<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE SECURITIES EXCHANGE
ACT OF 1934)
PREFERRED EMPLOYERS HOLDINGS, INC.
----------------------------------
(Name of Issuer)
PREFERRED EMPLOYERS HOLDINGS, INC.
----------------------------------
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class of Securities)
739908-101
---------------------
(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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<S> <C> <C>
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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<PAGE> 2
INTRODUCTION
This 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"), 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")
except 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
<S> <C>
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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<CAPTION>
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.................................................................................. *
</TABLE>
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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. 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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<PAGE> 4
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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<PAGE> 5
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) Commitment Letter, dated September 10, 1999, from City National
Bank of Florida to the Company.
(b) Opinion Letter of Advest, Inc., dated September 10, 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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<PAGE> 6
(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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<PAGE> 7
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: September 17, 1999
PREFERRED EMPLOYERS HOLDINGS, INC.
By: /s/ Mel Harris
-------------------------------------------
Name: Mel Harris
Title: Chairman of the Board of Directors and
Chief Executive Officer
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<PAGE> 8
EXHIBIT INDEX
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EXHIBIT NO. DESCRIPTION
<S> <C>
(a) Commitment Letter, dated September 10, 1999, from
City National Bank of Florida to the Company.
(b) Opinion Letter of Advest, Inc., dated September 10, 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.
</TABLE>
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<PAGE> 1
[CITY NATIONAL BANK OF FLORIDA LOGO]
September 10, 1999
Mr. Mel Harris, Chairman and CEO
Preferred Employers Holdings, Inc.
10800 Biscayne Boulevard, 10th floor
North Miami, Florida 33161
Re: $7,500,000.00 Revolving Line of Credit
Dear Mr. Harris:
This letter shall serve as City National Bank of Florida's commitment to make a
Revolving Line of Credit Loan to Preferred Employers Holdings, Inc. ("Borrower")
in the sum of $7,500,000 subject to the following terms and conditions. We shall
be referred to as "Bank" or "Lender" throughout this commitment.
The Consolidated Revolving Line of Credit will have the following terms:
1. AMOUNT: $7,500,000.00
2. PURPOSE: To provide funds for a self tender and to pay off existing loan in
the sum of $3,000,000 to Preferred Healthcare Staffing, Inc., a wholly owned
subsidiary of Borrower ("HC Staffing").
3. TERM: The Consolidated Revolving Line of Credit shall mature 364 days from
closing.
4. INTEREST: The interest rate shall be equal to Lender's Base Rate from time
to time in effect (the "Note Rate"). The Base Rate is neither tied to any
external rate of interest or index nor does it necessarily reflect the
lowest rate of interest actually charged by Lender to any particular class
or category of its customers. Interest as aforesaid shall be calculated on
the principal balance, which from time to time is outstanding, on the basis
of a three hundred sixty (360) day year, but interest shall accrue and be
payable for the actual number of days in each month. The rate of interest
from time to time applicable to the unpaid balance of the principal shall be
calculated on a daily basis so that, when such Base Rate shall change, the
Note Rate to be paid by Maker shall change effective as of the day of the
change in such Base Rate.
25 W. Flagler Street, Miami, Florida 33130 305-577-7333 305-577-7460 Fax
www.citynational.com
<PAGE> 2
Mr. Mel Harris
September 10, 1999
Page 2
- -------------------------------------------------------------------------------
5. REPAYMENT: Monthly payments of interest only shall be due and payable, with
the entire outstanding principal due at maturity.
6. BORROWER: Preferred Employers Holdings, Inc.
7. COLLATERAL: First lien security interest in all accounts receivable of HC
Staffing whether now owned or hereafter acquired. In connection with the
collateral, Borrower and HC Staffing will execute and deliver to Lender at
or before closing, all security and other documents the Lender may request
to perfect its security interest.
8. OPINION LETTER: Borrower shall provide Bank with an opinion of Borrower's
counsel in form, scope and substance satisfactory to Bank and Bank's
counsel. Said opinion shall include among other provisions: that the
execution and delivery of the Loan Documents have been duly authorized,
and that the same are valid, binding and enforceable in accordance with
their terms and do not violate or contravene any statute or contractual
restriction binding on Borrower.
9. EXPENSES: Whether or not the transaction contemplated hereby closes, the
Borrower agrees to pay all of the normal disbursements, costs and fees
of the Bank and the Borrower involved in this transaction including but
not necessarily limited to, documentary stamps, if applicable, and any
and all other additional expenses or additional requirements reasonably
imposed by the Bank, or the Bank's counsel collectively, the ("Expenses").
The Expenses shall be paid at the Loan Closing, if the transaction
contemplated hereby closes, or within 10 days after request for the payment
thereof if the Loan has not closed. In the event the Borrower accepts this
Commitment Letter, but the loan is not closed or disbursed for any reason
(other than willful default by the Bank hereunder) the Borrower's obligation
for the Expenses shall survive the termination of this Commitment Letter
and all expenses incurred by the Bank, including, but not limited to, the
expense for filing documents plus related disbursements, shall be reimbursed
to the Bank by the Borrower within ten days after request therefor by the
Bank.
10. DUE DILIGENCE: Notwithstanding anything to the contrary contained herein,
this commitment is subject to our completion of an analysis of the Borrower
and Guarantor's financial statements and other due diligence in underwriting
this increase, the results of which shall be subject to our reasonable
approval. We may require, as a condition to closing on this increase,
modifications to or additional covenants in the Loan Agreement dated May 9,
1998.
This commitment letter carries an expiration date of October 22, 1999 in the
event this loan does not close on or before said date. In the event this
commitment is not accepted by Borrower on or before September 24, 1999, it shall
be automatically withdrawn and of no effect.
<PAGE> 3
Mr. Mel Harris
September 10, 1999
Page 3
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Bank reserves the right to cancel this commitment and terminate its obligations
hereunder at any time upon the happening of any of the following events:
a. Borrower's failure to comply with any of the applicable conditions of this
commitment within the time specified.
b. Non-payment of any of the fees or expenses to be paid by Borrower in
connection with this commitment.
c. The filing by or against Borrower of any petition in bankruptcy or
insolvency or for the reorganization of Borrower or the appointment of a
receiver or trustee or the making of an assignment for the benefits of
creditors.
WAIVER OF JURY TRIAL. THE BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY WITH REGARD TO ANY
LITIGATION BASED ON THIS COMMITMENT, OR TO ANY OBLIGATION RESULTING FROM
OR RELATED TO ANY LOAN OR GUARANTY RELATING TO THIS COMMITMENT, OR ANY
AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE
OF DEALING, COURSE OF CONDUCT, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR
ACTIONS OF BORROWER OR LENDER. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
THE LENDER ENTERING INTO THIS COMMITMENT.
Very truly yours,
CITY NATIONAL BANK OF FLORIDA
By: /s/ Karen Gilmore
_____________________________________
Karen Gilmore
Executive Vice President
KG/gpc
ACCEPTED THIS ___ DAY OF ___________, 1999.
"Borrower"
PREFERRED EMPLOYERS HOLDINGS, INC.
By:____________________________________
<PAGE> 1
[ADVEST LOGO] 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
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September 10, 1999
The Board of Directors and the Independent Committee
Preferred Employers Holdings, Inc.
10800 Biscayne Boulevard, 10th 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;
(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;
Member: New York, American and Other Principal Stock Exchange, Member: SIPC
<PAGE> 2
(ADVEST LOGO)
Preferred Employers Holdings, Inc.
September 10, 1999
Page 2
(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
recommendation to any stockholder with respect to whether to elect to receive
the Consideration or vote in
<PAGE> 3
(Advest logo)
Preferred Employers Holdings, Inc.
September 10, 1999
Page 3
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
<PAGE> 1
SHARE ESCROW AGREEMENT
This SHARE ESCROW AGREEMENT, dated as of February 5, 1997 (the
"Agreement"), is entered into by and among PREFERRED EMPLOYERS HOLDINGS, INC.,
a Delaware corporation (the "Company"), HOWARD ODZER ("Odzer") and Baer Marks &
Upham LLP, a New York limited liability partnership, as Escrow Agent (the
"Escrow Agent").
W I T N E S S E T H:
WHEREAS, Odzer is the beneficial owner of 1,111,765 shares of Common
Stock, par value $.01 per share, of the Company ("Common Stock"); and
WHEREAS, Odzer agrees to place 300,000 shares of Common Stock (the
"Shares") in escrow with the Escrow Agent for issuance upon the exercise of
certain stock options which will be granted by him pursuant to the terms and
subject to the conditions hereof (the "Stock Options") to certain executives and
officers of the Company as designated by the Compensation Committee (the
"Committee") of the Board of Directors of the Company.
NOW, THEREFORE, in consideration of the foregoing and of the covenants and
agreements contained herein, the parties hereto, intending legally to be bound,
agree as follows:
1. ESCROW OF SHARES. (a) Concurrently with the execution and delivery
hereof, Odzer shall deliver to the Escrow Agent certificates representing the
Shares, duly endorsed for transfer (the "Certificates"), to be held for so long
as any Stock Options remain outstanding and such Certificates shall be retained
in escrow pursuant to the terms and subject to the conditions hereof.
(b) The Escrow Agent agrees to hold the Shares in accordance with the
terms and conditions of this Agreement and for the uses and purposes stated
herein.
(c) Odzer and the Company shall deliver to the Escrow Agent the Form of
Stock Option Agreement, attached hereto as Annex A (the "Form Option
Agreement"), to be retained in escrow in accordance with the terms and
conditions of this Agreement and for the uses and purposes stated herein.
(d) It is understood and agreed that the Escrow Agent's sole duties
hereunder are as indicated herein and that the Escrow Agent in the performance
of its duties hereunder shall incur no liability except for willful malfeasance
and shall not be liable or responsible for anything done or omitted to be done
in good faith as herein provided. The Company agrees to indemnify and save the
Escrow Agent harmless from any claims, liabilities, judgments, attorneys' fees
and other expenses of every kind and nature, which may be incurred by the
Escrow Agent by reason
<PAGE> 2
of its acceptance of, and its performance under, this Agreement, except such as
may arise because of the Escrow Agent's willful misconduct in performing the
specified duties as Escrow Agent. The parties hereby agree that in no event
shall any claim be made with respect to any conflict of interest in connection
with Baer Marks & Upham LLP's acting in its capacity of Escrow Agent and
counsel to the Company. All reasonable expenses of the Escrow Agent incurred in
connection with the exercise of its duties hereunder shall be borne by the
Company.
(e) The Escrow Agent may resign at any time upon giving the parties hereto
thirty (30) days' prior written notice; in such event, the successor Escrow
Agent shall be such person, firm or corporation as shall be selected by the
Company and approved by Odzer in his reasonable discretion. It is understood and
agreed that such resignation shall not be effective until a successor agrees to
act hereunder.
(f) Upon the receipt of a notice and a certified or bank cashier's check
for an amount equal to the full purchase price for the Shares from an optionee
of the exercise of any Stock Option pursuant to Section 3(b) of such optionee's
respective Option Agreement (as defined hereinafter), the Company shall promptly
give written notice thereof to the Escrow Agent and the Escrow Agent shall,
within 10 business days of its receipt of such notice, release and deliver to
the Company Certificates representing such number of Shares as shall be set
forth in such notice against payment by the Company to Odzer for the Shares.
2. TERMS OF STOCK OPTIONS. (a) Odzer hereby agrees that he shall
grant Stock Options to purchase all of the Shares upon the direction of, and to
those executives and officers of the Company designated by, the Committee in
accordance with the terms and subject to the conditions of this Agreement.
(b) In no event shall the exercise price of any Stock Option granted
pursuant to this Agreement be less than $7.25, the initial public offering price
of the Common Stock on a per share basis).
(c) The exercise of the Stock Options must occur, if at all, prior to
February 5, 2002 (the "Expiration Date"). Odzer shall receive all proceeds
received from the exercise of any Stock Options.
(d) Upon the Expiration Date, the balance of the Shares held in escrow
pursuant to the terms of this Agreement, shall revert back and be delivered by
the Escrow Agent to Odzer and such Shares shall no longer be subject to the
provisions hereof.
(e) The terms and conditions of the Stock Options shall be more fully set
forth in each of the respective option agreements which shall be executed and
delivered by Odzer and each optionee in substantially the form of the Form
Option Agreement (the "Option Agreements").
-2-
<PAGE> 3
3. ADMINISTRATION. (a) Odzer hereby appoints each of the Committee and
the Board of Directors as his attorney-in-fact with the power to designate the
executives and officers of the Company to whom Stock Options shall be granted
by Odzer.
(b) The administration of this Agreement and the Stock Options to be
granted pursuant to the terms hereof, shall be the sole responsibility of the
Committee, whose construction and interpretation of the terms and provisions
hereof and thereof shall be final and conclusive; provided, however, that the
Committee shall not be entitled to make a unilateral construction or
interpretation of any term or provision of this Agreement which adversely
affects the rights and obligations to which Odzer is entitled or subject
pursuant to the terms hereof without the consent of Odzer which consent shall
not be unreasonably withheld. The Committee shall in its sole discretion
designate the executives and officers to whom the Stock Options shall be
granted by Odzer and shall oversee the issuance of the Shares upon exercise of
such Stock Options as provided herein. The Committee shall have authority,
subject to the express provisions hereof, to construe this Agreement and the
respective Option Agreements, to be executed and delivered pursuant to the
terms hereof to prescribe, amend and rescind rules and regulations relating to
this Agreement and the issuance of the Shares upon exercise of such Stock
Options as provided herein; to determine the terms and provisions of the
respective Option Agreements to be executed and delivered pursuant to the terms
hereof, which need not be identical but which in all cases shall be consistent
with the terms of this Agreement and the Form Option Agreement; and to make
all other determinations in the judgment of the Committee necessary or
desirable for the administration of the provisions hereof; provided, however,
that the Committee shall not be entitled to make a unilateral construction or
interpretation of any term or provision of this Agreement which adversely
affects the rights and obligations to which Odzer is entitled or subject
pursuant to the terms hereof without the consent of Odzer which consent shall
not be unreasonably withheld. The Committee may correct any defect or supply
any omission or reconcile any inconsistency contained herein and in the
respective Option Agreements to be executed and delivered pursuant to the
terms hereof, in the manner and to the extent it shall deem expedient to carry
out the purposes and intent of this Agreement and it shall be the sole and
final judge of such expediency; provided, however, the Committee shall not be
entitled to make any correction, change or determination which adversely
affects the rights and obligations to which Odzer is entitled or subject,
without the consent of Howard Odzer, which consent shall be not unreasonably
withheld. No director or person acting pursuant to authority delegated by the
Board of Directors or the Committee shall be liable for any action or
determination under this Agreement made in good faith and consistent with the
express terms of this Agreement.
4. FURTHER ASSURANCES. Odzer shall do, execute, acknowledge and deliver
all and every such further acts, deeds, conveyances, certificates, notices,
transfers and assurances as the Escrow Agent or the Company may reasonably
require in order to effect the purposes and intention of, or facilitate the
performance of the terms and conditions contained in, this Agreement, or to
enable the Company or any grantee of a Stock Option to comply with any
applicable federal or state law, provided, however, that any such further
action which Odzer
-3-
<PAGE> 4
may be requested to undertake will be without cost or expense to Odzer and
shall not adversely affect the rights and obligations to which Odzer is
entitled or subject.
5. NOTICES. All notices, claims, certificates, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given or made as of the date delivered, mailed or transmitted, and shall
be effective upon receipt, if delivered personally, mailed by registered or
certified mail (postage prepaid, return receipt requested) to the parties at
the following addresses or sent by electronic transmission to the telecopier
number specified below:
(a) If to Odzer, to:
Howard Odzer
c/o Preferred Employers Holdings, Inc.
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Telephone: (305) 893-4040
Telecopy: (305)
with copies to:
Steel Hector & Davis LLP
200 South Biscayne Blvd.
Miami, FL 33131
Attn: Thomas R. McGuigan, P.A.
Telephone: (305) 577-2850
Telecopy: (305) 577-7001
(b) If to the Company, to:
Preferred Employers Holdings, Inc.
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Attn: Mel Harris
Telephone: (305) 893-4040
Telecopy: (305)
with copies to:
Baer Marks & Upham LLP
805 Third Avenue
New York, New York 10022
Attn: Donald J. Bezahler, Esq.
-4-
<PAGE> 5
Telephone: (212) 702-5700
Telecopy: (212) 702-5941
(c) If to Escrow Agent, to:
Baer Marks & Upham LLP
805 Third Avenue
New York, New York 10022
Attn: Donald J. Bezahler, Esq.
Telephone: (212) 702-5700
Telecopy: (212) 702-5941
or to such other address as the person to whom the notice is to be given may
have previously furnished to the other in writing in the manner set forth above.
6. BENEFIT AND ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns. Except as otherwise provided herein, this Agreement shall not be
assignable by the Escrow Agent without the prior written consent of the other
parties and shall not be assignable by either the Company or Odzer without the
consent of the other.
7. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains all the terms
agreed upon by the parties, and supersede any prior agreements, with respect to
the subject matter hereof. This Agreement may be amended only by a written
instrument signed by the parties against which enforcement of any waiver,
change, modification, extension or discharge is sought.
8. ATTORNEYS' FEES. If any action, suit or proceeding is brought by any of
the parties hereto arising out of or relating to this Agreement or its breach,
the successful or prevailing party in any such action, suit or proceeding, shall
be entitled to the full amount of its reasonable expenses, including all court
costs and attorneys' fees paid or incurred in connection therewith, in addition
to such other relief as such party shall be entitled to.
9. INTERPRETATION. The articles and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement.
-5-
<PAGE> 6
10. GOVERNING LAW. This Agreement and the legal relations of the parties
hereto shall be governed by and construed in accordance with the laws of the
State of New York, without giving effect to any conflict or choice of law.
11. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and
delivered by their duly authorized officers as of the 5th day of February, 1997.
PREFERRED EMPLOYERS HOLDINGS, INC.
By: /s/ ???
----------------------------
Name:
Title:
/s/ Howard Odzer
----------------------------
HOWARD ODZER
BAER MARKS & UPHAM LLP,
as Escrow Agent
/s/ Baer Marks & Upham LLP
----------------------------
-7-
<PAGE> 8
LETTER AGREEMENT OF ADDITIONAL TERMS REGARDING ESCROW AGREEMENT
This Letter Agreement of Additional Terms Regarding Escrow Agreement, dated
as of January __, 1997 (the "Agreement") is entered into by and between
Preferred Employers Holdings, Inc., a Delaware corporation (the "Company") and
Howard Odzer ("Odzer").
RECITALS
1. The parties to this Agreement, and Baer Marks & Upham LLP, a New York
limited liability partnership, are parties to an Escrow Agreement of even date
herewith pursuant to which Odzer agrees to place in escrow 300,000 shares of the
Company's common stock (the "Shares") for issuance upon the exercise of certain
stock options which will be granted by Odzer pursuant to the terms and subject
to the conditions of the Escrow Agreement and the "Form Option Agreement" (as
defined in the Escrow Agreement) (the "Stock Options") to certain executives and
officers of the Company.
2. The parties to this Agreement desire to incorporate certain additional
terms and conditions which will govern the relationship between the parties
regarding the implementation and operation of the Escrow Agreement, the Form
Option Agreement, and the exercise of any options thereunder.
AGREEMENT
1. Tax Indemnification.
(A) Upon the exercise of any option to purchase Shares subject to
the Escrow Agreement, the Company agrees to pay to Odzer an amount equal to the
additional federal, state and local taxes to which Odzer will be subject if the
income recognized by Odzer upon the exercise of an option to purchase any Shares
subject to the Escrow Agreement (or any additional shares which become subject
to the Escrow Agreement pursuant to the provisions of Section 9 of the Form
Option Agreement) is taxable to Odzer at a rate higher than the rate that would
have been applicable if the gain had been characterized as and taxable as a
"capital gain" and not as "ordinary income". The amount of the payment which
Odzer will be entitled to receive from the Company and which the Company will be
obligated to pay Odzer pursuant to this Section 1.(A) upon each exercise of an
option to purchase Shares will be equal to the product of the (i) amount of
income recognized or to be recognized by Odzer upon each exercise of an option
to purchase Shares (ii) multiplied by the difference between the maximum
statutory rate of tax to which Odzer is or would be subject on ordinary income
and the maximum statutory rate of tax to which Odzer is or would be subject on
capital gains for the year in which the option is exercised (determined
separately for each federal, state and local income tax to which Odzer is or may
become subject). In addition, to the extent that a payment or right to payment
under this Section 1 is included or subject to inclusion in Odzer's income for
income tax purposes, the amount of the payment shall be "grossed" up for the
payment of the income tax payable in respect of the payment and in respect of
the gross up so that the benefit to Odzer of all payments to which he is
entitled under this Section 1 shall be on an "after tax" basis. The amount of
the payment to
<PAGE> 9
which Odzer will be entitled for the indemnification and "gross up" to
compensate Odzer for the differential between the capital gains and ordinary
income tax rates will be calculated as follows:
I = OP times ((1-CG/1-OIG) - 1)
where,
"I" means the total indemnification payment to which Odzer is
entitled upon the exercise of any option to purchase Shares subject
to the Escrow Agreement,
"OP" means the amount paid to Odzer upon the exercise of any option
to purchase Shares subject to the Escrow Agreement;
"CG" means the maximum statutory rate of tax to which Odzer is or
would be subject on capital gains (determined separately for each
federal, state and local income tax to which Odzer is or may become
subject), and
"OIG" means the maximum statutory rate of tax to which Odzer is or
would be subject on ordinary income (determined separately for each
federal, state and local income tax to which Odzer is or may become
subject).
(B) Odzer shall consult with his tax advisors as to the
characterization of income to be recognized by Odzer upon an exercise of an
option to purchase the Shares pursuant to the Escrow Agreement and the Form
Option Agreement, and the tax advisor's characterization of the income shall be
notified by Odzer to the Company and be binding upon both the Company and Odzer
for purposes of this Agreement. Odzer agrees to report the characterization
reported to the company consistently on all federal, state and local income tax
returns which he files.
(C) The Company shall pay to Odzer in cash the amount of each payment
to which he is entitled pursuant to this Section 1 on the later of the (i) last
day of each calendar quarter within which any option is exercised, and (ii)
within 5 business days after such date.
2. SECURITIES LAWS DISCLOSURES AND COMPLIANCE
(A) The Company agrees that it will be responsible for and will comply
with all laws, rules and regulations pertaining to the sale and transfer of the
Shares and all other responsibilities of the Company with respect to the options
to be granted under the Escrow Agreement and the Form Option Agreement, and the
Shares, including but not limited to all laws, rules and regulations pertaining
to the federal and state securities laws to which the grant of the option and
the sale or transfer of the Shares is or will at the time of exercise of the
option be subject, and the Company agrees to comply with and make all
disclosures, filings and registrations required under all state and federal
securities laws to which the options and the Shares are subject.
<PAGE> 10
(B) The Company will, to the extent permitted by law, indemnify and hold
harmless Odzer, against all losses, claims, demands, damages or liabilities, to
which Odzer may become subject under any federal or state securities laws or
otherwise, and with respect to all claims asserted against Odzer by any
"Optionee" (as defined in the Form Option Agreement) insofar as the losses,
claims, demands, damages or liabilities (or actions or proceedings in respect
thereof) arise out of or are based upon any filing, statement or disclosure
made by the Company or failed to be made by the Company or arise out of or are
based upon the Escrow Agreement, the Form Option Agreement or the actual option
agreement (which must be substantially in the same form as the Form Option
Agreement) executed by any Optionee, other than losses, claims, demands,
damages or liabilities which are attributable to Odzer's failure to deliver the
Shares to the Escrow Agent pursuant to the Escrow Agreement or to transfer the
Shares to an Optionee in accordance with the terms of the Form Option
Agreement; and the Company will reimburse Odzer for all legal or other expenses
reasonably incurred by him in connection with investigating or defending any
such loss, claim, demand, damage, liability, action or proceeding for which the
Company is liable to reimburse or hold Odzer harmless. This indemnity shall
remain in full force and shall survive the transfer of Shares upon the exercise
of an Option.
3. NOTICES. All notices, claims, certificates, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given or made as of the date delivered, mailed or transmitted, and shall
be effective upon receipt, if delivered personally, mailed by registered or
certified mail (postage prepaid, return receipt requested) to the parties at
the following addresses or sent by electronic transmission to the Telecopier
number specified below:
(A) If to Odzer, to:
Howard Odzer
c/o Preferred Employers Holdings, Inc.
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Telephone: (305) 893-4040
Telecopy: (305)
With copies to:
Steel Hector & Davis, LLP
200 South Biscayne Blvd.
Miami, FL 33131
Attn: Thomas R. McGuigan, P.A.
Telephone: (305) 577-2850
Telecopy: (305) 577-7001
(B) If to the Company, to:
Preferred Employers Holdings, Inc.
<PAGE> 11
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Attn: Mel Harris
Telephone: (305) 893-4040
Telecopy: (305)
With copies to:
Baer Marks & Upham LLP
805 Third Avenue
New York, New York 10022
Attn: Donald J. Bezahler, Esq.
Telephone: (212) 702-5700
Telecopy: (212) 702-5941
or to such other address as the person to whom the notice is to be given may
have previously furnished to the other in writing in the manner set forth above.
4. BENEFIT AND ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns. Except as otherwise provided herein or pursuant to an assignment
permitted in the Escrow Agreement, this Agreement shall not be assignable by
either the Company or Odzer without the consent of the other.
5. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains all the terms
agreed upon by the parties, and supersede any prior agreements, with respect to
the subject matter hereof. This Agreement may be amended only by a written
instrument signed by the parties against which enforcement of any waiver,
change, modification, extension or discharge is sought. The parties acknowledge
and agree that this Agreement modifies the Escrow Agreement.
6. ATTORNEYS' FEES. If any action, suit or proceeding is brought by any of
the parties hereto arising out of or relating to this Agreement or its breach,
the successful or prevailing party in any such action, suit or proceeding, shall
be entitled to the full amount of its reasonable expenses, including all court
costs and attorneys' fees paid or incurred in connection therewith, in addition
to such other relief as to which such party shall be entitled.
7. INTERPRETATION. The articles and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement.
8. GOVERNING LAW. This Agreement and the legal relations of the parties
hereto shall be governed by and construed in accordance with the laws of the
State of New York, without giving effect to any conflict or choice of law.
<PAGE> 12
9. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized officers as of the date first above
written.
PREFERRED EMPLOYERS HOLDINGS, INC.
By: /s/
-------------------------------
Name:
Title:
/s/ Howard Odzer
-------------------------------
HOWARD ODZER
<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 OCTOBER 18, 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 other than 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
Debt Financing (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................................................. 12
3. OPINION OF ADVEST, INC................................ 13
4. INTERESTS OF CERTAIN PERSONS IN THE OFFER............. 18
5. BENEFICIAL OWNERSHIP OF SHARES........................ 19
6. FEES AND EXPENSES..................................... 21
7. DISSENTERS' RIGHTS.................................... 21
THE TENDER OFFER............................................ 22
1. TERMS OF THE OFFER; EXPIRATION DATE................... 22
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES......... 23
3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING
SHARES................................................ 24
4. WITHDRAWAL RIGHTS..................................... 26
5. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES.......... 26
6. PRICE RANGE OF SHARES; DIVIDENDS...................... 29
7. CERTAIN INFORMATION CONCERNING THE COMPANY............ 29
8. FINANCING OF THE OFFER................................ 35
9. DIVIDENDS AND DISTRIBUTIONS........................... 35
10. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES;
QUOTATION AND EXCHANGE ACT REGISTRATION............... 35
11. CERTAIN CONDITIONS OF THE OFFER....................... 37
12. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS........ 38
13. FEES AND EXPENSES..................................... 38
14. MISCELLANEOUS......................................... 39
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-5
QUARTERLY REPORT ON FORM 10-Q OF THE
COMPANY FOR THE QUARTERLY PERIODS ENDED
MARCH 31, 1999 AND JUNE 30, 1999
</TABLE>
2
<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 other than 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 9 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 Debt Financing (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 Securities and Exchange Commission (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 October 18, 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's management has been increasingly
frustrated during 1999 at the continuing decline in the price of the Company's
common stock in the face of continuing reported record increases in the gross
revenues of the Company. The Company's management believes the Shares have been
undervalued in the public markets primarily as a result of, among other reasons,
(i) the Company's failure to meet certain financial estimates and projections
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 Company's management
believes that these factors have 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.
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. Mr. Peter E. Kilissanly, President and Chief Operating
Officer of the Company and the other Remaining Stockholders 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
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<PAGE> 10
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.
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
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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 $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
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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 October 18, 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."
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. In reaching its determination referred to
immediately above, the Board and the Independent Committee considered, among
others, the following factors, each of which in the view of the Independent
Committee and the Board supported such determinations:
a. the historical market prices and recent trading activity of the
Shares, including (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, (ii) the fact that the Offer Price would be
payable in cash, thus eliminating any uncertainties in valuing the
consideration to be received by the Company's stockholders, and (iii) the
average trading volume of the Shares;
b. 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;
c. the low trading volume, low prices for the Shares, the lack of
market support for the Shares and the Company's failure to fully execute
its previously announced growth strategy and marketing plans;
d. 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
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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;
e. other potential alternatives to the Company, such as a reverse
stock split and a spinoff; and
f. the intention of the Remaining Stockholders to continue the
business as a going concern, which makes any consideration of liquidation
highly unlikely.
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 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 factors specified in clauses (a) through
(f), inclusive, above.
The Independent Committee 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 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 be impractical. 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 Remaining
Stockholders that they would not be receptive to a sale of their Shares.
The Offer does not require the approval of a majority of unaffiliated
security holders. All directors of the Company, including the Independent
Committee who are not employees of the Company, have approved the Offer. The
Independent Committee did not retain an unaffiliated representative other than
Advest which advised all of the directors including the Independent Committee.
3. OPINION OF ADVEST, INC.
On September 9, 1999, Advest rendered its opinion (the "Advest Opinion") to
the Board of Directors of the Company and 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 REN-
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DERING 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.
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; (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 7% convertible subordinated promissory
notes due May 2003; (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
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<PAGE> 15
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.
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),
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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.
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
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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.
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
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<PAGE> 18
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 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.
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<PAGE> 19
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 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.
19
<PAGE> 20
(5) Assumes conversion of the outstanding principal balance of $700,000
pursuant to the Company's 7% Convertible Subordinated Notes due May 2003
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 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, 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 7%
Convertible Subordinated Notes due May 2003. 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
National Explorers and Travelers Healthcare, Inc. ("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 of Florida, 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.
20
<PAGE> 21
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 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 7 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.
21
<PAGE> 22
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 October 18, 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
22
<PAGE> 23
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.
23
<PAGE> 24
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.
24
<PAGE> 25
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.
25
<PAGE> 26
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 9 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
26
<PAGE> 27
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.
27
<PAGE> 28
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.
28
<PAGE> 29
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
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.
29
<PAGE> 30
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,
30
<PAGE> 31
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.
31
<PAGE> 32
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
DECEMBER 31, SIX MONTHS
------------------- ENDED JUNE 30,
1998 1997 1999
-------- -------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Staffing income........................................... $34,462 $11,594 $22,172
Insurance income (1)...................................... 17,557 14,034 8,605
Net investment income..................................... 1,821 1,395 892
Other income.............................................. 471 570 211
------- ------- -------
Total revenue..................................... 54,311 27,593 31,880
------- ------- -------
Expenses:
Staffing costs............................................ 27,140 9,611 17,061
Insurance costs (2)....................................... 13,052 10,419 6,945
Other operating expenses.................................. 9,814 6,081 6,327
------- ------- -------
Total expenses.................................... 50,006 26,111 30,333
------- ------- -------
Operating income before income taxes........................ 4,305 1,482 1,547
------- ------- -------
Interest expense............................................ 1,077 664 537
Other nonoperating expenses................................. 649 -- 139
------- ------- -------
Total nonoperating expenses....................... 1,726 664 676
------- ------- -------
Income before income taxes.................................. 2,579 818 871
Income taxes................................................ 376 209 149
------- ------- -------
Net income.................................................. $ 2,203 $ 609 $ 722
======= ======= =======
Basic earnings per share.................................... $ .42 $ .12 $ .14
======= ======= =======
Diluted earnings per share.................................. $ .42 $ .12 $ .14
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------- AS OF JUNE 30,
1998 1997 1999
--------- --------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................................ $56,407 $32,244 $62,991
======= ======= =======
Notes Payable............................................... $12,430 $ 2,440 $11,021
======= ======= =======
Shareholders' equity........................................ $12,977 $10,774 $13,744
======= ======= =======
Shareholders' equity per basic share outstanding............ $ 2.48 $ 2.14 $ 2.62
======= ======= =======
</TABLE>
- ---------------
(1) Includes premiums earned and net commission income.
(2) Includes losses and loss adjustment expenses incurred and amortization of
deferred acquisition costs.
32
<PAGE> 33
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 Debt Financing 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 7% Convertible Subordinated Notes
due May 2003.
(3) Reflects pro forma operating adjustments.
33
<PAGE> 34
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 7% Subordinated Convertible Notes.
Assumes conversion of all unaffiliated outstanding 7% Subordinated
Convertible Notes at or prior to the expiration of the Offer.
(3) Records interest expense associated with the Debt Financing.
(4) Records amortization of estimated expenses associated with the Offer and the
Debt Financing.
(5) Records income tax effects on the above adjustments.
(6) Records gain on conversion of 7% Subordinated Convertible 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.
The Company does not undertake any obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. Because of risks and uncertainties, the forward-looking
events and circumstances discussed in this Offer to Purchase and any documents
referenced herein might not occur.
34
<PAGE> 35
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 withdrawn, is approximately $24 million. City National
has provided the Company with a commitment to provide a portion of the funds
necessary to consummate the Offer (the "Debt Financing") in the form of a
commitment letter dated September 10, 1999 (the "Commitment Letter"). The
Commitment Letter proposes to provide a $7.5 million revolving credit facility.
City National's commitment to furnish the Debt Financing is subject to
completion, including City National's analysis of the Company's financial
statements and other due diligence review. The Company expects to utilize up to
$16.5 million of its unrestricted cash to consummate the Offer. For the six
months ended June 30, 1999, 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 had an unrestricted cash balance of approximately $9.8 million.
It is expected that the Debt Financing will have the following features:
(i) $7.5 million of revolving loan facility; (ii) term of one year; (iii)
interest rate equal to City National's Base Rate from time to time in effect,
calculated on a daily basis on the principal balance from time to time
outstanding; (iv) interest on borrowings payable on a monthly basis and
principal due at maturity; (v) secured by a perfected security interest in all
accounts receivable of Preferred Healthcare Staffing, Inc., a Delaware
corporation and one of the Company's wholly-owned subsidiaries; (vi) customary
representations and warranties; and (vii) subject the Company to customary
covenants, including, without limitation, delivery of financial statements, tax
returns, inspection of books and assets, further assurances and limitations on
liens and other indebtedness, sale of accounts receivable, continuation of
business, compliance with laws, payment of dividends and guarantee obligations.
Definitive agreements for the issuance of the Debt Financing have not been
completed. Accordingly, the terms of the arrangements described above may
change.
City National is not required to fund the Debt Financing unless certain
objective and subjective conditions precedent have been satisfied. There can be
no assurance that such conditions will be satisfied or that the Debt Financing
will be consummated.
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.
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
35
<PAGE> 36
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.
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
36
<PAGE> 37
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, any of the following conditions exist:
a. the Company shall not have received the proceeds from the Debt
Financing 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 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
37
<PAGE> 38
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 sole 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.
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.
38
<PAGE> 39
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
39
<PAGE> 40
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> 41
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") 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> 42
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
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SCHEDULE II
ADVEST FAIRNESS OPINION
S-4
<PAGE> 44
SCHEDULE III
ANNUAL REPORT ON FORM 10-KSB OF THE COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1998
QUARTERLY REPORTS ON FORM 10-Q OF THE COMPANY
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 1999 AND JUNE 30, 1999
S-5
<PAGE> 45
Manually signed photocopies of the Letter of Transmittal will be accepted
from Eligible Institutions. The Letter of Transmittal and certificates for
Shares and any other required documents should be sent or delivered by each
shareholder or his or her broker, dealer, commercial bank, trust company or
nominee to the Depositary at one of its addresses set forth below.
THE DEPOSITARY FOR THE OFFER IS:
AMERICAN STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C>
By Mail/Overnight Delivery: By Hand Only:
40 Wall Street, 46th Floor 6201 15th Avenue
New York, New York 10005 Brooklyn, New York 11219
</TABLE>
By Facsimile Transmission:
(Eligible Institutions Only)
(718) 234-5001
Any questions or requests for assistance or additional copies of this Offer
to Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery may
be directed to the Information Agent at the telephone numbers and location
listed below. Shareholders may also contact their local broker, dealer,
commercial bank or trust company for assistance concerning the Offer.
THE INFORMATION AGENT FOR THE OFFER IS:
MORROW & CO., INC.
445 Park Avenue
Fifth Floor
New York, New York 10022
(212) 754-8000
Call Toll Free
(800) 662-5200
S-6
<PAGE> 46
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
FOR THE YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 001-12677
--------------------
PREFERRED EMPLOYERS HOLDINGS, INC.
(Name of small business issuer in its charter)
DELAWARE 65-0698-799
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10800 BISCAYNE BOULEVARD 33161
MIAMI, FLORIDA (Zip Code)
(Address of Issuer's principal executive offices)
(305) 893-4040
(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT
Common Stock, $.01 Par Value
----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the year ended December 31, 1998 were
$54,311,000.
The aggregate market value of the registrant's voting common equity (i.e.,
the Common Stock) held by non-affiliates as of March 26, 1999 was $32,801,431,
using the closing sale price of $9.5625 per share on such date, as reported by
the Nasdaq SmallCap Market(R).
The number of outstanding shares of the registrant's Common Stock as of
March 26, 1999 was 5,247,085.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE: None.
A list of Exhibits to this Annual Report on Form 10-KSB begins on Page 31.
================================================================================
<PAGE> 47
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I
Item 1. Description of Business................................................. 1
Item 2. Description of Property................................................. 12
Item 3. Legal Proceedings ...................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..................... 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ............... 13
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 14
Item 7. Financial Statements ................................................... 19
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure................................... 19
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act................................ 20
Item 10. Executive Compensation ................................................ 23
Item 11. Security Ownership of Certain Beneficial Owners and Management ........ 27
Item 12. Certain Relationships and Related Transactions......................... 29
Item 13. Exhibits and Reports on Form 8-K....................................... 31
</TABLE>
----------------------
The Company's principal executive offices are located at 10800 Biscayne
Boulevard, Miami, Florida 33161, and our telephone number is (305) 893-4040.
----------------------
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB includes forward-looking statements,
including statements regarding, among other things, the Company's:
o anticipated growth strategies, and
o its intention to introduce new products.
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.
The Company does not undertake any obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Because of risks and uncertainties, the
forward-looking events and circumstances discussed in this Annual Report on Form
10-KSB might not occur.
----------------------
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<PAGE> 48
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
We engage in the following activities:
o we provide temporary registered nurses and other professional medical
personnel primarily to client hospitals;
o we sell, on behalf of others, business insurance, including workers'
compensation, property, liability, casualty, and other types of
coverage, and provide 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
o we provide reinsurance for certain workers' compensation and
employer's liability insurance policies we sell.
EMPLOYEE STAFFING. In March and August of 1998, we acquired businesses
providing temporary registered nurses and other professional medical personnel
(often referred to as "Travelers") mainly to client 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. We believe
that the ability of Travelers to function as permanent staff improves the
continuity and consistency of patient care and reduces our clients' overall
administration, orientation and supervisory requirements relating to permanent
staff, as well as reducing turnover of their temporary staff.
INSURANCE. Since 1988, we have been engaged in the sale of insurance
products designed to provide clients with cost savings and reduce the time
otherwise spent in managing insurance needs and related costs. We offer clients
competitive rates and provide risk management services, including cost
containment, safety management and claims management programs. We believe that
our innovative approach to cost containment helps clients achieve lower claims
costs.
REINSURANCE. In 1997, we began operating as a reinsurer for certain
workers' compensation and employer's liability insurance policies sold by us.
Although we assume risks associated with being a reinsurer, our reinsurance
agreement (i) limits our liability for losses and certain expenses to the first
$300,000 per occurrence and (ii) limits our total liability for all coverage to
a maximum of 70% of the total premiums written for each underwriting year.
For the year ended December 31, 1998, the Company's total revenues were
$54,311,000 as compared to $27,593,000 for the year ended December 31, 1997,
representing a net increase of $26,718,000 and for the year ended December 31,
1997, the Company's total revenues were $27,593,000 as compared to total
revenues of $5,955,000 for the year ended December 31, 1996, representing a net
increase of $21,638,000. Approximately 63%, 33% and 4%, respectively, of the
Company's total revenues for the year ended December 31, 1998 were derived from
our staffing, reinsurance captive and general agency businesses and
approximately 42%, 49% and 9%, respectively, of the Company's total revenues for
the year ended December 31, 1997 were derived from our staffing, reinsurance
captive and general agency businesses, respectively.
UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, (I) THE
FINANCIAL STATEMENTS OF THE COMPANY GIVE RETROACTIVE EFFECT TO THE CONSUMMATION
OF THE MERGER OF NATIONAL EXPLORERS AND TRAVELERS HEALTHCARE, INC. ("NET
HEALTHCARE") WITH AND INTO PREFERRED HEALTHCARE STAFFING, INC., WHICH OCCURRED
IN AUGUST 1998 AND WAS ACCOUNTED FOR AS A "POOLING OF INTERESTS" AND (II) THE
TERMS THE "COMPANY," OUR "COMPANY" OR WORDS OF SIMILAR IMPORT MEAN PREFERRED
EMPLOYERS HOLDINGS, INC., TOGETHER WITH ITS WHOLLY-OWNED SUBSIDIARIES AS
FOLLOWS: PREFERRED EMPLOYERS GROUP, INC., P.E.G. REINSURANCE COMPANY, LTD. AND
PREFERRED HEALTHCARE STAFFING, INC.
<PAGE> 49
INDUSTRY OVERVIEW
EMPLOYEE STAFFING. One of our subsidiaries, Preferred Healthcare
Staffing, Inc. ("Preferred Staffing"), is engaged in the employee staffing
business. Employee staffing generally is a contractual arrangement through which
a business obtains human resources from a firm specializing in these functions.
The staffing firm typically provides health, unemployment, and workers'
compensation insurance, and other benefits, while the work site employer retains
full operational control over the employee's activities. In March and August of
1998, we acquired businesses providing temporary registered nurses and other
professional medical personnel, primarily to client hospitals. These Travelers
serve clients for periods ranging from 8 to 52 weeks and function essentially as
permanent hospital staff rather than short-term, supplemental staff.
The staffing industry has experienced rapid growth in recent years.
Initially thought of as a short-term solution for peak production periods and as
a temporary replacement for full-time personnel, the staffing industry is now
considered as an effective tool for helping companies manage their investment in
human resources. Contract personnel allows companies to expand and contract
employee levels based on current needs, thus converting fixed labor costs into
controllable variable costs while still maintaining a high degree of employee
skill level. Temporary staffing may also reduce costs associated with recruiting
and terminating employees. In addition, changing government regulations
concerning such matters as employee benefits, health insurance and retirement
plans have significantly increased employment costs related to permanent
employees. In response, an increasing number of companies are turning to
temporary staffing as a method of maintaining high employee skill levels while
controlling labor costs.
The staffing industry is highly competitive and fragmented. The
industry is currently experiencing a trend toward consolidation as large
companies seek to reduce the number of vendors and look to staffing companies
that offer a wider range of services over a broader geographic area. As
employers find it more difficult to locate full-time candidates with special
skills, they increasingly turn to temporary staffing companies to fill these
needs.
INSURANCE. One of our subsidiaries, Preferred Employers Group, Inc.
("Preferred Group"), sells, on behalf of others, business insurance, including
workers' compensation, property, liability, casualty, and other types of
business 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). All fifty States and the
District of Columbia have promulgated statutes, rules and regulations that
require employers to provide wage replacement and medical benefits to work
accident victims regardless of fault. As a result of these mandates, virtually
all employers must either (i) purchase workers' compensation insurance from a
private insurance carrier, (ii) obtain coverage from a state managed fund, or
(iii) be self-insured, if permitted, by the state in which the business is
conducted.
We believe that franchises often are the safest segment of a particular
industry. Most franchises use standardized operations based upon models with
demonstrated success. These businesses typically have standard operating
procedures and standard plant and equipment with standardized safety programs.
The design and construction of most franchises take into account safety
engineering of the workplace. For example, in a fast food restaurant, chairs and
tables are set a certain distance apart to allow for adequate walking space, and
the cooking equipment used must conform to certain safety standards. The
franchisor and the franchisee have a shared interest to maintain safe, clean and
uniform environments for their customers and employees. Consequently, we believe
that, in general, workers' compensation cost of claims for franchise businesses
are lower than non-franchise operations.
Franchises are often subject to the same workers' compensation premium
rating system that the insurance industry uses for any comparable business. As a
result, fast food franchise restaurants may pay the same rates as bars and
taverns which generally are open until later in the evening, as fine dining
restaurants where staff often carry heavy trays, or as "mom and pop" restaurants
without safety-engineered
2
<PAGE> 50
facilities or formal safety programs. Although these businesses may be charged
the same workers' compensation rates, their claims experience is typically
significantly higher. Consequently, we believe most franchise companies in many
industries generally suffer premium "redundancy" or an "overcharge" in their
insurance premiums. In effect, we believe franchise businesses subsidize the
higher workers' compensation claims costs of non-franchise operations. We seek
to offer our clients the opportunity to effectively lower their cost of claims.
REINSURANCE. One of our subsidiaries, P.E.G. Reinsurance Company, Ltd.
("Preferred Reinsurance"), acts as a reinsurer with respect to certain workers'
compensation and employer's liability insurance policies sold by us. Reinsurance
is an arrangement in which an insurance company, the reinsurer, agrees to
indemnify another insurance company, the ceding company, against all or a
portion of the insurance risks underwritten by the ceding company under one or
more insurance policies. The two basic types of reinsurance arrangements are
treaty and facultative reinsurance. In treaty reinsurance, the ceding company is
obligated to cede, and the reinsurer is obligated to assume, a specified portion
of a type or category of risk insured by the ceding company. In facultative
reinsurance, the ceding company cedes and the reinsurer generally assumes all or
part of the risk under a single insurance policy.
Both treaty and facultative reinsurance can be written on either a
pro-rata (also known as quota share or proportional) basis or an excess of loss
basis. For reinsurance written on a pro-rata basis, the reinsurer, in return for
a predetermined portion or share of the insurance premium charged by the ceding
company, indemnifies the ceding company against a predetermined portion of the
losses and the allocated portion of loss adjustment expenses ("ALAE") of the
ceding company under the covered insurance policy or policies. For reinsurance
written on an excess of loss basis, the reinsurer generally indemnifies the
ceding company against all or a specified portion of losses and ALAE on
underlying insurance policies in excess of a specified dollar amount, known as
the ceding company's retention or attachment point, subject to a negotiated
limit. Preferred Reinsurance is a facultative reinsurance company.
BUSINESS STRATEGY
We believe that we have substantial opportunities for growth which
include leveraging our capabilities and expertise in workers' compensation and
risk management in employee staffing and related businesses. In particular, we
believe that by combining our existing expertise in insurance matters with
strategic acquisitions of employee staffing businesses we can reduce the
operating expenses typically associated with these operations and increase the
products we offer to our existing clients and staffing employees.
Our current strategy for growth includes:
o seeking to enter additional segments of the staffing industry through
selective acquisitions of employee staffing operations;
o utilizing our core competencies to improve the efficiency and
profitability of staffing companies we acquire;
o focusing our employee staffing operations on industry specific
segments without regard to geographic boundaries;
o continuing to capitalize on our business of selling business
insurance and providing risk management services to franchise and
related companies; and
o growing our existing insurance business by offering workers'
compensation and other business insurance products, along with risk
management services, to select industries.
With regard to our employee staffing business, we are not seeking to
become staffing generalists. We are seeking to provide highly compensated
professionals to target industries 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
3
<PAGE> 51
imbalance of supply and demand is expected to continue into the future and where
we can manage workers' compensation and healthcare risks at a profitable rate.
PRODUCTS AND SERVICES
EMPLOYEE STAFFING. In March 1998, we purchased substantially all of the
assets of HSSI Travel Nurse Operations, Inc. ("Travel Nurse") for an aggregate
purchase price of $5.0 million in cash. In August 1998, we acquired through a
"pooling of interests" all of the outstanding capital stock of Net Healthcare
for an aggregate of 517,085 shares of our common stock. In October 1998, we
merged the two healthcare staffing companies and now the operations of Travel
Nurse and Net Healthcare are conducted through Preferred Staffing.
For the years ended December 31, 1998 and 1997, approximately 63% and
42%, respectively, of our total revenues were derived from our employee staffing
operations. Our employee staffing operations provide registered nurses and other
professional medical personnel, often referred to as "Travelers," primarily to
client hospitals on a contractual basis for periods generally ranging from 8 to
52 weeks, with the average being approximately 17 weeks (standard assignments
are usually for durations of thirteen or twenty-six weeks). Generally, clients
utilize our Travelers to provide cost effective interim staff to meet
predictable fluctuations in staffing requirements. In addition, unlike daily or
other very short-term supplemental staff, Travelers generally serve for a long
enough period to function essentially as permanent hospital staff. We believe
that the ability of Travelers to function essentially as permanent staff
improves the continuity and consistency of patient care and reduces the overall
administration, orientation and supervisory requirements of the clients'
permanent staff. Travelers are typically employed on a full-time basis for the
period of each assignment. Each Traveler is generally provided with housing and
utilities (or a housing subsidy) while on assignment, travel allowance, and
other employee benefits, including malpractice, group health and dental
insurance.
Preferred Staffing currently recruits personnel through its in-house
recruiting department. Recruiting methods historically have included national
and local advertising, attendance at national and regional conventions, personal
and professional referrals and the sponsoring of local seminars in selected
cities throughout the United States and Canada.
As of March 26, 1999, Preferred Staffing had more than 750 nurses,
surgical technologists and therapists under contract, providing services to over
300 client hospitals. As of March 26, 1999, Preferred Staffing had approximately
3,000 unfilled requests for Travelers, of which 100 were recently received from
the United Kingdom.
INSURANCE. We provide workers' compensation and business insurance
programs and risk management services to segments of the American franchise
industry. Our insurance programs are designed specifically to reduce the impact
of premium redundancy on franchise businesses while also emphasizing loss
control and cost containment. By taking advantage of this business segment's
good safety records and by providing risk management services, including loss
control, safety management and claims management, we seek to offer our clients
the opportunity to effectively lower their cost of claims. We have developed
proprietary information and claims analyses systems and custom-designed loss
reports which explain the claims procedure and assist client management in
seeking to promote safety and control claims expense. For the years ended
December 31, 1998 and 1997, respectively, approximately 4% and 9%, respectively,
of our total revenues were derived from our insurance business.
Our insurance programs are custom designed to be offered only through
nationally recognized carriers with the highest industry ratings. We work with
these carriers to establish competitive rates, while being mindful of the
carrier's need to maintain profitability and remain viable in the marketplace.
Additionally, we offer services designed to enable our clients to realize
savings in their workers' compensation costs while reducing the time required to
manage this element of their business. Specifically, we
4
<PAGE> 52
provide clients with potential savings by offering competitive rates and cost
containment programs which assist our clients in managing their workers'
compensation and other business insurance costs.
Using early intervention techniques, we seek to limit the number of
disputes with injured employees. Through a third-party administrator, we provide
our clients with access to national "toll-free" telephone numbers so that their
claims can be reported quickly, 24 hours-per-day, seven days-per-week. The
third-party administrator has trained medical staff available for four party
contact among the claimant, the employer, the adjuster and the treating
physician. This process helps to provide prompt and competent medical care for
the employee and management of the claim. We believe in the prompt settlement of
meritorious claims, but we aggressively advise to defend against non-meritorious
claims. We attempt to resolve cases prior to litigation and, if litigation
ensues, seek to settle reasonable claims.
In addition to these cost containing activities, our client services
staff seeks to maintain communication with our clients. Our loss control
department provides advice to clients on how to control the frequency and
severity of claims. We seek to persuade clients that safety is not just an issue
of good management, rather it can have a significant impact on the financial
success of their businesses.
We believe we have created a new, innovative, comprehensive and
aggressive approach to safety/loss control, blending old and new prevention
techniques to develop safety programs specific to each industry we serve. While
the primary thrust of our programs is safety for employees and customers,
emphasis is also placed on motivating client management to implement safety
programs as a means of improving profitability. We conduct workshops to
demonstrate the benefits of using our loss control safety programs at no
additional cost to our clients. Proprietary, custom-designed loss management
information is communicated by mail and telephoned to our clients at no
additional cost.
We believe our safety programs help reduce workers' compensation claims
costs. The basic elements of our safety programs, as recommended to our clients,
include:
o a written safety policy with safety rules;
o regularly scheduled safety meetings;
o new employee hiring practices and training of new and transferred
employees;
o supervisor responsibility and accountability;
o a regular self-inspection program administered by identified
supervisors;
o an incentive program that rewards safety awareness;
o a team safety committee program;
o a timely accident reporting and investigation program;
o a monitored record-keeping system for accidents;
o a policy to implement corrective action for unsafe conditions and
acts; and
o a monthly review of programs and their implementation.
Many states have allowed a reduction in workers' compensation insurance
premiums when an employer implements an approved safety program. Our safety
programs meet the requirements of most states that have approved safety
programs. Such workers' compensation safety program discounts are authorized on
a state-by-state basis and, therefore, guidelines are state specific. We deal
only with those able to the voluntary market, not the assigned risk market.
Certain states make safety program discounts available to all insureds while
others make them available only to those insureds with high experience
modification factors or based on the size of their premium. Some states require
state certification of the safety program on a risk-by-risk basis. We evaluate
requirements in the states where
5
<PAGE> 53
such discounts are available and provide employers with manuals, record keeping
tools and recommendations which assist the employer in obtaining certification.
REINSURANCE. In December 1996, we formed Preferred Reinsurance under
the laws of Bermuda. Preferred Reinsurance acts as the reinsurer with respect to
certain workers' compensation and employer's liability insurance policies sold
by us. Although Preferred Reinsurance assumes the risks associated with being a
reinsurer, its liabilities are limited for losses and certain defined expenses
to the first $300,000 per occurrence and its aggregate liability is limited for
all coverage to an amount not to exceed 70% of the gross written premiums for
each individual underwriting year. The reinsurance arrangements are governed by
the terms of a reinsurance agreement between Preferred Reinsurance and insurance
companies affiliated with the American International Group of Companies ("AIG").
The reinsurance agreement with Preferred Reinsurance is terminable by either
party upon the occurrence of certain events. For the years ended December 31,
1998 and 1997, approximately 33% and 49%, respectively, of our total revenues
were derived from our reinsurance business.
The purchase of excess and aggregate reinsurance from affiliates of AIG
and the stated aggregate limit of liability in the reinsurance agreement limits
the liability of Preferred Reinsurance for losses and loss adjustment expenses
and permits it to quantify its aggregate maximum loss exposure. By contrast,
maximum liability under pro-rata or quota share reinsurance contracts can be
more difficult to quantify. Quantification of loss exposure is fundamental to
the ability of Preferred Reinsurance to manage its losses.
Pursuant to the terms of the reinsurance agreement, affiliates of AIG
are obligated to cede to Preferred Reinsurance 100% of the net written premium
less certain expenses and commissions associated with the policies covered
thereby. The affiliates retain a commission allowance, which was 27.09% in 1998
and 28.83% in 1997, based on the net written premiums, and Preferred Reinsurance
retains the premiums ceded by the AIG affiliates to Preferred Reinsurance
together with the risks and potential for underwriting profits associated
therewith. Accordingly, we believe that the operations of Preferred Reinsurance
provide us with the opportunity to retain the underwriting profitability that
was previously retained by affiliates of AIG, while creating a relatively
limited risk exposure under the reinsurance agreement.
Preferred Reinsurance is required to provide affiliates of AIG, as
security for the payment of losses, a combination of cash, United States
government securities and/or an irrevocable letter of credit in an aggregate
amount equal to 51.5% of the net written premiums ceded to Preferred Reinsurance
pursuant to the reinsurance agreement less the amount of losses paid. Our
results of operations depend, in part, on the income derived from the investment
of premiums by Preferred Reinsurance. Increases in interest rates or events or
conditions which negatively affect the financial markets or the general economy
may result in losses, both realized and unrealized, on our investments.
CUSTOMERS
EMPLOYEE STAFFING. As of March 26, 1999, active clients of Preferred
Staffing consisted of over 300 hospitals and other clients located in
approximately 40 states and the U.S. Virgin Islands. Travelers serve both
for-profit and not-for-profit entities which range from small rural hospitals to
major teaching and research institutions. A typical client is a hospital with
approximately 250 beds which is located in or near a major metropolitan area.
INSURANCE. We market our insurance programs primarily to the franchise
industry both directly and through a network of broker/agents. Our customers
typically are owners of multiple unit franchises who understand the importance
of cost containment and safety features. While we focus our efforts on large,
national franchisees operating multiple outlets, we also serve smaller, regional
franchise operators.
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<PAGE> 54
SALES AND MARKETING
EMPLOYEE STAFFING. Our subsidiary, Preferred Staffing, currently
markets its Travelers program principally through in-house sales personnel.
Historically, marketing activities have been conducted primarily by telephone
contact, direct mail, attendance at national and regional conventions, seminars,
and direct contact with providers of healthcare services. Additionally, we
advertise in a variety of local and national media, including the Yellow Pages,
local and national newspapers and trade publications. We also have a Web Page on
the Internet in order to provide both prospective clients and prospective
Travelers with information about our company and our services as well as
employment opportunities.
Preferred Staffing has developed an extensive computer database of
available, qualified personnel, which we believe should enhance our ability to
match personnel with client needs. To attract qualified personnel, we use
sophisticated direct mail techniques followed by calls from our telemarketing
teams. Interested prospective Travelers are turned over to professional
recruiters to assist them in finding the right assignment to suit their specific
goals. Our marketing plan includes a continual review of our clients'
anticipated future staffing needs to enable us to respond to changes in their
demands. We seek to develop and maintain strong interactive relationships by
anticipating and focusing on our clients' needs.
INSURANCE. Our insurance sales and marketing programs are varied. We
engage in multiple targeted direct mail programs each year. These direct mail
programs, designed to introduce our products and services to franchise owners
and insurance agents, are complimented by extensive telemarketing efforts. We
utilize multiple databases of franchises and insurance agents in our direct mail
and telemarketing efforts. Our marketing programs identify prospective clients,
clients' agents and new agents to represent us.
Our marketing programs are designed to generate new prospects for both
high revenue broker/agents (those whose client bases produce workers'
compensation annual premiums in excess of $2 million) as well as smaller
broker/agents who operate in small towns. Generally, we target agents that have
the ability to produce $300,000 in annualized workers' compensation premiums to
receive a contract to represent us.
Our programs relieve the broker/agent of administrative and claims
tasks as we and/or the insurance carrier bills and collects premiums directly
from the insured, remits the commission earned to the broker/ agent, deals
directly with the insured in connection with any problems experienced by the
insured and serves as a clearinghouse, together with the third-party
administrator, with respect to reporting, processing, reviewing and evaluating
claims. As a result of the foregoing, we believe the broker/agent can earn more
revenue by focusing its efforts on selling products. Other benefits provided to
the broker/agent include the following:
o increasing the geographic area in which the broker/agent can generate
business;
o reducing the likelihood of the broker/agent losing larger multiple
store and multiple state franchisees because the broker/agent will
have many more states in which it is able to write business;
o providing the broker/agent with the option of offering other property
and casualty products to its clients; and
o providing the broker/agent's clients with the benefit of our loss
control and cost containment programs to reduce its clients' losses.
Client franchisees are provided with a personal client service
representative who is knowledgeable and available throughout the work day. A
1-800 "hot line" is also available to reach the manager of client services
should any issue need immediate attention. We believe that these client support
services distinguish us from our competition.
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POLICY RENEWALS
Client policy renewals are critical to our insurance operations. We
seek to maintain favorable renewal rates by (i) providing our clients with
quality service, (ii) ensuring that all insurance policy, endorsement and audit
documents are distributed to each client on a timely basis, and (iii) ensuring
that all documents distributed to clients are complete and accurate. We seek to
communicate with each client several times each year in order to maintain a
close relationship and learn of any real or perceived problems and concerns on a
timely basis. We believe that our quality service is a major factor in our
client retention rate, which as of December 31, 1998 was approximately 62%, and
as of December 31, 1997 was approximately 70%.
Our underwriting department reviews prospects to identify risks that
appear undesirable from a historical viewpoint and to recognize those prospects
dedicated to significant improvement in their loss history, which thereby makes
them a valuable addition to our customer base and to a carrier's portfolio. Our
underwriting department also evaluates each client for renewal purposes. This
evaluation determines whether the particular client is eligible to receive a
decrease or other form of modification to its renewal premium. If the client has
responded to loss control recommendations and its loss history reflects
improvement, a reduction in its renewal premium rate may be implemented. The
department also identifies clients whose experience has deteriorated and who
have not responded to loss control guidance and recommendations. If the
deterioration is significant enough and the client has not demonstrated a
sincere commitment to improvement in loss experience, our underwriting
department may make a recommendation not to renew the policy.
DATA MANAGEMENT
EMPLOYEE STAFFING. Our success in the employee staffing business is
dependent, in part, upon our ability to effectively and efficiently match
skilled personnel with specific customer assignments. As a result of continuous
recruiting efforts, we have established an extensive national resume database of
prospective Travelers.
Preferred Staffing's current database contains information on
pre-screened personnel classified by skill, experience, and choice and
availability for assignments. The database is updated on a regular basis. When
called upon to fill an assignment, our recruiters can access this database to
match a client's staffing needs with available personnel. Nurses and other
medical personnel listed in the database generally do not work exclusively for
any one employer. We continuously update our proprietary database to reflect
changes in personnel skill levels and availability. Upon receipt of assignment
specifications, we search our database to identify suitable personnel. Once a
prospective Traveler's skills are matched to the specifications, we consider
other selection criteria such as availability and geographic preferences to
ensure there is a proper fit between a prospective Traveler and the assignment
being staffed. The system also allows for the addition of new information as
acquired companies and databases are integrated. Our database is protected by a
multilevel security system.
INSURANCE. Our insurance management information systems include, among
other things, a central database to keep us abreast of market trends, current
premium rates, rate filings, renewal dates and information on our competition.
These systems constitute an integral part of our business operations. We utilize
the systems to process insurance applications, control the issuance of policies
and endorsements, audit medical fees, pay broker/agent commissions, manage
claims, provide reports to our clients, provide accounting statements and
financial reports, and analyze claims data. We believe these systems give us the
ability to write more effective and competitive policies and result in a higher
rate of policy renewals.
COMPETITION
EMPLOYEE STAFFING. The staffing industry is highly competitive and
fragmented. There are limited barriers to entry and new competitors frequently
enter the market. We face substantial competition from
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local and national staffing companies, and certain of our competitors have more
established and significantly larger operations and greater financial,
marketing, human and other resources. We compete with other staffing companies
as well as our clients and other employers for qualified personnel, and we
compete with other staffing companies for suitable acquisition candidates. In
addition, during any given year a number of our staffing employees may terminate
employment with us in order to accept employment with our clients. In the
future, we may encounter difficulty in recruiting a sufficient number of
staffing employees of the caliber that we are committed to provide to our
customers.
During periods of higher employment, we may incur increased expenses
associated with recruiting qualified staffing employees. We believe there is a
shortage of, and significant competition for, professional medical personnel who
possess the technical skills and expertise necessary to deliver services and
that such professionals are likely to remain a limited resource for the
foreseeable future. We believe that the availability and quality of candidates,
the level of service, the effective monitoring of job performance, and the price
of service are the principal elements of competition in the staffing industry.
In order to attract staffing candidates, we place emphasis upon our ability to
provide long-term placement opportunities, competitive compensation, quality and
varied assignments, and scheduling flexibility. In order to meet the challenge
of retaining qualified personnel, we provide what we believe to be a competitive
benefits package. Our years of expertise in risk management has permitted us to
earn a commission in workers' compensation and healthcare benefits, and we are
able to reinvest a portion of such commissions into better benefit packages for
our staffing employees.
INSURANCE. The business insurance industry is highly competitive. We
compete with other general agents, numerous large insurance companies, managed
health care companies, state sponsored insurance pools, risk management
consultants and affiliated broker/agents, many of which have significantly
larger operations and greater financial, marketing, human and other resources
than us. Competitors may have material advantages over us such as with respect
to the forms of insurance and services they offer in addition to workers'
compensation products and services. Competitive factors include product lines,
premium rates, personalized service and effective cost containment measures.
Consumers of insurance products have traditionally focused on price
rather than cost containment. They have come to expect little or no customer
service. We believe we can favorably compete by tailoring our products for each
niche market, providing quality customer service and, most importantly,
providing loss control and cost containment services.
REGULATIONS
EMPLOYEE STAFFING. We currently conduct our employee staffing business
in 42 states, and are subject to regulation by various state agencies pertaining
to a wide variety of employment-related laws. Many of these regulations were
enacted prior to the emergence of the employee staffing industry and do not
specifically address non-traditional employers. While many states do not
explicitly regulate staffing providers, a number of states have passed laws that
have licensing, registration or compliance requirements for staffing providers,
and other states consider enacting similar regulations from time to time.
Laws regulating the staffing industry vary from state to state. While
we believe we are currently qualified to conduct our staffing business in
substantially all of the states, there can be no assurance that we will be able
to satisfy any new licensing requirements or other applicable regulations of any
particular state. In addition, there can be no assurance that we will be able to
renew our licenses in the states in which we currently operate upon the
expiration of our licenses.
Numerous Federal and state laws and regulations involving employment
matters, benefit plans and taxes affect our operations. Many of these laws (such
as the Employee Retirement Income Security Act and Federal and state employment
tax laws) do not specifically address the obligations and responsibilities of
non-traditional employers such as staffing providers, and do not have a uniform
definition of "employer." Many Of the states in which we operate have not
addressed the staffing relationship for
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purposes of complying with applicable state laws governing the employer/employee
relationship. In addition, from time to time, states have considered, and may in
the future consider, imposing certain taxes on gross revenues or service fees of
staffing companies. If these Federal or state laws are adopted or applied in a
manner unfavorable to us, such adoption or application could have a material
adverse effect on our results of operations and financial condition.
In providing staffing services to our clients, we have the obligation
to pay the salaries, wages and related benefit costs and payroll taxes of our
staffing employees. We pay the (i) salaries and wages for work performed by
staffing employees and (ii) payroll withholding taxes, Federal and state
unemployment taxes, and taxes due under the Federal Insurance Contributions Act
(FICA). We are obligated to make these payments whether or not our clients make
timely payment, or if our clients default in their payment to us of staffing
revenue owed to us. In the event of substantial client default, there can be no
assurance that our ultimate liability for staffing employee payroll and related
tax costs will not have a material adverse effect on our results of operations
or financial condition.
INSURANCE. As a general agent, we are subject to the regulations of the
various states in which we sell insurance. These regulations vary from state to
state, and may include such matters as licensing requirements, bonding
requirements, requirements regarding our agreements with insurance carriers for
which we act as a general agent, and certain other requirements. Penalties may
be imposed for violations of such regulations.
Under the workers' compensation system, employer insurance or
self-funded coverage is governed by individual laws in each of the fifty states
and by certain federal laws. Changes in the federal law or state regulations
concerning workers' compensation or managed healthcare may create a greater or
lesser demand for some or all of our services, or require us to develop new or
modified services in order to meet the needs of the marketplace and compete
effectively in that marketplace.
REINSURANCE. Preferred Reinsurance is registered as a Class 3 insurer
in Bermuda and, accordingly, is subject to the provisions of the Bermuda
Insurance Act of 1978, as amended, and the regulations promulgated thereunder.
The Bermuda Insurance Act provides that no person shall carry on insurance
business in or from within Bermuda unless registered as an insurer under the
Bermuda Insurance Act by Bermuda's Minister of Finance. The Minister of Finance
has broad discretion to act in the public's interest. The Minister of Finance is
required by the Bermuda Insurance Act to ascertain whether the applicant is a
fit and proper body to be engaged in the insurance business and, in particular,
whether it has, or has available to it, adequate knowledge and expertise. In
connection with registration, the Minister of Finance may impose conditions
relating to the writing of certain types of insurance business.
The Bermuda Insurance Act imposes on Bermuda insurance companies, such
as our subsidiary Preferred Reinsurance, solvency and liquidity standards and
auditing and reporting requirements and grants to the Minister of Finance powers
to supervise, investigate and intervene in the affairs of insurance companies.
Significant aspects of the Bermuda insurance regulatory framework include those
set forth below:
o Preferred Reinsurance is required to maintain a principal office in
Bermuda and appoint and maintain a principal representative in
Bermuda. The Bermuda Insurance Act places a duty on the principal
representative to report to the Minister of Finance the occurrence of
certain events, including but not limited to, the failure by the
insurer for which he or she acts to comply with a condition imposed
by the Minister of Finance relating to a solvency margin or a
liquidity or other ratio with respect to any other such condition.
Without a reason acceptable to the Minister of Finance, Preferred
Reinsurance may not terminate the appointment of its principal
representative, and the principal representative may not cease to act
as such, unless 30 days' advance notice in writing to the Minister of
Finance is given of the intention to do so.
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o Preferred Reinsurance is required to appoint an independent auditor
to conduct an annual audit of its statutory-based financial
statements.
o Preferred Reinsurance is required to maintain share capital (the
aggregate par value of issued shares) of at least $120,000.
o Preferred Reinsurance must maintain statutory capital and surplus
exceeding the greater of the following three criteria: (a)
$1,000,000; (b) 20% of the net premiums where the net premiums in the
current financial year do not exceed $6,000,000, or where the net
premiums exceed $6,000,000, $1,200,000 plus 15% of the net premiums
which exceed $6,000,000 (The net premium is the gross premium after
deduction for any premium ceded for reinsurance.); and (c) 15% of
reserves for losses and loss expenses.
o Preferred Reinsurance is required to maintain liquid assets at a
level equal to or greater than 75% of its net relevant (insurance)
liabilities. For this purpose, liquid assets include cash and time
deposits, quoted (publicly traded) investments, unquoted bonds and
debentures, mortgage loans backed by first liens on real estate,
accrued investment income, accounts and premiums receivable,
reinsurance balances receivable and funds held by ceding companies.
o Preferred Reinsurance is required to obtain the approval of the
Minister of Finance before reducing by 15% or more its total
statutory capital (comprised of share capital, contributed surplus
and any other fixed capital) as set out in its previous year's
financial statements.
o Preferred Reinsurance may declare and pay dividends or make
distributions out of contributed surplus or other assets legally
available for distribution provided that after the payment of any
such dividend or distribution it will continue to maintain the
required statutory capital and surplus and liquid assets as
summarized above.
o Preferred Reinsurance is required to have a copy of its statutory
financial statements available at its principal office for production
to the Registrar of Companies and to file the statutory financial
statements and a statutory financial return within four months after
the end of each financial year (or such longer period, not exceeding
seven months, as the Registrar of Companies, on application, may
allow).
o Preferred Reinsurance is required to include in its annual statutory
financial statements the opinion of a loss reserve specialist in
respect of its loss and loss adjustment expense reserves.
o The Minister of Finance may appoint an inspector with extensive
powers to investigate the affairs of an insurer or reinsurer if the
Minister of Finance believes that an investigation is required in the
interest of the insurer's or reinsurer's policyholders or persons who
may become policyholders. To verify or supplement information
otherwise provided to him, the Minister of Finance may direct an
insurer or reinsurer to produce documents or information relating to
matters connected with the insurer's or reinsurer's business.
Under current Bermuda law, there is no Bermuda income, corporation or
profits tax, withholding tax, capital gains tax, capital transfer tax, estate
duty or inheritance tax payable by our company with respect to Preferred
Reinsurance. Preferred Reinsurance is not subject to stamp or other similar duty
on the issue, transfer or redemption of its shares of common stock.
We have obtained an assurance from the Minister of Finance under the
Exempted Undertakings Tax Protection Act of 1966 that if any legislation is
enacted in Bermuda imposing tax on profits or income, or on any capital assets,
gain or appreciation or any tax in the nature of estate duty or inheritance tax,
such tax shall not, until March 28, 2016, be applicable to us or to our
operations, or to our shares, debentures or other obligations except insofar as
such tax applies to persons ordinarily resident in Bermuda and holding such
shares, debentures or other obligations or any real property or leasehold
interests in Bermuda owned by us. As an exempted company, we are liable to pay a
registration fee in Bermuda based upon our
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authorized capital and the premium on our issued shares of common stock at a
rate not exceeding $25,000 per annum.
PREMIUM RATE RESTRICTIONS. State regulations governing the workers'
compensation system impose restrictions and limitations that affect the business
operations of Preferred Reinsurance. State laws regulate what workers'
compensation benefits must be paid to injured workers. Additionally, most states
must approve the workers' compensation premium rates that may be charged. As a
consequence, the ability of Preferred Reinsurance to pay insured workers'
compensation claims out of the premium revenue generated from Preferred
Reinsurance's assumption of such insurance is dependent on the level of benefits
and premium rates approved by the various states. In this regard, it is
significant that the state regulatory agency that regulates workers'
compensation benefits is often not the same agency that regulates workers'
compensation insurance premium rates.
POSSIBLE FUTURE REGULATIONS. The federal government and several state
legislatures have considered and are considering a number of cost containment
and health care reform proposals. No assurance can be given that the federal
government or any state will not adopt future regulations that could have a
material adverse effect on us.
EMPLOYEES
As of March 26, 1999, we had approximately 856 full-time employees, of
whom 6 were executive officers, 20 were managers, 59 were sales personnel and 58
were accounting, clerical, loss control or underwriting staff and approximately
713 were Travelers. Our Travelers do not necessarily work full-time shifts. As
the employer of the Travelers, we are responsible for the general payroll
expenses and employer's share of social security taxes (FICA), federal and state
unemployment taxes, workers' compensation insurance and other direct labor costs
relating to employees. We offer a package of benefits for our Travelers which we
believe to be competitive, including housing and utilities (or a housing
subsidy), travel allowance, 401(k) retirement plan and malpractice, health and
dental insurance. None of our employees are subject to a collective bargaining
agreement. We believe that our relationships with our employees are good.
ITEM 2. DESCRIPTION OF PROPERTY
We lease approximately 16,500 square feet of office space in Miami,
Florida for use as our corporate headquarters. Our initial lease term expires in
2002, but we have two five-year renewal options. Preferred Staffing leases
premises in Fort Lauderdale, Florida, consisting of approximately 20,000 square
feet. The lease will expire in 2005, subject to one five-year renewal option. We
anticipate that our existing leases will be renegotiated as they expire or that
alternative properties can be leased on acceptable terms. We believe that our
present facilities are in good condition and are suitable for our needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings arising in the ordinary
course of business. As of March 26, 1999, we are not a party to any legal
proceeding which, if adversely determined, would have a material adverse effect
on our results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the year ended December 31, 1998, no
matters were submitted by the Company to a vote of its stockholders.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION. The Company's common stock is currently listed on
the Nasdaq SmallCap 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. The following table sets forth the
high and low closing sale prices of its common stock as reported on the Nasdaq
SmallCap Market and the Boston Stock Exchange for each calendar quarter
commencing in February 1997 through December 31, 1999 (through August 1997 in
the case of the Boston Stock Exchange).
<TABLE>
<CAPTION>
NASDAQ SMALLCAP
MARKET
-------------------
CLOSING SALE PRICES
-------------------
YEAR PERIOD HIGH LOW
- ---- ------ ---- ---
<S> <C> <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 (through March 25, 1999).................................. 11.75 8.50
</TABLE>
<TABLE>
<CAPTION>
BOSTON STOCK
EXCHANGE
-------------------
CLOSING SALE PRICES
-------------------
YEAR PERIOD HIGH LOW
- ---- ------ ---- ---
<S> <C> <C> <C>
1997 First Quarter (Commencing February 6, 1997)............................. $ 8.38 $ 7.13
Second Quarter.......................................................... 7.14 6.00
Third Quarter (Ending August 9, 1997)................................... 7.75 6.50
</TABLE>
As of March 26, 1999, the closing sale price of the Company's common
stock on the Nasdaq SmallCap Market was $9.5625 per share. As of March 26, 1999,
there were approximately 410 holders of record for our common stock. A high
percentage of the Company's common stock held of record is registered in the
names of brokerage firms and depositaries.
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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's audited consolidated financial statements and notes related
thereto contained elsewhere in this Annual Report on Form 10-KSB. In August
1998, the Company consummated the merger of Net Healthcare with and into one of
the Company's wholly-owned subsidiaries, and in connection therewith issued
517,085 shares of common stock in exchange for all the outstanding common stock
of Net Healthcare. The business combination was accounted for as a
"pooling-of-interests" and, accordingly, our consolidated financial statements
for applicable periods prior to the combination have been restated to include
the accounts and results of operations of NET Healthcare.
GENERAL
The Company engages in the following activities:
o it provides temporary registered nurses and other professional
medical personnel primarily to client hospitals;
o 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
o it provides reinsurance for certain workers' compensation and
employer's liability insurance policies it sells.
EMPLOYEE STAFFING. In March and August of 1998, the Company acquired
businesses providing temporary registered nurses and other professional medical
personnel (often referred to as "Travelers") mainly to client 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. The Company believes that the ability of Travelers to function as
permanent staff improves the continuity and consistency of patient care and
reduces its clients' overall administration, orientation and supervisory
requirements relating to permanent staff, as well as reducing turnover of their
temporary staff.
Staffing income is recognized at the time the staffing services are
provided. In most instances, the staffing company's temporary healthcare
professionals are considered employees of the staffing company while under
assignment and costs of employment are the responsibility of the staffing
company and are included in the accompanying statements of operations.
INSURANCE. The Company is engaged in the property and casualty
insurance business and has conducted business as a general agent on behalf of
AIG, General Accident Insurance Company ("General Accident") and the 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 our 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 receives, as compensation
pursuant to the terms of these general agency agreements, gross commissions on
its business at rates which range from approximately 5% to 20%. 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
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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.
REINSURANCE. In December 1996, the Company formed Preferred Reinsurance
and entered into a reinsurance agreement with affiliates of AIG pursuant to
which Preferred Reinsurance 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. Preferred Reinsurance is required to
provide affiliates of AIG, as security for the payment of losses, a combination
of cash, United States government securities and/or an irrevocable letter of
credit in an aggregate amount equal to 51.5% of the net written premiums ceded
to Preferred Reinsurance pursuant to the insurance agreement less the amount of
losses paid. Preferred Reinsurance receives, as compensation pursuant to the
terms of the reinsurance agreement, the related net written premiums less
certain program expenses and commissions and the losses paid associated with the
business. Although Preferred Reinsurance assumes the risks associated with being
a reinsurer, the reinsurance agreement limits the liability of Preferred
Reinsurance for losses and certain defined expenses to the first $300,000 per
occurrence. In addition, the reinsurance agreement limits the aggregate
liability of Preferred Reinsurance for all coverage to an amount not to exceed
70% of the gross written premiums for each individual underwriting year. Because
the reinsurance agreement is effective for all business written on or after
January 1, 1996, the policies written prior to the execution of the contract and
formation of Preferred Reinsurance were accounted for as retroactive
reinsurance. The reinsurance agreement with Preferred Reinsurance is terminable
by either party upon the occurrence of certain events. In the event the
Company's reinsurance agreement is terminated, the Company, in all likelihood,
would be materially and adversely affected.
The Company collects workers' compensation premiums from the insureds
and remits the ceding commission (net of its commission) and reinsurance charge
to affiliates of AIG and remits the net premium to Preferred Reinsurance.
Commission income on workers' compensation business is recognized as income when
premiums are collected. Package insurance premiums are principally collected by
the insurance carrier. The package insurance carrier remits commissions to us
monthly on package premiums it collects. Commission income on package business
is recognized as income when premiums are due. Reinsurance premiums received by
Preferred Group are earned on a pro-rata basis over the term of the related
coverage.
For the year ended December 31, 1998, the Company's total revenues were
$54,311,000 as compared to $27,593,000 for the year ended December 31, 1997,
representing a net increase of $26,718,000. For the year ended December 31,
1997, the Company's total revenues were $27,593,000 as compared to total
revenues of $5,955,000 for the year ended December 31, 1996, representing a net
increase of $21,638,000. For the year ended December 31, 1998, approximately,
63%, 33% and 4% of the Company's total revenues were derived from its staffing,
reinsurance captive and general agency businesses, respectively. For the year
ended December 31, 1997, approximately 42%, 49% and 9% of the Company's total
revenues were derived from its staffing, reinsurance captive and general agency
businesses, respectively.
Historically, our employee staffing business has been seasonal, with
the demand for Travelers being the highest in the first and fourth quarters of
the calendar year (September through March), due largely to increased demand
particularly during the peak tourist and winter home period in Florida.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
TOTAL REVENUES. Total revenues for the year ended December 31,1998 were
$54,311,000 compared to $27,593,000 for the year ended December 31, 1997,
representing a net increase of $26,718,000 or 96.8%.
15
<PAGE> 63
The following table provides a comparison of revenues for the years
ended December 31, 1998 and 1997 by category:
<TABLE>
<CAPTION>
NET PERCENTAGE
1998 1997 CHANGE CHANGE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Staffing income .......................................... $34,462,000 11,594,000 22,868,000 197.2 %
Premiums earned .......................................... 15,594,000 11,675,000 3,919,000 33.6 %
Net commission income:
Workers' compensation .................................. 1,399,000 1,529,000 (130,000) (8.5)%
Package ................................................ 416,000 483,000 (67,000) (13.9)%
Other, net ............................................. 148,000 347,000 (199,000) (57.4)%
----------- ---------- ---------- ----------
Total net commission income .......................... 1,963,000 2,359,000 (396,000) (16.8)%
Net investment income .................................... 1,821,000 1,395,000 426,000 30.5 %
Other income ............................................. 471,000 570,000 (99,000) (17.4)%
----------- ---------- ---------- ----------
Total revenues ......................................... $54,311,000 27,593,000 26,718,000 96.8 %
=========== ========== ========== ==========
Workers' compensation:
Premiums collected ..................................... $14,431,000 14,929,000
Ratio of net commission income/premiums
collected .......................................... 9.7% 10.2%
=========== =========
</TABLE>
Staffing income increased $22,868,000 as a result of the acquisition of
certain of the assets of Travel Nurse (acquired in March 1998) and the increase
in business related to the acquisition of Net Healthcare. Premiums earned
increased $3,919,000 or 33.6% for the year ended December 31, 1998 as compared
to the prior year as a result of new business and renewals of the prior year
business and increased retention. Workers' compensation commission income
decreased $130,000 or 8.5% for the year ended December 31, 1998 as compared to
the prior year as a result of the decrease in premiums collected of $498,000,
which is attributable to the decrease in the workers' compensation book of
business. Package commission income decreased $67,000 or 13.9% for the year
ended December 31, 1998 as compared to the prior year as a result of a reduction
in the business written for fast food restaurants. Other net commission income
decreased $199,000 or 57.4% for the year ended December 31, 1998 as compared to
the prior year as a result of the reduction in volume of audit and small
business plan premiums collected. Net investment income increased $426,000 or
30.5% for the year ended December 31, 1998 as compared to the prior year as a
result of premiums received and invested by Preferred Reinsurance and the income
earned on the net proceeds received from the sale of the Company's convertible
subordinated notes in May 1998. Other income decreased $99,000 or 17.4% as a
result of the effects of the retroactive insurance accounting treatment of
Preferred Reinsurance as discussed more fully in Note 1(c) to the Company's
consolidated financial statements included in this Annual Report.
TOTAL OPERATING EXPENSES. Total operating expenses for the year ended
December 31, 1998 were $50,006,000 compared to $26,111,000 for the 1997
comparable period, representing an increase of $23,895,000 or 91.5%. The
following table provides a comparison of total expenses for the years ended
December 31, 1998 and 1997 by category:
<TABLE>
<CAPTION>
NET PERCENTAGE
1998 1997 CHANGE CHANGE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Staffing costs ........................................... $27,140,000 9,611,000 17,529,000 182.4%
Losses and loss adjustment expenses incurred ............. 8,052,000 6,257,000 1,795,000 28.7%
Amortization of deferred acquisition costs ............... 5,000,000 4,162,000 838,000 20.1%
Other operating expenses ................................. 9,814,000 6,081,000 3,733,000 61.4%
----------- ---------- ---------- ----------
Total operating expenses ................................. $50,006,000 26,111,000 23,895,000 91.5%
=========== ========== ========== ==========
</TABLE>
16
<PAGE> 64
Staffing costs increased $17,529,000 consistent with the increase in
staffing revenues for 1998 as discussed above. Losses and loss adjustment
expenses increased $1,795,000 or 28.7% which is consistent with the increase in
premiums earned in 1998 as discussed above. Amortization of deferred acquisition
costs increased $838,000 or 20.1% which is also consistent with the increase in
premiums earned in 1998 as discussed above. Other operating expenses increased
$3,733,000 or 61.4%. The following table provides a comparison of other
operating expenses for the years ended December 31, 1998 and 1997 by category:
<TABLE>
<CAPTION>
NET PERCENTAGE
1998 1997 CHANGE CHANGE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Personnel costs ........................................... $5,827,000 3,546,000 2,281,000 64.3%
Occupancy costs ........................................... 609,000 457,000 152,000 33.3%
Professional fees ......................................... 926,000 372,000 554,000 148.9%
Other operating expenses .................................. 2,452,000 1,706,000 746,000 43.7%
---------- --------- --------- ----------
Total other operating expenses .......................... $9,814,000 6,081,000 3,733,000 61.4%
========== ========= ========= ==========
</TABLE>
Personnel expenses increased $2,281,000 or 64.3% as a result of the
hiring of four marketing employees, one marketing executive, and three corporate
executives with aggregate annual compensation of $537,000 together with the
increased staff related to the acquisition of the assets of Travel Nurse and the
growth in the business of Net Healthcare. Occupancy expenses increased $152,000
or 33.3% principally as a result of the acquisition of Travel Nurse.
Professional fees increased $554,000 principally as a result of increased legal
and accounting fees associated with various corporate and acquisition matters.
Other operating expenses increased $746,000 or 43.7% primarily related to the
following: (i) increased insurance expense of $102,000, (ii) increased corporate
fees and services of $225,000, (iii) increased investment and service fees of
$120,000, and (iv) increased travel expenses of $124,000. Insurance expense
increased as a result of the purchase of additional coverages (i.e., directors
and officers liability insurance) and increased premiums due to increased
limits. Corporate fees and services, travel expenses, and investment and service
fees increased as a result of the expansion of the business of Net Healthcare
and the acquisition of the assets of Travel Nurse.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the year
ended December 31, 1998 were $1,726,000 compared to $664,000 for the 1997
comparable period. Interest expense increased $413,000 as a result of the
Company's private placement in May 1998 of 7% convertible subordinated notes in
the aggregate principal amount of $10,580,000 and borrowings under a revolving
line of credit. Amortization of intangible assets and other non-operating
expenses increased $649,000 consistent with the acquisitions as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Our principal source of cash is the collection of staffing
revenues from client hospitals and workers' compensation insurance premiums from
our insureds. In February 1997, we consummated an initial public offering of
1,725,000 shares of Common Stock (including the underwriters' over-allotment
option) and received gross cash proceeds of approximately $12,506,000. In May
1998, we consummated a $10,580,000 private placement of 7% convertible
subordinated notes due May 2003.
At December 31, 1998, net cash and investments were $32,755,000 (net of
premiums payable of $1,703,000). Net cash provided by operating activities
decreased to $3,258,000 in 1998 from $10,506,000 in 1997, a decrease of
$7,248,000. This decrease resulted primarily from increases in accounts
receivable, unpaid losses and loss adjustment and unearned premiums of
$10,779,000, $1,863,000 and $2,009,000, respectively. The increase in accounts
receivable is primarily associated with the acquisition of certain of the assets
of Travel Nurse and the increase in billings by the merged staffing companies
during 1998 of $3,350,000, and an increase of $7,399,000 related to reinsurance
premiums receivable. The increase in unpaid losses and loss adjustment expenses
is consistent with the increase in premiums earned during the
17
<PAGE> 65
year. The increase in unearned premiums is consistent with the increase in
reinsurance premiums receivable as discussed above.
Cash flows used in investing activities decreased to $13,180,000 for
the year ended December 31, 1998 from $23,252,000 for the year ended December
31, 1997, a decrease of $10,072,000. This decrease resulted primarily from the
reduction of security purchases of $15,223,000 and the acquisition of certain of
the assets of Travel Nurse for $5,000,000 in cash as discussed in the Note 1(b)
to our consolidated financial statements included in this Annual Report.
Cash flows from financing activities for the year ended December 31,
1998 reflects the net proceeds received from the Company's private placement of
7% convertible subordinated notes of $9,622,000, borrowings under a revolving
line of credit of $2,000,000 and repayment of lines of credit related to Net
Healthcare of $2,440,000, compared to the net proceeds received from the
Company's initial public offering of $10,384,000 and borrowings under a
revolving line of credit of $1,115,000 related to Net Healthcare for the
comparable period in 1997.
FINANCINGS. In May 1998, Preferred Staffing entered into a $3,000,000
unsecured revolving line of credit with a bank (the "Credit Facility").
Outstanding borrowings under the Credit Facility bear interest at the bank's
base rate of interest. Interest under the Credit Facility is due and payable
monthly and all unpaid principal and interest is due on May 2, 1999. The Company
expects to renew the Credit Facility for an additional one year term.
Outstanding borrowings under the Credit Facility are secured by our guarantee.
As of December 31, 1998, there was approximately $1,850,000 in outstanding
borrowings under the Credit Facility, which borrowings bore interest at the rate
of 7 3/4% per annum. As of March 29, 1999, outstanding borrowings under the
Credit Facility were approximately $1,150,000 and bore interest at the rate of
7 3/4% per annum.
In May 1998, we also consummated a $10,580,000 private placement of 7%
convertible subordinated notes due May 2003. The principal amount of the notes
is convertible at the option of the holder into shares of our common stock, at a
conversion price of $9.00 per share, at any time prior to the earlier of May 12,
2003 or ten business days after the receipt of a termination notice (as defined
in the notes). The notes generally prohibit or restrict, among other things, our
ability to incur liens and indebtedness, make certain fundamental corporate
changes and specified investments and conduct certain transactions with
affiliates.
We believe that our existing cash balances and cash flows from
activities will be adequate to meet our current operations, including expected
capital expenditures, for at least the next twelve months. In connection with
our current business strategy of making strategic acquisitions, we may seek
additional funds through equity and/or debt financings. There can be no
assurance that any such additional debt or equity financings will be available
to us, or if available, will be on favorable terms to us.
YEAR 2000
The Year 2000 presents potential concerns for businesses. The
consequences of this issue may include system failures and business process
interruption. In addition to the well-known calculation problems with the use of
2-digit date formats as the year changes from 1999 to 2000, the Year 2000 is a
special case leap year which may cause similar problems in many systems unless
remediated.
We have developed a plan with respect to evaluating and upgrading our
core information technology systems so that they are Year 2000 compliant. Two
vendors primarily supply software to us for use in our operations. One vendor
supplies the software used by our insurance operations and one vendor supplies
the software used by our staffing operations. The vendors have each advised us
that the latest upgrades of the software used in our operations are Year 2000
compliant. We intend to implement these software upgrades, and test the upgraded
software for Year 2000 compliancy during the first half of 1999. The
18
<PAGE> 66
historical and currently projected costs relating to these upgrades and Year
2000 compliance are not material.
We are in the process of developing a plan with respect to evaluating
and upgrading our non-core information technology systems and other systems
using embedded technology so that they will be Year 2000 compliant. We expect to
complete and implement that plan during the second quarter of 1999.
We also intend to make inquiries of other third parties supplying us
with products and services to receive assurances that they are Year 2000
compliant. We believe that we will complete that review by the end of the second
quarter of 1999.
We have not developed a "worst case" scenario with respect to Year
2000 issues. Although we have not done a cost analysis, we believe that no
material adverse effect on our business will occur if our non-core technology
systems are not Year 2000 compliant. We anticipate that the costs related to
such non-compliance, if any, will not be material.
Although we do not have a Year 2000 contingency plan, we are developing
such a plan, which we expect to complete by the end of the second quarter of
1999.
If we or third parties with which we have relationships were to cease
or not successfully complete Year 2000 remediation efforts, we could encounter
disruptions to our business. However, we could be materially and adversely
impacted by widespread economic or financial market disruption, or by Year 2000
computer system failures of third parties, that may generally occur as a result
of the Year 2000 issues.
Certain statements relating to the Year 2000 issues are forward-looking
statements and have been made pursuant to the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve known and unknown risks and uncertainties which may cause the actual
results in the future periods or plans for future periods to differ materially
from those described herein as anticipated, believed or estimated.
ITEM 7. FINANCIAL STATEMENTS
The Company's audited consolidated financial statements for the years
ended December 31, 1998 and 1997, respectively, are set forth at the end of this
Annual Report on Form 10-KSB and begin on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 67
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information, as of March 26,
1999, concerning our directors and executive officers:
<TABLE>
<CAPTION>
Name Age Positions With Our Company
- ---- --- --------------------------
<S> <C> <C>
Mel Harris ........................................ 58 Chairman of the Board of Directors and Chief
Executive Officer
Peter E. Kilissanly ............................... 51 President, Chief Operating Officer and
Director
D. Mark Olson ..................................... 50 Executive Vice President
William R. Dresback ............................... 51 Senior Vice President and Chief Financial
Officer
Jose Menendez ..................................... 37 Vice President, General Counsel and Assistant
Secretary
Nancy Ryan ........................................ 43 Vice President and Secretary
Jack D. Burstein .................................. 53 Director
Stuart J. Gordon .................................. 68 Director
Alexander M. Haig, Jr ............................. 74 Director
Maxwell M. Rabb ................................... 88 Director
</TABLE>
The business experience of each of the persons listed above for at
least the last five years is as follows:
MEL HARRIS has been a director of our company since its inception in
1988 and has been our Chairman of the Board of Directors and Chief Executive
Officer since April 1993. From May 1998 to January 1999, Mr. Harris served as
our 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 our company, is the President of
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 our
company.
PETER E. KILISSANLY has been President, Chief Operating Officer and a
director of our 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 our company, 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.
D. MARK OLSON has been an Executive Vice President of our company since
January 1999 and has been the President and Chief Executive Officer of Preferred
Employers Group, Inc., a wholly-owned subsidiary
20
<PAGE> 68
of our company, since June 1998. Mr. Olson was the Chief Operating Officer of
our company from July 1997 to June 1998. Prior to his employment with Preferred
Group, from March 1996 to July 1997, Mr. Olson served as President, Chief
Executive Officer and a director of PCA Solutions, Inc., a workers' compensation
third party administration company. From 1987 to 1993, Mr. Olson served as
national director of sales for Kemper Financial Services and later as Chairman,
President and Chief Executive Officer of Invest Financial Corporation, a Kemper
Financial Services subsidiary. From November 1993 to March 1996, he served as a
consultant to several of the nation's largest insurance and asset management
companies.
WILLIAM R. DRESBACK has been our Chief Financial Officer since May 1993
and a Senior Vice President since February 1997. From May 1993 to January 1999,
Mr. Dresback was the Secretary of our 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 our
company since joining our 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 our company since July 1992 and
in January 1999 Ms. Ryan was appointed as Secretary. From July 1992 to January
1999, Ms. Ryan was an Assistant Secretary of our 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 our company.
JACK D. BURSTEIN has been a director of our 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 our company since 1995. Mr.
Gordon has been 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
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<PAGE> 69
Care Review Board and served as a member of the Board of Governors of Daytop
Village. Mr. Gordon serves as a member of the Board of Advisors of the
Independent College Fund of New York.
ALEXANDER M. HAIG, A has been a director of our 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 our 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 our directors serve until the next annual meeting of
stockholders or until their successors are duly elected and qualified. All of
our officers serve at the discretion of the Board of Directors, subject to
rights, if any, under contracts of employment with us. See "Executive
Compensation--Employment Agreements." There are no family relationships among
our directors and executive officers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers, directors and persons who own more
than ten percent of a registered class of the Company's equity securities to
file certain reports regarding ownership of, and transactions in, the Company's
securities with the Securities and Exchange Commission (the "SEC"). These
officers, directors and stockholders are also required by SEC rules to furnish
the Company with copies of all Section 16(a) reports that are filed with the
SEC. Based solely on a review of copies of such forms received by the Company,
and written representations received by the Company from certain reporting
persons, the Company believes that for the year ended December 31, 1998 all
Section 16(a) reports required to be filed by the Company's executive officers,
directors and 10% stockholders were filed on a timely basis.
22
<PAGE> 70
ITEM 10. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid to, or earned by, our Chief Executive Officer and each of our
four other most highly compensated executive officers for the three years ended
December 31, 1998 whose total annual salary and bonus exceeded $100,000 for 1998
(collectively the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation ----------------
----------------------------------------------- Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options/SARs(#) Compensation
- --------------------------- ---- --------- ------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mel Harris(1)(2) ................. 1998 $ 50,000 -- -- -- 2,470(6)
Chairman of the Board and 1997 $116,729 -- -- 275,000 775(6)
Chief Executive Officer 1996 $ 50,000 -- -- -- --
Peter E. Kilissanly(l)(3) ........ 1998 $100,000 -- -- 150,000 --
President and Chief
Operating Officer
D. Mark Olson(l)(4) .............. 1998 $250,000 50,000 -- -- --
Executive Vice President 1997 $120,000 -- -- 150,000 --
William R. Dresback(1) ........... 1998 $150,000 -- -- 25,000 3,361(7)
Senior Vice President and 1997 $150,000 -- -- 50,000 1,666(7)
Chief Financial Officer 1996 $125,000 -- -- -- 891(7)
Jose Menendez(1)(5) .............. 1998 $ 85,385 -- -- 45,000 --
Vice President and General Counsel
</TABLE>
- ----------------
(1) In January 1999, Messrs. Harris, Kilissanly, Olson, Dresback and Menendez
entered into employment agreements with our company. See "--Employment
Agreements."
(2) In July 1997, Mr. Harris voluntarily reduced his salary from $150,000 per
annum to $52,000 per annum.
(3) Mr. Kilissanly was appointed as President and Chief Operating Officer of
the Company in January 1999 and has been President and Chief Executive
Officer of Preferred Staffing since March 1998.
(4) Mr. Olson was appointed Executive Vice President of the Company in January
1999 and has been President and Chief Executive Officer of Preferred Group
since June 1998.
(5) Mr. Menendez has been Vice President and General Counsel of the Company
since April 1998.
(6) Represents contributions by the Company to its 401(K) plan on behalf of Mr.
Harris.
(7) Represents (i) insurance premiums paid by the Company in the amount of $891
for each of 1996, 1997 and 1998 for a term life insurance policy for the
benefit of Mr. Dresback and (ii) contributions by the Company to its 401(K)
plan on behalf of Mr. Dresback for 1997 and 1998.
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<PAGE> 71
OPTION GRANTS IN 1998
The following table sets forth certain information concerning the grant
of stock options in 1998 to each of the Named Executive Officers.
<TABLE>
<CAPTION>
Percentage to Total
Number of Options Granted
Securities Underlying to Employees Exercise Price
Name Options Granted in 1998 ($/Share) Expiration Date
---- --------------------- ------------------- -------------- ---------------
<S> <C> <C> <C> <C>
Mel Harris ............................... -- -- -- --
Peter E. Kilissanly(l) ................... 75,000 23.4% $8.13 3/30/08
Peter E. Kilissanly(2) ................... 75,000 23.4% $8.50 7/22/08
D. Mark Olson ............................ -- -- -- --
William R. Dresback(3).................... 25,000 7.8% $8.50 7/22/08
Jose Menendez(4) ......................... 45,000 14.1% $8.50 7/22/08
</TABLE>
- ---------------------
(1) One-third of such options vest each year beginning on March 30, 1999. The
vesting of one-half of such options each year is also subject to the
Company meeting certain performance objectives.
(2) One-fifth of such options vest each year beginning on July 22, 1999. The
vesting of one-half of such options each year is also subject to the
Company meeting certain performance objectives.
(3) One-fifth of such options vest each year beginning on July 22, 1999.
(4) One-fifth of such options vest each year beginning on July 22, 1999.
AGGREGATE OPTION EXERCISES IN 1998 AND 1998 YEAR-END OPTION VALUES
The following table sets forth certain information concerning the Named
Executive Officers with respect to the number of shares covered by exercisable
and unexercisable stock options at December 31, 1998 and the aggregate value of
exercisable and unexercisable "in-the-money" options at December 31, 1998. No
options were exercised by the Named Executive Officers in 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------------------------- -------------------------
<S> <C> <C>
Mel Harris .................................. 55,000/220,000 $103,125/$412,500
Peter E. Kilissanly ......................... --/150,000 --/$196,500
D. Mark Olson ............................... 15,000/120,000 $ 39,375/$315,000
William R. Dresback ......................... 30,000/45,000 $ 71,250/$ 75,625
Jose Menendez ............................... --/45,000 --/$ 50,625
</TABLE>
- ------------------
(1) The value of unexercised "in-the-money" options is equal to the difference
between the closing sale price of the common stock on the Nasdaq SmallCap
Market as of December 31, 1998 ($9.625) and the option exercise price per
share, multiplied by the number of shares subject to options.
DIRECTOR COMPENSATION
Our directors do not receive compensation for their services as
directors, but are reimbursed for all reasonable out-of-pocket expenses incurred
in connection with each Board of Directors meeting attended. In addition, all of
our directors are eligible for grants of stock options pursuant to the 1996
Stock Option Plan and the Share Escrow Agreement dated February 5, 1997 by and
among the Company, Mr. Howard Odzer and the escrow agent named therein (the
"Share Escrow Agreement"). See "--Share Escrow Agreement." In 1998, no director
other than Mr. Peter Kilissanly, the Company's President and Chief Operating
Officer, received options. See "Executive Compensation." However, Mr. Jack
Burstein, one of
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<PAGE> 72
the Company's directors, did receive a warrant to purchase 25,000 shares of
common stock in connection with consulting services. See "Certain Relationships
and Related Transactions."
In January 1999, we entered into a three-year consulting agreement with
General Alexander M. Haig, Jr. The agreement is subject to automatic one-year
extensions upon notice from the Company. Pursuant to the agreement, General Haig
is to render consulting services to the Company, including introducing the
Company to third parties in connection with potential business relationships. As
full compensation for his services, General Haig received options to purchase
100,000 shares of the Company's common stock at an exercise price of $9.25,
which options will vest equally over a three-year period beginning January 22,
2000. In addition, in January 1999, the Company granted to General Haig options
to purchase 25,000 shares of common stock at an exercise price of $9.25 per
share in connection with his services as a director of the Company. One-fifth of
such options vest each year beginning on January 22, 2000.
EMPLOYMENT AGREEMENTS
In January 1999, we entered into a five-year employment agreement with
Mr. Harris pursuant to which he agreed to serve as Chairman of our Board of
Directors and Chief Executive Officer. The agreement is subject to automatic
one-year extensions, unless it is otherwise terminated by either party. Pursuant
to the agreement, Mr. Harris is entitled to receive an annual salary of
$300,000, reimbursement for all related business expenses and benefits and
perquisites similar to those made available to other senior executives. If Mr.
Harris' employment with the Company is terminated (i) by the Company without
cause (as defined in the agreement) or (ii) by the Company without cause or by
Mr. Harris for good reason (as defined in the agreement) within 6 months
following a change of control (as defined in the agreement), then the Company
shall pay to Mr. Harris (x) in a lump sum his base salary at the rate then in
effect for the remainder of the term (or for 90 days whichever is greater) plus
(y) on an annual basis for the remainder of the term the amount of bonus he
would have been entitled to receive under the Company's Executive Bonus
Compensation Plan (the "Bonus Plan") as if he were still employed by the Company
on the date of determination. In addition, all options granted to Mr. Harris by
the Company automatically vest upon a change of control, whether or not Mr.
Harris is terminated. 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 our
company. The agreement contains, among other things, customary non-compete and
non-solicitation provisions.
In January 1999, we entered into one-year employment agreements with
Mr. Kilissanly, Mr. Olson, Mr. Dresback, Mr. Menendez and Ms. Ryan. Pursuant to
the agreements, Mr. Kilissanly agreed to serve as our President and Chief
Operating Officer (and President and Chief Executive Officer of Preferred
Staffing) for a salary of $275,000 per annum, Mr. Olson agreed to serve as our
Executive Vice President (and President and Chief Executive Officer of Preferred
Group) for a salary of $250,000 per annum, Mr. Dresback agreed to serve as our
Senior Vice President and Chief Financial Officer for a salary of $175,000 per
annum, Mr. Menendez agreed to serve as our Vice President, General Counsel and
Assistant Secretary for a salary of $135,000 per annum, and Ms. Ryan agreed to
serve as our Vice President and Secretary for a salary of $90,000 per annum.
The agreements are subject to automatic one-year extensions, unless
they are otherwise terminated by either party. All of the executives are
entitled to receive benefits similar to benefits made available to our other
senior executives and reimbursement for all related business expenses. If their
employment with the Company is terminated (i) by the Company without cause (as
defined in the agreement) or (ii) by the Company without cause or by the officer
for good reason (as defined in the agreement) within 6 months following a change
of control (as defined in the agreement), then the Company shall pay to the
officer (x) in a lump sum his or her base salary at the rate then in effect for
the remainder of the term (or for 90 days whichever is greater) plus (y) the
amount of bonus he or she would have been entitled to under the Bonus Plan as if
he or she were still employed by the Company on the date of determination on a
pro-rata basis. In addition, all options granted to the officer by the Company
automatically vest upon a change of
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<PAGE> 73
control, whether or not the officer is terminated. The agreement contains, among
other things, customary non-compete and non-solicitation provisions.
EXECUTIVE BONUS COMPENSATION PLAN
In January 1999, the Company adopted an Executive Bonus Compensation
Plan (the "Bonus Plan") pursuant to which key management employees of the
Company, who are recommended by the Company's Chief Executive Officer and
approved by the Compensation Committee of the Board of Directors (the
"Committee"), are eligible to receive a bonus based upon the Company's operating
results. The Bonus Plan will be in effect each fiscal year beginning with the
fiscal year ending December 31, 1999, and will continue until it is otherwise
terminated by the Board of Directors. Pursuant to the Bonus Plan, the Chief
Executive Officer of the Company will recommend to the Committee on an annual
basis those employees of the Company who should be entitled to participate in
the Bonus Plan and each participant's percentage allocation of the "bonus pool."
Individuals who are then approved by the Committee will receive an award based
on an amount of the percentage of the "bonus pool" approved by the Committee for
each participant. No individual award to any participant may exceed two times
the individual's base compensation. Pursuant to the Bonus Plan, the "bonus pool"
will be an amount equal to 25% of the amount by which the Company's consolidated
pre-tax profits in a fiscal year exceeds the Company's budgeted consolidated
pre-tax profits for such fiscal year; provided, however, that $200,000 will be
contributed to the "bonus pool" in each fiscal year in which the Bonus Plan is
maintained if the Company's consolidated pre-tax profits in such fiscal year
equals 80% or more of the Company's budgeted consolidated pre-tax profits for
such fiscal year. Pursuant to the Bonus Plan, for the fiscal year ending
December 31, 1999, Messrs. Harris, Kilissanly, Olson, Dresback and Menendez will
receive 25%, 22.5%, 20%, 17.5% and 15%, respectively, of the "bonus pool."
1996 EMPLOYEE STOCK OPTION PLAN
In 1997, the Company adopted the 1996 Stock Option Plan (the "Plan").
The Plan provides for the grant to participants (including our officers and
directors) of options to purchase shares of our common stock. In September 1998,
we increased the total number of shares of common stock reserved for issuance
under the Plan, upon the exercise of stock options granted or which may be
granted, from 300,000 to 1,000,000 shares.
The Plan may be administered by the Board of Directors or the
Compensation Committee (the "Committee"). The Committee has the discretion to
select optionees and to establish the terms and conditions of each option,
subject to the provisions of the Plan. Options granted under the Plan may or may
not be "incentive stock options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended, depending upon the terms established by the
Committee at the time of grant, but the exercise price of options granted as
incentive stock options may not be less than 100% of the fair market value of
the common stock as of the date of grant (or 110% of the fair market value if
the grant is an incentive stock option to an employee who owns more than 10% of
the outstanding voting power of our company). Incentive stock options may not be
exercised after 10 years from the grant date (five years if the grant is an
incentive stock option to an employee who owns more than 10% of the outstanding
voting power of our company). Options granted under the Plan are not
transferable and may be exercised only by the respective grantees during their
lifetimes or by their heirs, executors, or administrators in the event of death.
Under the Plan, shares subject to cancelled or terminated options may be
available for subsequently granted options. The number of options outstanding
and the exercise price thereof are subject to adjustment under the Plan in the
case of certain transactions such as mergers, recapitalizations, stock splits or
stock dividends. As of March 26, 1999, options to purchase an aggregate of
978,000 shares of common stock were outstanding under the Plan.
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<PAGE> 74
SHARE ESCROW AGREEMENT
Pursuant to the Share Escrow Agreement by and among Mr. Howard Odzer,
the escrow agent, and our company, Mr. Odzer placed 300,000 shares of common
stock beneficially owned by him in escrow for issuance upon the exercise of
stock options granted to certain executives, officers and directors of the
Company as designated by the Compensation Committee, in its sole discretion (the
"Escrow Options"). Mr. Odzer will receive all proceeds from any exercise of the
Escrow Options. The Escrow Options expire in February 2002. After such date, the
balance of the shares of common stock held in escrow pursuant to the Share
Escrow Agreement, if any, shall revert to Mr. Odzer. As of March 26, 1999,
options to purchase an aggregate of 300,000 shares of common stock were
outstanding under the Share Escrow Agreement. See "Certain Relationships and
Related Transactions."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 26, 1999 with
respect to the beneficial ownership of (i) any person known to us to be the
beneficial owner of more than 5% of any class of our voting securities, (ii)
each of our directors, (iii) each of the Named Executive Officers (i.e., those
officers named in the Summary Compensation Table of this Annual Report under the
heading "Executive Compensation") and (iv) all of our directors and executive
officers as a group (10 persons).
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Number of Shares(2) Percent of Class(2)
------------------------------------ ------------------- -------------------
<S> <C> <C>
Mel Harris(1)(3) ..................................... 1,871,470 35.3%
Howard Odzer(4) ...................................... 711,765 13.6%
Peter E. Kilissanly(1)(5) ............................ 103,177 2.0%
D. Mark Olson(6) ..................................... 15,000 *
William R. Dresback(1)(7) ............................ 40,000 *
Jose Menendez(1) ..................................... -- --
Jack D. Burstein(8) .................................. 35,000 *
Stuart J. Gordon(9) .................................. 10,000 *
Alexander M. Haig, Jr.(10) ........................... -- *
Maxwell M. Rabb(11) .................................. 10,000 *
All directors and executive officers as a group
(10 persons)(12).................................... 2,125,647 39.0%
</TABLE>
- --------------------
* Less than 1%.
(1) The business address of each such person is Preferred Employers Holdings,
Inc., 10800 Biscayne Boulevard, Miami, Florida 33161.
(2) Unless otherwise noted, we believe that all persons named in the table have
sole voting and investment power with respect to the shares of common stock
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 options or warrants 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. See
"Certain Relationships and Related Transactions."
(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, (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 55,000 shares of common stock issued
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<PAGE> 75
pursuant to the 1996 Stock Option Plan which are exercisable within 60 days
of March 26, 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 220,000
shares of common stock which vest over a three year period ending August
2002 pursuant to our 1996 Stock Option Plan. The Compensation Committee of
our Board of Directors 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. See "Certain Relationships and
Related Transactions."
(4) Of the 711,765 shares held of record by Mr. Odzer, 300,000 shares have been
placed in escrow pursuant to the terms of the Share Escrow Agreement. The
Compensation Committee of our Board of Directors 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. See
"Certain Relationships and Related Transactions." Effective May 30, 1998,
Mr. Odzer resigned from his positions as President of Preferred Group and a
director of our company. 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 7% Convertible Subordinated Note due May 2003
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 Ms. 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 (iv) options to purchase 25,000 shares of common stock. Does
not include (i) options to purchase an additional 50,000 shares of the
Company's common stock, 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 purchase 75,000
shares of the Company's common stock, 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) Includes options to purchase 15,000 shares of common stock which vested on
July 7, 1998. Does not include: (i) options to purchase 34,875 shares of
the Company's common stock pursuant to the Company's 1996 Stock Option
Plan, at an exercise price of $7.00 per share, of which options to purchase
2,625, 2,250, 15,000 and 15,000 shares of common stock will vest on July 7,
1999, 2000, 2001 and 2002, respectively (one-half of the number of shares
covered by such option in each year are also subject to the Company meeting
80% of its budgeted pre-tax profits in such year); (ii) options to purchase
34,875 shares of the Company's common stock pursuant to the Company's 1996
Stock Option Plan, at an exercise price of $7.00 per share, of which
options to purchase 2,625, 2,250, 15,000 and 15,000 shares, respectively,
will vest on each of July 7, 1999, 2000, 2001 and 2002, respectively; (iii)
options to purchase 25,125 shares of common stock, pursuant to the Share
Escrow Agreement, at an exercise price of $7.00 per share, of which options
to purchase 12,375 and 12,750 shares of the Company's common stock will
vest on July 7, 1999 and July 7, 2000, respectively (one-half of the number
of shares covered by such year are also subject to the Company's meeting
80% of its budgeted pre-tax profits in each year); (iv) options to purchase
25,000 shares of common stock pursuant to the Share Escrow Agreement, at an
exercise price of $7.00 per share, of which options to purchase 12,375
shares of common stock will vest on July 1, 1999 and options to purchase
12,750 shares of common stock will vest on July 7, 2000 and (v) options to
purchase 15,000 shares of the Company's common stock pursuant to the
Company's 1996 Stock Option Plan at an exercise price of $7.00 per share,
of
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<PAGE> 76
which options to purchase 7,500 will vest on January 22, 2000 and on
January 21, 2001, respectively, subject to the Company meeting 80% of its
budgeted pre-tax profits in each year.
(7) Represents (a) options to purchase 20,000 shares of common stock issued
pursuant to our 1996 Stock Option Plan and (b) options to purchase 20,000
shares of common stock issued pursuant to the Share Escrow Agreement, all
exercisable within 60 days of March 26, 1999. Does not include (a) options
to purchase 5,000 shares of common stock pursuant to the Company's 1996
Stock Option Plan which vest in February 2000, (b) options to purchase
5,000 shares of common stock pursuant to the Share Escrow Agreement which
vest in February 2000 and (c) options to purchase 25,000 shares of common
stock which were granted in July 1998 and vest over a five year period
commencing July 1999 and ending July 2003 pursuant to the Company's 1996
Stock Option Plan.
(8) Represents (a) options to purchase 5,000 shares of common stock issued
pursuant to our 1996 Stock Option Plan, (b) options to purchase 5,000
shares of common stock issued pursuant to the Share Escrow Agreement and
(c) warrants to purchase an aggregate of 25,000 shares of common stock
issued to Strategica Group, all exercisable within 60 days of March 26,
1999. Mr. Burstein's business address is c/o Strategica Capital Corp., 1221
Brickell Avenue, Suite 2600, Miami, Florida 33131. See "Certain
Relationships and Related Transactions."
(9) Represents (a) options to purchase 5,000 shares of common stock issued
pursuant to our 1996 Stock Option Plan and (b) options to purchase 5,000
shares of common stock issued pursuant to the Share Escrow Agreement, all
exercisable within 60 days of March 26, 1999. Mr. Gordon's business address
is c/o Duane Morris and Heckscher, 1667 K Street, Suite 700, Washington,
D.C. 20006.
(10) Does not include (i) options to purchase 100,000 shares of the Company's
common stock, 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 of Common Stock, 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 of common stock were granted to General Haig in connection with his
consulting services to the Company. The options to purchase 25,000 shares
of common stock were granted to General Haig in connection with his
services as a director of the Company. See "Executive Compensation."
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 of common stock issued
pursuant to our 1996 Stock Option Plan and (b) options to purchase 5,000
shares of common stock issued pursuant to the Share Escrow Agreement, all
exercisable within 60 days of March 26, 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 of common stock by all
directors and executive officers named in this table, including shares
subject to options and warrants as specified above. Also includes 25,000
shares owned by Ms. Nancy Ryan, and options to purchase 16,000 shares
issued to Ms. Ryan pursuant to the 1996 Stock Option Plan and the Share
Escrow Agreement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STRATEGICA. Mr. Burstein, a director of our company, is the Chairman
and President of Strategica Group and Strategica Capital. Mr. Harris, the
Chairman of the Board and Chief Executive Officer of our company, is a director
and shareholder of Strategica Capital, an affiliate of Strategica Group. In
March 1997, we paid Strategica Group a fee of $50,000 as compensation for its
financial advisory and planning services provided in connection with our initial
public offering of 1,725,000 shares of common stock (which was consummated in
February 1997). In April 1998, we paid Strategica Group a fee of $150,000 as
compensation for its financial advisory and planning services provided in
connection with the
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<PAGE> 77
acquisition of substantially all of the assets used or pertaining to the
business of Travel Nurse. In August 1998, we paid Strategica Group a fee of
$148,000 in connection with services provided to us relating to the acquisition
of the outstanding capital stock of Net Healthcare. In July 1998, we issued
Strategica Group a warrant to purchase an aggregate of 25,000 shares of common
stock at an exercise price of $7.88 per share for consulting services. The
warrant expires on June 30, 2003. The warrant has standard anti-dilution and
adjustment provisions.
EXCHANGE. In February 1997, the then existing stockholders (the
"Exchanging Stockholders") of Preferred Group, a corporation which conducted
certain of our insurance operations, effected a recapitalization whereby we
exchanged 17,647.06 shares of common stock for each share of common stock of
Preferred Group held by the Exchanging Stockholders (the "Exchange"). As a
result of the Exchange, Preferred Group became a wholly-owned subsidiary of our
company. Pursuant to the Exchange, Mr. Harris, Mr. Odzer (the former President
of Preferred Group) and Ms. Ryan, a Vice President and Secretary of our company,
received 1,450,000, 1,111,765 and 25,000 shares of common stock, respectively.
SHAREHOLDERS' AGREEMENT. In February 1997, our company, Mr. Harris and
Mr. Odzer entered into a Shareholders Agreement which provided for certain
arrangements regarding restrictions on the transferability of shares owned by
them (or by members of their respective families) and other matters. Under the
Shareholders Agreement, the parties agreed to rights of first refusal under
certain circumstances with respect to the disposition of shares of common stock
held by Messrs. Harris and Odzer and certain registration and indemnification
rights. The Shareholders Agreement also reaffirmed the irrevocable proxy granted
to Mr. Harris to vote all of the shares held of record by Mr. Odzer which was
granted by Mr. Odzer to Mr. Harris in May 1995. Under the Shareholders
Agreement, the proxy would expire when Mr. Odzer owned less than fifteen percent
of the outstanding common stock of our company. As of March 26,1999, Mr. Odzer
owned approximately 13.6% of the outstanding common stock of our company, and
accordingly, the proxy and certain sections of the Shareholders Agreement have
been terminated, and other provisions of the Shareholders Agreement will expire
on May 30, 2004.
SHARE ESCROW AGREEMENT. Pursuant to a Share Escrow Agreement dated
February 5, 1997, Mr. Odzer placed 300,000 shares of our common stock
beneficially owned by him in escrow for issuance upon the exercise of stock
options granted to certain directors, executives and other officers of our
company, as designated by the Compensation Committee. As of March 26, 1999,
options to purchase an aggregate of 300,000 shares of common stock were
outstanding under the Share Escrow Agreement. See "Executive Compensation."
IIG. In January 1996, we entered into a Cost Sharing Agreement with
International Insurance Group, Inc. ("IIG"), pursuant to which we provide office
space, equipment and other administrative services to IIG. IIG is an insurance
brokerage company which is wholly-owned by Mr. Harris, the Chairman of the Board
and Chief Executive Officer of our company. Under the Cost Sharing Agreement, we
are entitled to receive from IIG approximately $9,300 per month for rendering
such services. Prior to January 1996, we provided these services without
reimbursement.
CONVERTIBLE NOTES. In May 1998, Mr. Kilissanly, the Company's President
and Chief Operating Officer, purchased a 7% Convertible Subordinated Note due
May 2003 in the aggregate principal amount of $700,000.
We are also a party to certain employment, stock option and other
arrangements with our directors and executive officers. See "Executive
Compensation."
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<PAGE> 78
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Unless otherwise indicated, the following is a list of Exhibits filed as a
part of this Annual Report on Form 10-KSB:
<TABLE>
<CAPTION>
Exhibits Description of Document Page
- -------- ----------------------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of Preferred (Incorporated herein by
reference to Exhibit 3.1 to Preferred's Registration Statement on Form
SB-2, No. 333-14103).
3.2 By-Laws of Preferred (Incorporated herein by reference to Exhibit 3.2
to Preferred's Registration Statement on Form SB-2, No. 333-14103).
4.1 Form of Representative Warrants (Incorporated herein by reference to
Exhibit 4.1 to Preferred's Registration Statement on Form SB-2, No.
333-14103).
4.2 Specimen Common Stock Certificate (Incorporated herein by reference to
Exhibit 4.2 to Preferred's Registration Statement on Form SB-2, No.
333-14103).
4.3 Form of 7% Convertible Subordinated Note (Incorporated herein by
reference to Exhibit 4.1 to Preferred's Current Report on Form 8-K,
dated May 4, 1998 (filed on June 2, 1998)).
4.4 Form of Agent's Warrant (Incorporated herein by reference to Exhibit
4.2 to Preferred's Current Report on Form 8-K, dated May 4, 1998
(filed on June 2, 1998)).
10.1 Form of Preferred's 1996 Employee Stock Option Agreement (Incorporated
herein by reference to Exhibit 10.1 to Preferred's Registration
Statement on Form SB-2, No. 333-14103).
10.2 Form of Share Escrow Agreement among Preferred, Baer Marks & Upham LLP
and Howard Odzer together with the Letter Agreement Regarding
Additional Terms (Incorporated herein by reference to Exhibit 10.2 to
Preferred's Registration Statement on Form SB-2, No. 333-14103).
10.3 Employment Agreement, dated May 15, 1995, between Preferred and Howard
Odzer (Incorporated herein by reference to Exhibit 10.3 to Preferred's
Registration Statement on Form SB-2, No. 333-14103).
10.4 Form of Employment Agreement between Preferred and Mel Harris
(Incorporated herein by reference to Exhibit 10.4 to Preferred's
Registration Statement on Form SB-2, No. 333-14103).
10.5 Letter dated October 21, 1996, from Preferred to New Hampshire
Insurance Company regarding the Reinsurance Agreement among P.E.G.
Reinsurance Company, Ltd., The Insurance Company of the State of
Pennsylvania and other AIG Affiliates and Form of Reinsurance
Agreement (Incorporated herein by reference to Exhibit 10.5 to
Preferred's Registration Statement on Form SB-2, No. 333-14103).
10.6 Office Space Lease Agreement, dated August 1, 1994, between Preferred
and K/B Opportunity Fund I, LP and PEGI (Incorporated herein by
reference to Exhibit 10.6 to Preferred's Registration Statement on
Form SB-2, No. 333-14103).
10.7 Form of Advisory Services Letter Agreement between Preferred and the
Representative (Incorporated herein by reference to Exhibit 10.7 to
Preferred's Registration Statement on Form SB-2, No. 333-14103).
</TABLE>
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<PAGE> 79
<TABLE>
<CAPTION>
Exhibits Description of Document Page
- -------- ----------------------- ----
<S> <C> <C>
10.8 Stock Repurchase Agreement dated as of May 15, 1995, among Preferred,
Howard Odzer and Ronald Rothstein (Incorporated herein by reference to
Exhibit 10.8 to Preferred's Registration Statement on Form SB-2, No.
333-14103).
10.9 Cost Sharing Agreement dated January 3, 1996, between Preferred and
International Insurance Group, Inc. (Incorporated herein by reference
to Exhibit 10.9 to Preferred's Registration Statement on Form SB-2,
No. 333-14103).
10.10 Form of Share Exchange Agreement among Preferred and certain
stockholders of PEGI listed therein (Incorporated herein by reference
to Exhibit 10.10 to Preferred's Registration Statement on Form SB-2,
No. 333-14103).
10.11 Amended and Restated Shareholders Agreement dated as of May 15, 1995,
among Preferred, Howard Odzer and Mel Harris (Incorporated herein by
reference to Exhibit 10.11 to Preferred's Registration Statement on
Form SB-2, No. 333-14103).
10.12 Form of Employment Agreement between Preferred and Howard Odzer
(Incorporated herein by reference to Exhibit 10.12 to Preferred's
Registration Statement on Form SB-2, No. 333-14103).
10.13 Agency Agreement dated September 1, 1994, among Preferred, General
Accident Insurance Company of America ("GAIC") and certain affiliates
of GAIC (Incorporated herein by reference to Exhibit 10.13 to
Preferred's Registration Statement on Form SB-2, No. 333-14103).
10.14 General Agency Agreement dated January 1, 1993, among Preferred, The
Insurance Company of the State of Pennsylvania and certain affiliates
of AIG (Incorporated herein by reference to Exhibit 10.14 to
Preferred's Registration Statement on Form SB-2, No. 333-14103).
10.15 Preferred's 1996 Stock Option Plan (Incorporated by reference to
Preferred's Annual Report on Form 10-KSB for the year ended December
31, 1997).
10.16 Employment Agreement dated July 7, 1997, between Preferred and D. Mark
Olson (Incorporated herein by reference to Preferred's Current Report
on Form 8-& dated July 7, 1997 (filed on July 9, 1997)).
10.17 Asset Purchase Agreement dated as of January 21, 1998, among HSSI
Travel Nurse Operations, Inc., Hospital Staffing Services, Inc. and
Preferred Employers Acquisition Corp. (Incorporated herein by
reference to Preferred's Current Report on Form 8-K dated March 6,
1998 (filed on March 16, 1998)).
10.18 Shareholders Agreement dated as of February 11, 1997, among Preferred,
Howard Odzer and Mel Harris (Incorporated hereby by reference to the
Company's Annual Report on Form 10-KSB/A No. 1 for the year ended
December 31, 1997).
10.19 Loan Agreement, dated May 4, 1998, between Preferred Healthcare
Staffing, Inc. and City National Bank of Florida (Incorporated herein
by reference to Exhibit 10.1 to Preferred's Current Report on Form 8-K
dated May 4, 1998 (filed on June 2, 1998)).
10.20 Promissory Note and Security Agreement dated April 27, 1998, by
Preferred Healthcare Staffing, Inc. to City National Bank of Florida
(Incorporated herein by reference to Exhibit 10.2 to Preferred's
Current Report on Form 8-K dated May 4, 1998 (filed on June 2, 1998)).
</TABLE>
32
<PAGE> 80
<TABLE>
<CAPTION>
Exhibits Description of Document Page
- -------- ----------------------- ----
<S> <C> <C>
10.21 Continuous Guaranty, dated May 5, 1998, by Preferred to City National
Bank of Florida (Incorporated herein by reference to Exhibit 10.3 to
Preferred's Current Report on Form 8-K, dated May 4, 1998 (filed on
June 2, 1998)).
10.22 Stock Purchase Agreement, dated July 10, 1998, by and among Preferred
Healthcare Staffing, Inc., Debbie Bender-Balazich, Steven Barth,
Steven Jones and Stephen M. McLaughlin (Incorporated herein by
reference to Exhibit 10.1 to Preferred's Current Report on Form 8-K,
dated July 10, 1998 (filed on July 28, 1998)).
10.23 Employment Agreement, made as of August 10, 1998, between Preferred
Healthcare Staffing, Inc. and Debbie Bender-Balazich. (Incorporated
herein by reference to Exhibit 10.1 to Preferred's Current Report on
Form 8-K, dated August 19, 1998 (filed on August 20, 1998)).
10.24 Stock Option Agreement, dated as of August 10, 1998, between Preferred
and Debbie Bender-Balazich. (Incorporated herein by reference to
Exhibit 10.2 to Preferred's Current Report on Form 8-K, dated August
19, 1998 (filed on August 20, 1998)).
10.25 Employment Agreement, dated as of August 10, 1998, between Preferred
Healthcare Staffing, Inc. and Stephen M. McLaughlin. (Incorporated
herein by reference to Exhibit 10.3 to Preferred's Current Report on
Form 8-K, dated August 19, 1998 (filed on August 20, 1998)).
10.26 Stock Option Agreement, dated as of August 10, 1998, between Preferred
and Stephen M. McLaughlin. (Incorporated herein by reference to
Exhibit 10.4 to Preferred's Current Report on Form 8-K dated August
19, 1998 (filed on August 20, 1998)).
10.27 Registration Rights Agreement, dated as of August 10, 1998, by and
among Preferred and Debbie Bender-Balazich, Steven Barth, Steven Jones
and Stephen M. McLaughlin. (Incorporated herein by reference to
Exhibit 10.5 to Preferred's Current Report on Form 8-K, dated August
19, 1998 (filed on August 20, 1998)).
*10.28 Executive Compensation Bonus Plan.
*10.29 Employment Agreement between Preferred and Mel Harris.
*10.30 Employment Agreement between Preferred and Peter E. Kilissanly.
*10.31 Employment Agreement between Preferred and D. Mark Olson.
10.32 Employment Agreement between Preferred and William R. Dresback.
*10.33 Employment Agreement between Preferred and Jose Menendez.
*10.34 Employment Agreement between Preferred and Nancy Ryan.
*10.35 Consulting Agreement between Preferred and Alexander M. Haig, Jr.
10.36 Amendment to Preferred's 1996 Stock Option Plan.
21.1 Subsidiaries of the Company (Incorporated herein by reference to
Exhibit 21.1 to Preferred's Annual Report on Form 10-KSB for the year
ended December 31, 1997).
*27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith.
33
<PAGE> 81
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 30, 1999.
PREFERRED EMPLOYERS HOLDINGS, INC.
By: /s/ MEL HARRIS
------------------------------------
Mel Harris
Chairman and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- ----
<S> <C> <C>
/s/ MEL HARRIS Chairman of the Board and March 30, 1999
- --------------------------------------- Chief Executive Officer
Mel Harris (Principal Executive
Officer)
/s/ PETER E. KILISSANLY President, Chief Operating March 30, 1999
- --------------------------------------- Officer and Director
Peter E. Kilissanly
/s/ WILLIAM R. DRESBACK Senior Vice President and March 30, 1999
- --------------------------------------- Chief Financial Officer
William R. Dresback (Principal Financial and
Accounting Officer)
/s/ JACK D. BURSTEIN Director March 30, 1999
- ---------------------------------------
Jack D. Burstein
/s/ STUART J. GORDON Director March 30, 1999
- ---------------------------------------
Stuart J. Gordon
/s/ ALEXANDER M. HAIG, JR. Director March 30, 1999
- ---------------------------------------
Alexander M. Haig, Jr.
/s/ MAXWELL M. RABB Director March 30, 1999
- ---------------------------------------
Maxwell M. Rabb
</TABLE>
34
<PAGE> 82
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report .............................................. F-2
Report of Independent Accountants ......................................... F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997 .............. F-4
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 ............................................. F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998 and 1997 .............................................. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 .............................................. F-7
Notes to Consolidated Financial Statements ................................. F-8
F-1
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Preferred Employers Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Preferred
Employers Holdings, Inc. and subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the two years then ended. The consolidated financial statements
give retroactive effect to the merger of Preferred Employers Holdings, Inc. and
subsidiaries and National Explorers and Travelers Healthcare, Inc. on August
10, 1998, which has been accounted for using the pooling of interests method as
described in the notes to the consolidated financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of National Explorers and
Travelers Healthcare, Inc. as of December 31, 1997, which statements reflect
total assets constituting approximately 8% of the restated consolidated balance
sheet totals as of December 31, 1997, and which reflect net losses constituting
approximately 98% of the restated consolidated statements of operations totals
for the year ended December 31, 1997. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for National Explorers and Travelers Healthcare, Inc.
is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Preferred Employers Holdings, Inc.
and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and cash flows for the years then ended.
/s/ KPMG LLP
Miami, Florida
March 25, 1999
F-2
<PAGE> 84
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
National Explorers and Travelers Health Care, Inc.
(d/b/a NET Healthcare, Inc.)
Fort Lauderdale, Florida
In our opinion, the accompanying balance sheet and the related statements
of operations, shareholders' deficiency and of cash flows present fairly, in
all material respects, the financial position of National Explorers and
Travelers Health Care, Inc. (d/b/a NET Healthcare, Inc.) (the "Company") at
December 31, 1997, and the results of their operations and their cash flows for
the year ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Since the date of completion of our audit of the above referenced
financial statements and the initial issuance of our report dated June 22,
1998, which contained an explanatory paragraph regarding the Company's ability
to continue as a going concern and an emphasis of a matter paragraph regarding
the pending sale of the Company, the shareholders of the Company, as discussed
in Note 1 (d), have sold their shares of the common stock of the Company to
Preferred Healthcare Staffing, Inc., a subsidiary of Preferred Employers
Holdings, Inc. Therefore, the conditions that raised substantial doubt about
whether the Company will continue as a going concern no longer exist.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
June 22, 1998, except for the information in
Note 1(d), for which the date is August 10, 1998
F-3
<PAGE> 85
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31,
1998 AND 1997 (RESTATED)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
(restated)
<S> <C> <C>
ASSETS
Investments:
Held-to-maturity securities, at amortized cost (fair value of $15,692,019
in 1998 and $8,237,669 in 1997) .................................................... $15,454,481 8,015,105
Held-to-maturity securities, at amortized cost-restricted (fair value of
$8,388,009 in 1998 and $7,947,981 in 1997) ......................................... 8,257,053 7,877,444
Short-term investments ............................................................... 7,032,027 7,090,550
----------- ----------
Total investments ................................................................. 30,743,561 22,983,099
Cash ................................................................................... 3,714,883 4,125,271
Accrued investment and interest income ................................................. 408,538 311,934
Accounts, commissions and premiums receivable, net ..................................... 11,200,923 2,699,657
Deferred acquisition costs ............................................................. 1,807,841 903,880
Property and equipment, net ............................................................ 897,625 709,800
Deferred tax assets .................................................................... 447,878 252,837
Deposits ............................................................................... 344,165 154,787
Goodwill and other intangible assets, net .............................................. 4,805,560 --
Other assets ........................................................................... 2,036,453 102,556
----------- ----------
Total assets ...................................................................... $56,407,427 32,243,821
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable ........................................................................ $12,430,000 2,440,000
Unpaid losses and loss adjustment expenses ........................................... 13,878,892 6,107,613
Premiums, commissions and other insurance balances payable ........................... 7,175,659 8,189,169
Unearned premiums .................................................................... 5,463,405 2,671,831
Accounts payable and accrued expenses ................................................ 1,588,326 1,360,613
Other liabilities .................................................................... 2,894,283 700,356
----------- ----------
Total liabilities ................................................................. 43,430,565 21,469,582
----------- ----------
Shareholders' equity:
Common stock, $0.01 par value; authorized 20,000,000 shares; issued
5,771,497 shares ................................................................... 57,715 57,715
Additional paid-in capital ........................................................... 9,891,562 9,147,730
Retained earnings .................................................................... 3,533,142 2,074,351
----------- ----------
Total shareholders' equity ........................................................ 13,482,419 11,279,796
Treasury stock, at cost, 529,412 shares .............................................. (505,557) (505,557)
----------- ----------
Net shareholders' equity .......................................................... 12,976,862 10,774,239
----------- ----------
Total liabilities and shareholders' equity ........................................ $56,407,427 32,243,821
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 86
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997 (restated)
<TABLE>
<CAPTION>
1998 1997
------------ ----------
(restated)
<S> <C> <C>
Revenues:
Staffing income ...................................................................... $34,461,735 11,594,300
Premiums earned ...................................................................... 15,594,070 11,674,659
Net commission income ................................................................ 1,963,005 2,359,445
Net investment income ................................................................ 1,820,843 1,394,544
Other income ......................................................................... 471,327 570,464
----------- ----------
Total revenues ....................................................................... 54,310,980 27,593,412
----------- ----------
Expenses:
Staffing costs ....................................................................... 27,140,355 9,610,778
Losses and loss adjustment expenses incurred ......................................... 8,051,866 6,257,095
Amortization of deferred acquisition costs ........................................... 4,999,956 4,161,884
Other operating expenses ............................................................. 9,814,401 6,080,808
----------- ----------
Total operating expenses ............................................................... 50,006,578 26,110,565
----------- ----------
Operating income before income taxes ................................................... 4,304,402 1,482,487
----------- ----------
Interest expense ....................................................................... 1,076,947 663,909
Amortization of intangible assets and other non-operating expenses ..................... 649,265 --
----------- ----------
Total non-operating expenses ........................................................... 1,726,212 663,909
----------- ----------
Income before income taxes ............................................................. 2,578,190 818,938
Income taxes ........................................................................... 375,565 208,980
----------- ----------
Net income ............................................................................. $ 2,202,625 609,958
=========== ==========
Net income -- basic .................................................................... $ 2,202,625 609,958
Impact of potential common shares -- convertible notes ................................. 407,496 --
----------- ----------
Net income -- diluted .................................................................. $ 2,610,121 609,958
=========== ==========
Weighted average outstanding shares -- basic ........................................... 5,242,085 5,030,647
Impact of potential common shares -- convertible notes ................................. 737,192 --
----------- ----------
Common shares and common share equivalents used in computing net earnings per
share -- diluted ..................................................................... 5,979,277 5,030,647
=========== ==========
Net basic earnings per share ........................................................... $ .42 .12
=========== ==========
Net diluted earnings per share ......................................................... $ .42 .12
=========== ==========
Pro forma information (Unaudited) (Note 5):
Historical income before income taxes .................................................. $ 2,578,190 818,938
Pro forma income tax provision (benefit) ............................................... 843,485 (250,336)
----------- ----------
Pro forma net income ................................................................... $ 1,734,705 1,069,274
=========== ==========
Pro forma net income -- basic .......................................................... $ 1,734,705 1,069,274
Impact of potential common shares -- convertible notes ................................. 407,496 --
----------- ----------
Pro forma net income -- diluted ........................................................ $ 2,142,201 1,069,274
=========== ==========
Weighted average shares outstanding -- basic ........................................... 5,242,085 5,030,647
Impact of potential common shares -- convertible notes ................................. 737,192 --
----------- ----------
Weighted average shares outstanding -- diluted ......................................... 5,979,277 5,030,647
=========== ==========
Pro forma net basic earnings per share ................................................. $ .33 .21
=========== ==========
Pro forma net diluted earnings per share ............................................... $ .33 .21
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 87
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997 (RESTATED)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
(restated)
<S> <C> <C>
COMMON STOCK -- NUMBER OF SHARES:
Balance at beginning of period ......................................................... 5,771,497 3,529,412
Exchange of common shares .............................................................. -- 517,085
Issuance of common shares .............................................................. -- 1,725,000
----------- ----------
Balance at end of period ............................................................... 5,771,497 5,771,497
=========== ==========
COMMON STOCK:
Balance at beginning of period ......................................................... $ 57,715 35,294
Exchange of common shares .............................................................. -- 5,171
Issuance of common shares .............................................................. -- 17,250
----------- ----------
Balance at end of period ............................................................... $ 57,715 57,715
=========== ==========
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period ......................................................... $ 9,147,730 --
Exchange of common shares .............................................................. -- (1,224,173)
Issuance of common shares .............................................................. -- 10,371,903
S Corporation undistributed income ..................................................... 743,832 --
----------- ----------
Balance at end of period ............................................................... $ 9,891,562 9,147,730
=========== ==========
RETAINED EARNINGS:
Balance at beginning of period ......................................................... $ 2,074,351 864,933
Net income ............................................................................. 2,202,625 1,209,418
S Corporation undistributed income ..................................................... (743,834) --
----------- ----------
Balance at end of period ............................................................... $ 3,533,142 2,074,351
=========== ==========
TREASURY STOCK:
Balance at end of period................................................................ (505,557) (505,557)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY ............................................................. $12,976,862 10,774,239
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 88
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 (RESTATED)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
(restated)
<S> <C> <C>
Cash flow from operating activities:
Net income ........................................................................... $ 2,202,625 609,958
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ....................................................... 1,032,627 202,312
Amortization of deferred acquisition costs .......................................... 4,999,956 4,161,884
Deferred income taxes ............................................................... (195,041) (252,837)
Provision for uncollectible accounts ................................................ (29,313) 106,367
Change in:
Accrued investment and interest income .............................................. (96,604) (311,934)
Accounts, commissions and premiums receivable ....................................... (8,471,953) 2,307,487
Deferred acquisition costs .......................................................... (5,903,917) (4,161,884)
Unpaid losses and loss adjustment expenses .......................................... 7,771,279 5,908,223
Unearned premiums ................................................................... 2,791,574 782,854
Premiums, commissions and other insurance balances payable .......................... (1,013,510) 2,759,821
Accounts payable and accrued expenses ............................................... 227,713 696,852
Other, net .......................................................................... (57,305) (2,303,141)
------------ -----------
Net cash provided by operating activities ........................................ 3,258,131 10,505,962
------------ -----------
Cash flow from investing activities:
Purchases of securities ............................................................. (8,346,495) (15,892,549)
Purchase of subsidiary .............................................................. (5,000,000) --
Sale (purchase) of short-term investments, net ...................................... 586,033 (7,090,550)
Purchase of property and equipment .................................................. (419,690) (268,470)
------------ -----------
Net cash used in investing activities ............................................ (13,180,152) (23,251,569)
------------ -----------
Cash flow from financing activities:
Proceeds from sale of common stock .................................................. -- 10,384,324
Repayment of shareholder loan ....................................................... -- (300,000)
Proceeds from subordinated convertible notes payable ................................ 9,621,914 --
Borrowings from revolving line of credit, net ....................................... 2,000,000 1,114,779
Repayment of lines of credit ........................................................ (2,590,000) --
Other, net .......................................................................... 479,719 27,008
------------ -----------
Net cash provided by financing activities ........................................ 9,511,633 11,226,111
------------ -----------
Net decrease in cash ................................................................... (410,388) (1,519,496)
Cash at beginning of period ............................................................ 4,125,271 5,644,767
------------ -----------
Cash at end of period .................................................................. $ 3,714,883 4,125,271
============ ===========
Supplemental disclosure of cash flow information:
Income taxes paid ................................................................... $ 953,500 202,300
============ ===========
Interest paid ....................................................................... $ 788,217 38,235
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 89
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (RESTATED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying consolidated financial statements of Preferred Employers
Holdings, Inc. (the "Company") and its subsidiaries, as described below, are
prepared in accordance with generally accepted accounting principles. These
principles vary in certain respects from statutory accounting practices
prescribed or permitted by regulatory authorities. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates, based on the best information available, in
recording transactions resulting from business operations. The balance sheet
amounts that involve a greater extent of accounting estimates and actuarial
determinations subject to future changes are the Company's liabilities for
unpaid losses and loss adjustment expenses. As additional information becomes
available (or actual amounts are determinable), the recorded estimates may be
revised and reflected in operating results. While management believes that the
liability for unpaid losses and loss adjustment expenses is adequate to cover
the ultimate liability, such estimates may be more or less than the amounts
actually paid when claims are settled.
(b) Organization
Preferred Employers Holdings, Inc. (the "Company") is the successor
company to Preferred Employers Group, Inc. ("PEGI"). In February, 1997, the
Company completed an initial public offering of 1,725,000 shares of common
stock (including the underwriter's over-allotment option) at a price of $7.25
per share. Immediately prior to the Company's initial public offering, the
Company and the stockholders of PEGI (the "Exchanging Stockholders") effected a
recapitalization whereby the Company exchanged 17,647.06 shares of common stock
for each share of common stock of PEGI held by the Exchanging Stockholders (the
"Exchange"). As a result of the Exchange, PEGI became a wholly-owned subsidiary
of the Company. Except as otherwise specified or when the context otherwise
requires, references to the Company herein include Preferred Employers
Holdings, Inc. and PEGI, through which the Company conducts certain of its
business.
In March 1998, the Company, through a wholly-owned subsidiary, consummated
the purchase of substantially all the assets of HSSI Travel Nurse Operations,
Inc. ("Travel Nurse"), a wholly owned subsidiary of Hospital Staffing Services,
Inc., for $5.0 million in cash. Based in Fort Lauderdale, Florida since 1981,
Travel Nurse has provided registered nurses and other professional medical
personnel, often referred to as "Travelers," primarily to client hospitals in
the United States and the Caribbean on a contractual basis for periods
generally ranging from 8 to 52 weeks. During 1997, Travel Nurse placed in
excess of 700 nurses.
In August 1998, the Company issued 517,085 shares of its common stock in
exchange for all the outstanding common stock of National Explorers and
Travelers Healthcare, Inc. ("NET Healthcare"), an employee staffing company
and provider of temporary registered nurses and other professional medical
personnel, primarily to client hospitals. This business combination was
accounted for as a pooling-of-interests combination and, accordingly, the
Company's consolidated financial statements for applicable periods prior to
the combination have been restated to include the accounts and results of
operations of NET Healthcare.
The Company was appointed as a general agent ("GA") by the American
International Group of Companies ("AIG"), a major group of international
insurance carriers, on January 1, 1993. In this regard,
F-8
<PAGE> 90
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997 (RESTATED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the Company is authorized to write workers' compensation as well as other forms
of "property and casualty" business (such other forms of insurance being
hereinafter referred to as "Package") on behalf of AIG. In addition, the
Company was appointed as a GA by General Accident Insurance Company of America
("GAIC") on September 1, 1994, with the authority to write all forms of
commercial property and casualty business for family style and fast-food
restaurants. On June 11, 1996, GAIC advised the Company that it would no longer
write Package insurance for fast-food restaurants; however, on March 20, 1997,
the Company was appointed as a GA by the Kemper Group of Insurance Companies
with the authority to write workers' compensation and other forms of commercial
property and casualty business for family style and fast-food restaurants and
convenience stores. In September 1998, Kemper advised the Company that they
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.
(c) Insurance Operations
In 1996, the Company formed a Bermuda licensed reinsurance subsidiary (the
"Reinsurer") and entered into a reinsurance agreement (the "Agreement") with
AIG affiliates during the fourth quarter of 1996. The Agreement provides that
the Reinsurer assumes certain workers' compensation and employer's liability
insurance policies from AIG with policy inception dates as of January 1, 1996
and subsequent. Although the Reinsurer assumes the risks associated with being
a reinsurer, the Agreement limits the liability of the Reinsurer for losses and
certain defined expenses to the first $300,000 per occurrence. In addition, the
Agreement limits the aggregate liability of the Reinsurer for all coverage to
an amount not to exceed 70 percent of the gross written premium for each
individual underwriting year.
Because the Agreement is effective for all business written on or after
January 1, 1996, the policies written prior to the execution of the Agreement
and formation of the Reinsurer are accounted for as retroactive reinsurance.
The principal difference between the accounting for retroactive and prospective
reinsurance is that revenue and costs of retroactive reinsurance are deferred
and accreted into income over the claim-settlement period, rather than over the
period for which contractual coverage is provided, as would be the case under
prospective reinsurance. Retroactive insurance accounting does not change the
amount of income to be recognized, but rather extends the period of recognition
from one year--the period of coverage, to six years--the period over which
claims liabilities from the business are expected to be settled. Cash flows from
the reinsurance transactions are not affected by the accounting treatment.
The accompanying financial statements reflect a composite
retroactive/prospective accounting treatment with business written prior to
October 1, 1996 being accounted for as retroactive and business written
subsequent thereto accounted for as prospective.
The effects of prospective and retroactive reinsurance accounting
treatment are illustrated below. The prospective method assumed that the
Agreement incepted on January 1, 1996, and provides for a loss ratio of 51.5%,
acquisition costs of 33.83%, aggregate net premiums written of approximately
$15 million ($12,600,000 relating to the period January 1 through September 30,
1996) and an investment yield of 6.5% on net cash flows. The retroactive
(deposit) method uses the same assumptions except that since the Agreement was
not executed until October 1996, any investment income on net cash flows earned
for the period from January through September 1996 are deferred and recognized
as "other income" over the payment period of the remaining claim liabilities.
F-9
<PAGE> 91
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997 (RESTATED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income before income taxes recognized, and estimated to be recognized in
the calendar year indicated below is as follows:
Composite
Prospective Retroactive/
Method Prospective
(pro forma) (actual)
----------- ------------
1996 ........................................ $1,658,000 324,000
1997 ........................................ 1,288,000 1,372,000
1998-2001 ................................... 1,314,000 2,564,000
--------- ---------
$4,260,000 4,260,000
========== =========
It should be noted that the table presented above is for illustrative
purposes only to highlight that the basis of accounting used only impacts the
timing of the net revenue recognition and not the aggregate economic results.
Further, it should be noted that the above table is based on estimates as to
the amount and timing of aggregate loss and loss expense payments, available
investment yields and acquisition and other costs associated with the provision
of insurance protection. Actual results may vary, perhaps materially, from
those illustrated above. No assurance is given or may be taken that subsequent
revisions of estimates will not have a material impact on the illustration
above.
Prospective reinsurance premiums are earned on a pro-rata basis over the
term of the related coverage. The reserve for unearned premiums represents the
portion of the net premiums written relating to the unexpired term of coverage.
Acquisition costs are deferred and amortized over the period in which the
related prospective reinsurance premiums are earned.
Losses and loss adjustment expenses are charged to income as incurred. The
reserve for unpaid claims represents the accumulation of estimates for reported
losses and includes provisions for losses incurred but not reported. The
methods of determining such estimates and establishing resulting reserves are
continually reviewed and updated. Adjustments, if any, resulting therefrom are
reflected in income, currently. The Company does not discount its loss
reserves.
(d) Staffing Operations
In March 1998, the Company purchased substantially all of the assets of
Travel Nurse for $5.0 million in cash. Based in Fort Lauderdale, Florida since
1981, Travel Nurse has provided registered nurses and other professional
medical personnel, often referred to as "Travelers," primarily to client
hospitals in the United States and Caribbean on a contractual basis for periods
generally ranging from 8 to 52 weeks. During 1997, Travel Nurse placed in
excess of 700 nurses.
In August 1998, the Company issued 517,085 shares of its common stock in
exchange for all the outstanding common stock of NET Healthcare, an employee
staffing company and provider of temporary registered nurses and other
professional medical personnel, primarily to client hospitals. This business
combination was accounted for as a pooling-of-interests combination.
F-10
<PAGE> 92
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997 (RESTATED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Staffing income is recognized at the time the staffing services are
provided. In most instances, the staffing company's temporary healthcare
professionals are considered employees of the staffing company while under
assignment and costs of employment are the responsibility of the staffing
company and are included in the accompanying statements of operations.
Receivables include amounts due from healthcare organizations for services
provided by the staffing company through the placement of healthcare
professionals. These receivables are presented net of an estimated allowance
for uncollectible accounts based on an evaluation of expected collections
resulting from an analysis of current and past due accounts, past collection
experience in relation to amounts billed and other relevant information.
Concentration of credit risk relating to accounts receivable is limited by
number, diversity and geographic dispersion of the healthcare organizations
serviced by the staffing company.
During 1995, NET Healthcare entered into a line of credit with a
shareholder to provide a total of $190,000 to fund the working capital
requirements of NET Healthcare. The line of credit bore interest at the rate of
5% per annum. In March 1996, NET Healthcare entered into an additional line of
credit with a shareholder collateralized by outstanding accounts receivable.
Interest was payable at the rate of 2% per month on average outstanding
balances. In May 1996, the agreement was amended to allow for additional
funding. In May 1997, the agreement was further amended to increase the
interest rate by .5% per month on approximately $600,000 of the balance of the
line of credit. The amended line of credit, effective April 1, 1998,
established a rate of interest of 10% per annum and eliminated restrictive
covenants included in the original agreement. The line of credit described
above had an aggregate outstanding balance of $2,440,000 at December 31, 1997.
Interest expense related to the line of credit amounted to $240,884 and
$608,300 for the years ended December 31, 1998 and 1997, respectively. The
aggregate outstanding balance together with its related accrued interest
expense was paid in full subsequent to the merger of NET Healthcare and the
Company.
The goodwill associated with the Company's acquisition of substantially
all of the assets of Travel Nurse is amortized over 21 years.
The former shareholders of NET Healthcare previously elected to have the
company treated as an "S Corporation" under the Internal Revenue Code and,
therefore, net income or loss was attributable directly to the former
shareholders. Accordingly, no pre-merger benefit for federal or state income
taxes has been reflected in the accompanying financial statements. In addition,
an adjustment has been made to the restated stockholders' equity of the Company
as of December 31, 1998 and 1997 to eliminate the untaxed effects of including
NET Healthcare's results of operations in the financial statements of the
Company.
(e) Investments
Fixed maturity securities which the Company has the positive intent and
ability to hold to maturity are classified as "held to maturity" and are
reported at amortized cost. Fixed maturity and equity securities that are
bought and held principally for the purpose of selling them in the near term
are classified as "trading" and are reported at fair value, with unrealized
gains and losses included in income. Fixed maturity and equity securities not
classified as either held to maturity or trading are classified as "available
F-11
<PAGE> 93
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997 (RESTATED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for sale" and are reported at fair value, with unrealized gains and losses (net
of deferred taxes) charged or credited as a separate component of shareholders'
equity.
Investment income is recorded as earned on the accrual basis and includes
amortization of premiums and accretion of discounts relating to investments
acquired at other than par value. Realized gains or losses on disposal of
investments are determined on a specific identification basis and are included
in revenues.
The Company does not own any on-balance sheet or off-balance sheet
derivative instruments.
(f) Property and Equipment, Net
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using an accelerated method of depreciation over the
estimated useful lives of the related assets, which ranges from five to seven
years. Leasehold improvements are carried at cost less accumulated amortization
provided on the straight-line basis over the shorter of the lease term or the
estimated useful lives of the improvements.
(g) Premiums Payable
Premiums which are collected from insureds are reported as assets of the
Company and as corresponding liabilities to the insurance carriers. Premiums
received from insureds but not yet remitted to the carriers are held as
invested cash in a fiduciary capacity.
(h) Commission Income
Commission income is recognized when premiums are received. Any subsequent
commission adjustments, including policy cancellations, are recognized upon
notification from the insurance carrier or broker.
(i) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) Earnings Per Share
Earnings per common share is based upon the weighted average number of
common shares outstanding during each period. On December 31, 1998, the Company
adopted SFAS No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128
requires specific computations, presentations and disclosures for earnings per
share (EPS) amounts in order to make EPS amounts more compatible with
international accounting standards. Stock options outstanding at December 31,
1998 and 1997 of 831,500 and 250,000, respectively, had no effect on diluted
earnings per share amounts.
F-12
<PAGE> 94
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 and 1997 (RESTATED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In May 1998, the Company concluded a private placement of 7% convertible
subordinated notes due May 12, 2003 in the aggregate principal amount of
$10,580,000. The effect on diluted earnings per share amounts is illustrated in
the accompanying consolidated statements of operations.
(k) Accounting Pronouncements
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net income and
net unrealized gains (losses) on securities and is presented in the
consolidated statements of shareholders' equity and comprehensive income. SFAS
No. 130 requires only additional disclosures in the consolidated financial
statements; it does not affect the Company's financial position or results of
operations. The Company did not have any items for the years ended December 31,
1998 and 1997 that would require the presentation of comprehensive income in
the accompanying financial statements.
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No.
131 establishes standards for disclosing information about an enterprise's
operating segments. Operating segments are components of an enterprise (1) that
engage in business activities from which revenues may be earned and in which
expenses are incurred; (2) whose operating results are reviewed by the
enterprise's chief operating decision maker for purposes of making decisions
with regard to resource allocation and performance evaluation; and (3) for
which discrete financial information is available. In accordance with SFAS No.
131, the Company has disclosed such information in the accompanying financial
statements.
(l) Reclassifications
Certain items in the Company's 1997 financial statements have been
reclassified to conform with the 1998 presentation.
(2) INVESTMENTS
Net investment income for the years ended December 31, 1998 and 1997 is
summarized as follows:
1998 1997
---------- ---------
Fixed maturities ............................... $1,341,339 973,839
Short-term investments and cash ................ 479,504 420,705
---------- ---------
Net investment income .......................... $1,820,843 1,394,544
========== =========
At December 31, 1998 and 1997, the Company did not hold fixed-maturity
securities which individually exceeded 10% of shareholders' equity except U.S.
government and government agency securities.
Bonds with an amortized cost of $8,257,053 and $7,877,444 were held in a
restricted account for the benefit of the ceding company (AIG) as unauthorized
reinsurance at December 31, 1998 and 1997, respectively, in accordance with
statutory requirements.
F-13
<PAGE> 95
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997 (RESTATED)
(2) INVESTMENTS (CONTINUED)
The amortized cost and estimated fair values of the Company's investments
at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Amount At
Gross Gross Which Shown
Amortized Unrealized Unrealized Estimated On the
December 31, 1998 Cost Gains Losses Fair Value Balance Sheet
- ----------------- ----------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Securities held to maturity:
Fixed maturities:
Obligations of states and political
subdivisions .......................... $15,454,481 241,667 (4,129) 15,692,019 15,454,481
Obligations of states and political
subdivisions -- restricted ............ 8,257,053 130,956 8,388,009 8,257,053
----------- ------- ------ ---------- ----------
Total fixed maturities .................. $23,711,534 372,623 (4,129) 24,080,028 23,711,534
=========== ======= ====== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Amount At
Gross Gross Which Shown
Amortized Unrealized Unrealized Estimated On the
December 31, 1997 Cost Gains Losses Fair Value Balance Sheet
- ----------------- ----------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Securities held to maturity:
Fixed maturities:
Obligations of states and political
subdivisions ......................... $ 8,015,105 222,564 -- 8,237,669 8,015,105
Obligations of states and political
subdivisions -- restricted ........... 7,877,444 70,537 -- 7,947,981 7,877,444
----------- ------- ------ ---------- ----------
Total fixed maturities ................. $15,892,549 293,101 -- 16,185,650 15,892,549
=========== ======= ====== ========== ==========
</TABLE>
F-14
<PAGE> 96
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997 (RESTATED)
(2) INVESTMENTS (CONTINUED)
The amortized cost and fair value of securities at December 31, 1998 and
1997, by contractual maturity date, are presented below:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------- -------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Fixed maturities
held-to-maturity:
Due in one year or less ............. $ -- -- -- --
Due after one year through
five years ........................ 14,394,846 14,600,179 6,941,072 7,139,209
Due after one year through
five years -- restricted .......... 7,197,418 7,296,169 6,803,411 6,849,521
Due after five years through
ten years ......................... -- -- -- --
Due after ten years ................. 1,059,635 1,091,840 1,074,033 1,098,460
Due after ten years -- restricted.... 1,059,635 1,091,840 1,074,033 1,098,460
----------- ---------- ---------- ----------
23,711,534 24,080,028 15,892,549 16,185,650
Short-term investments ................ 1,515,347 1,515,347 4,903,714 4,903,714
Short-term investments -- restricted .. 5,516,681 5,516,681 2,186,836 2,186,836
----------- ---------- ---------- ----------
Total ................................. $30,743,562 31,112,056 22,983,099 23,276,200
=========== ========== ========== ==========
</TABLE>
(3) FINANCIAL INSTRUMENTS
The carrying amounts for short-term investments, cash, accounts,
commissions and premiums receivable, accrued investment and interest income,
notes payable, premiums, commissions and other insurance balances payable and
accounts payable and accrued expenses approximate their fair values due to the
short-term nature of these instruments.
Estimated fair values for fixed maturities were provided by outside
consultants using market quotations, prices provided by market makers or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics. The carrying amount for the Company's
7% convertible subordinated notes is $10,580,000 and the related estimated fair
value is $10,280,955 which was determined by management based on available
market information and appropriate valuation methodologies.
F-15
<PAGE> 97
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997 (restated)
(4) ACCOUNTS, COMMISSIONS AND PREMIUMS RECEIVABLE
Accounts, commissions and premiums receivable consists of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Staffing accounts receivable -- billed .......................... $ 5,626,113 1,922,857
Staffing accounts receivable -- unbilled ........................ 1,000,370 317,095
----------- ---------
6,626,483 2,239,952
Less allowance for uncollectible accounts ...................... (96,054) (125,367)
----------- ---------
Staffing accounts receivable, net .............................. 6,530,429 2,114,585
Premiums receivable ............................................ 3,652,463
Commissions receivable ......................................... 1,018,031 585,072
----------- ---------
Total .......................................................... $11,200,923 2,699,657
=========== =========
</TABLE>
The allowance for uncollectible accounts as of December 31, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Beginning balance ................................................ $ 125,367 23,212
Provision for uncollectible accounts ............................. 96,624 106,367
Write-offs ....................................................... (125,937) (4,212)
--------- -------
Ending balance ................................................... $ 96,054 125,367
========= =======
</TABLE>
(5) STOCKHOLDER LOAN
In May 1995, the Company entered into a repurchase agreement with
stockholders (the "Agreement") whereby the Company agreed to repurchase from
them an aggregate of 30 shares of common stock (529,412 shares as adjusted to
give effect to the Exchange) (the "Shares") of the Company. The aggregate
purchase price for the Shares was $600,000 (including interest) to be paid in
24 installments of $25,000. The closing of the Agreement was subject to the
Company's completion of a $600,000 distribution to the stockholders of the
Company, pro rata based on the number of shares of common stock of the Company
outstanding and paid to the stockholders of record on the Agreement date,
without giving effect to the repurchase. The $600,000 distribution was made by
the Company on May 26, 1995.
Pursuant to a subsequent agreement made with the stockholders, the
outstanding loan balance at December 31, 1995 was to be repaid in 23 monthly
installments of $25,000 (including interest) commencing in February 1996. The
outstanding balance of the above-referenced stockholder loan was paid in full
during 1997.
F-16
<PAGE> 98
[MISSING COPY]
F-17
<PAGE> 99
PREFERRED EMPLOYER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997 (RESTATED)
(6) INCOME TAXES (CONTINUED)
Deferred income taxes are based upon temporary differences between the
Company's financial statements and tax bases of assets and liabilities. The
following deferred taxes are recorded for December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Deferred tax assets:
Unearned premiums ............................................. $ 411,176 --
Reserve for unpaid claims ..................................... 971,252 427,414
Other, net .................................................... 59,105 44,348
---------- --------
Gross deferred tax assets .................................. 1,441,533 471,762
---------- --------
Deferred tax liabilities:
Cash to accrual change ........................................ (284,575) (218,925)
Deferred acquisition costs .................................... (680,291) --
Other, net .................................................... (28,789) --
---------- --------
Gross deferred tax liabilities ............................. (993,655) (218,925)
---------- --------
Net deferred tax asset .................................. $ 447,878 252,837
========== ========
</TABLE>
A valuation allowance has not been established as the Company believes it
is more likely than not that the deferred tax asset will be realized.
The Company's reinsurance subsidiary is a Bermuda domiciled corporation.
The reinsurance subsidiary is a "controlled foreign corporation" ("CFC") for
United States federal income tax purposes. As a result, the Company includes in
its gross income for United States federal income tax purposes its pro-rata
share of the CFC's "subpart F income" even if such subpart F income is not
distributed. Substantially all of the income of the Company's reinsurance
subsidiary is subpart F income.
The Company has elected under section 953(d) of the Internal Revenue Code
to tax its reinsurance subsidiary as a domestic corporation for U.S. income tax
purposes. The Company does not believe this election has had a material effect
on its income tax expense.
(7) STATUTORY SOLVENCY REQUIREMENTS
The Bermuda Insurance Act of 1978 and related regulations (the "Act")
requires the Company to meet a minimum solvency margin. Statutory capital and
surplus as of December 31, 1998 and 1997 was $10,533,517 and $7,285,144
respectively, and the amounts required to be maintained by the Company were
$3,163,000 for 1998 and $3,300,000 for 1997. In addition, a minimum liquidity
ratio must be maintained whereby relevant assets, as defined by the Act, must
exceed 75% of relevant liabilities. Once these requirements have been met,
there is no restriction on the retained earnings available for distribution. At
December 31, 1998 and 1997, the Company was in compliance with this
requirement.
F-18
<PAGE> 100
PREFERRED EMPLOYER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997 (RESTATED)
(8) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity with respect to the Company's liability for unpaid losses and
loss adjustment expenses is summarized as follows for the years ended December
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Net unpaid losses and loss adjustment expenses at beginning of
year .............................................................. $ 6,107,613 199,390
----------- ---------
Incurred related to:
Current year ...................................................... 7,614,086 6,257,095
Prior year ........................................................ 437,780 --
----------- ---------
Total incurred ................................................. 8,051,866 6,257,095
----------- ---------
Paid related to:
Current year ...................................................... 280,587 348,872
Prior year ........................................................ -- --
Total paid ..................................................... 280,587 348,872
----------- ---------
Net unpaid losses and loss adjustment expenses at end of year......... $13,878,892 6,107,613
=========== =========
</TABLE>
(9) STOCK OPTIONS
During 1997, the Company adopted the 1996 Stock Option Plan (the "Plan")
to provide directors, officers and employees of the Company with the
opportunity to receive grants of incentive stock options. The Board of
Directors or a committee established by the Board has the sole authority to
determine who receives such grants, the type, size and timing of such grants,
and specify the terms of any agreements relating to the grants. The aggregate
number of shares that may be issued under the Plan is 1,000,000 shares.
The purchase price of the stock issuable upon the exercise of an option is
determined by the Board of Directors or its committee at the time of grant of
the option. The exercise price can not be less than 100% of the fair market
value of such stock at the time of the grant in the case of incentive stock
options, or less than 110% of the fair market value in the case of incentive
stock options granted to individuals possessing more than 10% of the total
combined voting power of all classes of stock of the Company.
The following table summarizes stock option activity under the Plan for
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ---------------------------------
Weighted Average Weighted Average
Option Shares Exercise Price Option Shares Exercise Price
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Beginning Balance ............................. 511,500 $7.48 -- --
Granted ....................................... 320,000 $8.44 511,500 $7.48
Exercised ..................................... -- -- -- --
Expired ....................................... -- -- -- --
------- ----- ------- -----
Ending Balance ................................ 831,500 $7.85 511,500 $7.48
======= ===== ======= =====
</TABLE>
F-19
<PAGE> 101
PREFERRED EMPLOYER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997 (RESTATED)
(9) STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$7.00 75,000 8.52 $ 7.00 22,274 $ 7.00
7.25 160,000 8.12 7.25 95,152 7.25
7.75 276,500 8.65 7.75 75,446 7.75
8.50 175,000 9.56 8.50 15,535 8.50
8.13 75,000 9.24 8.13 11,342 8.13
8.625 70,000 9.61 8.625 5,485 8.625
------- ---- ------- ------- -------
$7.00-8.625 831,500 8.86 $ 7.85 225,234 $ 7.85
======= ==== ======= ======= =======
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options as allowed
pursuant to FASB Statement No. 123, Accounting for Stock Based Compensation
(FASB Statement 123). FASB Statement 123 requires use of option valuation
models which include the input of highly subjective assumptions, including
expected stock price volatility. Because the Company's employee stock options
have characteristics significantly different from traded options and because
changes in the subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not necessarily
provide a reliable measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards under those plans,
consistent with FASB Statement No. 123, the reduction in the Company's 1998 and
1997 net income and net income per share would have been insignificant. The
effect of applying the fair method of accounting for stock options on reported
net income and net income per share for 1998 and 1997 may not be representative
of the effects for future years because outstanding options vest over a period
of several years and additional awards are generally made each year.
The fair value of options granted was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997:
1998 1997
--------- --------
Risk-free interest rate ......................... 5.58% 6.46%
Expected Life ................................... 6.5 years 7 years
Expected volatility ............................. 40% 25%
Expected dividend yield ......................... 0 0
(10) LEASES
In August 1994, the Company entered into an office lease agreement which
became effective on April 1, 1995. The agreement provides for an initial
seven-year term with two five-year renewal options. In
F-20
<PAGE> 102
PREFERRED EMPLOYER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997 (RESTATED)
(10) LEASES (CONTINUED)
October 1998, the staffing company entered into an office lease agreement which
became effective on October 1, 1998. The agreement provides for an initial
seven-year term with one five-year renewal option. The following is a schedule
of the approximate future minimum lease payments for office space and equipment
for the Company and its subsidiaries as of December 31, 1998:
Year Ending December 31, Total
------------------------ ---------
1999 .................................................. $ 800,000
2000 .................................................. 836,000
2001 .................................................. 859,000
2002 .................................................. 637,000
Thereafter ............................................ 1,453,000
----------
$4,585,000
==========
Rent expense for the years ended December 31, 1998 and 1997 was
approximately $433,000 and $249,000, respectively.
(11) UNSECURED REVOLVING LINE OF CREDIT
In May 1998, the Company obtained a $3 million unsecured revolving line of
credit from a bank. The terms of the loan provide for monthly interest payments
at the bank's prime lending rate (currently 7 3/4% per annum). The loan is
renewable on an annual basis. As of December 31, 1998, the aggregate amount
outstanding under the line of credit was $1,850,000.
(12) SUBORDINATED CONVERTIBLE NOTES
In May 1998, the Company concluded a private placement of $10,580,000 of
7% convertible subordinated notes (the "Notes") due May 2003. The principal
amount of the Notes is convertible at the option of the holders into shares of
the Company's common stock at a conversion price of $9.00 (the "Conversion
Price") at any time prior to the earlier of the maturity date (May 12, 2003) or
10 business days after receipt of a termination notice. In the event (i) the
closing bid price of the Company's common stock equals or exceeds $13.50 per
share for twenty consecutive trading days during any period commencing upon
satisfaction of one of the conditions contained in clause (ii) described herein
and (ii) either a registration statement covering the shares of common stock
issuable upon conversion of the Notes has been declared effective by the
Securities and Exchange Commission and remains effective or at least two years
has elapsed since the issuance date of the Notes and the shares of common stock
issuable upon conversion of the Notes are saleable, without restriction, under
Rule 144(k) promulgated under the Securities Act of 1933, as amended, then the
holders' rights to convert the outstanding principal amount of the Notes shall
be terminated by the Company by delivering to the holders a notice of
termination (the "Termination Notice"), in which event (a) the holders will
have the right at any time during 10 business days after receipt of the
Termination Notice, in their sole discretion, to convert the outstanding
principal amount of the Notes into shares of common stock of the Company at the
Conversion Price, and (b) thereafter, the holders' option to convert shall
terminate and the Notes may be prepaid by the Company, at any time prior to the
Maturity Date, in whole or in part for the face amount thereof, together with
all accrued and unpaid interest through the date of prepayment.
F-21
<PAGE> 103
PREFERRED EMPLOYER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 and 1997 (RESTATED)
(13) SEGMENT REPORTING
The Company's reportable business segments are strategic business units
that offer distinctive products and services that are marketed through
different channels. They are managed separately because of their unique
marketing and distribution requirements.
There are two reportable segments: Insurance and Employee Staffing. The
insurance segment sells, on behalf of others, business insurance principally to
the franchise industry and provides reinsurance for certain workers'
compensation and employers' liability insurance policies sold by the Company.
The employee staffing segment provides temporary registered nurses and
professional medical personnel primarily to client hospitals.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Management evaluates segment
performance based on profit or loss from operations before income taxes not
including non-recurring gains and losses and intersegment transactions. Sales
and services between segments are accounted for as if the sale or services were
provided to third parties, that is at current market prices.
Certain information concerning the Company's reporting segments for the
years ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Employee
1998 Insurance Staffing Totals
---- ----------- ---------- ----------
<S> <C> <C> <C>
Revenues from external customers .................... $18,028,102 34,462,035 52,490,137
Intersegment revenues ............................... 36,237 -- 36,237
Interest revenue .................................... 1,679,481 745 1,680,226
Interest expense .................................... -- 494,935 494,935
Depreciation and amortization ....................... 140,657 380,018 520,675
Segment profit ...................................... 2,843,101 1,962,923 4,806,024
Segment assets ...................................... 40,434,696 12,545,917 52,980,613
Expenditures for segment assets ..................... 39,250 317,740 356,990
</TABLE>
<TABLE>
<CAPTION>
Employee
1997 Insurance Staffing Totals
---- ----------- ---------- ----------
<S> <C> <C> <C>
Revenues from external customers .................... $14,604,568 11,594,300 26,198,868
Interest revenue .................................... 1,152,846 -- 1,152,846
Interest expense .................................... 16,534 647,375 663,909
Depreciation and amortization ....................... 150,341 51,971 202,312
Segment profit (loss) ............................... 1,410,149 (599,460) 810,689
Segment assets ...................................... 24,985,368 2,543,618 27,528,986
Expenditures for segment assets ..................... 82,677 185,793 268,470
</TABLE>
F-22
<PAGE> 104
[MISSING COPY]
F-23
<PAGE> 105
PREFERRED EMPLOYER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997 (restated)
(13) SEGMENT REPORTING (CONTINUED)
Other Items:
<TABLE>
<CAPTION>
Reportable Unallocated
Segment Corporate Consolidated
1998 Total Total Total
---- ---------- ----------- ------------
<S> <C> <C> <C>
Depreciation and amortization ......................... $ 520,675 511,952 1,032,627
Expenditures for assets ............................... 356,990 62,700 419,690
Amortization of deferred acquisition costs ............ 4,999,956 -- 4,999,956
</TABLE>
<TABLE>
<CAPTION>
Reportable Unallocated
Segment Corporate Consolidated
1997 Total Total Total
---- ---------- ----------- ------------
<S> <C> <C> <C>
Depreciation and amortization ......................... $ 202,312 -- 202,312
Expenditures for assets ............................... 268,470 -- 268,470
Amortization of deferred acquisition costs ............ 4,161,884 -- 4,161,884
</TABLE>
The Company does not attribute revenues or long-lived assets by geographic
areas. The Company does not have any single customer that can be identified as
major when considering the Company's consolidated revenues.
(14) LITIGATION
The Company is a defendant in various litigation matters considered to be
in the normal course of business. While the outcome of these matters cannot be
estimated with certainty, it is the opinion of management (after consultation
with legal counsel) that the resolution of such litigation will not have a
material adverse effect on the Company's financial statements.
(15) UNAUDITED PRO FORMA INFORMATION
Pro forma adjustments for income taxes represent the difference between
historical income taxes and income taxes that would have been reported had NET
Healthcare filed income tax returns as a taxable "C corporation" for 1998 and
1997.
(16) YEAR 2000
Year 2000 issues are the result of computer programs being written using
two digits rather than four to define the applicable year. The Company has
developed a plan to address Year 2000 issues. The plan is based on the
Company's primary software vendors having advised the Company that the
necessary programming changes related to Year 2000 issues have been made and
tested and that the software used by the Company can be upgraded to be Year
2000 compliant. During 1998, the Company began to implement this upgrade and
expects to be fully compliant with Year 2000 issues by the end of the first
quarter of 1999. As an integral component of such plan, the Company will
determine if they are Year 2000 compliant. It is management's belief that for
any suppliers who may not be Year 2000 compliant, such non-compliance will not
have a material adverse effect on the Company's business. However, each major
supplier's compliance will be assessed in light of their response. The costs
associated with the implementation of the above project are not expected to be
material.
F-24
<PAGE> 106
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
Commission File Number 1-12677
----------
PREFERRED EMPLOYERS HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 65-0698779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10800 BISCAYNE BOULEVARD, MIAMI, FLORIDA 33161
(Address of principal executive offices)
(305) 893-4040
(Registrant's telephone number, including area code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of common
equity, as of May 6, 1999, was 5,247,085 shares of Common Stock.
<PAGE> 107
PREFERRED EMPLOYERS HOLDINGS, INC.
Form 10-Q -- for the quarter ended March 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item-1 -- Quarterly Financial Statements .......................................................... 3
Consolidated Balance Sheets ............................................................. 3
Consolidated Statements of Operations ................................................... 4
Consolidated Statements of Cash Flows ................................................... 5
Notes to Consolidated Financial Statements .............................................. 6
Item-2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................ 20
Item-3 -- Quantitative and Qualitative Discussions About Market Risk .............................. 27
PART II -- OTHER INFORMATION
Item-1 -- Legal Proceedings ....................................................................... 28
Item-2 -- Changes in Securities and Use of Proceeds ............................................... 28
Item-3 -- Defaults Upon Senior Securities ......................................................... 28
Item-4 -- Submission of Matters to a Vote of Security Holders ..................................... 28
Item-5 -- Other Information ....................................................................... 28
Item-6 -- Exhibits and Reports on Form 8-K ........................................................ 28
SIGNATURE ......................................................................................... 29
</TABLE>
2
<PAGE> 108
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 (unaudited) and December 31, 1998
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
ASSETS
Investments:
Held-to-maturity securities, at amortized cost (fair value of
$17,743,070 in 1999 and $15,692,019 in 1998) ........................... $ 17,533,907 15,454,481
Held-to-maturity securities, at amortized cost-restricted (fair value
of $8,329,900 in 1999 and $8,388,009 in 1998) .......................... 8,224,217 8,257,053
Short-term investments .................................................. 5,244,232 7,032,027
------------ -----------
Total investments ....................................................... 31,002,356 30,743,561
Cash ...................................................................... 6,804,429 3,714,883
Accrued investment and interest income .................................... 322,475 408,538
Accounts, commissions and premiums receivables, net ....................... 12,311,832 11,200,923
Deferred acquisition costs ................................................ 2,044,595 1,807,841
Property and equipment, net ............................................... 980,779 897,625
Deferred tax assets ....................................................... 529,869 447,878
Deposits .................................................................. 382,607 344,165
Goodwill and other intangible assets, net ................................. 4,747,228 4,805,560
Prepaid expenses .......................................................... 707,738 427,502
Deferred convertible note issue costs ..................................... 919,217 979,137
Other assets .............................................................. 625,512 629,814
------------ -----------
Total assets .......................................................... $ 61,378,637 56,407,427
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable ........................................................... $ 11,685,000 12,430,000
Unpaid losses and loss adjustment expenses .............................. 15,885,541 13,878,892
Premiums, commissions and other insurance balances payable .............. 8,391,016 7,175,659
Unearned premiums ....................................................... 6,178,892 5,463,405
Accounts payable and accrued expenses ................................... 2,188,185 1,588,326
Escrow and trust funds .................................................. 2,939,599 1,891,966
Other liabilities ....................................................... 634,708 1,002,317
------------ -----------
Total liabilities ..................................................... 47,902,941 43,430,565
------------ -----------
Shareholders' equity:
Common stock, $0.01 par value; authorized 20,000,000 shares;
issued 5,776,497 shares in 1999 and 5,771,497 shares in 1998 ........... 57,765 57,715
Additional paid-in capital .............................................. 9,936,512 9,891,562
Retained earnings ....................................................... 3,986,976 3,533,142
------------ -----------
Total shareholders' equity ............................................ 13,981,253 13,482,419
Treasury stock, at cost, 529,412 shares ................................... (505,557) (505,557)
------------ -----------
Net shareholders' equity .............................................. 13,475,696 12,976,862
------------ -----------
Total liabilities and shareholders' equity ............................ $ 61,378,637 56,407,427
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 109
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For the three months ended March 31, 1999, 1998 (restated) and 1997 (restated)
<TABLE>
<CAPTION>
(RESTATED) (RESTATED)
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
REVENUES:
Staffing income ................................................... $10,852,976 5,921,412 2,244,934
Premiums earned ................................................... 3,741,842 3,066,609 2,044,430
Net commission income ............................................. 380,739 543,130 634,314
Net investment income ............................................. 435,165 385,985 213,652
Other income ...................................................... 134,919 138,905 145,084
----------- ---------- ---------
Total revenues .................................................. 15,545,641 10,056,041 5,282,414
----------- ---------- ---------
Expenses:
Staffing costs .................................................... 8,328,009 4,776,449 1,863,711
Losses and loss adjustment expenses incurred ...................... 2,058,013 1,655,969 1,103,317
Amortization of deferred acquisition costs ........................ 1,238,043 981,315 737,309
Other operating expenses .......................................... 2,986,818 1,780,984 1,284,254
----------- ---------- ---------
Total expenses .................................................. 14,610,883 9,194,717 4,988,591
----------- ---------- ---------
Operating income before income taxes ................................ 934,758 861,324 293,823
----------- ---------- ---------
Interest expense .................................................... 281,178 201,950 116,963
Amortization of intangible assets and other non-operating expenses .. 58,332 100,561 --
----------- ---------- ---------
Total non-operating expenses .................................... 339,510 302,511 116,963
----------- ---------- ---------
Income before income taxes .......................................... 595,248 558,813 176,860
Income taxes ........................................................ 141,414 50 339 129,590
----------- ---------- ---------
Net income ........................................................ $ 453,834 508,474 47,270
=========== ========== =========
Net income-basic .................................................... $ 453,834 508,474 47,270
Impact of potential common shares-convertible notes ................. 154,096 -- --
----------- ---------- ---------
Net income-diluted .................................................. $ 607,930 508,474 47,270
=========== ========== =========
Weighted average outstanding shares-basic ........................... 5,245,085 5,242,085 4,384,585
Impact of potential common shares-convertible notes ................. 1,170,000 -- --
----------- ---------- ---------
Common shares and common shares equivalents used in computing net
earnings per shares-diluted ....................................... 6,415,085 5,242,085 4,384,585
=========== ========== =========
Net basic earnings per share ........................................ $ 0.09 0.10 0.01
=========== ========== =========
Net diluted earnings per share ...................................... $ 0.09 0.10 0.01
=========== ========== =========
PRO FORMA INFORMATION (Notes 6 and 13):
Historical income before income taxes ............................... $ 595,248 558,813 176,860
Pro forma income tax provision ...................................... 141,414 208,229 13,241
----------- ---------- ---------
Pro forma net income ................................................ $ 453,834 350,584 163,619
=========== ========== =========
Pro forma net income-basic .......................................... $ 453,834 350,584 163,619
Impact of potential common shares-convertible notes ................. 154,096 -- --
----------- ---------- ---------
Pro forma net income-diluted ........................................ $ 607,930 350,584 163,619
=========== ========== =========
Weighted average outstanding shares-basic ........................... 5,245,085 5,242,085 4,384,585
Impact of potential common shares-convertible notes ................. 1,170,000 -- --
----------- ---------- ---------
Weighted average outstanding shares-diluted ......................... 6,415,085 5,242,085 4,384,585
----------- ---------- ---------
Pro forma net basic earnings per share .............................. $ 0.09 0.07 0.04
=========== ========== =========
Pro forma net diluted earnings per share ............................ $ 0.09 0.07 0.04
=========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 110
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the three months ended March 31, 1999, 1998 (restated) and 1997 (restated)
<TABLE>
<CAPTION>
(Restated) (Restated)
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net Income ..................................................... $ 453,834 $ 508,474 $ 47,270
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................ 186,890 150,764 44,542
Amortization of deferred acquisition costs ................... 1,238,043 981,315 737,309
Deferred income taxes ........................................ (81,991) (351,771) --
Provision for uncollectible accounts ......................... 13,549 16,549 26,321
Change in:
Accrued investment and interest income ......................... 86,063 67,974 --
Accounts, commissions and premiums receivable .................. (1,124,458) (2,868,147) 2,689,816
Deferred acquisition costs ..................................... (1,474,797) (651,604) --
Unpaid losses and loss adjustment expenses ..................... 2,006,649 1,655,969 1,016,082
Unearned premiums .............................................. 715,487 572,798 (603,435)
Premiums, commissions and other insurance balances ............. 1,215,357 661,760 (22,117)
Accounts payable and accrued expenses .......................... 599,859 810,631 903,347
Other, net ..................................................... 880,205 (39,335) 1,634,476
----------- ----------- ------------
Net cash provided by operating activities .................. 4,714,690 1,515,377 6,473,611
----------- ----------- ------------
Cash flow from investing activities:
Purchase of subsidiary ......................................... -- (5,000,000) --
Sale (purchase) of short-term investments, net ................. (258,795) 2,451,176 (17,405,936)
Purchase of property and equipment ............................. (148,303) (22,368) (61,002)
----------- ----------- ------------
Net cash used in investing activities ...................... (407,098) (2,571,192) (17,466,938)
----------- ----------- ------------
Cash flow from financing activities:
Proceeds from sale of common stock ............................. -- -- 10,402,129
Repayment of shareholder loan .................................. -- -- (75,000)
Borrowings from revolving line of credit, net .................. -- -- 880,000
Repayment of line of credit .................................... (700,000) -- (279,716)
Bank overdraft ................................................. (518,046) (38,327) --
Other, net ..................................................... -- (2,830) (2,830)
----------- ----------- ------------
Net cash (used in) provided by financing activities ........ (1,218,046) (41,157) 10,924,583
----------- ----------- ------------
Net increase (decrease) in cash .................................. 3,089,546 (1,096,972) (68,744)
Cash at beginning of period ...................................... 3,714,883 4,125,271 5,644,767
----------- ----------- ------------
Cash at end of period ............................................ $ 6,804,429 $ 3,028,299 $ 5,576,023
=========== =========== ============
Supplemental disclosure of cash flow information:
Income taxes paid .............................................. $ 180,000 $ -- $ --
=========== =========== ============
Interest paid .................................................. $ 222,094 $ 208,973 $ 87,742
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 111
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Preferred
Employers Holdings, Inc. (the "Company") and its subsidiaries have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the three months period ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. These consolidated financial statements and notes
should be read in conjunction wit the financial statements and notes included in
the audited consolidated financial statements of the Company for the year ended
December 31, 1998.
The accompanying unaudited consolidated financial statements of the
Company and its subsidiaries are prepared in accordance with generally accepted
accounting principles. These principles vary in certain respects from statutory
accounting practices prescribed or permitted by regulatory authorities. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates, based on
information available, in recording transactions resulting from business
operations. The balance sheet amounts that involve a greater amount of
accounting estimates and actuarial determinations subject to future changes are
the Company's liabilities for unpaid losses and loss adjustment expenses. As
additional information becomes available (or actual amounts are determinable),
the recorded estimates may be revised and reflected in operating results. While
management believes that the liability for unpaid losses and loss adjustment
expenses is adequate to cover the ultimate liability, such estimates may be more
or less than the amounts actually paid when claims are settled.
(b) ORGANIZATION
Preferred Employers Holdings, Inc. is the successor company to Preferred
Employers Group, Inc. ("PEGI"). Except as otherwise specified or when the
context otherwise requires, references to the Company herein include Preferred
Employers Holdings, Inc. and PEGI, through which the Company conducts certain of
it business operations.
In March 1998, the Company, through a wholly-owned subsidiary, consummated
the purchase of substantially all the assets of HSSI Travel Nurse Operations,
Inc. ("Travel Nurse"), a wholly-owned subsidiary of Hospital Staffing Services,
Inc., for $5.0 million in cash. Based in Ft. Lauderdale, Florida since 1981,
Travel Nurse has provided registered nurses and other professional medical
personnel, often referred to as "Travelers," primarily to client hospitals in
the United States and the Caribbean on a contractual basis for periods generally
ranging from 8 to 52 weeks.
In August 1998, the Company issued 517,085 shares of its common stock in
exchange for all the outstanding common stock of National Explorers and
Travelers Healthcare, Inc. ("NET Healthcare"), an employee staffing company and
provider of temporary registered nurses and other professional medical
personnel, primarily to client hospitals. This business combination was
accounted for as a pooling-of-interests combination and, accordingly, the
Company's consolidated financial statements for applicable periods prior to the
combination have been restated to include the accounts and results of operations
of NET Healthcare.
6
<PAGE> 112
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company was appointed as a general agent ("GA") by the American
International Group of Companies ("AIG"), a major group of international
insurance carriers, on January 1, 1993. In this regard, the Company is
authorized to write workers' compensation as well as other forms of "property
and casualty" business (such other forms of insurance being hereinafter referred
to as "Package") on behalf of AIG. In addition, the Company was appointed as a
GA by General Accident Insurance Company of America ("GAIC") on September 1,
1994, with the authority to write all forms of commercial property and casualty
business for family style and fast-food restaurants. On June 11, 1996, GAIC
advised the Company that it would no longer write Package insurance for
fast-food restaurants; however, on March 20, 1997, the Company was appointed as
a GA by the Kemper Group of Insurance Companies with the authority to write
workers' compensation and other forms of commercial property and casualty
business for family style and fast-food restaurants and convenience stores. In
September 1998, Kemper advised the Company that they 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.
(c) INSURANCE OPERATIONS
In 1996, the Company formed a Bermuda licensed reinsurance subsidiary (the
"Reinsurer") and entered into a reinsurance agreement (the "Agreement") with
certain affiliates of AIG during the fourth quarter of 1996. The Agreement
provides that the Reinsurer assumes certain workers' compensation and employer's
liability insurance policies from AIG with policy inception dates as of January
1, 1996 and subsequent. Although the Reinsurer assumes the risks associated with
being a reinsurer, the Agreement limits the liability of the Reinsurer for
losses and certain defined expenses to the first $300,000 per occurrence. In
addition, the Agreement limits the aggregate liability of the Reinsurer for all
coverage to an amount not to exceed 70 percent of the gross written premium for
each individual underwriting year.
Because the Agreement is effective for all business written on or after
January 1, 1996, the policies written prior to the execution of the Agreement
and formation of the Reinsurer are accounted for as retroactive reinsurance.
The principal difference between the accounting for retroactive and prospective
reinsurance is that revenue and costs of retroactive reinsurance are deferred
and accreted into income over the claim-settlement period rather than over the
period for which contractual coverage is provided, as would be the case under
prospective reinsurance. Retroactive insurance accounting does not change the
amount of income to be recognized, but rather extends the period of recognition
from one year-the period of coverage, to six years-the period over which claims
liabilities from the business are expected to be settled. Cash flows from the
reinsurance transactions are not affected by the accounting treatment.
The accompanying financial statements reflect a composite
retroactive/prospective accounting treatment with business written prior to
October 1, 1996, being accounted for as retroactive and business written
subsequent thereto accounted for as prospective.
The effects of prospective and retroactive insurance accounting treatment
are illustrated below. The prospective method assumes that the Agreement
incepted on January 1, 1996, and provides for a loss ratio of 51.5%, acquisition
costs of 33.83%, aggregate net premiums written of approximately $15 million
($12,600,000 relating to the period from January 1 through September 30, 1996)
and an investment yield of 6.5% on net cash flows. The retroactive (deposit)
method uses the same assumptions except that since the Agreement was not
executed until October 1996, any investment income on net cash flows earned for
the
7
<PAGE> 113
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
period from January through September 1996 are deferred and recognized as "other
income" over the payment period of the remaining claim liabilities.
Income before income taxes recognized, and estimated to be recognized in
the calendar year indicated below is as follows:
Prospective Composite
Method Retroactive/prospective
Years (pro forma) (actual)
----- ----------- -----------------------
1996 ........................ $1,658,000 324,000
1997 ........................ 1,288,000 1,372,000
1998-2001 ................... 1,314,000 2,564,000
---------- ---------
$4,260,000 4,260,000
========== =========
The table presented above is for illustrative purposes only to highlight
that the basis of accounting used only impacts the timing of the net revenue
recognition and not the aggregate economic results. Further, the above table is
based on estimates as to the amount and timing of aggregate loss and loss
expense payments, available investment yields and acquisition and other costs
associated with the provision of insurance protection. Actual results may vary,
perhaps materially, from those illustrated above. No assurance is given or may
be taken that subsequent revisions of estimates will not have a material impact
on the illustration above.
Prospective reinsurance premiums are earned on a pro-rata basis over the
term of the related coverage. The reserve for unearned premiums represents the
portion of the net premiums written relating to the unexpired term of coverage.
Acquisition costs are deferred and amortized over the period in which the
related prospective reinsurance premiums are earned.
Losses and loss adjustment expenses are charged to income as incurred. The
reserve for unpaid claims represents the accumulation of estimates for reported
losses and includes provisions for losses incurred but not reported. The methods
of determining such estimates and establishing resulting reserves are
continually reviewed and updated. Adjustments, if any, resulting therefrom are
reflected in income currently. The Company does not discount its loss reserves.
(d) STAFFING OPERATIONS
In March 1998, the Company purchased substantially all of the assets of
Travel Nurse for $5.0 million in cash. Based in Fort Lauderdale, Florida since
1981, Travel Nurse has provided registered nurses and other professional medical
personnel, often referred to as "Travelers," primarily to client hospitals in
the United States and the Caribbean on a contractual basis for periods generally
ranging from 8 to 52 weeks.
In August 1998, the Company issued 517,085 shares of its common stock in
exchange for all the outstanding common stock of NET Healthcare, an employee
staffing company and provider of temporary registered nurses and other
professional medical personnel, primarily to client hospitals. This business
combination was accounted for as a pooling-of-interests combination.
8
<PAGE> 114
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Staffing income is recognized at the time the staffing services are
provided. In most instances, the staffing company's temporary healthcare
professionals are considered employees of the staffing company while under
assignment and costs of employment are the responsibility of the staffing
company and are included in the accompanying statements of operations.
Receivables include amounts due from healthcare organizations for services
provided by the staffing company through the placement of healthcare
professionals. These receivables are presented net of an estimated allowance for
uncollectible accounts based on an evaluation of expected collections resulting
from an analysis of current and past due accounts, past collection experience in
relation to amounts billed and other relevant information. Concentration of
credit risk relating to accounts receivable is limited by number, diversity and
geographic dispersion of the healthcare organizations serviced by the staffing
company.
During 1995, NET Healthcare entered into a line of credit with a
shareholder to provide a total of $190,000 to fund the working capital
requirements of NET Healthcare. The line of credit bore interest at the rate of
5% per annum. In March 1996, NET Healthcare entered into an additional line of
credit with a then shareholder of NET Healthcare collateralized by outstanding
accounts receivable. Interest was payable at the rate of 2% per month on average
outstanding balances. In May 1996, the agreement was amended to allow for
additional funding. In May 1997, the agreement was further amended to increase
the interest rate by .5% per month on approximately $600,000 of the balance of
the line of credit. The amended line of credit, effective April 1, 1998,
established a rate of interest of 10% per annum and eliminated restrictive
covenants included in the original agreement. Interest expense related to the
line of credit amounted to $201,950 and $110,016 for the three months ended
March 31, 1998 and 1997, respectively. The aggregate outstanding balance
together with its related accrued interest expense was paid in full subsequent
to the merger of NET Healthcare and the Company.
The goodwill associated with the Company's acquisition of substantially
all of the assets of Travel Nurse is amortized over 21 years.
The former shareholders of NET Healthcare previously elected to have the
company treated as an "S Corporation" under the Internal Revenue Code and,
therefore, net income or loss was attributable directly to the former
shareholders. Accordingly, no pre-merger benefit for the federal or state income
taxes has been reflected in the accompanying financial statements. In addition,
an adjustment has been made to the restated stockholders' equity of the Company
as of December 31, 1998 to eliminate the untaxed effects of including NET
Healthcare's results of operations in the financial statements of the Company.
(e) INVESTMENTS
Fixed maturity securities which the Company has the positive intent and
ability to hold to maturity are classified as "held to maturity" and are
reported at amortized cost. Fixed maturity and equity securities that are bought
and held principally for the purpose of selling them in the near term are
classified as "trading" and are reported at fair value, with unrealized gains
and losses included in income. Fixed maturity and equity securities not
classified as either held to maturity or trading are classified as "available
for sale" and are reported at fair value, with unrealized gains and losses (net
of deferred taxes) charged or credited as a separate component of shareholders'
equity.
9
<PAGE> 115
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment income is recorded as earned on the accrual basis and includes
amortization of premiums and accretion of discounts relating to investments
acquired at other than par value. Realized gains or losses on disposal of
investments are determined on a specific identification basis and are included
in revenues.
The Company does not own any on-balance sheet or off-balance sheet
derivative instruments.
(f) PROPERTY AND EQUIPMENT, NET
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using an accelerated method of depreciation over the
estimated useful lives of the related assets, which range from five to seven
years. Leasehold improvements are carried at cost less accumulated amortization
provided on the straight-line basis over the shorter of the lease term or the
estimated useful lives of the improvements.
(g) PREMIUMS PAYABLE
Premiums which are collected from insureds are reported as assets of the
Company and as corresponding liabilities to the insurance carriers. Premiums
received from insureds but not yet remitted to the carriers are held as invested
cash in a fiduciary capacity.
(h) COMMISSION INCOME
Commission income is recognized when premiums are billed. Any subsequent
commission adjustments, including policy cancellations, are recognized upon
notification from the insurance carrier or broker.
(i) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) EARNINGS PER SHARE
Earnings per common share is based upon the weighted average number of
common shares outstanding during each period. On December 31, 1998 the Company
adopted SFAS No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128 requires
specific computations, presentations and disclosures for earnings per share
(EPS) amounts in order to make EPS amounts more compatible with international
accounting standards. Stock options outstanding at March 31, 1999, 1998 and 1997
of 1,263,000, 616,500 and 250,000, respectively, had no effect on diluted
earnings per share amounts.
In May 1998, the Company consummated a private placement of 7% convertible
subordinated notes due May 12, 2003 in the aggregate principal amount of
$10,580,000. Principal balances outstanding as of March 31, 1999 and December
31, 1998 were $10,535,000 and $10,580,000, respectively. The effect on
10
<PAGE> 116
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
diluted earnings per share amounts is presented in the accompanying consolidated
statements of operations.
(k) RECLASSIFICATIONS
Certain items in the Company's 1998 and 1997 financial statements have
been reclassified to conform them with the presentation of the Company's
financial statements as of and for the three months ended March 31, 1999.
(2) INVESTMENTS
At March 31, 1999 and December 31, 1998, the Company did not hold
fixed-maturity securities which individually exceeded 10% of shareholders'
equity except U.S. government and government agency securities.
Bonds with an amortized cost of $8,224,217 and $8,257,053 were held in a
restricted account for the benefit of the ceding company (AIG) as unauthorized
reinsurance at March 31, 1999 and December 31, 1998, respectively, in accordance
with statutory requirements.
The amortized cost and estimated fair values of the Company's investments
at March 31, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Amount At
Which
Shown
Gross Gross on the
Amortized Unrealized Unrealized Estimated Balance
Cost Gains Losses Fair Value Sheet
----------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
March 31, 1999:
Securities held to maturity:
Fixed maturities:
Obligations of states and political
subdivision .......................... $17,533,907 220,818 (11,655) 17,743,070 17,533,907
Obligations of states and political
subdivisions-restricted .............. 8,224,217 105,683 -- 8,329,900 8,224,217
----------- ------- ------- ---------- ----------
Total fixed maturities ................... $25,758,124 326,501 (11,655) 26,072,970 25,758,124
=========== ======= ======= ========== ==========
December 31, 1998:
Securities held to maturity:
Fixed maturities:
Obligations of states and political
subdivision .......................... $15,454,481 241,667 (4,129) 15,692,019 15,454,481
Obligations of state and political
subdivisions-restricted .............. 8,257,053 130,956 -- 8,388,009 8,257,053
----------- ------- ------- ---------- ----------
Total fixed maturities ................... $23,711,534 372,623 (4,129) 24,080,028 23,711,534
=========== ======= ======= ========== ==========
</TABLE>
11
<PAGE> 117
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(2) INVESTMENTS (CONTINUED)
The amortized cost and fair value of securities at March 31, 1999 and
December 31, 1998, by contractual maturity date, are presented below:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturities held-to-maturity:
Due in one year or less ................... $ -- -- -- --
Due after one year through five years ..... 16,470,840 16,682,520 14,394,846 14,600,179
Due after one year through
five years-restricted ................... 8,224,217 8,329,900 7,197,418 7,296,169
Due after five years through ten years .... -- -- -- --
Due after ten years ....................... 1,063,067 1,060,550 1,059,635 1,091,840
Due after ten years-restricted ............ -- -- 1,059,635 1,091,840
----------- ---------- ---------- ----------
25,758,124 26,072,970 23,711,534 24,080,028
Short-term investments .................... 78,330 78,330 1,515,347 1,515,347
Short-term investments-restricted ......... 5,165,902 5,165,902 5,516,681 5,516,681
----------- ---------- ---------- ----------
Total ..................................... $31,002,356 31,317,202 30,743,562 31,112,056
=========== ========== ========== ==========
</TABLE>
(3) FINANCIAL INSTRUMENTS
The carrying amounts for short-term investments, cash, accounts,
commissions and premiums receivable, accrued investment and interest income,
notes payable, premiums, commissions and other insurance balances payable and
accounts payable and accrued expenses approximate their fair values due to the
short-term nature of these instruments.
Estimated fair values for fixed maturities were provided by outside
consultants using market quotations, prices provided by market makers or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics. The carrying amount for the 7%
convertible subordinated notes at March 31, 1999 and December 31, 1998 were
$10,535,000 and $10,580,000, respectively, and the related estimated fair value
at March 31, 1999 and December 31, 1998 were $10,251,210 and $10,280,955,
respectively, which was determined by management based on available market
information and appropriate valuation methodologies.
12
<PAGE> 118
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(4) ACCOUNTS, COMMISSIONS AND PREMIUMS RECEIVABLE:
Accounts, commissions and premiums receivable consists of the following at
March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Staffing accounts receivable-billed ...................... $ 4,333,576 5,626,113
Staffing accounts receivable-unbilled .................... 1,908,384 1,000,370
----------- ---------
6,241,960 6,626,483
Less allowance for uncollectible accounts ................ (109,603) (96,054)
----------- ---------
Staffing accounts receivable, net ........................ 6,132,357 6,530,429
Premiums receivable ...................................... 4,849,575 3,652,463
Commissions receivable ................................... 1,329,900 1,018,031
----------- ----------
Total .................................................... $12,311,832 11,200,923
=========== ==========
</TABLE>
The allowance for uncollectible accounts as of March 31, 1999 and
December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Beginning balance .......................................... $ 96,054 125,367
Provision for uncollectible accounts ....................... 22,210 96,624
Write-offs ................................................. (8,661) (125,937)
-------- --------
Ending Balance ............................................. $109,603 96,054
======== ========
</TABLE>
(5) STOCKHOLDERS LOAN
In May 1995, the Company entered into a repurchase agreement with
stockholders (the "Agreement") whereby the Company agreed to repurchase from
them an aggregate of 30 shares of common stock (529,412 shares as adjusted to
give effect to the recapitalization of the Company in February 1997 whereby the
Company exchanged 17,647.06 shares of Common Stock for each share of PEGI
Common Stock held by the stockholders of PEGI) (the "Shares") of the Company.
The aggregate purchase price for the Shares was $600,000 (including interest)
to be paid in 24 installments of $25,000. The closing of the Agreement was
subject to the Company's completion of a $600,000 distribution to the
stockholders of the Company, pro rata based on the number of shares of common
stock of the Company outstanding and paid to the stockholders of record on the
Agreement date, without giving effect to the repurchase. The $600,000
distribution was made by the Company on May 26, 1995.
Pursuant to a subsequent agreement made with the stockholders, the
outstanding loan balance at December 31, 1995 was to be repaid in 23 monthly
installments of $25,000 (including interest) commencing in February 1996. The
outstanding balance of the above-referenced stockholder loan was paid in full
during 1997.
13
<PAGE> 119
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(6) INCOME TAXES
U.S. Federal and state income tax expense (benefit) consists of the
following components:
<TABLE>
<CAPTION>
For the Three Months Ended Current Deferred Total
-------------------------- ------- -------- -----
<S> <C> <C> <C>
March 31, 1999 ......................................... $223,405 (81,991) 141,414
March 31, 1998 (restated) .............................. 402,110 (351,771) 50,339
March 31, 1997 (restated) .............................. 129,590 -- 129,590
</TABLE>
Income tax expense for the three months ended March 31, 1999, 1998 and
1997 differed from the amount computed by applying the U.S. Federal income tax
rate of 34% to income before Federal income taxes as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Expected income tax expense ............................ $202,384 189,996 60,132
State income tax, net .................................. 22,099 13,217 7,074
Tax-exempt investment income ........................... (89,375) (65,904) (19,061)
Travel and entertainment expense ....................... 16,938 -- --
"S Corporation" income ................................. -- (66,204) 96,305
Other, net ............................................. (10,632) (20,766) (14,860)
-------- -------- -------
Total income tax expense ............................... $141,414 50,339 129,590
======== ======== =======
</TABLE>
As a result of the business combination of NET Healthcare, an "S
corporation," with the Company, a "C corporation," NET Healthcare's "S
corporation" status ceased to exist. The unaudited pro forma information in the
consolidated statements of operations reflects income tax expense had NET
Healthcare been taxed as a "C corporation," of $208,229 and $13,241 for the
three months ended March 31, 1998 and 1997, respectively.
Deferred income taxes are based upon temporary differences between the
financial statement and tax bases of assets and liabilities. The following
deferred taxes are recorded for March 31, 1999, and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
--------- -------
<S> <C> <C>
Deferred tax assets:
Unearned premiums ................................................ $ 465,023 411,176
Reserve for unpaid losses and loss adjustment expenses ......... 1,130,382 971,252
Other, net ....................................................... 59,105 59,105
---------- ----------
Gross deferred tax assets ...................................... 1,654,510 1,441,533
---------- ----------
Deferred tax liabilities:
Cash to accrual change ........................................... (338,239) (284,575)
Deferred acquisition costs ....................................... (769,382) (680,291)
Other, net ....................................................... (17,020) (28,789)
----------- ----------
Gross deferred tax liabilities ................................. (1,124,641) (993,655)
----------- ----------
Net deferred tax asset ...................................... $ 529,869 447,878
=========== ==========
</TABLE>
14
<PAGE> 120
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(6) INCOME TAXES (CONTINUED)
A valuation allowance has not been established as the Company believes it
is more likely than not that the net deferred tax asset will be realized.
The Company's reinsurance subsidiary is a Bermuda domiciled corporation.
The reinsurance subsidiary is a "controlled foreign corporation" ("CFC") for
United States federal income tax purposes. As a result, the Company includes in
its gross income for United States federal income tax purposes its pro-rata
share of the CFC's "subpart F income" even if such subpart F income is not
distributed. Substantially all of the income of the reinsurance subsidiary's
income is subpart F income.
The Company has elected under section 953(d) of the Internal Revenue Code
to tax its reinsurance subsidiary as a domestic corporation for U.S. income tax
purposes. The Company does not believe this election has a material effect on
its income tax expense.
(7) ANNUAL STATUTORY SOLVENCY REQUIREMENTS
The Bermuda Insurance Act of 1978 and related regulations (the "Act")
requires the Company to meet a minimum solvency margin. Statutory capital and
surplus as of December 31, 1998 was $10,531,208 and the amount required to be
maintained by the Company was $3,163,000. In addition, a minimum liquidity
ratio must be maintained whereby relevant assets, as defined by the Act, must
exceed 75% of relevant liabilities. Once these requirements have been met,
there is no restriction on the retained earnings available for distribution. At
March 31, 1999 and December 31, 1998, the Company was in compliance with this
requirement.
(8) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses
is summarized as follows for the three months ended March 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- -------
<S> <C> <C> <C>
Net unpaid losses and loss adjustment expenses
at beginning of period ........................... $13,878,892 6,107,613 199,390
----------- --------- ---------
Incurred related to:
Current year ..................................... 1,875,387 1,655,969 1,103,317
Prior year ....................................... 182,626 -- --
----------- --------- ---------
Total incurred ................................. 2,058,013 1,655,969 1,103,317
----------- --------- ---------
Paid related to:
Current year ..................................... 51,364 -- 87,235
Prior year ....................................... -- -- --
----------- --------- ---------
Total paid ..................................... 51,364 -- 87,235
----------- --------- ---------
Net unpaid losses and loss adjustment expenses
at end of period ............................... $15,885,541 7,763,582 1,215,472
=========== ========= =========
</TABLE>
15
<PAGE> 121
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(9) UNSECURED REVOLVING LINE OF CREDIT
In May 1998, the Company obtained a $3 million unsecured revolving line of
credit from a bank. The terms of the loan provide for monthly interest payments
at the bank's prime lending rate (currently 7 3/4% per annum). The loan is
renewable on an annual basis. As of March 31, 1999 and December 31, 1998, the
aggregate amount outstanding under the line of credit was $1,150,000 and
$1,850,000, respectively.
(10) SUBORDINATED CONVERTIBLE NOTES
In May 1998, the Company consummated a private placement of $10,580,000 of
7% convertible subordinated notes (the "Notes") due May 2003. The principal
amount of the Notes is convertible at the option of the noteholders into shares
of the Company's common stock at a conversion price of $9.00 per share (the
"Conversion Price") at any time prior to the earlier of the maturity date (May
12, 2003) or 10 business days after receipt of a termination notice. In the
event (i) the closing bid price of the Company's common stock equals or exceeds
$13.50 per share for twenty consecutive trading days during any period
commencing upon satisfaction of one of the conditions contained in clause (ii)
described herein and (ii) either a registration statement covering the shares
of common stock issuable upon conversion of the Notes has been declared
effective by the Securities and Exchange Commission and remains effective or at
least two years has elapsed since the issuance date of the Notes and the shares
of common stock issuable upon conversion of the notes are saleable, without
restriction, under Rule 144(k) promulgated under the Securities Act of 1933, as
amended, then the holders' right to convert the outstanding principal amount of
the Notes shall be terminated by the Company by delivering to the holders a
notice of termination (the "Termination Notice"), in which event (a) the
holders will have the right at any time during 10 business days after receipt
of the Termination Notice, in their sole discretion, to convert the outstanding
principal amount of the Notes into shares of common stock of the Company at the
Conversion Price, and (b) thereafter, the holders' option to convert shall
terminate and the Notes may be prepaid by the Company, at any time prior to the
Maturity Date, in whole or in part for the face amount thereof, together with
all accrued and unpaid interest through the date of prepayment. As of March 31,
1999, the aggregate principal amount of Notes outstanding was $10,535,000.
Notes in an aggregate principal amount of $45,000 were converted into 5,000
shares of common stock of the Company during the first quarter of 1999.
(11) SEGMENT REPORTING
The Company's reportable business segments are strategic business units
that offer distinctive products and services that are marketed through
different channels. They are managed separately because of their unique
marketing and distribution requirements.
There are two reportable segments: insurance and employee staffing. The
insurance segment sells, on behalf of others, business insurance principally to
the franchise industry and provides reinsurance of certain workers'
compensation and employers' liability insurance policies sold by the Company.
The employee staffing segment provides temporary registered nurses and other
professional medical personnel primarily to client, hospitals.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Management evaluates segment
performance based on profit or loss from operations before income taxes not
including non-recurring gains and losses and intersegment transactions. Sales
and services between segments are accounted for as if the sale or services were
provided to third parties, that is at current market prices.
16
<PAGE> 122
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(11) SEGMENT REPORTING (CONTINUED)
Certain information concerning the Company's reporting segments for the
three months ended March 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Employee
1999 Insurance Staffing Totals
---- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues from external customers .................. $ 4,257,500 10,852,976 15,110,476
Intersegment revenue .............................. 9,834 -- 9,834
Interest revenue .................................. 416,190 -- 416,190
Segment profit .................................... 655,453 819,124 1,474,577
Segment assets .................................... 46,376,619 13,048,866 59,425,485
1998
----
Revenues from external customers .................. $ 3,748,644 5,921,412 9,670,056
Interest revenue .................................. 385,985 -- 385,985
Segment profit .................................... 554,636 189,965 744,601
Segment assets .................................... 27,897,131 9,551,508 37,448,639
1997
----
Revenues from external customers .................. $ 2,823,531 2,244,934 5,068,465
Interest revenue .................................. 180,891 -- 180,891
Segment profit .................................... 317,186 (173,384) 143,802
Segment assets .................................... 17,339,623 1,715,534 19,055,157
</TABLE>
17
<PAGE> 123
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(11) SEGMENT REPORTING (CONTINUED)
Information for the Company's reportable segments relates to the
enterprise's consolidated totals as follows:
<TABLE>
<CAPTION>
Revenues: 1999 1998 1997
--------- ----------- ---------- ---------
<S> <C> <C> <C>
Total revenues for reportable segments ........... $15,536,500 10,056,041 5,249,356
Intersegments revenue ............................ (9,834) -- --
Unallocated corporate interest revenue ........... 18,975 -- 33,058
----------- ---------- ---------
Total consolidated revenues ...................... $15,545,641 10,056,041 5,282,414
=========== ========== =========
Profit or Loss:
---------------
Total profit or loss for reportable segments ...... $ 1,474,577 744,601 143,802
Unallocated amounts:
General corporate expenses ...................... (898,304) (185,788) --
Corporate interest revenue ...................... 18,975 -- 33,058
----------- -------- ---------
Income before income taxes .................... $ 595,248 558,813 176,860
=========== ======== =========
Assets:
-------
Total assets for reportable segments .............. $59,425,485 37,448,639 19,055,157
Elimination of intersegment receivables ........... (496,699) (889,341) --
Unallocated general corporate assets .............. 3,522,627 667,824 6,842,494
Elimination of receivable from corporate .......... (1,072,776) (201,641) (96,836)
----------- ---------- ----------
Total consolidated assets ..................... $61,378,637 37,025,481 25,800,815
=========== ========== ==========
</TABLE>
Other items:
<TABLE>
<CAPTION>
Reportable Unallocated
Segment Corporate Consolidated
1999 Total Total Total
---- ---------- ----------- -------------
<S> <C> <C> <C>
Depreciation and amortization ....................... $ 129,206 4,275 133,481
Amortization of deferred acquisition costs .......... 1,238,043 -- 1,238,043
1998
----
Depreciation and amortization ....................... $ 150,764 -- 150,764
Amortization of deferred acquisition costs .......... 981,315 -- 981,315
1997
----
Depreciation and amortization ....................... $ 38,663 -- 38,663
Amortization of deferred acquisition costs .......... 737,309 -- 737,309
</TABLE>
The Company does not attribute revenues or long-lived assets by geographic
areas. The Company does not have any single customer that can be identified as
material when considering the Company's consolidated revenues.
18
<PAGE> 124
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
(12) LITIGATION
The Company is a defendant in various litigation matters considered to be
in the normal course of business. While the outcome of these matters cannot be
estimated with certainty, it is the opinion of management (after consultation
with legal counsel) that the resolution of such litigation will not have a
material adverse effect on the Company's financial statements.
(13) UNAUDITED PRO FORMA INFORMATION
Pro forma adjustments for income taxes represent the difference between
historical income taxes and income taxes that would have been reported had NET
Healthcare filed income tax returns as a taxable "C corporation" for 1998 and
1997.
(14) YEAR 2000
Year 2000 issues are the result of computer programs being written using
two digits rather than four to define the applicable year. The Company has
developed a plan to address Year 2000 issues. The plan is based on the
Company's primary software vendors having advised the Company that the
necessary programming changes related to Year 2000 issues have been made and
tested and that the software used by the Company can be upgraded to be Year
2000 compliant. During the first quarter of 1999 the Company completed the
implementation of this upgrade. The additional costs associated with the
implementation of the above project were not material.
It is management's belief that for any suppliers who may not be Year 2000
compliant, such non-compliance will not have a material adverse effect on the
Company's business. However, each major supplier's compliance will be assessed
in light of their response.
19
<PAGE> 125
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes related thereto
contained elsewhere in this Quarterly Report on Form 10-Q. In August 1998, the
Company consummated the merger of NET Healthcare with and into one of the
Company's wholly-owned subsidiaries, and in connection therewith issued 517,085
shares of common stock in exchange for all the outstanding common stock of NET
Healthcare. The business combination was accounted for as a
"pooling-of-interests" and, accordingly, our consolidated financial statements
for applicable periods prior to the combination have been restated to include
the accounts and results of operations of NET Healthcare.
GENERAL
The Company engages in the following activities:
o it provides temporary registered nurses and other professional
medical personnel primarily to client hospitals;
o it sells, on behalf of others, business insurance, including
workers' compensation, property, liability, casualty, and other
types of coverage, and provides risks 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
o it provides reinsurance for certain workers' compensation and
employers' liability insurance policies it sells.
EMPLOYEE STAFFING. In March and August of 1998, the Company acquired
businesses providing temporary registered nurses and other professional medical
personnel (often referred to as "Travelers") mainly to client 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. The Company believes that the ability of Travelers to function as
permanent staff improves the continuity and consistency of patient care and
reduces its clients' overall administration, orientation and supervisory
requirements relating to permanent staff, as well as reducing turnover of their
temporary staff.
Staffing income is recognized at the time the staffing services are
provided. In most instances, the staffing company's temporary healthcare
professionals are considered employees of the staffing company while under
assignment and costs of employment are the responsibility of the staffing
company and are included in the accompanying statements of operations.
INSURANCE. The Company is engaged in the property and casualty insurance
business and has conducted business as a general agent on behalf of 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 our
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 receives, as compensation pursuant to the terms of these
general agency agreements, gross commissions on its business at rates which
range from approximately 5% to 20%. 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
20
<PAGE> 126
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.
REINSURANCE. In December 1996, the Company formed a Bermuda subsidiary
("Preferred Reinsurance") and entered into a reinsurance agreement with
affiliates of AIG pursuant to which Preferred Reinsurance 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.
Preferred Reinsurance is required to provide affiliates of AIG, as security for
the payment of losses, a combination of cash, United States government
securities and/or an irrevocable letter of credit in an aggregate amount equal
to 51.5% of the net written premiums ceded to Preferred Reinsurance pursuant to
the insurance agreement less the amount of losses paid. Preferred Reinsurance
receives, as compensation pursuant to the terms of the reinsurance agreement,
the related net written premiums less certain program expenses and commissions
and the losses paid associated with the business. Although Preferred Reinsurance
assumes the risks associated with being a reinsurer, the reinsurance agreement
limits the liability of Preferred Reinsurance for losses and certain defined
expenses to the first $300,000 per occurrence. In addition, the reinsurance
agreement limits the aggregate liability of Preferred Reinsurance for all
coverage to an amount not to exceed 70% of the gross written premiums for each
individual underwriting year. Because the reinsurance agreement is effective for
all business written on or after January 1, 1996, the policies written prior to
the execution of the contract and formation of Preferred Reinsurance were
accounted for as retroactive reinsurance. The reinsurance agreement with
Preferred Reinsurance is terminable by either party upon the occurrence of
certain events. In the event the Company's reinsurance agreement is terminated,
the Company, in all likelihood, would be materially and adversely affected.
The Company collects workers' compensation premiums from the insureds and
remits the ceding commission (net of its commission) and reinsurance charge to
affiliates of AIG and remits the net premium to Preferred Reinsurance.
Commission income on workers' compensation business is recognized as income when
premiums are billed. Package insurance premiums are principally collected by the
insurance carrier. The package insurance carrier remits commissions to us
monthly on package premiums it collects. Commission income on package business
is recognized as income when premiums are due. Reinsurance premiums received are
earned on a pro-rata basis over the term of the related coverage.
For the three months ended March 31, 1999 the Company's total revenues
were $15,546,000 as compared to $10,056,000 for the 1998 comparable period
representing a net increase of $5,490,000. For the three months ended March 31,
1998, the Company's total revenues were $10,056,000 as compared to total
revenues of $5,282,000 for the 1997 comparable period, representing a net
increase of $4,774,000. For the three months ended March 31, 1999,
approximately, 70%, 28% and 2% of the Company's total revenues were derived from
its staffing, reinsurance captive and general agency businesses, respectively.
For the three months ended March 31, 1998, approximately 59%, 36%, and 5% of the
Company's total revenues were derived from its staffing, reinsurance captive and
general agency businesses, respectively. For the three months ended March 31,
1997, approximately 42%, 46% and 12% of the Company's total revenues were
derived from its staffing, reinsurance captive and general agency businesses,
respectively.
Historically, our employee staffing business has been seasonal with the
demand for Travelers being the highest in first and fourth quarters of the
calendar year (September through March), due largely to increased demand
particularly during the peak tourist and winter home period in Florida.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
TOTAL REVENUES. Total revenues for the three months ended March 31, 1999
were $15,546,000 compared to $10,056,000 for the 1998 comparable period,
representing a net increase of $5,490,000 or 54.6%.
21
<PAGE> 127
Total revenues for the three months ended March 31, 1998 were $10,056,000
compared to $5,282,000 for the 1997 comparable period, representing a net
increase of $4,774,000 or 90.4%.
The following tables provide a comparison of revenues for the three months
ended March 31, 1999, 1998 and 1997 by category:
<TABLE>
<CAPTION>
NET PERCENTAGE
1999 1998 CHANGE CHANGE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Staffing Income ....................................... $10,853,000 5,921,000 4,932,000 83.3%
Premiums earned ....................................... 3,742,000 3,067,000 675,000 22.0%
Net commission income:
Workers' compensation ............................... 286,000 416,000 (130,000) (31.3)%
Package ............................................. 54,000 89,000 (35,000) (39.3)%
Other, net .......................................... 41,000 38,000 3,000 7.9 %
----------- ----------- ----------- -----
Total net commission income ....................... 381,000 543,000 (162,000) (29.8)%
Net investment income ............................. 435,000 386,000 49,000 12.7%
Other income ...................................... 135,000 139,000 (4,000) (2.9)%
----------- ----------- ----------- -----
Total revenues .................................... $15,546,000 10,056,000 5,490,000 54.6%
=========== =========== =========== =====
Workers' compensation:
Premiums collected .................................. $ 2,929,000 4,732,000
Ratio of net commission income/premiums collected ... 9.8% 8.8%
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
NET PERCENTAGE
1998 1997 CHANGE CHANGE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Staffing Income ....................................... $ 5,921,000 2,245,000 3,676,000 163.7%
Premiums earned ....................................... 3,067,000 2,044,000 1,023,000 50.0 %
Net commission income:
Workers' compensation ............................... 416,000 432,000 (16,000) (3.7)%
Package ............................................. 89,000 102,000 (13,000) (12.7)%
Other, net .......................................... 38,000 100,000 (62,000) (62.0)%
----------- ----------- ----------- -----
Total net commission income ....................... 543,000 634,000 (91,000) (14.4)%
Net investment income ............................. 386,000 214,000 172,000 80.4 %
Other income ...................................... 139,000 145,000 (6,000) (4.1)%
----------- ----------- ----------- -----
Total revenues .................................... $10,056,000 5,282,000 4,744,000 90.4%
=========== =========== =========== =====
Workers' compensation:
Premiums collected .................................. $ 4,732,000 4,219,000
Ratio of net commission income/premiums collected ... 8.8% 10.2%
=========== ===========
</TABLE>
1999 COMPARED TO 1998
Staffing income increased $4,932,000 as a result of the acquisition of
certain of the assets of Travel Nurse (acquired in March 1998) and the increase
in business related to the acquisition of NET Healthcare. Premiums earned
increased $675,000 or 22.0% for the three months ended March 31, 1999 as
compared to the prior year as a result of new business and renewals of the prior
year business and increased retention. Workers' compensation commission income
decreased $130,000 or 31.3% for the three months ended March 31, 1999 as
compared to the prior year as a result of the decrease in premiums collected of
$1,803,000, which is attributable to the decrease in the workers' compensation
book of business. Package commission income decreased $35,000 of 39.3% for the
three months ended March 31, 1999 as compared to the prior year as a result of a
reduction in the business written for fast food restaurants. Other net
22
<PAGE> 128
commission income increased $3,000 or 7.9% for the three months ended March 31,
1999 as compared to the prior year as a result of the increase in volume of
small business plan premiums collected. Net investment income increased $49,000
or 12.7% for the three months ended March 31, 1999 as compared to the prior year
as a result of premiums received and invested by Preferred Reinsurance and the
income earned on the net proceeds received from the sale of the Company's 7%
convertible subordinated notes in May 1998. Other income decreased $4,000 or
2.9% as a result of the effects of the retroactive insurance accounting
treatment of Preferred Reinsurance as discussed more fully in Note 1(c) to the
Company's consolidated financial statements.
TOTAL OPERATING EXPENSES. Total operating expenses for the three months
ended March 31, 1999 were $14,611,000 compared to $9,195,000 for the 1998
comparable period, representing an increase of $5,416,000 or 58.9%. Total
operating expenses for the three months ended March 31, 1998 were $9,195,000
compared to $4,989,000 for the 1997 comparable period, representing an increase
of $4,206,000 or 84.3%.
The following tables provide a comparison of total expenses for the three
months ended March 31, 1999, 1998 and 1997 by category:
<TABLE>
<CAPTION>
NET PERCENTAGE
1999 1998 CHANGE CHANGE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Staffing costs ................................... $ 8,328,000 4,777,000 3,551,000 74.3%
Losses and loss adjustment expenses incurred ..... 2,058,000 1,656,000 402,000 24.3%
Amortization of deferred acquisition costs ....... 1,238,000 981,000 257,000 26.2%
Other operating expenses ......................... 2,987,000 1,781,000 1,206,000 67.7%
----------- ----------- ----------- ----
Total operating expenses .................... $14,611,000 9,195,000 5,416,000 58.9%
=========== =========== =========== ====
</TABLE>
<TABLE>
<CAPTION>
NET PERCENTAGE
1998 1997 CHANGE CHANGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Staffing costs ................................... $4,777,000 1,864,000 2,913,000 156.3%
Losses and loss adjustment expenses incurred ..... 1,656,000 1,103,000 553,000 50.1%
Amortization of deferred acquisition costs ....... 981,000 737,000 244,000 33.1%
Other operating expenses ......................... 1,781,000 1,285,000 496,000 38.6%
---------- ---------- ---------- -----
Total operating expenses .................... $9,195,000 4,989,000 4,206,000 84.3%
========== ========== ========== =====
</TABLE>
Staffing costs increased $3,551,000 consistent with the increase in
staffing revenues for the three months ended March 31, 1999 as discussed above.
Losses and loss adjustment expenses increased $402,000 or 24.3% which is
consistent with the increase in premiums earned for the three months ended March
31, 1999 as discussed above. For the quarter ended March 31, 1999, the Company's
ratio of losses incurred to premiums earned was approximately 55%. Amortization
of deferred acquisition costs increased $257,000 or 26.2% which is also
consistent with the increase in premiums earned for the first quarter as
discussed above. Other operating expenses increased $1,206,000 or 67.7%. The
following table provides a comparison of other operating expenses for the three
months ended March 31, 1999 and 1998 by category:
<TABLE>
<CAPTION>
NET PERCENTAGE
1999 1998 CHANGE CHANGE
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Personnel costs .................................. $1,757,000 1,081,000 676,000 62.5%
Occupancy costs .................................. 218,000 121,000 97,000 80.2%
Professional fees ................................ 275,000 143,000 132,000 92.3%
Other operating expenses ......................... 737,000 436,000 301,000 69.0%
---------- ---------- ---------- ----
Total other operating expenses .............. $2,987,000 1,781,000 1,206,000 67.7%
========== ========== ========== ====
</TABLE>
23
<PAGE> 129
Personnel expenses increased $676,000 or 62.5% as a result of salary
increases together with the increased staff related to the acquisition of the
assets of Travel Nurse and the growth in the business of NET Healthcare.
Occupancy expenses increased $97,000 or 80.2% principally as a result of the
lease of additional office space and relocation of our subsidiary Preferred
Healthcare Staffing, Inc. Professional fees increased $132,000 or 92.3%
principally as a result of increased legal and accounting fees associated with
various corporate and acquisition matters. Other operating expenses increased
$301,000 or 69.0% primarily related to the following: (i) increased insurance
expense of $28,000, (ii) increased corporate fees and services of $29,000, (iii)
increased investment and service fees of $38,000, and (iv) increased advertising
and promotion expenses of $101,000. Insurance expense increased as a result of
the purchase of additional coverages (i.e., directors and officers liability
insurance) and increased premiums due to increased limits. Corporate fees and
services, advertising and promotion, and investment and service fees increased
as a result of the expansion of the business of NET Healthcare and the
acquisition of the assets of Travel Nurse.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the three
months ended March 31, 1999 were $340,000 compared to $303,000 for the 1998
comparable period. Interest expense increased $79,000 as a result of the
Company's private placement in May 1998 of 7% convertible subordinated notes in
the aggregate principal amount of $10,580,000 and borrowings under a revolving
line of credit. Amortization of intangible assets and other non-operating
expenses decreased $42,000, primarily related to the acquisition of NET
Healthcare.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Our principal source of cash is the collection of staffing
revenues from client hospitals and workers' compensation insurance premiums from
our insureds. In February 1997, we consummated an initial public offering of
1,725,000 shares of Common Stock (including the underwriters' over-allotment
option) and received gross cash proceeds of approximately $12,506,000. In May
1998, we consummated a $10,580,000 private placement of 7% convertible
subordinated notes due May 2003.
At March 31, 1999, net cash and investments were $34,791,000 (net of
premiums payable of $3,016,000). Net cash provided by operating activities
increased to $4,715,000 in 1999 from $1,515,000 in the first quarter of 1998, an
increase of $3,200,000. This increase resulted primarily from a decrease in
accounts receivable of $1,744,000 and increases in unpaid losses and loss
adjustment expenses, premiums, commissions and other insurance balances and
unearned premiums of $351,000, $554,000 and $143,000, respectively. The decrease
in accounts receivable is primarily associated with increased collection efforts
of the staffing company during the first quarter of 1999. The increases in
unpaid losses and loss adjustment expenses and premiums, commissions and other
insurance balances are consistent with the increase in premiums earned during
the first quarter of 1999. The increase in unearned premiums is consistent with
an increase in reinsurance premiums receivable during the first quarter of 1999.
Cash flows used in investing activities decreased to $407,000 for the three
months ended March 31, 1999 from $2,571,000 for the three months ended March 31,
1998, a decrease of $2,164,000. This decrease resulted primarily from the
increase of net security purchases of $2,710,000 and the acquisition of certain
of the assets of Travel Nurse for $5,000,000 in cash during the first quarter of
1998 as discussed in the Note 1(b) to our consolidated financial statements
included herein.
A decrease in cash flows from financing activities for the three months
ended March 31, 1999 reflects the repayment of a portion of the revolving line
of credit of $700,000 and payment of bank overdraft of $518,000, compared to the
repayment of bank overdraft of $38,000 for the comparable period in 1997.
FINANCINGS. In May 1998, Preferred Staffing entered into a $3,000,000
unsecured revolving line of credit with a bank (the "Credit Facility").
Outstanding borrowings under the Credit Facility bear interest at the bank's
base rate of interest. Interest under the Credit Facility is due and payable
monthly and all unpaid principal and interest is due on May 2, 2000. The Company
has renewed the Credit Facility for an
24
<PAGE> 130
additional one year term. Outstanding borrowings under the Credit Facility are
secured by our guarantee. As of March 31, 1999, outstanding borrowings under the
Credit Facility were approximately $1,150,000 and bore interest at the rate of
7 3/4% per annum.
In May 1998, we also consummated a $10,580,000 private placement of 7%
convertible subordinated notes due May 2003. The principal amount of the notes
is convertible at the option of the holder into shares of our common stock, at a
conversion price of $9.00 per share, at any time prior to the earlier of May 12,
2003 or ten business days after the receipt of a termination notice (as defined
in the notes). The notes generally prohibit or restrict, among other things, our
ability to incur liens and indebtedness, make certain fundamental corporate
changes and specified investments and conduct certain transactions with
affiliates. At March 31, 1999, the principal amount outstanding under the 7%
convertible subordinated notes was $10,535,000.
We believe that our existing cash balances and cash flows from activities
will be adequate to meet our current operations, including expected capital
expenditures, for at least the next twelve months. In connection with our
current business strategy of making strategic acquisitions, we may seek
additional funds through equity and/or debt financings. There can be no
assurance that any such additional debt or equity financings will be available
to us, or if available, will be on favorable terms to us.
YEAR 2000
The Year 2000 presents potential concerns for businesses. The consequences
of this issue may include system failures and business process interruption. In
addition to the well-known calculation problems with the use of 2-digit date
formats as the year changes from 1999 to 2000, the Year 2000 is a special case
leap year which may cause similar problems in many systems unless remediated.
We have developed a plan with respect to evaluating and upgrading our core
information technology systems so that they are Year 2000 compliant. Two vendors
primarily supply software to us for use in our operations. One vendor supplies
the software used by our insurance operations and another vendor supplies the
software used by our staffing operations. The vendors have each advised us that
the latest upgrades of the software used in our operations are Year 2000
compliant. We implemented these software upgrades, and we are currently testing
the upgraded software for Year 2000 compliancy. We intend to finish the testing
step during the first half of 1999. The historical and currently projected costs
relating to these upgrades and Year 2000 compliance are not material.
We are in the process of developing a plan with respect to evaluating and
upgrading our non-core information technology systems and other systems using
embedded technology so that they will be Year 2000 compliant. We
expect to complete and implement that plan during the second quarter of 1999.
We also intend to make inquiries of other third parties supplying us with
products and services to receive assurances that they are Year 2000 compliant.
We believe that we will complete that review by the end of the second quarter of
1999.
We have not developed a "worst case" scenario with respect to Year 2000
issues. Although we have not done a cost analysis, we believe that no material
adverse effect on our business will occur if our non-core technology systems are
not Year 2000 compliant. We anticipate that the costs related to such
non-compliance, if any, will not be material.
Although we do not have a Year 2000 contingency plan, we are developing
such a plan, which we expect to complete by the end of the second quarter of
1999.
If we or third parties with which we have relationships were to cease or
not successfully complete Year 2000 remediation efforts, we could encounter
disruptions to our business. In addition, we could be materially and adversely
impacted by widespread economic or financial market disruption, or by Year 2000
computer system failures of third parties, that may generally occur as a result
of the Year issues.
25
<PAGE> 131
Certain statements relating to the Year 2000 issues are forward-looking
statements and have been made pursuant to the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve known and unknown risks and uncertainties which may cause the actual
results in future periods or plans for future periods to differ materially from
those described herein as anticipated, believed or estimated.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK.
Not Applicable.
26
<PAGE> 132
Part II: Other Information
Item 1. Legal Proceedings.
Not Applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included in this Quarterly Report on
Form 10-Q:
Exhibit Description of Document
27.1 Financial Data Schedule
27
<PAGE> 133
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREFERRED EMPLOYERS HOLDINGS, INC.
By: /s/ William R. Dresback
---------------------------------------------
William R. Dresback
Senior Vice President and Chief Financial
Officer (principal and chief accounting
officer and duly authorized to sign on behalf
of the Registrant)
Date: May 14, 1999
28
<PAGE> 134
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 1-12677
------------------
PREFERRED EMPLOYERS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0698779
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or
organization)
10800 BISCAYNE BOULEVARD, MIAMI, FLORIDA 33161
(Address of principal executive offices)
(305) 893-4040
(Registrant's telephone number, including area code)
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of common
stock, as of August 12, 1999 was 5,247,085 shares of Common Stock.
===============================================================================
<PAGE> 135
PREFERRED EMPLOYERS HOLDINGS, INC.
FORM 10-Q -- FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
Page
----
PART I -- FINANCIAL INFORMATION
Item - 1 -- Quarterly Financial Statements
Consolidated Balance Sheets ................................. 3
Consolidated Statements of Operations ....................... 4
Consolidated Statements of Cash Flows ....................... 6
Notes to Consolidated Financial Statements .................. 8
Item - 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 23
Item - 3 -- Quantitative and Qualitative Discussions About Market Risk .. 30
PART II -- OTHER INFORMATION
Item - 1 -- Legal Proceedings ........................................... 31
Item - 2 -- Changes in Securities and Use of Proceeds ................... 31
Item - 3 -- Defaults Upon Senior Securities ............................. 31
Item - 4 -- Submission of Matters to a Vote of Security Holders ......... 31
Item - 5 -- Other Information ........................................... 31
Item - 6 -- Exhibits and Reports on Form 8-K ............................ 31
SIGNATURE ................................................................ 32
2
<PAGE> 136
PART 1: FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Investments:
Held-to-maturity securities, at amortized cost (fair value of
$19,438,700 in 1999 and $15,692,019 in 1998) .................................. $19,610,103 15,454,481
Held-to-maturity securities, at amortized cost-restricted (fair value of
$9,191,460 in 1999 and $8,388,009 in 1998) .................................... 9,265,583 8,257,053
Short-term investments .......................................................... 3,852,725 7,032,027
----------- ----------
Total investments ............................................................... 32,728,411 30,743,561
Cash .............................................................................. 6,785,535 3,714,883
Accrued investment and interest income ............................................ 471,100 408,538
Accounts, commissions and premiums receivables, net ............................... 11,899,245 11,200,923
Deferred acquisition costs ........................................................ 2,083,056 1,807,841
Property and equipment, net ....................................................... 939,341 897,625
Deferred tax assets ............................................................... 827,594 447,878
Deposits .......................................................................... 436,719 344,165
Goodwill and other intangible assets, net ......................................... 4,688,896 4,805,560
Prepaid expenses .................................................................. 777,414 427,502
Deferred convertible note issue costs ............................................. 863,507 979,137
Other assets ...................................................................... 490,269 629,814
----------- ----------
Total assets .................................................................... $62,991,087 56,407,427
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable ................................................................... $11,021,417 12,430,000
Unpaid losses and loss adjustment expenses ...................................... 18,113,136 13,878,892
Premiums, commissions and other insurance balances payable ...................... 7,243,435 7,175,659
Unearned premiums ............................................................... 6,295,120 5,463,405
Accounts payable and accrued expenses ........................................... 2,124,095 1,588,326
Escrow and trust funds .......................................................... 3,666,111 1,891,966
Other liabilities ............................................................... 784,183 1,002,317
----------- ----------
Total liabilities ............................................................ 49,247,497 43,430,565
----------- ----------
Shareholders' equity:
Common stock, $0.01 par value; authorized 20,000,000 shares; issued
5,776,497 shares in 1999 and 5,771,497 shares in 1998 .......................... 57,765 57,715
Additional paid-in capital ...................................................... 9,936,512 9,891,562
Retained earnings ............................................................... 4,254,870 3,533,142
----------- ----------
Total shareholders' equity .................................................... 14,249,147 13,482,419
Treasury stock, at cost, 529,412 shares .......................................... (505,557) (505,557)
----------- ----------
Net shareholders' equity ......................................................... 13,743,590 12,976,862
----------- ----------
Total liabilities and shareholders' equity .................................... $62,991,087 56,407,427
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 137
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 1999, 1998 (RESTATED) AND 1997 (RESTATED)
<TABLE>
<CAPTION>
(RESTATED) (RESTATED)
1999 1998 1997
----------- --------- ----------
<S> <C> <C> <C>
REVENUES:
Staffing income ........................................................... $11,318,878 8,941,998 2,419,269
Premiums earned ........................................................... 4,141,662 4,349,917 2,625,364
Net commission income ..................................................... 341,086 526,585 497,072
Net investment income ..................................................... 456,760 505,561 505,994
Other income .............................................................. 75,790 125,426 142,977
---------- ---------- ---------
Total revenues ............................................................ 16,334,176 14,449,487 6,190,676
---------- ---------- ---------
Expenses:
Staffing costs ............................................................ 8,732,954 6,820,469 2,150,538
Losses and loss adjustment expenses incurred .............................. 2,277,914 2,348,955 1,422,830
Amortization of deferred acquisition costs ................................ 1,371,322 1,464,038 952,255
Other operating expenses .................................................. 3,339,802 2,738,872 1,382,855
---------- ---------- ---------
Total expenses ......................................................... 15,721,992 13,372,334 5,908,478
---------- ---------- ---------
Operating income before income taxes ....................................... 612,184 1,077,153 282,198
---------- ---------- ---------
Interest expense ........................................................... 255,513 256,635 162,997
Amortization of intangible assets and other non-operating expenses ......... 81,131 138,060 --
---------- ---------- ---------
Total non-operating expenses ........................................... 336,644 394,695 162,997
---------- ---------- ---------
Income before income taxes ................................................. 275,540 682,458 119,201
Income taxes ............................................................... 7,646 91,629 41,233
---------- ---------- ---------
Net income ............................................................... $ 267,894 590,829 77,968
========== ========== =========
Net income -- basic ........................................................ $ 267,894 590,829 77,968
Impact of potential common shares -- convertible notes ..................... 152,536 79,287 --
---------- ---------- ---------
Net income -- diluted ...................................................... $ 420,430 670,116 77,968
========== ========== =========
Weighted average outstanding shares -- basic ............................... 5,247,085 5,242,085 5,242,085
Impact of potential common shares -- convertible notes ..................... 1,170,000 581,044 --
---------- ---------- ---------
Common shares and common shares equivalents used in computing net
earnings per shares -- diluted ............................................ 6,417,085 5,823,129 5,242,085
========== ========== =========
Net basic earnings per share ............................................... $ 0.05 0.11 0.01
========== ========== =========
Net diluted earnings per share ............................................. $ 0.05 0.11 0.01
========== ========== =========
PRO FORMA INFORMATION (NOTES 6 AND 13):
Historical income before income taxes ...................................... $ 275,540 682,458 119,201
Pro forma income tax provision ............................................. 7,646 256,350 5,229
---------- ---------- ---------
Pro forma net income ....................................................... $ 267,894 426,108 113,972
========== ========== =========
Pro forma net income -- basic .............................................. $ 267,894 426,108 113,972
Impact of potential common shares -- convertible notes ..................... 152,536 79,287 --
---------- ---------- ---------
Pro forma net income -- diluted ............................................ $ 420,430 505,395 113,972
========== ========== =========
Weighted average outstanding shares -- basic ............................... 5,247,085 5,242,085 5,242,085
Impact of potential common shares -- convertible notes ..................... 1,170,000 581,044 --
---------- ---------- ---------
Weighted average outstanding shares -- diluted ............................. 6,417,085 5,823,129 5,242,085
========== ========== =========
Pro forma net basic earnings per share ..................................... $ 0.05 0.08 0.02
========== ========== =========
Pro forma net diluted earnings per share ................................... $ 0.05 0.08 0.02
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 138
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999, 1998
(RESTATED) AND 1997 (RESTATED)
<TABLE>
<CAPTION>
(RESTATED) (RESTATED)
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Staffing income ........................................................... $22,171,854 14,863,410 4,664,203
Premiums earned ........................................................... 7,883,505 7,416,526 4,669,794
Net commission income ..................................................... 721,824 1,069,715 1,131,386
Net investment income ..................................................... 891,924 891,546 719,646
Other income .............................................................. 210,709 264,331 288,061
----------- ---------- ----------
Total revenues ........................................................ 31,879,816 24,505,528 11,473,090
----------- ---------- ----------
Expenses:
Staffing costs ............................................................ 17,060,963 11,596,918 4,014,249
Losses and loss adjustment expenses incurred .............................. 4,335,927 4,004,924 2,526,147
Amortization of deferred acquisition costs ................................ 2,609,364 2,445,353 1,689,564
Other operating expenses .................................................. 6,326,620 4,519,855 2,667,109
----------- ---------- ----------
Total expenses ........................................................ 30,332,874 22,567,050 10,897,069
----------- ---------- ----------
Operating income before income taxes ...................................... 1,546,942 1,938,478 576,021
----------- ---------- ----------
Interest expense .......................................................... 536,691 458,585 279,960
Amortization of intangible assets and other non-operating expenses ........ 139,463 238,621 --
----------- ---------- ----------
Total non-operating expenses .......................................... 676,154 697,206 279,960
----------- ---------- ----------
Income before income taxes ................................................ 870,788 1,241,272 296,061
Income taxes .............................................................. 149,060 141,968 170,823
----------- ---------- ----------
Net income ............................................................ $ 721,728 1,099,304 125,238
=========== ========== ==========
Net income -- basic ....................................................... $ 721,728 1,099,304 125,238
Impact of potential common shares -- convertible notes .................... 306,633 79,287 --
----------- ---------- ----------
Net income -- diluted ..................................................... $ 1,028,361 1,178,591 125,238
=========== ========== ==========
Weighted average outstanding shares -- basic .............................. 5,247,085 5,242,085 4,815,704
Impact of potential common shares -- convertible notes .................... 1,170,000 292,127 --
----------- ---------- ----------
Common shares and common shares equivalents used in computing net
earnings per shares -- diluted ........................................... 6,417,085 5,534,212 4,815,704
=========== ========== ==========
Net basic earnings per share .............................................. $ 0.14 0.21 0.03
=========== ========== ==========
Net diluted earnings per share ............................................ $ 0.14 0.21 0.03
=========== ========== ==========
PRO FORMA INFORMATION (NOTES 6 AND 13):
Historical income before income taxes ..................................... $ 870,787 1,241,272 296,061
Pro forma income tax provision ............................................ 149,060 464,578 102,122
=========== ========== ==========
Pro forma net income ...................................................... $ 721,728 776,694 193,939
=========== ========== ==========
Pro forma net income -- basic ............................................. $ 721,728 776,694 193,939
Impact of potential common shares -- convertible notes .................... 306,633 79,287 --
----------- ---------- ----------
Pro forma net income -- diluted ........................................... $ 1,028,361 855,981 193,939
=========== ========== ==========
Weighted average outstanding shares -- basic .............................. 5,247,085 5,242,085 4,815,704
Impact of potential common shares -- convertible notes .................... 1,170,000 292,127 --
----------- ---------- ----------
Weighted average outstanding shares -- diluted ............................ 6,417,085 5,534,212 4,815,704
=========== ========== ==========
Pro forma net basic earnings per share .................................... $ 0.14 0.15 0.04
=========== ========== ==========
Pro forma net diluted earnings per share .................................. $ 0.14 0.15 0.04
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 139
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 1999, 1998
(RESTATED) AND 1997 (RESTATED)
<TABLE>
<CAPTION>
(RESTATED) (RESTATED)
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net Income .......................................................... $ 267,894 590,829 77,968
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ...................................... 185,542 219,880 60,430
Loss on sale of property and equipment ............................. 22,799 -- --
Amortization of deferred acquisition costs ......................... 1,371,321 1,464,038 952,255
Deferred income taxes .............................................. (297,725) (477,630) --
Provision for uncollectible accounts ............................... (7,275) (38,969) 18,107
Change in:
Accrued investment and interest income .............................. (148,625) (13,453) (173,941)
Accounts, commissions and premiums receivable ....................... 419,862 (4,380,750) 395,959
Deferred acquisition costs .......................................... (1,409,782) (3,288,725) (1,689,564)
Unpaid losses and loss adjustment expenses .......................... 2,227,595 2,155,636 1,335,597
Unearned premiums ................................................... 116,228 3,846,284 (348,461)
Premiums, commissions and other insurance balances................... (1,147,581) (718,749) (931,135)
Accounts payable and accrued expenses ............................... (64,090) 725,115 464,494
Other, net .......................................................... 883,949 (75,013) 404,287
----------- ----------- ----------
Net cash provided by operating activities ........................ 2,420,112 8,493 565,996
----------- ----------- ----------
Cash flow from investing activities:
Purchases of short-term investments, net ............................ (1,726,055) (10,922,753) (2,329,458)
Proceeds from disposal of property and equipment .................... 6,000 -- --
Purchases of property and equipment ................................. (55,368) (32,529) (111,450)
----------- ----------- ----------
Net cash used in investing activities ............................ (1,775,423) (10,955,282) (2,440,908)
----------- ----------- ----------
Cash flow from financing activities:
Proceeds from subordinated convertible notes payable ................ -- 9,621,914 --
Repayment of shareholder loan ....................................... -- -- (75,000)
Borrowings from revolving line of credit, net ....................... -- 2,000,000 699,195
Repayment of line of credit ......................................... (663,583) -- (289,271)
Other, net .......................................................... -- (2,830) (20,635)
----------- ----------- ----------
Net cash (used in) provided by financing activities............... (663,583) 11,619,084 314,289
----------- ----------- ----------
Net increase (decrease) in cash ...................................... (18,894) 672,295 (1,560,623)
Cash at beginning of period .......................................... 6,804,429 3,028,300 5,576,023
----------- ----------- ----------
Cash at end of period ................................................ $ 6,785,535 3,700,595 4,015,400
=========== =========== ==========
Supplemental disclosure of cash flow information:
Income taxes paid ................................................... $ 343,000 950,000 --
=========== =========== ==========
Interest paid ....................................................... $ 195,750 135,010 180,134
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 140
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999, 1998
(RESTATED) AND 1997 (RESTATED)
<TABLE>
<CAPTION>
(RESTATED) (RESTATED)
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net Income ........................................................... $ 721,728 1,099,304 125,238
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ....................................... 372,432 370,644 104,972
Loss on sale of property and equipment .............................. 22,799 -- --
Amortization of deferred acquisition costs .......................... 2,609,364 2,445,353 1,689,564
Deferred income taxes ............................................... (379,716) (829,401) --
Provision for uncollectible accounts ................................ 6,274 (22,420) 44,428
Change in:
Accrued investment and interest income .............................. (62,562) 54,521 (173,941)
Accounts, commissions and premiums receivable ....................... (704,596) (7,248,897) 3,085,775
Deferred acquisition costs .......................................... (2,884,579) (3,940,329) (1,689,564)
Unpaid losses and loss adjustment expenses .......................... 4,234,244 3,811,005 2,351,679
Unearned premiums ................................................... 831,715 4,419,082 (951,896)
Premiums, commissions and other insurance balances .................. 67,776 (56,989) (953,252)
Accounts payable and accrued expenses ............................... 535,769 1,535,746 1,367,841
Other, net .......................................................... 1,764,154 (114,348) 2,038,763
----------- ------------ -----------
Net cash provided by operating activities ........................ 7,134,801 1,523,871 7,039,607
----------- ------------ -----------
Cash flow from investing activities:
Purchase of subsidiary ................................................ -- (5,000,000) --
Purchases of short-term investments, net .............................. (1,984,850) (8,471,577) (19,735,394)
Proceeds from disposal of property and equipment ...................... 6,000 -- --
Purchases of property and equipment ................................... (203,671) (54,897) (172,452)
----------- ------------ -----------
Net cash used in investing activities ............................. (2,182,520) (13,526,474) (19,907,846)
----------- ------------ -----------
Cash flow from financing activities:
Proceeds from sale of common stock .................................... -- -- 10,384,324
Proceeds from subordinated convertible notes payable .................. -- 9,621,914 --
Repayment of shareholder loan ......................................... -- -- (150,000)
Borrowings from revolving line of credit, net ......................... -- 2,000,000 1,579,195
Repayment of line of credit ........................................... (1,363,583) -- (568,987)
Bank overdraft ........................................................ (518,046) (38,327) --
Other, net ............................................................ -- (5,660) (5,660)
----------- ------------ -----------
Net cash (used in) provided by financing activities ............... (1,881,629) 11,577,927 11,238,872
----------- ------------ -----------
Net increase (decrease) in cash ........................................ 3,070,652 (424,676) (1,629,367)
Cash at beginning of period ............................................ 3,714,883 4,125,271 5,644,767
----------- ------------ -----------
Cash at end of period .................................................. $ 6,785,535 3,700,595 4,015,400
=========== ============ ===========
Supplemental disclosure of cash flow information:
Income taxes paid ..................................................... $ 523,000 950,000 --
=========== ============ ===========
Interest paid ......................................................... $ 417,844 343,983 267,876
=========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 141
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying unaudited consolidated financial statements of Preferred
Employers Holdings, Inc. (the "Company") and its subsidiaries have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the six months period
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. These consolidated financial
statements and notes should be read in conjunction with the financial
statements and notes included in the audited consolidated financial statements
of the Company for the year ended December 31, 1998.
The accompanying unaudited consolidated financial statements of the
Company and its subsidiaries are prepared in accordance with generally accepted
accounting principles. These principles vary in certain respects from statutory
accounting practices prescribed or permitted by regulatory authorities. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates, based on
information available, in recording transactions resulting from business
operations. The balance sheet amounts that involve a greater extent of
accounting estimates and actuarial determinations subject to future changes are
the Company's liabilities for unpaid losses and loss adjustment expenses. As
additional information becomes available (or actual amounts are determinable),
the recorded estimates may be revised and reflected in operating results. While
management believes that the liability for unpaid losses and loss adjustment
expenses is adequate to cover the ultimate liability, such estimates may be
more or less than the amounts actually paid when claims are settled.
(b) Organization
Preferred Employers Holding, Inc. is the successor company to Preferred
Employers Group, Inc. ("PEGI"). Except as otherwise specified or when the
context otherwise requires, references to the Company herein include Preferred
Employers Holdings, Inc. and PEGI, through which the Company conducts certain
of its business operations.
In March 1998, the Company, through a wholly-owned subsidiary, consummated
the purchase of substantially all the assets of HSSI Travel Nurse Operations,
Inc., ("Travel Nurse") a wholly-owned subsidiary of Hospital Staffing Services,
Inc., for $5.0 million in cash. Based in Ft. Lauderdale, Florida since 1981,
Travel Nurse has provided registered nurses and other professional medical
personnel, often referred to as "Travelers," primarily to client hospitals in
the United States and the Caribbean on a contractual basis for periods
generally ranging from 8 to 52 weeks.
In August 1998, the Company issued 517,085 shares of its common stock in
exchange for all the outstanding common stock of National Explorers and
Travelers Healthcare, Inc. ("NET Healthcare"), an employee staffing company and
provider of temporary registered nurses and other professional medical
personnel, primarily to client hospitals. This business combination was
accounted for as a pooling-of-interests combination and, accordingly, the
Company's consolidated financial statements for applicable periods prior to the
combination have been restated to include the accounts and results of
operations of NET Healthcare.
8
<PAGE> 142
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company was appointed as a general agent ("GA") by the American
International Group of Companies ("AIG"), a major group of international
insurance carriers, on January 1, 1993. In this regard, the Company is
authorized to write workers' compensation as well as other forms of "property
and casualty" business (such other forms of insurance being hereinafter referred
to as "Package") on behalf of AIG. In addition, the Company was appointed as a
GA by General Accident Insurance Company of America ("GAIC") on September 1,
1994, with the authority to write all forms of commercial property and casualty
business for family style and fast-food restaurants. On June 11, 1996, GAIC
advised the Company that it would no longer write Package insurance for
fast-food restaurants; however, on March 20, 1997, the Company was appointed as
a GA by the Kemper Group of Insurance Companies ("Kemper") with the authority to
write workers' compensation and other forms of commercial property and casualty
business for family style and fast-food restaurants and convenience stores. In
September 1998, Kemper advised the Company that they 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. On June
1, 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.
(c) Insurance Operations
In 1996, the Company formed a Bermuda licensed reinsurance subsidiary (the
"Reinsurer") and entered into a reinsurance agreement (the "Agreement") with
certain affiliates of AIG during the fourth quarter of 1996. The Agreement
provides that the Reinsurer assume certain workers' compensation and employer's
liability insurance policies from AIG with policy inception dates as of January
1, 1996 and subsequent. Although the Reinsurer assumes the risks associated
with being a reinsurer, the Agreement limits the liability of the Reinsurer for
losses and certain defined expenses to the first $300,000 per occurrence. In
addition, the Agreement limits the aggregate liability of the Reinsurer for all
coverage to an amount not to exceed 70% of the gross written premium for each
individual underwriting year.
Because the Agreement is effective for all business written on or after
January 1, 1996, the policies written prior to the execution of the Agreement
and formation of the Reinsurer are accounted for as retroactive reinsurance.
The principal difference between the accounting for retroactive and prospective
reinsurance is that revenue and costs of retroactive reinsurance are deferred
and accreted into income over the claim-settlement period rather than over the
period for which contractual coverage is provided, as would be the case under
prospective reinsurance. Retroactive insurance accounting does not change the
amount of income to be recognized, but rather extends the period of recognition
from one year--the period of coverage, to six years--the period over which
claims liabilities from the business are expected to be settled. Cash flows from
the reinsurance transactions are not affected by the accounting treatment.
The accompanying financial statements reflect a composite
retroactive/prospective accounting treatment with business written prior to
October 1, 1996, being accounted for as retroactive and business written
subsequent thereto accounted for as prospective.
The effects of prospective and retroactive insurance accounting treatment
are illustrated below. The prospective method assumes that the Agreement
incepted on January 1, 1996, and provides for a loss ratio of 51.5%,
acquisition costs of 33.83%, aggregate net premiums written of approximately
$15 million ($12,600,000 relating to the period from January 1 through
September 30, 1996) and an investment yield of 6.5% on net cash flows. The
retroactive (deposit) method uses the same assumptions except that since the
9
<PAGE> 143
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Agreement was not executed until October 1996, any investment income on net
cash flows earned for the period from January through September 1996 are
deferred and recognized as "other income" over the payment period of the
remaining claim liabilities.
Income before income taxes recognized, and estimated to be recognized in
the calendar year indicated below is as follows:
<TABLE>
<CAPTION>
Prospective Composite
Method Retroactive/Prospective
Years (Pro Forma) (Actual)
----- ----------- -----------------------
<S> <C> <C>
1996 .................................................. $1,658,000 324,000
1997 .................................................. 1,288,000 1,372,000
1998 .................................................. 400,000 840,000
1999 .................................................. 332,000 658,000
2000 .................................................. 300,000 563,000
2001 .................................................. 282,000 503,000
---------- ---------
$4,260,000 4,260,000
========== =========
</TABLE>
The table presented above is for illustrative purposes only to highlight
that the basis of accounting used only impacts the timing of the net revenue
recognition and not the aggregate economic results. Further, the above table is
based on estimates as to the amount and timing of aggregate loss and loss
expense payments, available investment yields and acquisition and other costs
associated with the provision of insurance protection. Actual results may vary,
perhaps materially, from those illustrated above. No assurance is given or may
be taken that subsequent revisions of estimates will not have a material impact
on the illustration above.
Prospective reinsurance premiums are earned on a pro-rata basis over the
term of the related coverage. The reserve for unearned premiums represents the
portion of the net premiums written relating to the unexpired term of coverage.
Acquisition costs are deferred and amortized over the period in which the
related prospective reinsurance premiums are earned.
Losses and loss adjustment expenses are charged to income as incurred. The
reserve for unpaid claims represents the accumulation of estimates for reported
losses and includes provisions for losses incurred but not reported. The
methods of determining such estimates and establishing resulting reserves are
continually reviewed and updated. Adjustments, if any, resulting therefrom are
reflected in income currently. The Company does not discount its loss reserves.
(d) Staffing Operations
In March 1998, the Company purchased substantially all of the assets of
Travel Nurse for $5.0 million in cash. Based in Fort Lauderdale, Florida since
1981, Travel Nurse has provided registered nurses and other professional
medical personnel, often referred to as "Travelers," primarily to client
hospitals in the United States and the Caribbean on a contractual basis for
periods generally ranging from 8 to 52 weeks.
10
<PAGE> 144
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In August 1998, the Company issued 517,085 shares of its common stock in
exchange for all of the outstanding common stock of NET Healthcare, an employee
staffing company and provider of temporary registered nurses and other
professional medical personnel, primarily to client hospitals. This business
combination was accounted for as a pooling-of-interests combination.
Staffing income is recognized at the time the staffing services are
provided. In most instances, the staffing company's temporary healthcare
professionals are considered employees of the staffing company while under
assignment and costs of employment are the responsibility of the staffing
company and are included in the accompanying statements of operations.
Receivables include amounts due from healthcare organizations for services
provided by the staffing company through the placement of healthcare
professionals. These receivables are presented net of an estimated allowance
for uncollectible accounts based on an evaluation of expected collections
resulting from an analysis of current and past due accounts, past collection
experience in relation to amounts billed and other relevant information.
Concentration of credit risk relating to accounts receivable is limited by
number, diversity and geographic dispersion of the healthcare organizations
serviced by the staffing company.
During 1995, NET Healthcare entered into a line of credit with a
shareholder to provide a total of $190,000 to fund the working capital
requirements of NET Healthcare. The line of credit bore interest at the rate of
5% per annum. In March 1996, NET Healthcare entered into an additional line of
credit with a shareholder collateralized by outstanding accounts receivable.
Interest was payable at the rate of 2% per month on average outstanding
balances. In May 1996, the agreement was amended to allow for additional
funding. In May 1997, the agreement was further amended to increase the
interest rate by .5% per month on approximately $600,000 of the balance of the
line of credit. The amended line of credit, effective April 1, 1998,
established a rate of interest of 10% per annum and eliminated restrictive
covenants included in the original agreement. Interest expense related to the
line of credit amounted to $215,030 and $267,959 for the six months ended June
30, 1998 and 1997, respectively. The aggregate outstanding balance together
with its related accrued interest expense was paid in full subsequent to the
merger of NET Healthcare and the Company.
The goodwill associated with the Company's acquisition of substantially
all of the assets of Travel Nurse is amortized over 21 years.
The former shareholders of NET Healthcare previously elected to have the
company treated as an "S Corporation" under the Internal Revenue Code and,
therefore, net income or loss was attributable directly to the former
shareholders. Accordingly, no pre-merger benefit for the federal or state
income taxes has been reflected in the accompanying financial statements. In
addition, an adjustment has been made to the restated stockholders' equity of
the Company as of December 31, 1998 to eliminate the untaxed effects of
including NET Healthcare's results of operations in the financial statements of
the Company.
(e) Investments
Fixed maturity securities which the Company has the positive intent and
ability to hold to maturity are classified as "held to maturity" and are
reported at amortized cost. Fixed maturity and equity securities that are
bought and held principally for the purpose of selling them in the near term
are classified as "trading" and are reported at fair value, with unrealized
gains and losses included in income. Fixed
11
<PAGE> 145
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
maturity and equity securities not classified as either held to maturity or
trading are classified as "available for sale" and are reported at fair value,
with unrealized gains and losses (net of deferred taxes) charged or credited as
a separate component of shareholders' equity.
Investment income is recorded as earned on the accrual basis and includes
amortization of premiums and accretion of discounts relating to investments
acquired at other than par value. Realized gains or losses on disposal of
investments are determined on a specific identification basis and are included
in revenues.
The Company does not own any on-balance sheet or off-balance sheet
derivative instruments.
(f) Property and Equipment, Net
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using an accelerated method of depreciation over the
estimated useful lives of the related assets, which range from five to seven
years. Leasehold improvements are carried at cost less accumulated amortization
provided on the straight-line basis over the shorter of the lease term or the
estimated useful lives of the improvements.
(g) Premiums Payable
Premiums which are collected from insureds are reported as assets of the
Company and as corresponding liabilities to the insurance carriers. Premiums
received from insureds but not yet remitted to the carriers are held as invested
cash in a fiduciary capacity.
(h) Commission Income
Commission income is recognized when premiums are billed. Any subsequent
commission adjustments, including policy cancellations, are recognized upon
notification from the insurance carrier or broker.
(i) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) Earnings Per Share
Earnings per common share is based upon the weighted average number of
common shares outstanding during each period. On December 31, 1998, the Company
adopted SFAS No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128
requires specific computations, presentations and disclosures for earnings per
share (EPS) amounts in order to make EPS amounts more compatible with
international accounting standards. Stock options outstanding at June 30, 1999,
1998 and 1997 of 1,263,000, 616,500 and 250,000, respectively, had no effect on
diluted earnings per share amounts.
12
<PAGE> 146
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In May 1998, the Company consummated a private placement of 7% convertible
subordinated notes due May 12, 2003 in the aggregate principal amount of
$10,580,000. Principal balances outstanding as of June 30, 1999 and December
31, 1998 were $10,535,000 and $10,580,000, respectively. The effect on diluted
earnings per share amounts is presented in the accompanying consolidated
statements of operations.
(k) Reclassifications
Certain items in the Company's 1998 and 1997 financial statements have
been reclassified to conform them with the presentation of the Company's
financial statements as of and for the three months and six months ended June
30, 1999.
(2) INVESTMENTS
At June 30, 1999 and December 31, 1998, the Company did not hold
fixed-maturity securities which individually exceeded 10% of shareholders'
equity except U.S. government and government agency securities.
Bonds with an amortized cost of $9,265,583 and $8,257,053 were held in a
restricted account for the benefit of the ceding company (AIG) as unauthorized
reinsurance at June 30, 1999 and December 31, 1998, respectively, in accordance
with statutory requirements.
The amortized cost and estimated fair values of the Company's investments
at June 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Amount at
Which
Shown
on the
Amortized Unrealized Unrealized Estimated Balance
Cost Gains Losses Fair Value Sheet
----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
June 30, 1999:
- --------------
Securities held to maturity:
Fixed maturities:
Obligations of states and political
subdivision ................................. $19,610,103 64,587 (235,990) 19,438,700 19,610,103
Obligations of states and political
subdivisions -- restricted.................... 9,265,583 6,740 (80,863) 9,191,460 9,265,583
----------- ------- -------- ---------- ----------
Total fixed maturities ......................... $28,875,686 71,327 (316,853) 28,630,160 28,875,686
=========== ======= ======== ========== ==========
December 31, 1998:
- ------------------
Securities held to maturity:
Fixed maturities:
Obligations of states and political
subdivision.................................. $15,454,481 241,667 (4,129) 15,692,019 15,454,481
Obligations of state and political
subdivisions -- restricted................... 8,257,053 130,956 -- 8,388,009 8,257,053
----------- ------- -------- ---------- ----------
Total fixed maturities........................... $23,711,534 372,623 (4,129) 24,080,028 23,711,534
=========== ======= ======== ========== ==========
</TABLE>
13
<PAGE> 147
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(2) INVESTMENTS (CONTINUED)
The amortized cost and fair value of securities at June 30, 1999 and
December 31, 1998, by contractual maturity date, are presented below:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Fixed maturities held-to-maturity:
Due in one year or less ................................ $ -- -- -- --
Due after one year through five years .................. 17,497,971 17,376,380 14,394,846 14,600,179
Due after one year through five years --
restricted ........................................... 9,265,583 9,191,460 7,197,418 7,296,169
Due after five years through ten years ................. 1,049,756 1,024,300 -- --
Due after ten years .................................... 1,062,376 1,038,020 1,059,635 1,091,840
Due after ten years -- restricted ...................... -- -- 1,059,635 1,091,840
----------- ---------- ---------- ----------
28,875,686 28,630,160 23,711,534 24,080,028
Short-term investments ................................. 162,965 162,965 1,515,347 1,515,347
Short-term investments -- restricted ................... 3,689,760 3,689,760 5,516,680 5,516,680
----------- ---------- ---------- ----------
Total .................................................. $32,728,411 32,482,885 30,743,561 31,112,055
=========== ========== ========== ==========
</TABLE>
(3) FINANCIAL INSTRUMENTS
The carrying amounts for short-term investments, cash, accounts,
commissions and premiums receivable, accrued investment and interest income,
notes payable, premiums, commissions and other insurance balances payable and
accounts payable and accrued expenses approximate their fair values due to the
short-term nature of these instruments.
Estimated fair values for fixed maturities were provided by outside
consultants using market quotations, prices provided by market makers or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics. The carrying amount for the 7%
convertible subordinated notes at June 30, 1999 and December 31, 1998 was
$10,535,000 and $10,580,000, respectively, and the related estimated fair value
at June 30, 1999 and December 31, 1998 was $10,265,465 and $10,280,955,
respectively, which was determined by management based on available market
information and appropriate valuation methodologies.
14
<PAGE> 148
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(4) ACCOUNTS, COMMISSIONS AND PREMIUMS RECEIVABLE
Accounts, commissions and premiums receivable consists of the following at
June 30, 1999 and December 31,1998:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Staffing accounts receivable -- billed .................... $ 4,038,581 5,626,113
Staffing accounts receivable -- unbilled .................. 1,907,833 1,000,370
----------- ---------
5,946,414 6 626,483
Less allowance for uncollectible accounts ................. (102,328) (96,054)
----------- ---------
Staffing accounts receivable, net ......................... 5,844,086 6,530,429
Premiums receivable ....................................... 4,949,709 3,652,463
Commissions receivable .................................... 1,105,450 1,018,031
----------- ----------
Total ..................................................... $11,899,245 11,200,923
=========== ==========
</TABLE>
The allowance for uncollectible accounts as of June 30, 1999 and December
31, 1998 consists of the following:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Beginning balance ......................................... $ 96,054 125,367
Provision for uncollectible accounts ...................... 47,116 96,624
Write-offs ................................................ (40,842) (125,937)
-------- --------
Ending Balance ............................................ $102,328 96,054
======== ========
</TABLE>
(5) STOCKHOLDERS LOAN
In May 1995, the Company entered into a repurchase agreement with PEGI
stockholders (the "Agreement") whereby the Company agreed to repurchase from
them an aggregate of 30 shares of common stock (529,412 shares as adjusted to
give effect to the recapitalization of the Company in February 1997 whereby the
Company exchanged 17,647.06 shares of Common Stock for each share of PEGI
Common Stock held by the stockholders of PEGI) (the "Shares") of the Company.
The aggregate purchase price for the Shares was $600,000 (including interest)
to be paid in 24 installments of $25,000. The closing of the Agreement was
subject to the Company's completion of a $600,000 distribution to the
stockholders of the Company, pro rata based on the number of shares of common
stock of the Company outstanding and paid to the stockholders of record on the
Agreement date, without giving effect to the repurchase. The $600,000
distribution was made by the Company on May 26, 1995.
Pursuant to a subsequent agreement made with the stockholders, the
outstanding loan balance at December 31, 1995 was to be repaid in 23 monthly
installments of $25,000 (including interest) commencing in February 1996. The
outstanding balance of the above-referenced stockholder loan was paid in full
during 1997.
15
<PAGE> 149
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(6) INCOME TAXES
U.S. Federal and state income tax expense (benefit) consists of the
following components:
<TABLE>
<CAPTION>
For the Three Months Ended Current Deferred Total
-------------------------- -------- -------- ------
<S> <C> <C> <C>
June 30, 1999 ........................................... $305,371 (297,725) 7,646
June 30, 1998 ........................................... 569,259 (477,630) 91,629
June 30, 1997 ........................................... 41,233 -- 41,233
For the Six Months Ended Current Deferred Total
------------------------ -------- -------- -------
June 30, 1999 ........................................... $528,776 (379,716) 149,060
June 30, 1998 ........................................... 971,369 (829,401) 141,968
June 30, 1997 ........................................... 170,823 -- 170,823
</TABLE>
Income tax expense for the three months and six months ended June 30,
1999, 1998 and 1997 differed from the amount computed by applying the U.S.
Federal income tax rate of 34% to income before Federal income taxes as a
result of the following:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------- ------------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Expected income tax expense ........................ $93,684 232,036 40,528 296,068 422,032 100,661
State income tax, net .............................. 9,738 16,361 4,768 31,837 29,578 11,842
Tax-exempt investment income ....................... (93,303) (58,694) (67,873) (182,678) (124,598) (86,934)
Travel and entertainment expense ................... 6,646 -- -- 23,584 -- --
"S Corporation" (income) expense ................... -- (78,785) 62,281 -- (144,989) 158,586
Other, net ......................................... (9,119) (19,289) 1,529 (19,751) (40,055) (13,332)
------- ------- ------- -------- -------- -------
Total income tax expense ........................... $ 7,646 91,629 41,233 149,060 141,968 170,823
======= ======= ======= ======== ======== =======
</TABLE>
As a result of the August 1998 business combination of NET Healthcare, an
"S corporation," with the Company, a "C corporation," NET Healthcare's "S
Corporation" status ceased to exist. The unaudited pro forma information in the
consolidated statements of operations reflect income tax expense had NET
Healthcare been taxed as a "C corporation," of $256,350 and $5,229 for the
three months ended June 30, 1998 and 1997, respectively, and $464,578 and
$102,122 for the six months ended June 30, 1998 and 1997, respectively.
16
<PAGE> 150
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(6) INCOME TAXES (CONTINUED)
Deferred income taxes are based upon temporary differences between the
financial statement and tax bases of assets and liabilities. The following
deferred taxes are recorded for June 30, 1999, and December 31, 1998,
respectively:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Deferred tax assets:
Unearned premiums ................................................ $ 473,771 411,176
Reserve for unpaid losses and loss adjustment expenses............ 1,305,205 971,252
Other, net ....................................................... 59,105 59,105
----------- ---------
Gross deferred tax assets ...................................... 1,838,081 1,441,533
----------- ---------
Deferred tax liabilities:
Cash to accrual change ........................................... (219,704) (284,575)
Deferred acquisition costs ....................................... (783,854) (680,291)
Other, net ....................................................... (6,929) (28,789)
----------- ---------
Gross deferred tax liabilities ................................. (1,010,487) (993,655)
----------- ---------
Net deferred tax asset ....................................... $ 827,594 447,878
=========== =========
</TABLE>
A valuation allowance has not been established as the Company believes it
is more likely than not that the net deferred tax asset will be realized.
The Company's reinsurance subsidiary is a Bermuda domiciled corporation.
The reinsurance subsidiary is a "controlled foreign corporation" ("CFC") for
United States federal income tax purposes. As a result, the Company includes in
its gross income for United States federal income tax purposes its pro-rata
share of the CFC's "subpart F income," even if such subpart F income is not
distributed. Substantially all of the income of the reinsurance subsidiary's
income is subpart F income.
The Company has elected under section 953(d) of the Internal Revenue Code
to tax its reinsurance subsidiary as a domestic corporation for U.S. income tax
purposes. The Company does not believe this election has a material effect on
its income tax expense.
(7) ANNUAL STATUTORY SOLVENCY REQUIREMENTS
The Bermuda Insurance Act of 1978 and related regulations (the "Act")
requires the Company's reinsurance subsidiary to meet a minimum solvency
margin. Statutory capital and surplus as of December 31, 1998 was $10,531,208
and the amount required to be maintained by the Company's reinsurance
subsidiary was $3,163,000. In addition, a minimum liquidity ratio must be
maintained whereby relevant assets, as defined by the Act, must exceed 75% of
relevant liabilities. Once these requirements have been met, there is no
restriction on the retained earnings available for distribution. At June 30,
1999 and December 31, 1998, the Company's reinsurance subsidiary was in
compliance with this requirement.
17
<PAGE> 151
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(8) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses
is summarized as follows for the six months ended June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ----------
<S> <C> <C> <C>
Net unpaid losses and loss adjustment expenses at beginning of
period .............................................................. $13,878,892 6,107,613 199,390
----------- --------- ---------
Incurred related to
Current year ........................................................ 3,677,961 4,004,924 2,526,147
Prior year .......................................................... 657,966 -- --
----------- --------- ---------
Total incurred .................................................... 4,335,927 4,004,924 2,526,147
----------- --------- -------
Paid related to:
Current year ........................................................ 100,021 193,319 174,468
Prior year .......................................................... 1,662 -- --
----------- --------- ---------
Total paid ........................................................ 101,683 193,319 174,468
----------- --------- ---------
Net unpaid losses and loss adjustment expenses at end of period ........ $18,113,136 9,919,218 2,551,069
=========== ========= =========
</TABLE>
(9) UNSECURED REVOLVING LINE OF CREDIT
In May 1998, the Company obtained a $3 million unsecured revolving line of
credit from a bank. The terms of the loan provide for monthly interest payments
at the bank's prime lending rate (7 3/4% per annum at June 30, 1999). The loan
is renewable on an annual basis. As of June 30, 1999 and December 31, 1998,
the aggregate amount outstanding under the line of credit was $486,417 and
$1,850,000, respectively.
(10) SUBORDINATED CONVERTIBLE NOTES
In May 1998, the Company consummated a private placement of $10,580,000 of
7% convertible subordinated notes (the "Notes") due May 2003. The principal
amount of the Notes is convertible at the option of the noteholders into shares
of the Company's common stock at a conversion price of $9.00 per share (the
"Conversion Price") at any time prior to the earlier of the maturity date (May
12, 2003) or 10 business days after receipt of a termination notice. In the
event (i) the closing bid price of the Company's common stock equals or exceeds
$13.50 per share for twenty consecutive trading days during any period
commencing upon satisfaction of one of the conditions contained in clause (ii)
described herein and (ii) either a registration statement covering the shares
of common stock issuable upon conversion of the Notes has been declared
effective by the Securities and Exchange Commission and remains effective or at
least two years has elapsed since the issuance date of the Notes and the shares
of common stock issuable upon conversion of the notes are saleable, without
restriction, under Rule 144(k) promulgated under the Securities Act of 1933, as
amended, then the holders' right to convert the outstanding principal amount of
the Notes shall be terminated by the Company by delivering to the holders a
notice of termination (the "Termination Notice"), in which event (a) the
holders will have the right at any time during 10 business days after receipt
of the Termination Notice, in their sole discretion, to convert the outstanding
principal amount of the Notes into shares of common stock of the Company at the
Conversion Price, and (b) thereafter, the holders' option to convert shall
terminate and the Notes may be prepaid by the Company, at
18
<PAGE> 152
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(10) SUBORDINATED CONVERTIBLE NOTES (CONTINUED)
any time prior to the Maturity Date, in whole or in part for the face amount
thereof, together with all accrued and unpaid interest through the date of
prepayment. As of June 30, 1999, the aggregate principal amount of Notes
outstanding was $10,535,000. Notes in an aggregate principal amount of $45,000
were converted into 5,000 shares of common stock of the Company during the
first quarter of 1999.
(11) SEGMENT REPORTING
The Company's reportable business segments are strategic business units
that offer distinctive products and services that are marketed through
different channels. They are managed separately because of their unique
marketing and distribution requirements.
There are two reportable segments: insurance and employee staffing. The
insurance segment sells, on behalf of others, business insurance principally to
the franchise industry and provides reinsurance of certain workers'
compensation and employers' liability insurance policies sold by the Company.
The employee staffing segment provides temporary registered nurses and other
professional medical personnel primarily to client hospitals.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Management evaluates segment
performance based on profit or loss from operations before income taxes not
including non-recurring gains and losses and intersegment transactions. Sales
and services between segments are accounted for as if the sale or services were
provided to third parties, that is at current market prices.
Certain information concerning the Company's reporting segments for the
three months and six months ended June 30, 1999, 1998 and 1997 is as follows:
For the Three Months Ended June 30,
- -----------------------------------
<TABLE>
<CAPTION>
Employee
1999 Insurance Staffing Totals
---- --------- ---------- ----------
<S> <C> <C> <C>
Revenues from external customers ................... $4,558,538 11,318,878 15,877,416
Intersegment revenue ............................... 6,507 -- 6,507
Interest revenue ................................... 452,289 302 452,591
Segment profit ..................................... 529,022 949,034 1,478,056
1998
----
Revenues from external customers ................... $5,001,928 8,941,998 13,943,926
Interest revenue ................................... 505,561 -- 505,561
Segment profit ..................................... 756,348 365,079 1,121,427
1997
----
Revenues from external customers ................... $3,265,511 2,419,269 5,684,780
Interest revenue ................................... 425,887 -- 425,887
Segment profit ..................................... 354,967 (293,047) 61,920
</TABLE>
19
<PAGE> 153
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(11) SEGMENT REPORTING (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30,
- ---------------------------------
<TABLE>
<CAPTION>
Employee
1999 Insurance Staffing Totals
- ---- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues from external customers ........................................ $ 8,816,038 22,171,854 30,987,892
Intersegment revenue .................................................... 16,341 -- 16,341
Interest revenue ........................................................ 868,479 302 868,781
Segment profit .......................................................... 1,184,475 1,768,158 2,952,633
Segment assets .......................................................... 49,114,134 12,832,371 61,946,505
1998
- ----
Revenues from external customers ........................................ $ 8,750,572 14,863,410 23,613,982
Interest revenue ........................................................ 891,546 -- 891,546
Segment profit .......................................................... 1,310,984 555,044 1,866,028
Segment assets .......................................................... 36,802,571 12,083,921 48,886,492
1997
- ----
Revenues from external customers ........................................ $ 6,089,042 4,664,203 10,753,245
Interest revenue ........................................................ 606,778 -- 606,778
Segment profit .......................................................... 672,153 (466,431) 205,722
Segment assets .......................................................... 18,597,890 1,906,885 20,504,775
</TABLE>
Information for the Company's reportable segments relates to the
enterprise's consolidated totals as follows:
FOR THE THREE MONTHS ENDED JUNE 30,
- -----------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ---------
Revenues:
- ---------
<S> <C> <C> <C>
Total revenues for reportable segments ................................... $16,336,514 14,449,487 6,110,667
Intersegment revenue ..................................................... (6,507) -- --
Unallocated corporate interest revenue ................................... 4,169 -- 80,009
----------- ---------- ---------
Total consolidated revenues .............................................. $16,334,176 14,449,487 6,190,676
=========== ========== =========
Profit or Loss:
- ----------------
Total profit or loss for reportable segments ............................. $ 1,478,056 1,121,427 61,920
Unallocated amounts:
General corporate expenses ............................................. (1,206,685) (438,969) (22,728)
Corporate interest revenue ............................................. 4,169 -- 80,009
------------ --------- ---------
Income before income taxes ............................................... $ 275,540 682,458 119,201
============ ========== =========
</TABLE>
20
<PAGE> 154
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(11) SEGMENT REPORTING (CONTINUED)
OTHER items:
<TABLE>
<CAPTION>
Reportable Unallocated
Segment Corporate Consolidated
Total Total Total
---------- ----------- ------------
1999
- -----
<S> <C> <C> <C>
Depreciation and amortization .......................................... $ 121,765 4,674 126,439
Amortization of deferred acquisition costs ............................. 1,371,322 -- 1,371,322
1998
- ----
Depreciation and amortization .......................................... $ 191,191 -- 191,191
Amortization of deferred acquisition costs ............................. 1,464,038 -- 1,464,038
1997
- ----
Depreciation and amortization .......................................... $ 43,809 -- 43,809
Amortization of deferred acquisition costs ............................. 952,255 -- 952,255
</TABLE>
FOR THE SIX MONTHS ENDED JUNE 30,
- ----------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
Revenues:
- ---------
<S> <C> <C> <C>
Total revenues for reportable segments ................................ $31,873,014 24,505,528 11,360,023
Intersegment revenue .................................................. (16,341) -- --
Unallocated corporate interest revenue ................................ 23,143 -- 113,067
----------- ---------- ----------
Total consolidated revenues ........................................... $31,879,816 24,505,528 11,473,090
=========== ========== ==========
Profit or Loss:
- ---------------
Total profit or loss for reportable segments .......................... $ 2,952,633 1,866,028 205,722
Unallocated amounts:
General corporate expenses .......................................... (2,104,989) (624,756) (22,728)
Corporate interest revenue .......................................... 23,143 -- 113,067
----------- ---------- ----------
Income before income taxes ............................................ $ 870,787 1,241,272 296,061
=========== ========== ==========
Assets:
- -------
Total assets for reportable segments .................................. $61,946,505 48,886,492 20,504,775
Elimination of intersegment receivables ............................... (276,286) (539,748) --
Unallocated general corporate assets .................................. 2,799,477 9,349,268 6,104,104
Elimination of receivable from corporate .............................. (1,478,609) (576,641) (201,641)
----------- ---------- ----------
Total consolidated assets ............................................. $62,991,087 57,119,371 26,407,238
=========== ========== ==========
</TABLE>
21
<PAGE> 155
PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(11) SEGMENT REPORTING (CONTINUED)
Other items:
<TABLE>
<CAPTION>
Reportable Unallocated
Segment Corporate Consolidated
Total Total Total
---------- ----------- ------------
1999
- -----
<S> <C> <C> <C>
Depreciation and amortization ...................................... $ 240,871 8,949 249,820
Amortization of deferred acquisition costs ............................. 2,609,364 -- 2,609,364
1998
- ----
Depreciation and amortization .......................................... $ 341,955 -- 341,955
Amortization of deferred acquisition costs ............................. 2,445,353 -- 2,445,353
1997
- ----
Depreciation and amortization .......................................... $ 82,472 -- 82,472
Amortization of deferred acquisition costs ............................. 1,689,564 -- 1,689,564
</TABLE>
The Company does not attribute revenues or long-lived assets by geographic
areas. The Company does not have any single customer that can be identified as
material when considering the Company's consolidated revenues.
(12) LITIGATION
The Company is a defendant in various litigation matters considered to be
in the normal course of business. While the outcome of these matters cannot be
estimated with certainty, it is the opinion of management (after consultation
with legal counsel) that the resolution of such litigation will not have a
material adverse effect on the Company's financial statements.
(13) UNAUDITED PRO FORMA INFORMATION
Pro forma adjustments for income taxes represent the difference between
historical income taxes and income taxes that would have been reported had NET
Healthcare filed income tax returns as a taxable "C corporation" for 1998 and
1997.
(14) YEAR 2000
Year 2000 issues are the result of computer programs being written using
two digits rather than four to define the applicable year. The Company has
developed a plan to address Year 2000 issues. The plan is based on the
Company's primary software vendors having advised the Company that the
necessary programming changes related to Year 2000 issues have been made and
tested and that the software used by the Company can be upgraded to be Year
2000 compliant. During the first quarter of 1999, the Company completed the
implementation of this upgrade. The additional costs associated with the
implementation of the above project were not material.
It is management's belief that for any suppliers who may not be Year 2000
compliant, such non-compliance will not have a material adverse effect on the
Company's business. However, each major supplier's compliance will be assessed
in light of their response.
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<PAGE> 156
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes related thereto
contained elsewhere in this Form 10-Q. In August 1998, the Company consummated
the merger of NET Healthcare with and into one of the Company's wholly-owned
subsidiaries, and in connection therewith issued 517,085 shares of common stock
in exchange for all of the outstanding common stock of NET Healthcare. The
business combination was accounted for as a "pooling-of-interests" and,
accordingly, our consolidated financial statements for applicable periods prior
to the combination have been restated to include the accounts and results of
operations of NET Healthcare.
GENERAL
The Company engages in the following activities:
o it provides temporary registered nurses and other professional
medical personnel primarily to client hospitals;
o it sells, on behalf of others, business insurance, including workers'
compensation, property, liability, casualty, and other types of
coverage, and provides risks 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
o it provides reinsurance for certain workers' compensation and
employers' liability insurance policies it sells.
Employee Staffing. In March and August of 1998, the Company acquired
businesses providing temporary registered nurses and other professional medical
personnel (often referred to as "Travelers") mainly to client 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. The Company believes that the ability of Travelers to function as
permanent staff improves the continuity and consistency of patient care and
reduces its clients' overall administration, orientation and supervisory
requirements relating to permanent staff, as well as reducing turnover of their
temporary staff.
Staffing income is recognized at the time the staffing services are
provided. In most instances, the staffing company's temporary healthcare
professionals are considered employees of the staffing company while under
assignment and costs of employment are the responsibility of the staffing
company and are included in the accompanying statements of operations.
Insurance. The Company is engaged in the property and casualty insurance
business and has conducted business as a general agent on behalf of 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 our 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 receives, as compensation pursuant to the terms of
these general agency agreements, gross commissions on its business at rates
which range from approximately 5% to 20%. 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
23
<PAGE> 157
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. On June 1, 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.
Reinsurance. In December 1996, the Company formed Preferred Reinsurance
and entered into a reinsurance agreement with affiliates of AIG pursuant to
which Preferred Reinsurance 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. Preferred Reinsurance is
required to provide affiliates of AIG, as security for the payment of losses, a
combination of cash, United States government securities and/or an irrevocable
letter of credit in an aggregate amount equal to 51.5% of the net written
premiums ceded to Preferred Reinsurance pursuant to the insurance agreement
less the amount of losses paid. Preferred Reinsurance receives, as compensation
pursuant to the terms of the reinsurance agreement, the related net written
premiums less certain program expenses and commissions and the losses paid.
Preferred Reinsurance receives, as compensation pursuant to the terms of the
reinsurance agreement, the related net written premiums less certain program
expenses and commissions and the losses paid associated with the business.
Although Preferred Reinsurance assumes the risks associated with being a
reinsurer, the reinsurance agreement limits the liability of Preferred
Reinsurance for losses and certain defined expenses to the first $300,000 per
occurrence. In addition, the reinsurance agreement limits the aggregate
liability of Preferred Reinsurance for all coverage to an amount not to exceed
70% of the gross written premiums for each individual underwriting year.
Because the reinsurance agreement is effective for all business written on or
after January 1, 1996, the policies written prior to the execution of the
contract and formation of Preferred Reinsurance were accounted for as
retroactive reinsurance. The reinsurance agreement with Preferred Reinsurance
is terminable by either party upon the occurrence of certain events. In the
event the Company's reinsurance agreement is terminated, the Company, in all
likelihood, would be materially and adversely affected.
The Company collects workers' compensation premiums from the insureds and
remits the ceding commission (net of its commission) and reinsurance charges to
affiliates of AIG and remits the net premium to Preferred Reinsurance.
Commission income on workers' compensation business is recognized as income
when premiums are billed. Package insurance premiums are principally collected
by the insurance carrier. The package insurance carrier remits commissions to
the Company monthly on package premiums it collects. Commission income on
package business is recognized as income when premiums are due. Reinsurance
premiums received are earned on a pro-rata basis over the term of the related
coverage.
For the three months 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 three months 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 three months 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 three months 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 three
months 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 revenue 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
24
<PAGE> 158
from its staffing, reinsurance captive and general agency business,
respectively. For the six months ended June 30, 1998, approximately 61%, 35%,
and 4% of Company's total revenue 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
business, respectively.
Historically, our 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.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Total Revenues. Total revenues for the three months ended June 30, 1999
were $16,334,000 compared to $14,449,000 for the 1998 comparable period,
representing a net increase of $1,885,000 or 13.0%. Total revenues for the
three months ended June 30, 1998 were $14,449,000 compared to $6,191,000 for
the 1997 comparable period, representing a net increase of $8,258,000 or
133.4%.
The following table provides a comparison of revenues for the three months
ended June 30, 1999 and 1998 by category:
<TABLE>
<CAPTION>
Net Percentage
1999 1998 Change Change
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Staffing Income ......................................... $11,319,000 8,942,000 2,377,000 26.6 %
Premiums earned ......................................... 4,141,000 4,350,000 (209,000) (4.8)%
Net commission income:
Workers' compensation ................................. 284,000 393,000 (109,000) (27.7)%
Package ............................................... 17,000 93,000 (76,000) (81.7)%
Other, net ............................................ 40,000 41,000 (1,000) (2.4)%
----------- ---------- --------- ----
Total net commission income ........................ 341,000 527,000 (186,000) (35.3)%
Net investment income ................................... 457,000 505,000 (48,000) (9.5)%
Other income ............................................ 76,000 125,000 (49,000) (39.2)%
----------- ---------- --------- -----
Total revenues ..................................... $16,334,000 14,449,000 1,885,000 13.0 %
=========== ========== ========= =====
Workers' compensation:
Premiums collected .................................... $ 3,437,000 4,276,000
=========== ==========
Ratio of net commission income/premiums
collected ........................................... 8.3% 9.2%
=========== =========
</TABLE>
Staffing income increased $2,377,000 or 26.6% as a result of the
acquisition of certain of the assets of Travel Nurse (acquired in March 1998)
and the increase in business related to the acquisition and merger of NET
Healthcare. Premiums earned decreased $209,000 or 4.8% for the three months
ended June 30, 1999 as compared to the 1998 comparable period as a result of
the decrease in the book of business. Workers' compensation commission income
decreased $109,000 or 27.7% for the three months ended June 30, 1999 as
compared to the 1998 comparable period as a result of the decrease in premiums
collected of $839,000, which was attributable to the decrease in the workers'
compensation book of business. Package commission income decreased $76,000 or
81.7% for the three months ended June 30, 1999 as compared to the 1998
comparable period as a result of a reduction in the business written for fast
food restaurants. Other net commission income decreased $1,000 or 2.4% for the
three months ended June 30, 1999 as compared to the 1998 comparable period as a
result of the decrease in volume of small business plan premiums collected. Net
investment income decreased $48,000 or 9.5% and other income
25
<PAGE> 159
decreased $49,000 or 39.2% for the three months ended June 30, 1999 as compared
to the 1998 comparable period as a result of the effects of the retroactive
insurance accounting treatment of Preferred Reinsurance as discussed more fully
in Note 1 (c) to the Company's consolidated financial statements.
Total Operating Expenses. Total operating expenses for the three months
ended June 30, 1999 were $15,722,000 compared to $13,372,000 for the 1998
comparable period, representing an increase of $2,350,000 or 17.6%. Total
operating expenses for the three months ended June 30, 1998 were $13,372,000
compared to $5,908,000 for the 1997 comparable period, representing an increase
of $7,464,000 or 126.3%.
The following table provides a comparison of total operating expenses for
the three months ended June 1999 and 1998 by category:
<TABLE>
<CAPTION>
Net Percentage
1999 1998 Change Change
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Staffing costs ........................................ $ 8,733,000 6,820,000 1,913,000 28.0 %
Losses and loss adjustment expenses incurred .......... 2,278,000 2,349,000 (71,000) (3.0)%
Amortization of deferred acquisition costs ............ 1,371,000 1,464,000 (93,000) (6.4)%
Other operating expenses .............................. 3,340,000 2,739,000 601,000 21.9 %
----------- ---------- --------- ----
Total operating expenses .............................. $15,722,000 13,372,000 2,350,000 17.6 %
=========== ========== ========= ====
</TABLE>
Staffing costs increased $1,913,000 or 28.0% consistent with the increase
in staffing revenues for the three months ended June 30, 1999 as discussed
above. Losses and loss adjustment expenses incurred decreased $71,000 or 3.0%
which is consistent with the decrease in premiums earned for the three months
ended June 30, 1999 as discussed above. For the quarter ended June 30, 1999,
the Company's ratio of losses incurred to premiums earned was approximately
55%. Amortization of deferred acquisition costs decreased $93,000 or 6.4% which
is also consistent with the decrease in premiums earned for the second quarter
as discussed above. Other operating expenses increased $601,000 or 21.9%. The
following table provides a comparison of other operating expenses for the three
months ended June 30, 1999 and 1998 by category:
<TABLE>
<CAPTION>
Net Percentage
1999 1998 Change Change
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Personnel costs ......................................... $1,881,000 1,592,000 289,000 18.2 %
Occupancy expenses ...................................... 214,000 223,000 (9,000) (4.0)%
Professional fees ....................................... 462,000 189,000 273,000 144.4 %
Other operating expenses ................................ 783,000 735,000 48,000 6.5 %
---------- --------- ------- -----
Total other operating expenses ........................ $3,340,000 2,739,000 601,000 21.9 %
========== ========= ======= =====
</TABLE>
Personnel costs increased $289,000 or 18.2% as a result of annual salary
increases together with the increased staff related to the acquisition of the
assets of Travel Nurse and the growth in the business of NET Healthcare.
Occupancy expenses decreased $9,000 or 4.0% principally as a result of changing
to a long distance carrier with lower rates. Professional fees increased
$273,000 or 144.4% principally as a result of increased legal, accounting and
actuarial fees associated with various corporate and acquisition matters. Other
operating expenses increased $48,000 or 6.5% primarily related to the increased
advertising and promotional expenses, which increased as a result of the
expansion of the staffing business.
Total Non-Operating Expenses. Total non-operating expenses for the three
months ended June 30, 1999 were $337,000 compared to $395,000 for the 1998
comparable period. Amortization of intangible assets and other non-operating
expenses decreased $57,000, primarily related to the acquisition and merger of
NET Healthcare.
26
<PAGE> 160
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Total Revenues Total revenues for the six months ended June 30, 1999 were
$31,880,000 compared to $24,506,000 for the 1998 comparable period,
representing a net increase of $7,374,000 or 30.1%. Total revenues for the six
months ended June 30, 1998 were $24,506,000 compared to $11,473,000 in the 1997
comparable period, representing a net increase of $13,033,000 or 113.6%.
The following table provides a comparison of revenues for the six months
ended June 30, 1999 and 1998 by category:
<TABLE>
<CAPTION>
Net Percentage
1999 1998 Change Change
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Staffing Income ......................................... $22,172,000 14,863,000 7,309,000 49.2 %
Premiums earned ......................................... 7,883,000 7,417,000 466,000 6.3 %
Net commission income:
Workers' compensation ................................. 570,000 809,000 (239,000) (29.5)%
Package ............................................... 71,000 182,000 (111,000) (61.0)%
Other, net ............................................ 81,000 79,000 2,000 2.5 %
----------- ---------- --------- -----
Total net commission income ......................... 722,000 1,070,000 (348,000) (32.5)%
Net investment income ............................... 892,000 892,000 -- --
Other income ........................................ 211,000 264,000 (53,000) (20.1)%
----------- ---------- --------- ------
Total revenues ...................................... $31,880,000 24,506,000 7,374,000 30.1 %
=========== ========== ========= ======
Workers' compensation:
Premiums collected .................................... $ 6,366,000 7,982,000
=========== ==========
Ratio of net commission income/premiums
collected ........................................... 9.0% 10.1%
=========== ==========
</TABLE>
Staffing income increased $7,309,000 or 49.2% as a result of the
acquisition of certain of the assets of Travel Nurse (acquired in March 1998)
and the increase in business related to the acquisition and merger of NET
Healthcare. Premiums earned increased $466,000 or 6.3% 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. Workers' compensation commission income
decreased $239,000 or 29.5% for the six months ended June 30, 1999 as compared
to the 1998 comparable period as a result of the decrease in premiums collected
of $1,616,000, which was attributable to the decrease in the workers'
compensation book of business. Package commission income decreased $111,000 or
61.0% for the six months ended June 30, 1999 as compared to the 1998 comparable
period as a result of a reduction in the business written for fast food
restaurants. Other net commission income increased $2,000 or 2.5% for the six
months ended June 30, 1999 as compared to the 1998 comparable period as a
result of the increase in volume of small business plan premiums collected.
Other income decreased $53,000 or 20.1% as a result of the effects of the
retroactive insurance accounting treatment of Preferred Reinsurance as
discussed more fully in Note 1(c) to the Company's consolidated financial
statements.
Total Operating Expenses. Total operating expenses for the six months
ended June 30, 1999 were $30,333,000 as compared to $22,567,000 for the 1998
comparable period, representing an increase of $7,766,000 or 34.4%. Total
operating expenses for the six months ended June 30, 1998 were $22,567,000 as
compared to $10,897,000 for the 1997 comparable period, representing an
increase of $11,670,000 or 107.1%.
27
<PAGE> 161
The following table provides a comparison of total operating expenses for
the six months ended June 30, 1999 and 1998 by category:
<TABLE>
<CAPTION>
Net Percentage
1999 1998 Change Change
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Staffing costs .......................................... $17,061,000 11,597,000 5,464,000 47.1%
Losses and loss adjustment expenses incurred ............ 4,336,000 4,005,000 331,000 8.3%
Amortization of deferred acquisition costs .............. 2,609,000 2,445,000 164,000 6.7%
Other operating expenses ................................ 6,327,000 4,520,000 1,807,000 40.0%
----------- ----------- --------- ----
Total operating expenses ............................... $30,333,000 22,567,000 7,766,000 34.4%
=========== =========== ========= ====
</TABLE>
Staffing costs increased $5,464,000 or 47.1% consistent with the increase
in staffing revenues for the six months ended June 30, 1999 as discussed above.
losses and loss adjustment expenses incurred increased $331,000 or 8.3% which is
consistent with the increase in premiums earned in 1999 as discussed above. For
the six months ended June 30, 1999, the Company's ratio of losses incurred to
premiums earned was approximately 55%. Amortization of deferred acquisition
costs increased $164,000 or 6.7% which is also consistent with the increase in
premiums earned for the six months ended June 30, 1999 as discussed above.
Other operating expenses increased $1,807,000 or 40.0%. The following table
provides a comparison of other operating expenses for the six months ended June
30, 1999 and 1998 by category:
<TABLE>
<CAPTION>
Net Percentage
1999 1998 Change Change
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Personnel costs ........................................ $3,637,000 2,673,000 964,000 36.1%
Occupancy expenses ..................................... 432,000 344,000 88,000 25.6%
Professional fees ...................................... 737,000 332,000 405,000 122.0%
Other operating expenses ............................... 1,521,000 1,171,000 350,000 29.9%
---------- --------- --------- -----
Total other operating expenses ........................ $6,327,000 4,520,000 1,807,000 40.0%
========== ========= ========= =====
</TABLE>
Personnel costs increased $964,000 or 36.1% as a result of annual salary
increases together with the increased staff related to the acquisition of the
assets of Travel Nurse and the growth in the business of NET Healthcare.
Occupancy expenses increased $88,000 or 25.6% principally as a result of the
lease of additional office space and relocation of our subsidiary Preferred
Healthcare Staffing, Inc. Professional fees increased $405,000 or 122.0%
principally as a result of increased legal, accounting and actuarial fees
associated with various corporate and acquisition matters. Other operating
expenses increased $350,000 or 29.9% primarily related to the following: (i)
increased insurance expense of $20,000, (ii) increased corporate fees and
services of $64,000, (iii) increased investment and service fees of $40,000,
and (iv) increased advertising and promotional expenses of $147,000. Insurance
expense increased as a result of the purchase of additional coverages (i.e.,
directors and officers liability insurance) and increased premiums due to
increased limits. Corporate fees and services, advertising and promotional, and
investment and service fees increased as a result of the expansion of the
staffing business.
Total Non-Operating Expenses. Total non-operating expenses for the six
months ended June 30, 1999 were $676,000 compared to $697,000 for the 1998
comparable period. Interest expense increased $78,000 as a result of the
Company's private placement in May 1998 of 7% convertible subordinated notes in
the aggregate principal amount of $10,580,000 and borrowings under a revolving
line of credit.
Amortization of intangible assets and other non-operating expenses
decreased $100,000, primarily related to the acquisition and merger of NET
Healthcare.
28
<PAGE> 162
LIQUIDITY AND CAPITAL RESOURCES
General. Our principal source of cash is the collection of staffing
revenues from client hospitals and workers' compensation insurance premiums
from our insureds. In February 1997, we consummated an initial public offering
of 1,725,000 shares of Common Stock (including the underwriters' over-allotment
option) and received gross cash proceeds of approximately $12,506,000. In May
1998, we consummated a $10,580,000 private placement of 7% convertible
subordinated notes due May 2003.
For the six months ended June 30, 1999, net cash and investments were
$37,679,000 (net of premiums payable of $1,835,000). Net cash provided by
operating activities for the six months ended June 30, 1999 increase to
$7,135,000 from $1,524,000 in the 1998 comparable period, an increase of
$5,611,000. This increase resulted primarily from decreases in accounts
receivable, deferred acquisition cost in unpaid losses and loss adjustment
expenses and premiums of $6,544,000, $1,056,000, and $3,587,000, respectively,
and increases in unpaid losses and loss adjustment expenses and premiums,
commissions and other insurance balances of $423,000 and $125,000, respectively.
The decrease in accounts receivable was primarily associated with increased
collection efforts of the staffing company during 1999. The increases in unpaid
losses and loss adjustment expenses and premiums, commissions and other
insurance balances are consistent with the increase in premiums earned during
1999. The decreases in unearned premiums and deferred acquisition costs are
consistent with a decrease in reinsurance premiums receivable during 1999.
Cash flows used in investing activities decreased to $2,183,000 for the
six months ended June 30, 1999 from $13,526,000 for the six months ended June
30, 1998, a decrease of $11,343,000. This decrease resulted primarily from the
decrease of net investment purchases of $6,487,000 and the acquisition of
certain of the assets of Travel Nurse for $5,000,000 in cash during the first
quarter of 1998 as discussed in the Note 1 (b) to our consolidated financial
statements included herein.
A decrease in cash flows from financing activities for the six months
ended June 30, 1999 reflects the repayment of a portion of the revolving line
of credit of $1,364,000 and payment of a bank overdraft of $518,000, compared
to the net proceeds received from the private placement of convertible
subordinated notes of $9,622,000 and borrowings under the revolving line of
credit of $2,000,000 and the repayment of a bank overdraft of $38,000 for the
comparable period in 1998.
Financings. In May 1998, Preferred Staffing entered into a $3,000,000
unsecured revolving line of credit with a bank (the "Credit Facility").
Outstanding borrowings under the Credit Facility bear interest at the bank's
base rate of interest. Interest under the Credit Facility is due and payable
monthly and all unpaid principal and interest is due on May 2, 2000.
Outstanding borrowings under the Credit Facility are secured by our guarantee.
As of June 30, 1999, outstanding borrowings under the Credit Facility were
approximately $486,000 and bore interest at the rate of 7 3/4% per annum.
In May 1998, we also consummated a $10,580,000 private placement of 7%
convertible subordinated notes due May 2003. The principal amount of the notes
is convertible at the option of the holder into shares of our common stock, at
a conversion price of $9.00 per share, at any time prior to the earlier of May
12, 2003 or ten business days after the receipt of a termination notice (as
defined in the notes). The notes generally prohibit or restrict, among other
things, our ability to incur liens and indebtedness, make certain fundamental
corporate changes and specified investments and conduct certain transactions
with affiliates. At June 30, 1999, the principal amount outstanding under the
7% convertible subordinated notes was $10,535,000.
We believe that our existing cash balances and cash flows from activities
will be adequate to meet our current operations, including expected capital
expenditures, for at least the next twelve months. In connection with our
current business strategy of making strategic acquisitions, we may seek
additional funds through equity and/or debt financings. There can be no
assurance that any such additional debt or equity financings will be available
to us, or if available, will be on favorable terms to us.
29
<PAGE> 163
YEAR 2000
The Year 2000 presents potential concerns for businesses. The consequences
of this is we may include system failures and business process interruption. In
addition to the well-known calculation problems with the use of 2-digit date
formats as the year changes from 1999 to 2000, the Year 2000 is a special case
leap year which may cause similar problems in many systems unless remediated.
We have developed a plan with respect to evaluating and upgrading our core
information technology systems so that they are Year 2000 compliant. Two
vendors primarily supply software to us for use in our operations. One vendor
supplies the software used by our insurance operations and another vendor
supplies the software used by our staffing operations. The vendors have each
advised us that the latest upgrades of the software used in our operations are
Year 2000 compliant. We implemented these software upgrades, and we are
currently testing the upgraded software for Year 2000 compliancy. We intend to
finish the testing step during the third quarter of 1999. The historical and
currently projected costs relating to these upgrades and Year 2000 compliance
are not material.
We are in the process of developing a plan with respect to evaluating and
upgrading our non-core information technology systems and other systems using
embedded technology so that they will be Year 2000 compliant. We expect to
complete and implement that plan during the third quarter of 1999.
We also intend to make inquiries of other third parties supplying us with
products and services to receive assurances that they are Year 2000 compliant.
We believe that we will complete that review by the end of the third quarter of
1999.
We have not developed a "worst case" scenario with respect to Year 2000
issues. Although we have not done a cost analysis, we believe that no material
adverse effect on our business will occur if our non-core technology systems are
not Year 2000 compliant. We anticipate that the costs related to such
non-compliance, if any, will not be material.
Although we do not have a Year 2000 contingency plan, we are developing
such a plan, which we expect to complete by the end of the third quarter of
1999.
If we or third parties with which we have relationships were to cease or
not successfully complete Year 2000 remediation efforts, we could encounter
disruptions to our business. In addition, we could be materially and adversely
impacted by widespread economic or financial market disruption, or by Year 2000
computer system failures of third parties, that may generally occur as a result
of the Year issues.
Certain statements relating to the Year 2000 issues are forward-looking
statements and have been made pursuant to the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve known and unknown risks and uncertainties which may cause the actual
results in future periods or plans for future periods to differ materially from
those described herein as anticipated, believed or estimated.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
Not Applicable.
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<PAGE> 164
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included in this Quarterly Report a Form
10-Q:
27.1 Financial Data Schedule
(b) Reports on Form 8-K. The Company's Current Report on Form 8-K dated
May 7, 1999 (filed on May 12, 1999).
31
<PAGE> 165
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto, duly authorized.
PREFERRED EMPLOYERS HOLDINGS, INC.
By: /s/ WILLIAM R. DRESBACK
--------------------------------
William R. Dresback
Senior Vice President and Chief
Financial Officer (principal and
chief accounting officer and
duly authorized to sign on behalf
of the Registrant)
Date: August 13, 1999
32
<PAGE> 1
LETTER OF TRANSMITTAL
TO TENDER SHARES OF COMMON STOCK
OF
PREFERRED EMPLOYERS HOLDINGS, INC.
PURSUANT TO THE OFFER TO PURCHASE DATED SEPTEMBER , 1999
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 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, $0.01 par value per share, of the Company (all such shares of common
stock, par value $0.01 per share, from time to time outstanding being,
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
, 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 , 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>
<S> <C> <C>
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 __________ , 1996
- -----------------------------------------------------------------------------------------------------------------------
</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) 6201 15th Avenue
New York, NY 10005 (718) 234-5001 Brooklyn, NY 11219
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 per value per share (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 OCTOBER 18, 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 OCTOBER 18, 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 (the "Shares"), 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 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 DEBT FINANCING, 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 and 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
OCTOBER 18, 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 OCTOBER 18, 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 (the "Shares"), 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 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, other than 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") and the Independent
Committee (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, and recommends that
stockholders accept the Offer and tender their Shares pursuant to the Offer.
4. The Offer and withdrawal rights will expire at 5:00 P.M., New York City
time, on October 18, 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, other than 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 (the "Shares"), 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.
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.
Dated: September 17, 1999
<TABLE>
<CAPTION>
Sign Here
Signature(s)
<S> <C>
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
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE
THE PAYER. -- Social Security Numbers have nine digits separated by two
hyphens: i.e., 000-00-0000. Employer identification numbers have nine digits
separated by only one hyphen: i.e., 00-0000000. The table below will help
determine the number to give the payer.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE NAME AND SOCIAL SECURITY NUMBER OF --
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1. An individual's account The individual
2. Two or more individuals (joint account) The actual owner of the account or, if combined funds,
any one of the individuals (1)
3. Husband and wife (joint account) The actual owner of the account or, if joint funds,
either person (1)
4. Custodian account of a minor (Uniform Gift to Minors Act) The minor (2)
5. Adult and minor (joint account) The adult or, if the minor is the only contributor, the
minor (1)
6. Account in the name of guardian or committee for a designated The ward, minor, or incompetent person (3)
ward, minor, or incompetent person
7. a) The usual revocable savings trust account (grantor is also The grantor-trustee (1)
trustee)
b) So-called trust account that is not a legal or valid trust The actual owner (1)
under State law
8. Sole proprietorship account The owner (4)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER IDENTIFICATION NUMBER OF --
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
9. A valid trust, estate or pension trust The legal entity (do not furnish the identification
number of the personal representative or trustee unless
the legal entity itself is not designated in the
account title (5)).
10. Corporate account The corporation
11. Religious, charitable, or educational organization The organization
12. Partnership account held in the name of the business The partnership
13. Association, club, or other tax-exempt organization The organization
14. A broker or registered nominee The broker or nominee
15. Account with the Department of Agriculture in the name of a The public entity
public entity (such as a state or local government, school district,
or prison) that receives agricultural program payments
</TABLE>
- ---------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE:If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
OBTAINING A NUMBER. -- If you don't have a taxpayer identification number
or you don't know your number, obtain Form SS-5, Application for a Social
Security Number Card, or Form SS-4, Application for Employer Identification
Number, at the local office of the Social Security Administration or the
Internal Revenue Service (the "IRS") and apply for a number.
<PAGE> 2
PAYEES EXEMPT FROM BACKUP WITHHOLDING. -- Payees specifically exempted
from backup withholding on ALL payments include the following (Section
references are to the Internal Revenue Code of 1986, as amended (the "Code"):
- A corporation.
- A financial institution.
- An organization exempt from tax under Section 501(a) of the
Code or an individual retirement plan.
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United
States, or any subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign
government, or any agency or instrumentality thereof.
- An international organization or any agency, or
instrumentality thereof.
- A registered dealer in securities or commodities registered
in the United States or a possession of the United States.
- A futures commission merchant registered with the Commodity
Futures Trading Commission.
- A real estate investment trust.
- A common trust fund operated by a bank under Section 584(a)
of the Code.
- An exempt charitable remainder trust, or a non-exempt trust
described in Section 4947(a)(1) of the Code.
- An entity registered at all times under the Investment
Company Act of 1940.
- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- Payments to nonresident aliens subject to withholding under
Section 1441 of the Code.
- Payments to partnerships not engaged in a trade or business
in the United States and which have at least one non-resident
partner.
- Payments of patronage dividends where the amount received is
not paid in money.
- Payments made by certain foreign organizations.
2
<PAGE> 3
- Payments made to an appropriate nominee. Payments of
interest not generally subject to backup withholding include
the following:
- Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this
interest is $600 or more and is paid in the course of the
payer's trade or business and you have not provided your
correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including the
exempt-interest dividends under Section 852 of the Code).
- Payments described in Section 6049(b)(5) of the Code to
non-resident aliens.
- Payments on tax-free covenant bonds under Section 1451 of the
Code.
- Payments made by certain foreign organizations.
- Payments made to an appropriate nominee.
Exempt payees described above should file the Substitute Form W-9 enclosed
herewith to avoid possible erroneous backup withholding. FILE THIS FORM WITH
THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE
FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST,
DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage
dividends that are not subject to information reporting are also not subject to
backup withholding. For details, see the regulations under sections 6041,
6041A(a), 6045, 6042, 6044, 6045, 6049, 6050A and 6050N of the Code and their
regulations.
PRIVACY ACT NOTICE. -- Section 6109 of the Code requires most
recipients of dividend, interest, or other payments to give taxpayer
identification numbers to payers who must report the payments to the IRS. The
IRS uses the numbers for identification purposes. Payers must be given the
numbers whether or not recipients are required to file tax returns. Payers must
generally withhold 31% of taxable interest, dividend, and certain other
payments to a payee who does not furnish a taxpayer identification number to a
payer. Certain penalties may also apply.
PENALTIES:
1. PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If
you fail to furnish your taxpayer identification number to a payer,
you are subject to a penalty of $50 for each such failure unless your
failure is due to reasonable cause and not to willful neglect.
2. FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS. -- If you
fail to include any portion of an includible payment for interest,
dividends, or patronage dividends in gross income, such failure will
be treated as being due to negligence and will be subject to a penalty
of 5% on any portion of an under-payment attributable to that failure
unless there is clear and convincing evidence to the contrary.
3
<PAGE> 4
3. CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If
you make a false statement with no reasonable basis which results in
no imposition of backup withholding, you are subject to a penalty of
$500.
4. CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Falsifying
certifications or affirmations may subject you to criminal penalties
including fines and or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT
OR THE INTERNAL REVENUE SERVICE
4
<PAGE> 1
NEWS RELEASE
- --------------------------------------------------------------------------------
FOR IMMEDIATE RELEASE
PREFERRED EMPLOYERS HOLDINGS
INITIATES SELF TENDER
- --------------------------------------------------------------------------------
Miami, Florida -- September 17, 1999
Preferred Employers Holdings, Inc. (Nasdaq:PEGI) announced today that its
Board of Directors has approved and authorized the Company to make a cash tender
offer of $5.00 per share for all outstanding shares of its common stock other
than those shares held by the Company's executive officers and directors. The
Company will pay all fees and expenses related to the tender offer and tendering
stockholders will not be required to pay any brokerage fees or commissions. On
September 16, 1999, the last full trading day prior to the announcement of the
tender offer, the Closing price per share of the Company's Common Stock was
$2.75 per share. The tender offer will remain open until October 18, 1999,
unless the Offer is extended.
The Company believes that its purchase of issued and outstanding shares
creates an attractive long term investment for the Company and those
stockholders who elect not to tender their shares. At the same time, the Company
is providing to those stockholders who wish to sell their shares the opportunity
to do so at a fair price and at a premium over recent market prices. A committee
of independent directors as well as the full Board of Directors of the Company
unanimously approved the offer. Advest, Inc. was retained as financial advisor
to the Company's Board of Directors and has rendered an opinion that the offer
is fair, from a financial point of view, to the Company's stockholders.
Founded in 1988, Preferred Employers Holdings, Inc. provides businesses
with workers' compensation and other business insurance products as well as risk
management and cost containment services and reinsures certain workers'
compensation and employers' liability insurance policies, and furnishes
temporary professional medical personnel to client hospitals.
For more information contact the Information Agent for the tender offer,
Morrow & Co., Inc. at:
Morrow & Co., Inc.
445 Park Avenue, 5th Floor
New York , New York 10022
Banks and Brokerage Firms can call: (800) 662-5200
Stockholders can call: (800) 566-9061
or the Company's Chief Financial Officer, William R. Dresback,
at (305) 893-4040.
Certain statements contained herein, including without limitation,
statements containing the words "believes," "expects" and words of similar
import constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements involve known and
unknown risks, uncertainties and other factors, which may cause actual Company
results to differ materially from expectations. Such factors include the
following: (1) circumstances which could affect the writing of workers'
compensation, liability and property insurance, (2) economic, business and
competitive conditions in the employee staffing and insurance industry and the
economy in general, (3) the enactment of new regulations and laws, and the
amendment of existing regulations and laws which could affect the Company's
business, and (4) changes in the Company's business strategy or development
plans.
<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"), except 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 October 18,
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,
Mel Harris
Chairman of the Board of Directors
and Chief Executive Officer
(Letterhead footer)
