepting the Offer and Tendering Shares" in
the Offer to Purchase.
The Company will not pay any fees or commissions to any broker, dealer or
other person (other than the Depositary and the Information Agent as described
in the Offer) in connection with the solicitation of tenders of Shares pursuant
to the Offer. However, the Company will reimburse you for customary mailing and
handling expenses incurred by you in forwarding any of the enclosed materials to
your clients. The Company will pay or cause to be paid any stock transfer taxes
payable with respect to the transfer of Shares to it, except as otherwise
provided in Instruction 6 of the Letter of Transmittal.
Any inquiries you may have with respect to the Offer should be addressed to
Morrow & Co., Inc. or American Stock Transfer & Trust Company at their
respective addresses and telephone numbers set forth on the back cover page of
the Offer to Purchase.
Additional copies of the enclosed material may be obtained from the
Information Agent, at the address and telephone number set forth on the back
cover page of the Offer to Purchase.
Very truly yours,
MORROW & CO., INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL RENDER YOU, OR ANY
OTHER PERSON, THE AGENT OF THE COMPANY, THE INFORMATION AGENT OR THE DEPOSITARY,
OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY
DOCUMENT OR TO MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH
THE OFFER OTHER THAN THE ENCLOSED DOCUMENT AND THE STATEMENTS CONTAINED THEREIN.
<PAGE> 1
OFFER TO PURCHASE FOR CASH
BY PREFERRED EMPLOYERS HOLDINGS, INC.
ALL OUTSTANDING SHARES OF ITS COMMON STOCK,
$.01 PAR VALUE PER SHARE, AT $5.00 NET PER SHARE
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 PM, NEW YORK CITY TIME,
ON NOVEMBER 3, 1999, UNLESS THE OFFER IS EXTENDED.
September 17, 1999
To Our Clients:
Enclosed for your consideration are an Offer to Purchase, dated September
17, 1999 (the "Offer to Purchase"), and a related Letter of Transmittal in
connection with the offer by Preferred Employers Holdings, Inc., a Delaware
corporation (the "Company"), to purchase for cash all outstanding shares of its
common stock, $0.01 par value per share, including shares held by the executive
officers and directors of the Company (the "Shares"), at a price of $5.00 per
Share, net to the seller in cash, upon the terms and subject to the conditions
set forth in the Offer to Purchase and in the related Letter of Transmittal
(which, together with the Offer to Purchase, constitute the "Offer").
WE ARE (OR OUR NOMINEE IS) THE HOLDER OF RECORD OF SHARES HELD BY US FOR
YOUR ACCOUNT. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US OR OUR NOMINEE AS
THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF
TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY
YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT.
We request instructions as to whether you wish to have us tender on your
behalf any or all of the Shares held by us for your account, upon the terms and
subject to the conditions set forth in the Offer.
Your attention is invited to the following:
1. The tender price is $5.00 per Share, net to the seller in cash.
2. The Offer is being made for all outstanding Shares, including Shares
held by Mr. Mel Harris, the Chairman of the Board and Chief Executive Officer of
the Company, Mr. Peter E. Kilissanly, President and Chief Operating Officer of
the Company, and the other executive officers and directors of the Company
listed in Schedule I of the Offer to Purchase.
3. The Board of Directors of the Company (the "Board"), the Independent
Committee and the Remaining Stockholders (as defined in the Offer to Purchase
under "Special Factors -- 1. Purpose and Background of the Offer; Certain
Effects of the Offer; Plans of the Company After the Offer") have determined
that the Offer is fair to, and in the best interests of, the stockholders of the
Company.
4. The Offer and withdrawal rights will expire at 5:00 P.M., New York City
time, on November 3, 1999, unless the Offer is extended.
5. Tendering stockholders will not be obligated to pay brokerage fees or
commissions or, except as otherwise provided in Instruction 6 of the Letter of
Transmittal, stock transfer taxes with respect to the purchase of Shares by the
Company pursuant to the Offer. However, federal income tax backup withholding at
a rate of 31% may be required, unless an exemption is provided or unless the
required tax payer identification information is provided. See Instruction 10 of
the Letter of Transmittal.
If you wish to have us tender any or all of your Shares, please so instruct
us by completing, executing and returning to us the instruction form contained
in this letter. An envelope in which to return your instructions to us in
enclosed. If you authorize the tender of your Shares, all such Shares will be
tendered unless otherwise specified in your instructions. YOUR INSTRUCTIONS
SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR
BEHALF PRIOR TO THE EXPIRATION OF THE OFFER.
<PAGE> 2
The Offer is made solely by the Offer to Purchase and the related Letter of
Transmittal and is being made to all holders of Shares, including Mr. Mel
Harris, the Chairman of the Board and Chief Executive Officer of the Company,
Mr. Peter E. Kilissanly, President and Chief Operating Officer of the Company,
and the other executive officers and directors of the Company listed in Schedule
I of the Offer to Purchase. The Company is not aware of any state where the
making of the Offer is prohibited by administrative or judicial action pursuant
to any valid state statute. If the Company becomes aware of any valid state
statute prohibiting the making of the Offer or the acceptance of Shares pursuant
thereto, the Company will make a good faith effort to comply. If after such good
faith effort, the Company cannot comply with such state statute, the Offer will
not be made to (nor will tenders be accepted from or on behalf of) the holders
of Shares in such state. In any jurisdiction where the securities, blue sky or
other laws require the Offer to be made by a licensed broker or dealer, the
Offer shall be deemed to be made on behalf of the Company by one or more
registered brokers or dealers licensed under the laws of such jurisdiction.
<PAGE> 3
INSTRUCTIONS WITH RESPECT TO THE OFFER TO PURCHASE FOR CASH ALL OUTSTANDING
SHARES OF COMMON STOCK OF
PREFERRED EMPLOYERS HOLDINGS, INC.
The undersigned acknowledge(s) receipt of your letter and the enclosed
Offer to Purchase, dated September 17, 1999, and the related Letter of
Transmittal (which together with the Offer to Purchase, constitute the "Offer")
in connection with the offer by Preferred Employers Holdings, Inc., a Delaware
corporation (the "Company") to purchase all outstanding shares of common stock,
$0.01 par value per share, including shares held by the executive officers and
directors of the Company (the "Shares"), at a price of $5.00 per Share, net to
the seller in cash, upon the terms and subject to the conditions set forth in
the Offer.
This will instruct you to tender the number of Shares indicated below (or
if no number is indicated below, all Shares) that are held by you for the
account of the undersigned, upon the terms and subject to the conditions set
forth in the Offer.
<TABLE>
<S> <C>
Dated: September 17, 1999
-----------------------------------------------------
-----------------------------------------------------
Signature(s)
-----------------------------------------------------
Number of Shares to be Tendered:
-----------------------------------------------------
Please Type or Print Name(s)
Shares*
-----------------------------------------------------
Please Type or Print Address
-----------------------------------------------------
(Zip Code)
-----------------------------------------------------
Area Code and Telephone Number
-----------------------------------------------------
Taxpayer Identification Number
or Social Security Number
</TABLE>
- ---------------------
* Unless otherwise indicated, it will be assumed that all Shares held by us for
your account are to be tendered.
<PAGE> 1
(LETTERHEAD)
September 17, 1999
Dear Stockholders:
Preferred Employers Holdings, Inc. (the "Company") is offering to purchase
all of its issued and outstanding shares of common stock, $0.01 par value per
share (the "Shares"), including Shares held by the executive officers and
directors of the Company, at a purchase price of $5.00 per Share (the "Offer"),
net to the Seller in cash. The Offer is explained in detail in the enclosed
Offer to Purchase and Letter of Transmittal. I encourage you to read these
materials carefully before making any decision with respect to the Offer. The
instructions on how to tender Shares are also contained in the accompanying
materials and explained in detail.
On September 16, 1999, the last day the Shares were traded prior to the
announcement of the Offer, the last reported sales price per Share for the
Company's common stock on the Nasdaq National Market was $2.75. Any stockholder
tendering Shares will receive the net purchase price in cash and will not be
obligated to pay brokerage fees or commissions or otherwise incur the usual
transaction costs associated with open-market sales.
The Board of Directors of the Company, based on, among other things, the
unanimous recommendation of an independent committee of non-employee directors
of the Board, has unanimously approved the Offer. However, neither the Company
nor its Board of Directors makes any recommendation to any stockholder as to
whether to tender or refrain from tendering shares and has not authorized any
person to make any such recommendations. Stockholders are urged to evaluate
carefully all information contained in this Offer to Purchase and accompanying
documents, consult their own investment and tax advisors and make their own
decisions whether to tender Shares and, if so, how many Shares to tender.
The Offer will expire at 5:00 p.m., New York City time, on November 3,
1999, unless extended by the Company. If you have any questions or requests for
assistance or for additional copies of the Offer to Purchase and the Letter of
Transmittal, you may call the Information Agent for the Offer, Morrow & Co.,
Inc., at 800-566-9061.
Sincerely,
/s/ Mel Harris
Mel Harris
Chairman of the Board of Directors
and Chief Executive Officer
(Letterhead footer)
