SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Schedule 13E-4
Issuer Tender Offer Statement
(Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)
AVESIS INCORPORATED
-------------------
(Name of the Issuer)
AVESIS INCORPORATED
-------------------
(Name of Person Filing Statement)
Class A, Nonvoting Cumulative Convertible Preferred Stock, Series 2
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(Title of Class of Securities)
05650-20-6
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(CUSIP Number of Class of Securities)
Mr. Joel H. Alperstein
Treasurer
Avesis Incorporated
3724 North Third Street
Suite 300
Phoenix, Arizona 85012
(602) 241-3400
with copies to
Walter J. Skipper, Esq.
Quarles & Brady
411 E. Wisconsin Avenue
Milwaukee, Wisconsin 53202-4497
(414) 277-5119
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(Names, Addresses and Telephone Numbers of Persons Authorized to Receive Notices
and Communications on Behalf of Person Filing Statements.)
April 23, 1998
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(Date Tender Offer First Published, Sent or Given to Security Holders)
Calculation of Filing Fee:
Transaction Value $727,837.50 Amount of Fee $146*
*For purposes of calculating fee only. This amount assumes the purchase of
388,180 shares of Class A, Nonvoting Cumulative Convertible Preferred Stock,
Series 2 at $1.875 per share. The amount of the filing fee is calculated in
accordance with Regulation 240.0-11 of the Securities Exchange Act of 1934, as
amended as the average of $1.125 (bid) and $2.625 (ask).
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This Schedule 13E-4 Issuer Tender Offer Statement is being filed by
Avesis Incorporated. Avesis Incorporated is the issuer of the class of
securities which is the subject of the Schedule 13E-4 transaction. A copy of the
Offer to Exchange is attached as an Exhibit hereto. The information contained in
the Offer to Exchange is incorporated by reference in answer to the items of
this Issuer Tender Offer Statement and the Cross Reference Sheet set forth below
shows the location in the Offer To Exchange of the information required to be
included in response to the items of this Issuer Tender Offer Statement. The
information contained in the Offer to Exchange, including all exhibits and
annexes thereto, is hereby expressly incorporated by reference and the responses
to each item herein are qualified in their entirety by reference to the
information contained in the Offer to Exchange and the exhibits and annexes
thereto.
Cross Reference Sheet
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(Pursuant to General Instructions to Schedule 13E-4)
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<CAPTION>
Schedule 13E-4 Item Number Caption Caption in Offer to Exchange (for incorporation by
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reference)
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<S> <C> <C>
1. Security and Issuer
(a) Name and address "The Company"
(b) Securities
"Intention of Directors and Executive Officers," "The
Exchange Offer," and "Description of Capital Stock"
(c) Market "Market and Trading Information"
(d) Name and address of non-issuer Not applicable
filer
2. Source and Amount of Funds or Other Considerations
(a) Funds "The Exchange Offer" and "Description of Capital Stock"
(b) Borrowing of funds Not applicable
3. Purpose of the Tender Offer and Plans or
Proposals of the Issuer or Affiliate
(a) Additional acquisitions "Background and Purposes of the Exchange Offer;
Certain Effects"
(b) Extraordinary corporate transaction Not applicable
(c) Sale or transfer of assets Not applicable
(d) Change in management Not applicable
(e) Change in dividend rate or policy "Background and Purposes of the Exchange Offer;
Certain Effects"
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<TABLE>
<S> <C> <C>
(f) Change in corporate structure "Background and Purposes of the Exchange Offer;
Certain Effects"
(g) Change in charter or bylaws "Background and Purposes of the Exchange Offer;
Certain Effects"
(h) Delisting of securities Not applicable
(i) Termination of registration "Certain Effects on Non-Tendering Holders"
(j) Suspension of reporting obligation Not applicable
4. Interest in Securities of the Issuer "Management"
5. Contracts, Arrangements, Understandings "Management"
or Relationships with Respect to the Issuer's
Securities
6. Persons Retained, Employed or to Be "Management"
Compensated
7. Financial Information
(a) Material financial data
(1) Audited financial statements "1997 Form 10-KSB"
(2) Unaudited balance sheets "Business; Proforma Financial Statements"
(3) Ratio of earnings to fixed Not applicable
(4) Book value per share "Business; Proforma Financial Statements"
(b) Pro forma data
(1) Balance sheet "Business; Proforma Financial Statements"
(2) Income statement "Business; Proforma Financial Statements"
(3) Book value per share "Business; Proforma Financial Statements"
8. Additional Information
(a) Contracts with affiliates Not applicable
(b) Regulatory requirements Not applicable
</TABLE>
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<TABLE>
<S> <C> <C>
(c) Margin requirements Not applicable
(d) Material pending legal proceedings Not applicable
(e) Additional material information Not applicable
9. Material to be Filed as Exhibits
(a) (1) Offer to Exchange, dated April 23, 1998.
(2) Cover letter to Shareholders, dated April 23, 1998.
(3) Letter of Transmittal.
(4) Notice of Guaranteed Delivery.
(5) Letter to Clients.
(6) Letter to Broker, Dealers, Commercial Banks, Trust Companies, and Other Nominees
(b) Loan agreement Not applicable
(c) Solicitation contracts Not applicable
(d) Tax legal opinion Not applicable
(e) Prospectus Not applicable
(f) Oral solicitation instructions Not applicable
</TABLE>
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SIGNATURES
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: April 25, 1998.
AVESIS INCORPORATED
BY: /s/ Joel H. Alperstein
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Joel H. Alperstein, Treasurer
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Avesis Incorporated
OFFER TO EXCHANGE
One Share of Class A, Senior Nonvoting Cumulative
Convertible Preferred Stock, Series A
for
Each Outstanding Share of Class A, Nonvoting Cumulative
Convertible Preferred Stock, Series 2
--------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON MAY 27, 1998, UNLESS EXTENDED.
THE EXCHANGE OFFER IS NOT CONDITIONED ON ANY MINIMUM NUMBER OF
SHARES BEING TENDERED. SEE "THE EXCHANGE OFFER -- CONDITIONS OF
THE EXCHANGE OFFER."
--------------------
Avesis Incorporated, a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this Offering
Circular and Offer to Exchange (the "Offer to Exchange") and in the accompanying
Letter of Transmittal, as they may be supplemented or amended from time to time
(collectively the "Exchange Offer"), to exchange one share of Class A, Senior
Nonvoting Cumulative Convertible Preferred Stock, Series A, par value $.01 (the
"Series A Shares") for each outstanding share of Class A, Nonvoting Cumulative
Convertible Preferred Stock, Series 2, par value $.01 (the "Series 2 Shares").
As of the date of this Exchange Offer, the amount of unpaid dividends
on the Series 2 Shares is $4.95 per share. Under the terms of the Certificate of
Designation, Powers, Preferences and Rights (the "Certificate of Designation")
of the Series 2 Shares, unpaid dividends accrue, without interest, and holders
of Series 2 Shares are entitled to cash dividends only when, as and if declared
by the Board of Directors. Under the Certificate of Designation, the Company has
no obligation to redeem the Series 2 Shares and the Series 2 Shares may remain
outstanding indefinitely.
Previously, the Series 2 Shares were quoted on the NASDAQ Small-Cap
Market (the "NASDAQ Small-Cap Market"). The Series 2 Shares were delisted on
October 16, 1992 from trading on the NASDAQ Small-Cap Market due to a failure to
satisfy the National Association of Securities Dealers, Inc. listing
requirement. The Series 2 Shares are now thinly traded in the over-the-counter
market and quotations are reported in the "pink sheets" published by National
Quotation Bureau Inc. and via the National Association of Securities Dealers
Inc.'s Electronic Bulletin Board. See "Market and Trading Information."
<PAGE>
As of the date of this Offer to Exchange, 388,180 Series 2 Shares are
outstanding. Executive officers and directors beneficially own 109,478 Series 2
Shares (representing approximately 28% of the outstanding Series 2 Shares), and
1,031,448 shares of Common Stock (representing approximately 26% of the Common
Stock presently outstanding). In addition, the directors and executive officers
own options and warrants for 2,980,750 Shares of Common Stock, representing
approximately 59% of the outstanding shares of Common Stock assuming complete
exercise of the options and warrants, which have exercise prices from $.40 to
$.48 per share. All the directors and executive officers have advised the
Company that they intend to tender all of their Series 2 Shares pursuant to the
Exchange Offer. See "Management." Holders of Series 2 Shares tendered and
accepted for exchange will not receive any separate payment in respect of
accrued dividends.
The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Section 3(a)(9) thereof and under
certain state law exemptions. The Company will not pay any commission or other
remuneration to any broker, dealer, salesman or other person for soliciting
tenders of the Series 2 Shares. Regular employees of the Company, who will not
receive additional compensation therefor, may provide information to holders of
the Series 2 Shares concerning the Exchange Offer.
The Company has made no arrangements and has no understanding with any
independent dealer, salesman or other person regarding the solicitation of
tenders hereunder. No person has been authorized by the Company to give any
information or to make any representation in connection with the Exchange Offer
other than those contained herein and, if given or made, such other information
or representations must not be relied upon as having been authorized. The
delivery of this Offer to Exchange shall not, under any circumstances, create
any implication that the information herein is correct as of any time subsequent
to the date hereof.
The Exchange Offer is being made to all holders of Series 2 Shares in
the states of Arizona, California, Colorado, Connecticut, Florida, Maryland, New
Jersey, New York and Tennessee. These are all the states where a holder of
Series 2 Shares is known by the Company to reside. The Company is not aware of
any state where a shareholder resides and the making of the Exchange Offer is
prohibited by administrative or judicial action pursuant to a valid state
statute. If the Company becomes aware of any valid state statute prohibiting the
making of the Exchange Offer or a shareholder residing in a state other than
listed above, the Company will make a good faith effort to comply with such
statute and regulations. If, after such good faith effort, the Company cannot
comply with such statute, the Exchange Offer will not be made to, nor will
tenders be accepted from or on behalf of, holders of Series 2 Shares in such
state.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE EXCHANGE OFFER. HOWEVER,
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO
SHAREHOLDERS AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING THEIR SERIES 2
SHARES. EACH SHAREHOLDER MUST MAKE THE DECISION WHETHER TO TENDER SERIES 2
SHARES AND, IF SO, HOW MANY SHARES TO TENDER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS OFFER TO EXCHANGE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
iii
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TABLE OF CONTENTS
Page
----
SUMMARY OF THE EXCHANGE OFFER.................................................1
THE COMPANY...................................................................5
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER....................................5
CERTAIN EFFECTS ON NON-TENDERING HOLDERS......................................6
NO RECOMMENDATION BY BOARD OF DIRECTORS.......................................6
INTENTION OF DIRECTORS AND EXECUTIVE OFFICERS.................................6
ACCEPTANCE BY SHAREHOLDERS NOT MANDATORY......................................7
BACKGROUND AND PURPOSES OF THE EXCHANGE OFFER; CERTAIN EFFECTS
.........................................................................7
RISK FACTORS.................................................................11
BUSINESS ....................................................................13
PRO FORMA UNAUDITED CONSOLIDATED
AVESIS INCORPORATED FINANCIAL STATEMENTS................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................23
MARKET AND TRADING INFORMATION...............................................26
PROPERTIES...................................................................28
LEGAL PROCEEDINGS............................................................28
MANAGEMENT...................................................................29
THE EXCHANGE OFFER...........................................................33
DESCRIPTION OF CAPITAL STOCK.................................................41
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS....................................44
iv
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ADDITIONAL INFORMATION.......................................................48
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................49
ANNEX A Certificate of Designation for the Series A Shares.................A-1
ANNEX B Form 10-KSB for year ended May 31, 1997............................B-1
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SUMMARY OF THE EXCHANGE OFFER
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, contained
elsewhere or incorporated by reference in this Offer to Exchange. Capitalized
terms used and not defined in this summary have the respective meanings ascribed
to them elsewhere in this Offer to Exchange.
The Exchange Offer............... One Series A Share will be issued in
exchange for each tendered Series 2 Share.
There are 388,180 Series 2 Shares
outstanding. All directors and executive
officers have indicated that they will
tender all of their Series 2 Shares.
Series A Shares and
Series 2 Shares................. Each share of the Series A Shares will be
convertible into ten (10) shares of Common
Stock and have a $3.75 liquidation amount. A
Series 2 Share is convertible into 2.5
shares of Common Stock and has a $10
liquidation amount. The Series A Shares have
an annual dividend rate of $.3375 per share
and the Series 2 Shares have an annual
dividend rate of $.90. Both Series A Shares
and Series 2 Shares have cumulative rights
to dividends. Assuming all outstanding
Series 2 Shares are exchanged in the
Exchange Offer, the Series A Shares would be
convertible into approximately 29% of the
Common Stock that would be outstanding after
the exercise of all outstanding options and
warrants. The outstanding Series 2 Shares
are currently convertible into approximately
9% of the outstanding Common Stock after the
exercise of all outstanding options and
warrants. The Series A Shares will be senior
in rights to annual dividends and
redemptions to any Series 2 Shares that
remain outstanding after the Exchange Offer.
Under the Certificate of Designation
(attached as Annex A) for the Series A
Shares, no dividends may be paid on the
Series 2 Shares or the Common Stock until
the Series A Shares have received all
current and cumulative dividends and the
earliest of any of the following events
occur (i) every outstanding share of Series
A Shares has been either redeemed or
converted, (ii) any time after May 31, 2005,
or (iii) the
1
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first day of any fiscal year following two
consecutive fiscal years in which the
Company had net income and net cash flow in
each year in excess of $1.5 million and the
Company's tangible net equity at the end of
the second fiscal year is at least $5
million. Redemption of the Series A Shares
can only occur (i) when the Common Stock is
quoted on an exchange (over a 30 day period
prior to the notice of redemption) or, if
not quoted on an exchange or Nasdaq, valued
by the Company at $.75 or more per share,
(ii) any date after May 31, 2005, or (iii)
the first day of any fiscal year following
two consecutive fiscal years in which the
Company had net income and net cash flow in
each year in excess of $1.5 million and the
Company's tangible net equity at the end of
the second fiscal year is at least $5
million. See "Description of Capital Stock."
Conditions to Exchange
Offer.......................... The Exchange Offer is not conditioned on any
minimum number of shares being tendered. See
"The Exchange Offer -- Conditions" for a
statement of the conditions to the Company's
obligation to accept the Series 2 Shares
tendered pursuant to the Exchange Offer.
Dividends........................ Dividends have not been paid on the Series 2
Shares since September 1992. As of the date
of this Offer to Exchange, the amount of
unpaid dividends on the Series 2 Shares is
$4.95 per share. HOLDERS OF SERIES 2 SHARES
ACCEPTED FOR EXCHANGE WILL NOT RECEIVE ANY
DIVIDEND PAYMENT IN RESPECT TO UNPAID
DIVIDENDS. NO SEPARATE PAYMENT IS BEING MADE
IN RESPECT OF UNPAID DIVIDENDS ON SERIES 2
SHARES. See "The Exchange Offer -- Dividends
on Series 2 Shares."
Expiration Date.................. The "Expiration Date" of the Exchange Offer
will be 5:00 P.M., New York City time, on
May 27, 1998, unless the Exchange Offer is
extended, in which case the term "Expiration
Date" shall mean the time on the last date
to which the Exchange Offer is extended.
References herein to the "last Expiration
Date" shall refer to the time on the last
date to which the Exchange Offer is
extended. See "The Exchange Offer --
Expiration Date; Extensions; Amendments."
How To Tender in the
Exchange Offer................. A holder electing to tender Series 2 Shares
in the Exchange Offer should either (a)
complete and sign the Letter of Transmittal,
have the signatures thereon guaranteed, if
required, and mail or deliver the Letter of
Transmittal with the stock certificates
representing the tendered Series 2 Shares
and any other required documents to the
Exchange Agent at the address set forth on
the cover page of the Letter of Transmittal,
or (b) effect a tender of Series 2 Shares
pursuant to the procedures for book-entry
transfer as set forth under "The Exchange
Offer -- How to Tender in the Exchange
Offer," or (c) request his broker, dealer,
commercial bank, trust company or other
nominee to effect the transaction for him.
Holders will not be obligated to pay the
Company any brokerage commissions in
connection with the Exchange Offer. Tendered
Series 2 Shares may
2
<PAGE>
be withdrawn at any time prior to the
Expiration Date and, if not otherwise
accepted for exchange by the Company, at any
time after June 22, 1998. See "The Exchange
Offer -- Withdrawal of Tenders."
Acceptance of Series 2
Shares and Delivery
of Series A Shares............. Subject to the satisfaction or waiver of all
conditions of the Exchange Offer, the
Company will accept for exchange all Series
2 Shares validly tendered on or prior to the
Expiration Date. The Company anticipates
that the Series A Shares stock certificates
will be delivered in exchange for the Series
2 Shares accepted in the Exchange Offer
promptly after acceptance on the Expiration
Date. See "The Exchange Offer -- General."
Risk Factors..................... Prior to tendering shares, holders should
consider the factors set forth under the
section captioned "Risk Factors."
Federal Income Tax
Considerations................. For a discussion of certain Federal income
tax consequences of the Exchange Offer to
tendering holders and to the Company, see
"Certain Federal Income Tax Considerations."
For holders who tender some, but not all of
their Series 2 Shares in the Exchange Offer
or who hold Common Stock in addition to
their Series 2 Shares, there could be
certain adverse tax consequences associated
with the Exchange Offer.
Common Stock..................... There are 20,000,000 shares of Common Stock
authorized for issuance, of which 4,021,126
shares are issued and outstanding on the
date of this Offer to Exchange. In addition,
options and warrants to acquire up to an
additional 5,290,000 shares of Common Stock
are outstanding. There are 12,000,000
authorized shares of Preferred Stock, of
which 388,180 shares of Series 2 Shares are
issued and outstanding. See "Description of
Capital Stock."
Market and
Trading Information............ The Series 2 Shares were quoted in the "pink
sheets" on April 21, 1998 at a bid price of
$1.125 per Series 2 Share and a $2.625 ask
price per Series 2 Share and the bid and ask
price of the Common Stock was $.1875 and
$.28125, respectively. There is no existing
market for the Series A Shares and there can
be no assurance that a market will develop.
IF AVAILABLE, SHAREHOLDERS ARE URGED TO
OBTAIN CURRENT INFORMATION WITH RESPECT TO
THE MARKET PRICES AND TRADING VOLUMES OF THE
COMMON STOCK AND THE SERIES 2 SHARES. See
"Market and Trading Information."
3
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Exchange Agent;
Further Information............ Continental Stock Transfer & Trust Company
has been appointed as Exchange Agent for the
Exchange Offer. Requests for additional
copies of this Offer to Exchange, the Letter
of Transmittal or any other documents
furnished herewith should be directed to the
Exchange Agent at its address and telephone
number set forth on the Letter of
Transmittal. For further information
concerning the Exchange Offer, contact Joel
Alperstein, Treasurer, Avesis Incorporated
at 1-800-522-0258, Extension 204.
4
<PAGE>
THE COMPANY
Avesis Incorporated, a Delaware corporation (the "Company"), markets
and administers vision, hearing, dental and chiropractic managed care and
discount programs nationally. The programs are designed to enable participants
who are enrolled through various sponsoring organizations, such as insurance
carriers, Blue Cross/Blue Shield organizations, corporations, unions and various
associations, to realize savings on the purchase of products and services
through networks of providers such as ophthalmologists, optometrists, opticians,
hearing specialists, dentists and chiropractors. See "Business."
The principal executive offices of the Company are located at 3724
North Third Street, Suite 300, Phoenix, Arizona 85012; telephone number (602)
241-3400 or 1-800-522-0258.
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The purposes of the Exchange Offer are to eliminate or significantly
reduce the number of Series 2 Shares outstanding with the arrears of unpaid
dividends and to allow holders to participate in the potential growth of the
Company through convertibility of the Series A Shares received in the Exchange
Offer into Common Stock at much more favorable terms than existing under the
current terms of the Series 2 Shares. Under the terms of the Certificate of
Designation, the Series 2 Shares are entitled to an annual cumulative cash
dividend of $.90. Dividends on the Series 2 Shares, including accrued and unpaid
dividends (currently in the amount of $4.95 per share), reduce the Company's net
income applicable to the Common Stock for financial reporting purposes. The
Exchange Offer is intended to reduce or eliminate the arrearage and establish a
senior class of preferred stock with a reduced dividend rate and liquidation
amount. The Company at its current level of profits and cash flow anticipates
paying dividends on the Series A Shares in a timely manner. The Company believes
that the elimination or reduction in the number of outstanding Series 2 Shares
resulting from the Exchange Offer will provide a number of benefits to the
Company and holders of Common Stock and Series 2 Shares. See "Background and
Purposes of the Exchange Offer; Certain Effects -- Purposes and Effects of the
Exchange Offer."
Under the Certificate of Designation, the Company may not declare or
pay dividends on the Series 2 Shares (but dividends will continue to accrue)
until all dividends on Series A Shares have been paid and the earliest of the
following occurs (i) all of the Series A Shares have been redeemed or converted,
(ii) any day after May 31, 2005, or (iii) the first date of any fiscal year
following two consecutive fiscal years in which the Company had net income and
net cash flow in each year in excess of $1.5 million and the Company's tangible
net equity at the end of the second fiscal year is at least $5 million. Unless
the Series A Shares are redeemed or converted (see "Description of Capital
Stock" for discussion on the limits), it is likely that holders of Series 2
Shares will not receive dividends for the foreseeable future. Subject to
profitability and other factors, the Company does intend to pay semi-annual
dividends on Series A Shares. The Company believes its current earnings and cash
position are likely to be sufficient to pay the annual dividend rate of $.3375
per Series A Share (totaling approximately $131,000 per year, if all Series 2
Shares are tendered in the Exchange Offer).
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CERTAIN EFFECTS ON NON-TENDERING HOLDERS
The Series 2 Shares are currently registered under the Securities
Exchange Act of 1934 (the "Exchange Act"). Under applicable law, the Company
could terminate the registration of Series 2 Shares under the Exchange Act at
any time when there are fewer than 300 record holders thereof. As of April 20,
1998, there were 33 record holders of the Series 2 Shares. The Company does not
intend to register the Series A Shares under the Exchange Act, but it does
intend to continue the registration of the Common Stock. The Company believes
that holders of Series 2 Shares who had freely tradeable Series 2 Shares may
freely trade the Series A Shares they receive in the Exchange Offer. There can,
however, be no assurance that a public market will develop for the Series A
Shares. Affiliates, which will include executive officers and directors, may
resell only in compliance with the provisions of Rule 144 promulgated under the
Securities Act. As a consequence, holders of Series A Shares will be subject to
the same restrictions, if any, applicable to the Series 2 Shares.
The Series 2 Shares and the Series A Shares generally have no voting
rights. Under Delaware law, however, the affirmative vote of the holders of at
least a majority of the outstanding Series 2 Shares and the Series A Shares,
voting as a separate class, is required for any amendment to the Company's
Certificate of Incorporation that would adversely affect the rights and
preferences of the Series 2 Shares and the Series A Shares, respectively. No
amendment or vote is necessary for the Company to create and issue a class of
preferred stock senior to the Series 2 Shares.
NO RECOMMENDATION BY BOARD OF DIRECTORS
The Board of Directors of the Company has approved the Exchange Offer.
However, neither the Company nor its Board of Directors makes any recommendation
to shareholders as to whether to tender or refrain from tendering their shares.
Each shareholder must make the decision whether to tender shares and, if so, how
many shares should be tendered.
INTENTION OF DIRECTORS AND EXECUTIVE OFFICERS
All of the Company's directors and executive officers, who in the
aggregate beneficially own 109,478 Series 2 Shares, have advised the Company
that they intend to tender all of their Series 2 Shares pursuant to the Exchange
Offer.
ACCEPTANCE BY SHAREHOLDERS NOT MANDATORY
Series 2 Shares shareholders are free to exchange all, some, or none of
their Series 2 Shares for Series A Shares in the Exchange Offer and may tender
all or some of their Series 2 Shares by properly completing and delivering a
Letter of Transmittal, together with the stock certificates representing their
Series 2 Shares, to the Exchange Agent. No vote of the Series 2 Shares
shareholders is required in connection with the Exchange Offer and no appraisal
rights under Delaware law apply to the Exchange Offer. Shareholders who tender
some, but not all, of their Series 2 Shares or who hold Common Stock and tender
their Series 2 Shares should consider the
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possible adverse tax consequences arising from the Exchange Offer. See "Certain
Federal Income Tax Considerations."
BACKGROUND AND PURPOSES OF THE EXCHANGE OFFER; CERTAIN EFFECTS
Series 2 Shares Arrearages
As of the date of this Offer to Exchange, the amount of accrued and
unpaid dividends on the Series 2 Shares is $4.95 per share. Under the terms of
the Certificate of Designation of the Series 2 Shares, unpaid dividends
accumulate or accrue, without interest, and holders of Series 2 Shares are
entitled to cash dividends only when, as and if declared by the Board of
Directors. Under the Certificate of Designation, the Company has no obligation
to redeem the Series 2 Shares and the Series 2 Shares may remain outstanding
indefinitely.
Purposes and Effects of The Exchange Offer
A primary purpose of the Exchange Offer is to eliminate or
significantly reduce the number of Series 2 Shares outstanding in order to
reduce or eliminate the dividend arrearage and the substantial after-tax cost of
dividends at $.90 per share of the Series 2 Shares. In light of the Company's
February 28, 1998 net shareholder equity of approximately $727,000 and estimated
1998 fiscal year earnings of approximately $240,000, the Company does not
believe it could generate sufficient cash to redeem in the foreseeable future
the Series 2 Shares with the current aggregate liquidation amount of $3,881,800,
current accrued (but unpaid) dividends totaling $1,921,491, and annual dividends
accumulating at $349,362 per year. Consequently, the Company believes it is
advisable to offer shareholders a chance to modify the preferred capital
structure of the Company through this Exchange Offer.
The Series 2 Shares were originally designed to provide participation
with the Common Stock through the convertibility feature. The Company's past
losses, dividend arrearage, and the low trading price of its Common Stock have
adversely impacted the value of the Series 2 Shares. Based upon the current
"pink sheet" or "electronic bulletin board" bid prices of Common Stock and the
Series 2 Shares on April 21, 1998 of $.1875 and $1.125, respectively, the
Company believes the Common Stock may have little trading value in any market
unless the Company can exchange, convert or redeem the outstanding Series 2
Shares. As described above, the Company does not have sufficient cash to redeem
the Series 2 Shares. Consequently, the Company decided to proceed with the
Exchange Offer to restore a realistic convertibility rate to the outstanding
preferred stock and a lower liquidation amount (reflecting the past losses and
present net equity) and thereby strive to link the interests of the current
holders of outstanding preferred stock to those of holders of the Common Stock.
This may benefit the holders of the Common Stock, though not necessarily at the
expense of the holders of the Series 2 Shares. The Series 2 Shares have a $10
liquidation amount and the Series A Shares have a $3.75 liquidation amount.
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<PAGE>
At the April 21 bid price of $.1875 per share for Common Stock,
conversion into ten shares produces a derived value of $1.875 for each Class A
Share, a 67% premium above the current $1.125 bid price for Series 2 Shares.
While the Series 2 Shares have a liquidation value of $10 per share, the Series
A Shares have a $3.75 liquidation amount. The Company established the lower
liquidation amount on the Series A Shares to reduce the amount due to preferred
shareholders in the event of a liquidation to a more realistic amount given the
Company's past losses and present net equity position. The Series A Shares will
accrue preferential dividends at the rate of $.3375 per annum, and, at current
income levels, the Company currently anticipates paying those annual dividends
on a semi-annual basis as they accrue.
The Series A Shares will have senior rights over the Common Stock and
Series 2 Shares. Under the terms of the Certificate of Designation, the Series 2
Shares are entitled to a cumulative cash dividend of $.90 per annum.
In determining the terms of the Series A Shares, the Company also
considered that the Common Stock and the options to acquire Common Stock
currently have minimal value because of the Series 2 Shares dividend arrearage
and $10 liquidation amount. The Company concluded that it was advisable to offer
holders a senior security with no dividend arrearage and lower annual dividend
and liquidation amount, but significantly higher conversion value in this
Exchange Offer as a method of adjusting its capitalization.
At the time of issuance of Series 2 Shares, there were two other
outstanding classes of Preferred Stock of the Company: one class with senior
rights and another class with junior rights as compared to the Series 2 Shares.
As of the date of this Offer to Exchange, only Common Stock and Series 2 Shares
are outstanding. As allowed by Delaware law and the Company's Certificate of
Incorporation, the Company has now established the new senior Series A Shares,
which are senior to the Series 2 Shares and have more favorable convertibility
terms, senior liquidation rights, and senior dividend rights in an effort to
offer holders an incentive to exchange their Series 2 Shares, which have per
share dividend arrearages in the amount of $4.95, a higher annual dividend rate
($.90 annually) and a higher liquidation amount ($10).
The following is a summary of the certain factors that should be
considered by holders of Series 2 Shares in deciding whether to tender.
Advantages The Company believes that the elimination or reduction in
the number of outstanding Series 2 Shares resulting from the Exchange Offer will
provide a number of benefits to the Company and holders of Common Stock and
Series 2 Shares, including the following:
1. Equity. By offering holders of Series A Shares conversion at the
rate of 10 shares of Common Stock for each share of Series A Shares held, as
opposed to only 2.5 shares for each share of Series 2, the Company is providing
the holders with an opportunity to participate in the potential long-term
appreciation of the Company's business, which the Company expects will be
enhanced by the change in its capital structure and increased financial
flexibility as a result of the consummation of the Exchange Offer. The holders
of the Series A Shares will gain greater voting rights by converting their
Series A Shares for Common Stock as compared to conversion of Series 2 Shares.
8
<PAGE>
2. Priority of the Series A Shares. Holders of the Series A Shares will
have priority for dividends, liquidation and, if applicable, redemption payments
over holders of the Series 2 Shares. Until at least June 1, 2005 or until the
Company increases its annual earnings approximately 6.25 times its current
estimated fiscal year 1998 earnings and its net equity is approximately 6.9
times its net equity at February 28, 1998, all Series A Shares must be redeemed
or converted before any dividends can be declared for Series 2 Shares. It is
anticipated that current dividends of $.3375 per share per annum will be paid on
the Series A Shares. No dividends have been paid on the Series 2 Shares for the
past five years, and it is likely that none will be declared or paid on the
Series 2 for the foreseeable future.
3. Possible Use of Common Stock for Acquisitions. The Company from time
to time has considered acquiring other companies in closely related fields and
funding the acquisition through issuance of Common Stock. In the past,
shareholders of possible targets have refused to proceed with an acquisition to
be accomplished through use of Common Stock because the Common Stock was viewed
as less favorable due to the dividend arrearage and larger liquidation
preference of the Series 2 Shares. No current acquisitions are under
consideration, and there can be no assurances that upon completion of the
Exchange Offer acquisitions will be completed or successful.
Disadvantages. The Company believes that completion of the Exchange
Offer will result in the following disadvantages for current holders of Series 2
Shares.
1. Preferred Stock Dividends. The annual dividend rate on the Series A
Shares is $.3375 per share compared to the annual $.90 dividend rate on the
Series 2 Shares. Under the Company's Certificate of Designation (attached as
Annex A), payment of dividends on the Series 2 Shares is subordinate to the
payment of dividends and redemption of the Series A Shares. A holder who
exchanges will also lose any rights to accrued, but unpaid, dividends, currently
totaling $4.95 per share.
2. Continued Risks Associated with Subordinate Equity Position. In the
event of liquidation, dissolution or winding up in bankruptcy of the Company,
holders of the Series 2 Shares who elect not to exchange them in the Exchange
Offer would be entitled to share in the assets of the Company only after
satisfying the prior claims of all creditors and holders of any senior equity,
including the Series A Shares. There may not be any assets remaining for
distribution to holders of the Series 2 Shares (which has a $10 liquidation
amount, plus accrued but unpaid dividends) after senior claims, including the
Series A Shares (which have a $3.75 liquidation amount plus any accrued but
unpaid dividends), are satisfied. If the Company were to have been liquidated at
its net book value as of February 28, 1998, the Series 2 Shares would have
received a total of $1.87 per share, notwithstanding their liquidation
preference of $14.95 per share. If at least 193,891 Series 2 Shares had been
exchanged for Series A Shares and the Company was liquidated at its February 28,
1998 book value, the liquidation preference of $3.75 per Series A Share would
reduce the liquidation amount of the remaining Series 2 Shares to zero.
3. Dilution. Each share of Series A Shares is initially convertible
into 10 shares of Common Stock while each share of Series 2 Shares is
convertible into 2.5 shares of Common Stock. As a result and assuming full
conversion, there is a greater dilution of Common Stock to the Company of
approximately 20% of the current fully diluted outstanding shares.
9
<PAGE>
4. Tax Consequences. Holders of Series 2 Shares who also own Common
Stock or who elect to exchange only part of their Series 2 Shares in the
Exchange Offer for Series A Shares may have the Series A Shares classified as
"Section 306 Stock." If the stock of the Company is "Section 306 Stock" and no
exemptions apply, some or all of the proceeds upon the sale of stock in the
Company, depending on the circumstances, could be taxed at ordinary income
levels and losses could be disallowed. Furthermore (and while the Company does
not believe it likely), if the Company, as of the issue date of the Series A
Shares, was more likely than not to exercise its redemption rights with respect
to the Series A Shares and certain other conditions were present, the Exchange
Offer could result in the recognition of gain or loss or be treated as a
dividend. See "Certain Federal Income Tax Considerations."
The foregoing is not intended to be a complete comparison of the Series
A Shares and the Series 2 Shares and is qualified by reference to the complete
terms and conditions of the Offer to Exchange. Holders are urged to review
carefully the complete terms and conditions set forth herein as well as other
information included in this Offer to Exchange. See "Risk Factors" and
"Description of Capital Stock."
Rule 13e-4 under the Exchange Act prohibits the Company from making any
purchases of Series 2 Shares, other than pursuant to the Exchange Offer, until
at least 10 business days after the Expiration Date. Any Series 2 Share
purchases the Company may choose to make may be on the same terms as, or on
terms more or less favorable to shareholders than, the terms of the Exchange
Offer. Any possible future purchases by the Company will depend on numerous
factors, including the market price, the results of the Exchange Offer, the
Company's business and financial condition and general economic and market
conditions.
The maximum number of Series A Shares offered for exchange by the
Company in the Exchange Offer is 388,180 shares. Should all of those Series A
Shares be converted into Common Stock, they would represent approximately 29% of
the shares of Common Stock which would then be outstanding after giving effect
to the conversions and assuming the exercise of all outstanding common stock
equivalents, without regard to how many shares could be retired by use of the
proceeds which would accrue to the Company from the exercise of all of its
outstanding options and warrants.
Certain Effects on Non-Tendering Holders
----------------------------------------
The Series 2 Shares are currently registered under the Exchange Act.
Under applicable law, the Company could apply to the Securities and Exchange
Commission to terminate the registration of Series 2 Shares under the Exchange
Act. The Company has no present intention to terminate their registration.
Series A Shares issued for exchange in the Exchange Offer, issued
pursuant to the Section 3(a)(9) exemption in the Securities Act, will not be
registered under the Exchange Act, but the Company intends to maintain the
registration of Common Stock. The Company believes that holders of Series 2
Shares who had freely tradeable Series 2 Shares may freely trade the Series A
Shares they receive. Affiliates, which will include executive officers and
directors, may resell only in compliance with the provisions of Rule 144
promulgated under the Securities Act. As a consequence, holders of Series A
Shares will be subject to the same restrictions, if any, applicable to the
Series 2 Shares.
10
<PAGE>
The Series 2 Shares and Series A Shares have no voting rights, except
as required under Delaware law. Under Delaware law the affirmative vote of the
holders of at least a majority of the outstanding shares of any class (including
the Series 2 Shares and Series A Shares, voting as separate classes) is required
for the authorization of changes, by amendment to the Company's Certificate of
Incorporation or otherwise, to the terms and provisions of the class so as to
adversely affect the rights and preferences of the class. See "Description of
Capital Stock." This Exchange Offer does not result in any changes to the
Company's Certificate of Designation, other than the creation of the Series A
Shares.
No Recommendation by Board of Directors
The Board of Directors of the Company has approved the Exchange Offer.
However, neither the Company nor its Board of Directors makes any recommendation
to shareholders as to whether to tender or refrain from tendering their shares.
Each shareholder must make the decision whether to tender shares and, if so, how
many shares should be tendered.
RISK FACTORS
The Series A Shares being offered hereunder are speculative.
Prospective holders who tender should be aware that the purchase of such
securities involves a high degree of risk. The following risks, among others set
forth in the Offer to Exchange, should be carefully considered by prospective
investors.
Risks Associated with Dividend Rights. The payment of dividends on the
Company's Series A Shares and Series 2 Shares is subject to the availability of
current earnings or surplus as those terms are defined under applicable Delaware
law. The Company estimates that it will have approximately $240,000 in current
earnings for the fiscal year ending May 31, 1998 and intends to pay the $.3375
per share annual dividends on the Series A Shares, but under the Certificate of
Designation may not pay dividends on the Series 2 Shares until it has paid all
dividends on the Series A Shares and (i) all of the Series A Shares have been
redeemed or converted (ii) any time after May 31, 2005 or (iii) certain income,
cash flow, and net equity targets are met. The Series A Shares can only be
redeemed by the Company if the price of Common Stock is $.75 or more per share
or any time after May 31, 2005 or if certain net income, cash flow, and net
equity targets are met. See "Purposes and Effects of the Tender Offer."
No Assurance of Dividends. Although the lower annual dividend rate and
absence of an accumulated dividend arrearage on the Series A Shares may make it
more likely that the Company will be able to pay and actually will declare and
pay future dividends as they accrue on the Series A Shares, and although Company
management has expressed a present intention to pay dividends on the Series A
Shares as the dividends accrue, there is no assurance that the Company will be
able to pay or have sufficient income to pay any future dividends. The Company's
estimated income for fiscal year 1998, which is not subject to income tax
because of the Company's net loss carry forward, is only 1.83 times the annual
amount of Series A Shares aggregate dividends requirement (if all Series 2
Shares are exchanged). Further, the loss of any of the Company's three major
clients could reduce income significantly and make it difficult for the Company
to have sufficient cash to declare and pay dividends. Therefore, there is a risk
that a shareholder who exchanges Series 2 Shares for Series A Shares in the
Exchange Offer might not receive more dividends than a shareholder who does not
exchange any Series 2 Shares.
11
<PAGE>
Risks in the Event of Liquidation. In the event of a liquidation of the
Company and after payment of all amounts owing to creditors, holders of Series A
Shares will receive up to $3.75 per share and any accrued but unpaid dividends,
if any, before holders of Series 2 Shares are entitled to any proceeds.
Thereafter, holders of Series 2 Shares will receive $10.00 per share and any
accrued but unpaid dividends, if any, before holders of Common Stock are
entitled to any payment. Thus, in the event of a liquidation of the Company, a
shareholder who has exchanged Series 2 Shares for Series A Shares will be more
likely to receive some payment, but will be limited to a smaller liquidation
payment, than a shareholder who does not exchange any Series 2 Shares. Based
upon the Company's February 28, 1998 book value, if the Company was liquidated
at the net book value amount, only $1.87 per Series A Share would be available
to holders, all of which would be liquidation amounts belonging to holders of
Series A Shares, provided 193,891 Series 2 Shares were exchanged in the tender
offer (directors and officers have committed to exchange 109,478 Series 2
Shares).
Potential Claims Regarding Exchange Offer. Although the Company has no
knowledge or notice of any potential claims or litigation regarding the Exchange
Offer, it is possible that shareholders or others may allege that the Exchange
Offer is unfair and may seek to prevent the Exchange Offer, or to obtain money
damages as a result of the Exchange Offer, in a legal action in court or
otherwise. In such event the Company has the right (but no obligation) to cancel
or terminate the Exchange Offer. Any litigation expenses, losses or damages paid
by the Company in connection with the Exchange Offer would reduce the Company's
resources available for other purposes, including dividends on Series A Shares
or Series 2 Shares.
Dependence Upon Obtaining New Members. The Company's financial
condition is dependent upon increasing the number of members participating in
the Company's benefit plans and using the Company's services. There can be no
assurances that new members can be enrolled and/or retained in the Company's
programs and that the Company will be able to maintain or improve upon the
current level of profitability. See "Business."
Dependence On Certain Sponsors. Three of the Company's Sponsors
accounted for an aggregate of 46% of the Company's revenue during the fiscal
year ended May 31, 1997. The loss of any of these Sponsors would have a material
adverse effect on the Company. See "Business."
Regulation. The delivery of healthcare products and services is subject
to extensive federal, state and local regulation. New interpretation of current
or future statutes or regulations could have a material adverse effect on the
conduct, growth, or profitability of the Company's business. See "Business."
Conflict of Interest. As a result of tenders in the Exchange Offer it
is possible that the Common Stock may increase in value. Executive officers and
directors own 28% and 26% of the Series 2 Shares and Common Stock, respectively,
and hold options and warrants to acquire an additional 2,980,750 Shares of the
Common Stock (or 59% of the outstanding shares of Common Stock, assuming full
exercise of the options and warrants). If all Series 2 Shares were exchanged for
Series A Shares, the pro forma earnings per share of Common Stock increase from
2(cent) per share loss to 2(cent) per share gain for the nine months ended
February 28, 1998. This earnings per share increase may increase the market
value or trading price of the Common Stock. In authorizing the Exchange Offer
and establishing the terms of the Series A Shares, directors faced conflicts of
interest in formulating the Exchange Offer and establishing the terms of the
Series A Shares, including
12
<PAGE>
eliminating the dividend arrears and reducing the annual rate for preferred
dividends that must be paid before any dividends on the Common Stock, and in
establishing the conversion ratio into Common Stock. See "Management."
Tax Considerations. Holders of Series 2 Shares who also own Common
Stock or who elect to exchange only part of their Series 2 Shares for Series A
Shares may have the Series A Shares classified as "Section 306 Stock." If the
stock of the Company is "Section 306 Stock" and no exemptions apply, some or all
of the proceeds for the sale of stock in the Company, depending on the
circumstances, could be taxed at ordinary income levels and losses could be
disallowed. Furthermore, if the Company, as of the issue date of the Series A
Shares, was more likely than not to exercise its redemption rights with respect
to the Series A Shares and other conditions were present, the exchange of Series
2 Shares for Series A Shares could result in the recognition of gain or loss or
be treated as a dividend. See "Certain Federal Income Tax Considerations."
No Market For the Series A Shares, Series 2 Shares or Common Stock.
Except for trading of Series 2 Shares and Common Stock in the "pink sheets" or
"electronic bulletin board," no public market currently exists and no assurances
can be given that any active market will develop upon completion of this
Exchange Offer. The Company currently does not qualify to obtain or maintain a
Nasdaq listing or a listing on any other securities exchange.
Control By Management. 26% of the outstanding Common Stock and 28% of
the Series 2 Shares are currently held by directors and executive officers of
the Company. In addition, officers and/or directors hold options or warrants to
acquire an additional 2,980,750 shares of Common Stock that would be outstanding
after the exercise thereof, giving them approximately 59% of the total. As a
consequence, management will continue to be able to exert influence over the
Company's policies after completion of the Exchange Offer. See "Management."
No Dividends on Common Stock or Series 2 Shares. The Company has never
paid any dividends on its Common Stock and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. Based upon current
profitability, the Company does intend to pay dividends on the Series A Shares
as such dividends accrue, but at current operating levels and pursuant to the
Certificate of Incorporation does not believe it will be able to declare and pay
dividends on the Series 2 Shares for the foreseeable future.
BUSINESS
General
The Company nationally markets and administers vision, hearing, dental
and chiropractic managed care and discount programs ("Programs"). These programs
are designed to enable participants ("Members") who are enrolled through various
Sponsoring organizations, such as insurance carriers, Blue Cross/Blue Shield
organizations, corporations, unions and various associations ("Sponsors"), to
realize savings on purchases of products and services through networks of
providers such as: ophthalmologists, optometrists, opticians, hearing
specialists, dentists and chiropractors ("Providers"). The Company formerly
operated a pharmaceutical discount program.
13
<PAGE>
Administration fees and provider fee revenue have been derived from the
product lines in the following proportions:
<TABLE>
<CAPTION>
Nine Months Fiscal Years Ended May 31,
Ended -------------------------
February 28, 1998 1997 1996
----------------- ---- ----
<S> <C> <C> <C>
Vision and Hearing Programs 81% 69% 68%
Dental Program 19% 31% 31%
Chiropractic Program 0% 0% 0%
Pharmaceutical Program1 0% 0% 1%
</TABLE>
Vision Program
The Company offers provider networks and administrative services for
group vision programs. Its Vision Program is designed to provide savings by
reducing the cost of eye examinations and materials (frames, eyeglass lenses and
contact lenses).
Under the Company's Vision Program, a Member is entitled to discounted
pricing for eye examinations and the purchase of eyewear at network Provider
locations. The Member is fully responsible for paying the Provider unless the
Sponsor (a self-funding employer or insurer) is obligated to pay the Provider,
or reimburse the Member. In some cases, the Company may act as a third party
administrator for the Sponsor and pay Provider claims from funds provided by the
Sponsor for that purpose.
Under some Programs, each Member pays an annual enrollment fee to the
Company for the right to utilize network Providers and receive discounts. In
other cases, Sponsors pay an enrollment fee for each Member.
If the Program has insured or self-funded benefits, the Sponsor
determines the products and services that will be covered, how frequently the
benefit is available and, subject to local law, whether reimbursement for
non-network Provider purchases will be made.
The Company principally derives revenues from fees paid by or on behalf
of Members for enrollment, plan administration and services, and claims
administration, and in certain cases also derives revenues from fees paid by
Providers when Members purchase eyewear and services.
- --------
(1) The pharmaceutical line was sold in December 1992. The Company provided
services related to the pharmaceutical program through July 1995.
14
<PAGE>
The table below sets forth the approximate numbers of Providers and
Members enrolled in the Vision Program at the dates indicated:
<TABLE>
<CAPTION>
Date Number of Number of Number of
---- Providers States Members
--------- ------ -------
<S> <C> <C> <C>
February 28, 1998 4,394 47 676,000
May 31, 1997 3,220 48 385,000
May 31, 1996 3,332 48 396,000
</TABLE>
Substantially all of the Providers indicated above are optometrists. The number
of Members indicated in the above table are as reported to the Company by
Sponsors and may not include eligible spouses and children of Members.
The Company has entered into arrangements with certain frame
manufacturers which enable Providers to obtain frames at prices below wholesale.
The Company has a buying group for Providers to seek larger discounts on frames.
The Company is billed directly by the frame manufacturers and is responsible for
the billing and collection of amounts due from the Providers. The Company
receives a discount, in addition to the amount given to the Providers, by the
frame manufacturers to pay for the cost of administering the buying group
program. Providers are not obligated to purchase from designated suppliers.
Hearing Program
The Company's hearing program (the "Hearing Program") has been marketed
principally as an adjunct to the Vision Program. Revenues from the Hearing
Program have not been significant. A Hearing Program Member may obtain a hearing
evaluation by a Provider for a reduced fee. In addition, the Member may purchase
a hearing aid from a Provider at wholesale cost plus a professional fee or at a
discount from the Provider's usual charge, depending on the options selected by
the Plan Sponsor. Such benefits are also available to the Member's spouse,
children, parents and grandparents.
Dental Program
The Company establishes and maintains dental Provider networks which it
also makes available to Sponsors. Fees charged to Members by Providers are based
upon panel fee schedules which the Providers have agreed to accept. Like the
Vision Program, the Company's dental program (the "Dental Program") is offered
both for Members who are themselves responsible for paying 100% of the costs of
their care to their Providers, and for Programs under which the Sponsor assumes
the obligation of paying Providers (or reimbursing Members) for the agreed-upon
costs of specified care. Revenues from the Dental Program principally are
derived in the same manner as in the case of the Vision Program.
15
<PAGE>
The table below sets forth the approximate number of Providers and
Members enrolled in the Dental Program at the dates indicated, as reported to
the Company by the Sponsors:
<TABLE>
<CAPTION>
Date Number of Number of Number of
---- Providers States Members
--------- ------ -------
<S> <C> <C> <C>
February 28, 1998 11,045 50 129,000
May 31, 1997 11,082 43 118,000
May 31, 1996 3,776 41 95,000
</TABLE>
Included in the number of Providers in the table above as of February 28, 1998
and May 31, 1997 are 5,726 and 6,180, respectively, who participate in a third
party's Provider network. The Company has a network rental agreement which
allows Members to utilize the services of the third party's Provider network.
Chiropractic Program
The Company has developed a program for cost-effective and budgetable
delivery of chiropractic services. Members pay reduced fees to the Provider for
history and physical examinations, spinal manipulation, non-manual procedures,
physiotherapy, acupuncture and additional care. The Company derived its first
revenues from the Chiropractic Program in the first quarter of fiscal 1997.
Although the Company has not generated significant revenues from the
Chiropractic Program, it believes the Program is important because it enables
the Company to offer to Sponsors a complete line of ancillary benefits.
Provider Networks
The Company usually contracts with Providers to provide services
simultaneously with the plan Sponsor's development of a membership base in a
geographic area; however, some Providers are enlisted in expansion areas where
there is little or no membership base. The Programs supplement the practices of
Providers by enabling them to obtain additional patients who are Members while
allowing Providers to retain their existing practices. Although Members
generally pay fees and charges less than those of non-Member patients, the
incremental revenues from Member patients can be an important source of revenue
to Providers. There can be no assurance that Providers will continue to
participate in the Programs even if their participation results in such an
increase in revenues since the business derived from the Programs may be less
profitable than other aspects of their practices.
The Company periodically reviews a portion of its Providers. This
review includes the use of a patient survey form which is distributed on a
random basis by the Company to Members, the investigation of any complaints
received from Members and a desk or field audit by a Company auditor to confirm
that Members were not charged more than the contracted prices for services and
products.
16
<PAGE>
Program Administration and Administration of Claims
The Company receives fees from Sponsors for program administration
services. These fees vary depending upon the type of program involved, the
number of card-holding Members in a Sponsor's program, and the extent of claims
administration and other administrative services involved.
When the Company acts as a third party administrator for Programs under
which the Sponsor pays for Providers' services, Members obtaining services from
Providers present their cards to the Providers, who in certain cases contact the
Company to confirm eligibility and, upon performance of services, submit claim
forms to the Company. The Company processes the claims, requests funds from the
appropriate Sponsors, and forwards payments to the Providers and/or Members from
the funds received from Sponsors. Monthly information about the use of the
Programs by Members and cost savings is reported to certain Sponsors.
Although the Company does not believe it would have any liability due
to any malpractice on the part of any Provider, the usual form of Provider
Agreement requires each Provider to indemnify the Company against any claim
based on the negligence of the Provider in the performance of services for
Members. In addition, Providers are required to carry malpractice insurance with
limits equal to or greater than their stated required minimums.
Marketing
The Company markets nationally to potential Sponsors which have or have
access to a large number of potential Members. Marketing is done through the
efforts of the Company's sales personnel and unaffiliated insurance brokers,
general agents and employee benefit consultants compensated on a commission
basis. Substantial marketing services are also provided through National Health
Enterprises, Inc. ("NHE").
The Company's sales and marketing personnel market the full range of
the Company's products and services. The Company believes that offering a range
of products and services in multiple product lines differentiates it from its
competitors and enables it to offer a more comprehensive solution to its
customers' benefits needs.
17
<PAGE>
The following customers accounted for more than 10% of the Company's
revenues during the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended Year ended Year ended
February 28, 1998 May 31, 1997 May 31, 1996
----------------- ------------ ------------
<S> <C> <C> <C>
National Insurance Services, Inc. 0% 6% 27%
Fraternal Order of Police/
Department of Corrections
(Washington, D.C.) 9% 15% 13%
Blue Cross/Blue Shield of Arizona 16% 17% 12%
HealthPartners HealthPlan 37% 14% 0%
</TABLE>
The Company is substantially dependent on a limited number of customers
and would be materially adversely affected by termination of its agreements with
such customers.
Competition
The Company competes for potential Sponsors, Members and Providers,
depending on the geographic area or market, with various provider organizations,
health maintenance organizations and health care membership programs. Most of
these competitors have significantly greater financial, marketing and
administrative resources than the Company. The Company believes it has an
advantage over its competitors because it is able to offer a full line of
ancillary benefits while substantially all of its competitors concentrate on one
benefit line.
Regulation
Certain registration and licensing laws and regulations (including
those applicable to third party administrators, preferred provider
organizations, franchises and business opportunities) in many states in which
the Company operates may have application to various of the Company's programs.
In addition, statutes and regulations applicable to insurers and providers,
including those relating to fee splitting, referral fees, advertising, patient
freedom of choice, provider rights to participate and antidiscrimination in
reimbursement, may impact the Company. The Company believes that it is in
substantial compliance with such laws and regulations. However, there can be no
assurance that changes in enforcement and compliance practices will not occur in
the future, or that existing laws and regulations will not be broadened. In any
such event, the Company could be required to effect registration in various
additional states and/or post substantial fidelity or surety bonds in connection
therewith. Alternatively, the Company may be required to alter substantially the
services offered by it, modify its contractual arrangements with Sponsors,
Providers and Members, be precluded from providing some or all of its services
in some states, or be subject to substantial fines or penalties. Any or all of
the foregoing consequences could materially adversely affect the Company.
18
<PAGE>
Employees
As of March 25, 1998, the Company had 39 full-time and 1 part-time
employees.
19
<PAGE>
PRO FORMA UNAUDITED CONSOLIDATED
AVESIS INCORPORATED FINANCIAL STATEMENTS
Balance Sheet (Unaudited)
As of February 28, 1998
<TABLE>
<CAPTION>
Proforma Assuming Exchange
As --------------------------------------------------------
ASSETS Reported 25% 50% 75% 100%
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 797,820 $ 797,820 $ 797,820 $ 797,820 $ 797,820
Receivables, net 377,399 377,399 377,399 377,399 377,399
Prepaid expenses and other 109,916 109,916 109,916 109,916 109,916
----------- ----------- ----------- ----------- -----------
Total current assets 1,285,135 1,285,385 1,285,385 1,285,385 1,285,385
Property and equipment, net 423,129 423,129 423,129 423,129 423,129
Deposits and other assets 258,296 258,296 258,296 258,296 258,296
----------- ----------- ----------- ----------- -----------
Total Assets $ 1,966,560 $ 1,966.560 $ 1,966,560 $ 1,966,560 $ 1,966,560
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 855,424 $ 855,424 $ 855,424 $ 855,424 $ 855,424
Accrued expenses--
Compensation 41,196 41,196 41,196 41,196 41,196
Rent 30,158 30,158 30,158 30,158 30,158
Other 23,251 23,251 23,251 23,251 23,251
Capital lease, short-term 10,288 10,288 10,288 10,288 10,288
Notes payable to shareholders 160,000 160,000 160,000 160,000 160,000
Deferred income 16,950 16,950 16,950 16,950 16,950
----------- ----------- ----------- ----------- -----------
Total current liabilities 1,137,267 1,137,267 1,137,267 1,137,267 1,137,267
Accrued rent 68,544 68,544 68,544 68,544 68,544
Capital lease, long-term 33,652 33,652 33,652 33,652 33,652
----------- ----------- ----------- ----------- -----------
Total liabilities 1,239,463 1,239,463 1,239,463 1,239,463 1,239,463
Shareholders' equity:
Preferred stock $.01 par value,
authorized 12,000,000 shares
Series A Shares -- 970 1,941 2,912 3,882
Series 2 Shares 3,882 2,912 1,941 970 --
Common Stock of $.01 par value,
authorized 20,000,000 shares;
4,021,126 shares issued and
outstanding 40,211 40,211 40,211 40,211 40,211
Additional paid-in capital 9,929,321 9,929,321 9,929,321 9,929,321 9,929,321
Accumulated deficit (9,246,317) (9,246,317) (9,246,317) (9,246,317) (9,246,317)
----------- ----------- ----------- ----------- -----------
Net shareholders' equity 727,097 727,097 727,097 727,097 727,097
----------- ----------- ----------- ----------- -----------
Total Liabilities and Shareholders' Equity $ 1,966,560 $ 1,966,560 $ 1,966,560 $ 1,966,560 $ 1,966,560
=========== =========== =========== =========== ===========
Book Value
Series A Shares -- $ 3.75 $ 3.75 $ 2.50 $ 1.87
Series 2 Shares $ 1.87 $ 1.25 -- -- --
Common Stock -- -- -- -- --
Total Net Shareholder Equity $ 727,097 $ 727,097 $ 727,097 $ 727,097 $ 727,097
=========== =========== =========== =========== ===========
Series 2 Shares Dividend Arrearage 1,921,491 1,441,118 760,746 480,373 --
(as of March 31, 1998)
</TABLE>
20
<PAGE>
Avesis Incorporated
Statements of Operations (Unaudited)
For the Nine Months Ended February 28, 1998
<TABLE>
<CAPTION>
Pro Forma Assuming Exchange
As -----------------------------------------------------------
Reported 25% 50% 75% 100%
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Service revenues:
Administration Fees $ 4,594,003 $ 4,594,003 $ 4,594,003 $ 4,594,003 $ 4,594,003
Buying group sales 1,197,774 1,197,774 1,197,774 1,197,774 1,197,774
Provider fees 86,959 86,959 86,959 86,959 86,959
Other 4,980 4,980 4,980 4,980 4,980
----------- ----------- ----------- ----------- -----------
Total service revenues 5,883,716 5,883,716 5,883,716 5,883,716 5,883,716
Cost of services 4,422,165 4,422,165 4,422,165 4,422,165 4,422,165
----------- ----------- ----------- ----------- -----------
Income from services 1,461,551 1,461,551 1,461,551 1,461,551 1,461,551
General and administrative 710,736 710,736 710,736 710,736 710,736
expenses
Selling and marketing expenses 553,021 553,021 553,021 553,021 553,021
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 197,794 197,794 197,794 197,794 197,794
Non-operating income (expense):
Other income (expense) (24,980) (24,980) (24,980) (24,980) (24,980)
Interest income 24,394 24,394 24,394 24,394 24,394
Interest expense (18,920) (18,920) (18,920) (18,920) (18,920)
----------- ----------- ----------- ----------- -----------
Net non-operating
income/(expense) (19,506) (19,506) (19,506) (19,506) (19,506)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 178,288 $ 178,288 $ 178,288 $ 178,288 $ 178,288
=========== =========== =========== =========== ===========
Net income (loss) per common $ (0.02) $ (0.01) $ 0.00 $ 0.01 $ 0.02
Share - Basic*
Net income (loss) per common $ (0.02) $ (0.01) $ 0.00 $ 0.01 $ 0.02
Share - Diluted*
Weighted average common shares
and equivalents outstanding - Basic 4,088,045 4,088,045 4,088,045 4,088,045 4,088,045
Weighted average common shares
and equivalents outstanding - Diluted 4,113,245 4,113,245 4,113,245 4,113,245 4,113,245
</TABLE>
*The earnings per share increase is a result of the difference in dividend
amounts between the Series 2 Shares and the Series A Shares.
21
<PAGE>
Avesis Incorporated
Statements of Operations (Unaudited)
For the Three Months Ended February 28, 1998
<TABLE>
<CAPTION>
Proforma Assuming Exchange
As ---------------------------------------------------------
Reported 25% 50% 75% 100%
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Service revenues:
Administration Fees $ 1,675,511 $ 1,675,511 $ 1,675,511 $ 1,675,511 $ 1,675,511
Buying group sales 392,165 392,165 392,165 392,165 392,165
Provider fees 32,163 32,163 32,163 32,163 32,163
Other 2,373 2,373 2,373 2,373 2,373
----------- ----------- ----------- ----------- -----------
Total service revenues 2,102,212 2,102,212 2,102,212 2,102,212 2,102,212
Cost of services 1,572,476 1,572,476 1,572,476 1,572,476 1,572,476
----------- ----------- ----------- ----------- -----------
Income from services 529,736 529,736 529,736 529,736 529,736
General and administrative 252,989 252,989 252,989 252,989 252,989
expenses
Selling and marketing expenses 219,936 219,936 219,936 219,936 219,936
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 56,811 56,811 56,811 56,811 56,811
Non-operating income (expense):
Other income (expense) (807) (807) (807) (807) (807)
Interest income 6,976 6,976 6,976 6,976 6,976
Interest expense (3,759) (3,759) (3,759) (3,759) (3,759)
Net non-operating
income/(expense) 4,024 4,024 4,024 4,024 4,024
----------- ----------- ----------- ----------- -----------
Net Income $ 60,835 $ 60,835 $ 60,835 $ 60,835 $ 60,835
=========== =========== =========== =========== ===========
Net income (loss) per
common Share - Basic* $ (0.01) $ 0.00 $ 0.00 $ 0.00 $ 0.01
=========== =========== =========== =========== ===========
Net income (loss) per
common Share - Diluted* $ (0.01) $ 0.00 $ 0.00 $ 0.00 $ 0.01
=========== =========== =========== =========== ===========
Weighted average common
shares and equivalents
outstanding - Basic 4,065,661 4,065,661 4,065,661 4,065,661 4,065,661
Weighted average common
shares and equivalents
outstanding - Diluted 4,065,661 4,065,661 4,065,661 4,065,661 4,065,661
</TABLE>
*The earnings per share increase is a result of the difference in dividend
amounts between the Series 2 Shares and the Series A Shares.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis For the Third Quarter and Nine
Months Ended February 28, 1998 and February 28, 1997, respectively.
The statements contained in this discussion and analysis regarding
management's anticipation of adequacy of cash for continuing operations,
adequacy of reserves for claims, sustained viability of the Company and
continued positive cash flows constitute "forward-looking" statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based upon assumptions that involve risks and
uncertainties, which could cause actual results to differ materially from the
forward-looking statements. Management's anticipation is based upon assumptions
regarding the market in which the Company operates, the level of competition,
demand for services, stability of costs, retention of sponsors and cardholders
enrolled in the Company's benefit programs, and stability of the regulatory
environment. Any of these assumptions could prove inaccurate, and therefore
there can be no assurance that the forward-looking information will prove to be
accurate.
Results of Operations:
- ----------------------
The Company's service revenues were $2,102,212 and $5,883,716 for the
quarter and nine months ended February 28, 1998, compared to $1,416,514 and
$3,965,818 for the same periods in the prior year, representing an increase of
$685,698 (33%) and $1,917,898 (33%), respectively. The increase is principally
due to the addition of a vision plan Sponsor who added 130,000 Cardholders
during July 1997 and the steady increase of Cardholders in a majority of the
Company's existing plans.
Past and future revenues in all lines of business are directly related
to the number of Cardholders enrolled in the Company's benefit programs.
However, there may be significant pricing differences to Sponsors depending on
whether the benefit is funded in part or whole by the plan Sponsor. A
substantial portion of the Company's Cardholder base is derived from a limited
number of Sponsors. The Company's four largest sponsors accounted for
approximately 83% and 59% of the total administration fee revenue for the
quarters ended February 28, 1998 and 1997, respectively.
The Company's administration fees from vision and hearing programs
accounted for $1,412,283 (67%) and $753,868 (53%) of total service revenues for
the quarters ended February 28, 1998 and 1997, respectively, and $3,698,152
(63%) and $1,727,865 (44%) of total service revenues for the nine months ended
February 28, 1998 and 1997, respectively. There were approximately 676,000
vision and 6,500 hearing cardholders as of February 28, 1998, compared to
approximately 366,000 vision and 40,000 hearing cardholders as of February 28,
1997. The increase in vision and hearing revenue during the current quarter and
nine months was largely the result of three vision plan Sponsors who increased
Cardholders by approximately 300,000. The decrease in hearing
23
<PAGE>
cardholders was largely due to the discontinuation of services for one hearing
plan Sponsor with approximately 32,000 total cardholders. The loss of hearing
cardholders did not have a material impact on total service revenues. The other
changes in the number of vision and hearing cardholders were due to Sponsors'
employee or Member fluctuations in the normal course of business.
Vision provider fee revenue declined by $6,722 (17%) and $20,262 (19%)
during the quarter and nine months ended February 28, 1998, as compared to the
same periods in fiscal 1997 largely due to a modification of the Company's
agreements with its Providers in response to competitive pressures. Under the
modified agreement, for new Sponsors, the Providers are not required to pay a
fee based on gross sales to that Sponsor's Members.
Administration fees from the Company's dental program accounted for
$256,312 (12%) and $245,921 (17%) of total service revenues during the quarters
ended February 28, 1998 and 1997, respectively, and $878,548 (15%) and $946,590
(24%) of total service revenues during the nine months ended February 28, 1998
and 1997, respectively. There were approximately 129,000 and 80,000 dental
cardholders as of February 28, 1998 and 1997, respectively. The Company's dental
program revenue has increased during the current quarter compared to the same
period in the prior fiscal year, and the number of dental cardholders has
increased. Due to pricing differences among the different plan benefits, as
discussed above, revenue did not increase at a rate proportional to the increase
of cardholders, which accounted for the decrease in revenue in the current
nine-month period. The changes in the number of dental cardholders were due to
one new Sponsor and significant increases in two other Sponsors' Members.
The Company makes available to its vision Providers a buying group
program that enables the Provider to order eyeglass frames from the
manufacturers at discounts from wholesale costs. These discounted prices are
generally lower than a Provider could negotiate individually, due to the large
volume of purchases of the buying group. Buying group revenues accounted for
$392,165 (19%) and $368,344 (26%) of total service revenues for the quarters
ended February 28, 1998 and 1997, respectively, and $1,197,774 (20%) and
$1,127,865 (28%) of total service revenues for the nine months ended February
28, 1998 and 1997, respectively.
Card production activity for non-Company groups was phased out during
the quarter ended February 28, 1997, as the historical revenues generated from
this activity were not sufficient to justify the resources expended. Revenues
resulting from this activity were recorded by the Company as other service
revenues.
Cost of services were $1,572,476 (75%) and $1,091,994 (77%) for the
quarters ended February 28, 1998 and 1997, respectively, and $4,422,165 (75%)
and $2,856,054 (72%) for the nine months ended February 28, 1998 and 1997,
respectively. These costs relate to servicing Members, Providers, and Sponsors
under the Company's vision, hearing, dental and chiropractic benefit programs as
well as the cost of frames that are sold through the Company's buying group
program as discussed above. The Company's cost of services for the current
fiscal year as compared to the prior fiscal year increased as a percentage of
total service revenues due to a shift in product mix from discount to managed
care programs which have greater associated costs due to additional customer
service and claims payment functions.
24
<PAGE>
General and administrative expenses were $252,989 (12%) and $250,832
(18%) for the quarters ended February 28, 1998 and 1997, respectively, and
$710,736 (12%) and $757,776 (19%) for the nine months ended February 28, 1998
and 1997, respectively. The decrease in general and administrative expenses, as
a percentage of total service revenues, in the quarter and nine months ended
February 28, 1998, as compared to the same periods in fiscal 1997 is due to a
decrease in rent expense resulting from the relocation of the Company's
principal office, a decrease in depreciation expense as the Company abandoned a
significant portion of software to the start of the current year, and the
increase in total service revenues in fiscal 1998.
Selling and marketing expenses were $219,936 (14%) and $101,340 (7%)
for the quarters ended February 28, 1998 and 1997, respectively, and $553,021
(9%) and $392,291 (10%) for the nine months ended February 28, 1998 and 1997,
respectively. Selling and marketing expenses include marketing fees, broker
commissions, inside sales and marketing salaries and related expenses, travel
related to the Company's sales activities and an allocation of other overhead
expenses relating to the Company's sales and marketing functions. The increase
in expenses during the current period was primarily due to the addition of
personnel involved in the Company's sales and marketing activities and the
increase of commission expense.
Other expense of $24,980 for the nine months ended February 28, 1998
includes the write-off of unamortized moving expenses of $25,835 related to the
Company's previous relocation of the principal office. The Company capitalized
$14,588 of moving expenses, included in deposits and other assets, related to
the relocation of the Company's principal office during October 1997, which will
be amortized over the five-year life of the current lease agreement.
Liquidity and Capital Resources
- -------------------------------
The Company had cash and cash equivalents of $797,820 as of February
28, 1998, compared to $817,535 as of May 31, 1997. The decrease of $19,715 was
due primarily to the Company's financing of the development of new software
systems, the purchase of necessary new computer hardware and the retirement of
the remaining convertible subordinated debentures outstanding, from cash
provided by operations. Current cash on hand and cash provided from operations
is expected to allow the Company to sustain operations for at least the next
twelve months.
As of February 28, 1997, the Company had paid approximately $253,000
for software development and related hardware of the projected total of
$250,000. The budget overage of approximately $3,000 was a result of additional
hardware needs due to the growth of staff. These expenses also would have been
incurred on the previous platform and are in the normal course of business. All
significant expenses related to the new systems development have been paid as of
February 28, 1998. The project is anticipated to be completed and operational by
the end of the Company's fiscal year.
As of February 28, 1998, the Company has $855,424 of Accounts Payable,
compared to $516,820 in the prior fiscal year. The increase is predominately due
to the increase in reserves for claims of $372,500 to $564,348 as of February
28, 1998, for claim reimbursements to Providers who participate in the managed
care programs. The Company believes this reserve is conservative and
25
<PAGE>
adequate. The remaining change in Accounts Payable was due to the timing of
invoices received in the normal course of business. The Company is current and
in good standing with its vendors.
As of February 28, 1998, the Company had $160,000 of subordinated notes
payable to shareholders that were due and paid on March 18, 1998.
MARKET AND TRADING INFORMATION
The Company's Series 2 Shares and Common Stock are quoted in the
over-the-counter market and quotations are reported in the "pink sheets"
published by the National Quotation Bureau, Inc. and via the National
Association of Securities Dealers' Inc. Electronic Bulletin Board. The following
table sets forth the high and low bid price for the Company's Series 2 Shares
and Common Stock as reported by the National Quotation Bureau, Inc. for fiscal
1998 and each quarterly period during fiscal 1997 and 1996. Such market
quotations reflect inter-dealer prices, without retail markup, markdown or
commission and may not represent actual transactions.
26
<PAGE>
<TABLE>
<CAPTION>
Series 2 Shares Common Stock
------------------- -------------------
Bid Quotation Range Bid Quotation Range
------------------- -------------------
Fiscal Year 1998 High Low High Low
---------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $1.25 $1.25 $0.25 $0.1875
Second Quarter 1.25 1.00 0.21875 0.15625
Third Quarter 1.125 1.0625 0.27 0.1875
Fourth Quarter (through 1.125 1.125 0.27 0.1875
April 21, 1998)
Fiscal Year 1997
----------------
First Quarter $2.75 $2.50 $0.6875 $0.375
Second Quarter 2.50 1.00 0.4375 0.125
Third Quarter 1.00 1.00 0.2188 0.125
Fourth Quarter 1.25 1.00 0.25 0.1875
Fiscal Year 1996
----------------
First Quarter $2.75 $2.50 $1.375 $0.9375
Second Quarter 2.75 2.75 1.01 0.5625
Third Quarter 2.75 2.75 1.00 0.75
Fourth Quarter 2.75 2.50 0.875 0.6875
</TABLE>
On April 21, 1998, two days prior to the Exchange Offer, the bid and ask price
of the Series 2 Shares was $1.125 and $2.625, respectively, and the bid and ask
price of the Common Stock was $.1875 and $.28125, respectively. Holders are
encouraged to seek more current information.
The exchange of the Series 2 Shares pursuant to the Exchange Offer will
reduce the number of the Series 2 Shares that might otherwise trade publicly and
the number of holders of such shares and, depending on the number of shares
exchanged, could adversely affect the liquidity and the "pink sheet" market
value of remaining shares. At the same time, there is no assurance that any
market will develop for the Series A Shares issued pursuant to the Exchange
Offer.
27
<PAGE>
PROPERTIES
As of October 1997, the Company maintains its executive offices at 3724
North Third Street, Suite 300, Phoenix, Arizona 85012, in space leased from an
independent party. The lease agreement covers approximately 6,700 usable square
feet of space and expires on September 30, 2002.
Until October 1997 the Company maintained its executive offices at 100
West Clarendon, Suite 2300, Phoenix, Arizona 85013. The lease agreement covers
approximately 13,300 usable square feet of space and expires on September 30,
2000. On October 29, 1996 the Company entered into an agreement to sublease
approximately 9,090 usable square feet of space through October 1, 1997 and all
13,300 usable square feet thereafter, until the expiration of the Company's
lease agreement.
The Company owns and leases various computer equipment, data processing
and other office equipment. The Company believes that its facilities and
equipment are maintained in good operating condition and are adequate for the
present level of operations.
LEGAL PROCEEDINGS
The Company is currently not a party to any litigation.
Certain Legal Matters; Regulatory Approvals.
The Company is not aware of any license or regulatory permit that
appears to be material to the Company's business that might be adversely
affected by the Exchange Offer as contemplated herein or of any approval or
other action by any government or governmental, administrative or regulatory
authority or agency, domestic or foreign, that would be required. Should any
such approval or other action be required, the Company presently contemplates
that such approval or other action will be sought. The Company is unable to
predict whether it may determine that it is required to delay the acceptance
pursuant to the Exchange Offer pending the outcome of any such matter. There can
be no assurance that any such approval or other action, if needed, would be
obtained or would be obtained without substantial conditions or that the failure
to obtain any such approval or other action might not result in adverse
consequences to the Company's business. The Company's obligation under the
Exchange Offer to accept for exchange and to exchange Shares is subject to
certain conditions.
The Exchange Offer is not being made to, nor will the Company accept
tenders from, holders of the Series 2 Shares in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction. The Exchange Offer is being
made in the States where all known holders reside, which are the States of
Arizona, California, Colorado, Connecticut, Florida, Maryland, New Jersey, New
York, and Tennessee. If the Company becomes aware of a holder located in another
State, it will make a good faith effort to comply with the applicable securities
law of such State and, if compliance is not possible or practicable, the Offer
to Exchange will not be open to such person.
28
<PAGE>
MANAGEMENT
Based upon the Company's records and upon information provided to the
Company by its Directors, executive officers and affiliates, neither the Company
nor its subsidiary nor, to the best of the Company's knowledge, any of the
Directors or executive officers of the Company nor its subsidiary, nor any
associates of any of the foregoing, has effected any transaction in the Series 2
Shares during the last 90 days.
Except as set forth in this Exchange Offer, neither the Company nor, to
the best of the Company's knowledge, any of its affiliates, Directors or
executive officers or any of the executive officers or Directors of its
subsidiary, is a party to any contract, arrangement, understanding or
relationship with any other person relating, directly or indirectly, to the
Exchange Offer with respect to any securities of the Company (including, but not
limited to, any contract, arrangement, understanding or relationship concerning
the transfer of the voting of any such securities, joint ventures, loan or
option arrangement, puts or calls, guarantees of loans, guarantees against loss
or the giving or withholding of proxies, consents or authorizations). The
Company has retained Richter & Co., Inc. an affiliate of one of the Company's
directors, to develop the conceptual idea that led to the Exchange Offer. Under
such agreement, Richter & Co., Inc. will not solicit any tenders in the Exchange
Offer and will receive $50,000 and 250,000 shares of Common Stock for providing
such services to the Company.
The following information is given as of April 15, 1998 (the "Reporting
Date") and concerns beneficial ownership of the Series 2 Shares and Common
Stock, and options to acquire such securities, by the Directors and executive
officers of the Company and the known holders of 5% or more of either class of
security. The following table includes Mr. Alan S. Cohn who will become the
Chief Executive Officer of the Company effective June 1, 1998. According to the
rules adopted by the Commission, "beneficial ownership" of securities for this
purpose is the power to vote them or direct their investment, and includes the
right to acquire beneficial ownership within 60 days. Except as otherwise
indicated, the listed owners have sole voting and investment power with respect
to shares beneficially owned. A total of 388,180 Series 2 Shares were
outstanding on the reporting date. A total of 4,021,126 shares of Common Stock,
together with options and warrants for an additional 5,290,000 shares of Common
Stock (with exercise prices of $.40 to $1.00), were outstanding on that date.
29
<PAGE>
<TABLE>
<CAPTION>
Common Stock Series 2 Shares Beneficially Owned
------------------- -------------------------- ----------------------------
Options Total
and/or Common % of
Warrants Stock Common
Common for Common Series 2 Beneficially Stock
Stock % of Stock Preferred % of Owned Beneficially
Class Shares Class (1)(2) Owned
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
William L. Richter, 406,951 10.1% 521,000 47,599 12.3% 1,046,949 14.4%
director(3)
William R. Cohen, 61,117 1.5% 100,000 10,582 2.7% 187,572 2.6%
director
Samuel Oolie, director 220,021 5.5% 100,000 24,023 6.2% 380,079 5.2%
Kenneth L. Blum, 140,000 3.5% - 5,000 1.3% 152,500 2.1%
Sr., director (4)
Gerald L. Cohen, 153,359 3.8% 100,000 22,274 5.7% 309,044 4.3%
director
Alan S. Cohn, 50,000 1.2% 1,754,750 - * 1,804,750 24.8%
effective June 1,
1998 Chief Executive
Officer
Neal A. Kempler, Vice - * 255,000 - * 255,000 3.5%
President
Joel Alperstein, - * 150,000 - * 150,000 2.1%
Treasurer
Kenneth L. Blum, Jr. 50,000 1.2% 1,764,750 - * 1,814,750 24.9%
(5)
Benjamin D. Ward (6) 931,888 23.2% - - * 931,888 12.8%
All Directors and 1,031,448 25.6% 2,980,750 109,478 28.2% 4,285,894 59.0%
Executive Officers as
a group (8 persons)
</TABLE>
* Less than 1.0%
(1) Unless otherwise indicated, the specified persons have sole voting
and/or dispositive power as to all of the shares indicated.
(2) Assumes conversion of the Series 2 Shares into Common Stock and the
exercise of all options and/or warrants. After the Exchange Offer and
assuming the exchange of all Series 2 Shares for Series A shares and
the conversion of the Series A Shares into Common Stock, the total
Common Stock beneficially owned by the executive officers and directors
would be: Mr. Richter, 17.3%, Mr. W. Cohen, 3.3%, Mr. Oolie, 6.9%, Mr.
Blum Sr., 2.3%, Mr. G. Cohen, 5.9%, Mr. Cohn, 22.3%, Mr. Kempler, 3.1%,
Mr. Alperstein, 1.9% and all directors and executive officers as a
group 63.0%.
(3) Excludes the 250,000 shares of Common Stock that will be received as a
fee for services and excludes 2,500 Series 2 Shares held by spouse as
to which beneficial ownership is disclaimed.
(4) The shares are held by Mr. Blum's spouse.
(5) Kenneth L. Blum, Jr. is the owner of National Health Enterprises, Inc.
("NHE") and as described below, NHE manages substantially all aspects
of the Company's business. The Company does not consider Mr. Blum, Jr.
to be an executive officer. His business address is 11460 Cronridge
Drive, Suite 120, Owings Mills, MD 21117.
(6) Mr. Ward's address is 4712 North 41st Place, Phoenix, Arizona 85018.
30
<PAGE>
The Company's directors and executive officers have stated their
intention to tender all of their Series 2 Shares subject to the terms and
conditions of the Exchange Offer.
Agreements with National Health Enterprises, Inc.("NHE")
Management Agreement. Effective March 18, 1993, the Company entered
into a Management Agreement (the "Management Agreement") with NHE pursuant to
which NHE agreed to manage substantially all aspects of the Company's business,
subject to certain limitations and the direction of the Company's Board of
Directors. NHE is owned by Kenneth L. Blum, Jr., the son of the Company's
President and CEO, Kenneth L. Blum, Sr. The Management Agreement provided cash
compensation of $220,000 in the first year and $200,000 per year thereafter, as
well as options for the purchase of up to 4,400,000 shares of the Company's
Common Stock, as described below. The Management Agreement has an initial term
of five years, and the Company has the right to extend it for up to two
additional two-year periods. In December 1997, the Management Agreement was
amended and extended for a five-year period The Management Agreement is
terminable by the Company for cause, as defined in the Management Agreement.
Pursuant to the Management Agreement, the Company has agreed that it will not,
without NHE's consent, issue (i) securities for consideration less than the fair
market value thereof; (ii) shares of Common Stock to any director, officer,
employee, or affiliate for less than $.40 per share; or (iii) securities to any
director, officer, employee, or affiliate except to the extent of 300,000 shares
of Common Stock plus options previously issued to such persons.
The Management Agreement includes certain representations and
warranties and limitations on solicitation by NHE of customers and employees of
the Company during the term of the Management Agreement and for two years
thereafter. The Management Agreement also requires that NHE hold in confidence
the Company's confidential information, provides that confidential information
developed by NHE shall belong to NHE, and further provides that the Company
shall have a nonexclusive, royalty-free, perpetual license to confidential
information developed by NHE.
Stock Option Grant. Effective March 18, 1993, the Company issued
10-year options (the "Options") to NHE for the purchase of up to 4,400,000
shares of the Company's Common Stock, of which Options for the purchase of
1,400,000 shares were exercisable as of the date of grant at an exercise price
of $.40 pear share. The remaining Options (an aggregate of 3,000,000 Options)
could become exercisable under their original terms at prices ranging from $.40
to $.80 contingent upon achievement of profitability targets. Pursuant to such
provisions, Options for the purchase of 500,000 shares became exercisable at
$.432 based upon the Company's results for the quarter ended May 31, 1994.
Effective December 5, 1994, the Board of Directors approved the vesting of the
remaining 2,500,000 of these Options at an exercise price of $.48 per share, and
NHE and the Company agreed that the exercise price of the 500,000 Options which
had vested at $.432 per share would be increased to $.48 per share. The actions
of the Board of Directors were predicated upon the Board's view of the Company's
performance relative to the original vesting criteria and other relevant
considerations. Options remain exercisable throughout the 10-year term of the
Options, except that Options terminate 120 days after termination of the
Management Agreement by the Company for cause.
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The Options are transferable only to employees or affiliates of NHE
performing substantial services for or on behalf of the Company or to employees
of the Company, subject to compliance with applicable law. NHE transferred all
of the Options in March 1993, principally to Kenneth L. Blum, Jr., Alan S. Cohn,
an employee of NHE, and Frank Cappadora, the Company's President at the time.
Effective December 5, 1994, Messrs. Blum, Jr., Cohn and Cappadora transferred an
aggregate of 125,000 of the Options exercisable at $.48 per share to Richter &
Co., Inc. ("RCI"), a company controlled by William L. Richter, in consideration
of services performed and to be performed by RCI on behalf of NHE in connection
with NHE's provision of management services to the Company. RCI in turn
transferred 50,000 of such Options to William L. Richter effective December 5,
1994. Transferred Options may revert to NHE if a transferee ceases performing
substantial services for or on behalf of the Company. Effective January 27,
1997, NHE transferred 200,000 options, which automatically reverted to NHE from
Mr. Cappadora, to Neal A. Kempler.
Stock Purchase. Kenneth L. Blum, Jr. and Alan S. Cohn each acquired
50,000 shares (the "Shares") of the Company's Common Stock on March 18, 1993 for
consideration of $.40 per share.
Registration Rights Agreement. The Company entered into a Registration
Rights Agreement (the "Registration Rights Agreement") effective March 18, 1993
with NHE, Mr. Blum, and Mr. Cohn. The Registration Rights Agreement provides two
demand registrations with respect to the Shares and the shares issuable pursuant
to the Options ("Registrable Securities"). The first demand registration is
exercisable at the request of holders of at least 900,000 Registrable Securities
after the exercise by NHE and/or its transferees of at least 900,000 Options.
The second demand registration is exercisable at the request of holders of at
least 1,000,000 Options after completion of a fiscal year in which the Company
has Profits of at least $1,000,000. The Registration Rights Agreement also
provides piggyback registration rights with respect to registrations in which
other selling stockholders are participating. The Company is obligated to pay
the offering expenses of each such registration, except for the selling
stockholders' pro rata portion of underwriting discounts and commissions. No
precise prediction can be made of the effect, if any, that the availability of
shares pursuant to registrations under the Registration Rights Agreement will
have on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock pursuant to such registrations could
adversely affect prevailing market prices.
Marketing Agreement. Effective March 18, 1993, the Company and NHE
entered into a Marketing Representation Agreement (the "Marketing Agreement")
pursuant to which NHE is entitled to receive a commission equal to 7 1/2% of the
enrollment fees (as defined) from Sponsor contracts generated by NHE. The
Company also agreed to pay NHE commissions equal to 2 1/2% of the enrollment
fees from Sponsor contracts with respect to which NHE provides marketing
assistance in procuring the contract, but does not itself generate the initial
Sponsor contact. The term of the Marketing Agreement is coextensive with that of
the Management Agreement. In fiscal 1997 and 1996, the Company paid
approximately $65,000 and $85,000, respectively, to NHE under the Marketing
Agreement.
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Software Development Services
During fiscal year 1995, the Company contracted with National Computer
Services, Inc. ("NCS") to develop software related to the Company's vision,
dental and hearing programs. The Company paid approximately $76,000 and $326,000
to NCS for such services during fiscal 1997 and 1996, respectively.
Additionally, the Company has contracted with NCS to lease its computer system
for approximately $2,500 per month. The Company paid $15,502 and $33,012 of
computer lease charges in fiscal 1997 and 1996, respectively. Kenneth L. Blum,
Jr., a principal of NHE, is President and stockholder of NCS and the son of
Kenneth L. Blum, Sr., the Acting President, CEO and a director of the Company.
During fiscal 1997, the Company decided to discontinue the programming
services being performed related to portions of the computer system not yet
placed in service. It was further determined that all of the Company's current
systems, which to date have been running on three separate platforms, should be
integrated through the use of a PC platform. The Company will continue to use
the completed modules developed by NCS until the new system is complete. The
capitalized costs related to modules not yet placed in service, $286,069, were
expensed in 1997.
THE EXCHANGE OFFER
The Exchange Offer
Upon the terms and subject to the conditions set forth in this Offer to
Exchange and in the accompanying Letter of Transmittal (including any
supplements or amendments), the Company is offering in the Exchange Offer to
issue one Series A Share of the Company for each outstanding Series 2 Share.
This Offer to Exchange and the Letter of Transmittal are first being
mailed to holders on or about April 25, 1998.
General
As of the date of this Offer to Exchange, a total of 388,180 Series 2
Shares are outstanding. The Company shall be deemed to have accepted validly
tendered Series 2 Shares in the Exchange Offer when, as and if the Company has
given oral or written notice thereof to the Exchange Agent. The Exchange Agent
will act as agent for tendering holders of Series 2 Shares for the purpose of
receiving the Series A Shares from the Company.
The Series A Shares will be delivered in exchange for Series 2 Shares
accepted in the Exchange Offer promptly after acceptance on the Expiration Date.
The Company's obligation to accept Series 2 Shares for exchange is subject to
the satisfaction of the conditions set forth below under "--Conditions."
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Holders of Series 2 Shares who tender in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Series
2 Shares for Series A Shares pursuant to the Exchange Offer. The Company will
pay all charges and expenses, exclusive of certain applicable taxes and
brokerage fees, in connection with the Exchange Offer. See "--Fees and
Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 P.M., New York City time, on
May 27, 1998, unless the Company extends the Exchange Offer, in which case the
term "Expiration Date" shall mean the time on the last date to which the
Exchange Offer is extended. References herein to the "last Expiration Date"
shall refer to the time on the last date to which the Exchange Offer is
extended.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such announcement
may state that the Company is extending the Exchange Offer for a specified
period or on a daily basis.
The Company expressly reserves the right, in its reasonable discretion,
at any time and from time to time, to (i) delay accepting any Series 2 Shares,
to extend the Exchange Offer or to terminate the Exchange Offer and not accept
Series 2 Shares not previously accepted if any of the conditions set forth
herein under " -- Conditions" shall exist or shall have occurred and shall not
have been waived or satisfied by the Company, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent, or (ii) waive any
such condition or amend the terms of the Exchange Offer in any respect. Any such
delay in acceptance, extension, termination, amendment or waiver will be
followed as promptly as practicable by public announcement thereof. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose each amendment in a manner
reasonably calculated to inform the holders of such amendment and the Company
will extend each such amended Exchange Offer for a period which the Company in
its discretion deems appropriate, depending upon the significance of the
amendment and the manner of disclosure to holders of the Series 2 Shares, if
such amended Exchange Offer would otherwise expire during such period. Any such
extension shall be in compliance with the applicable rules and regulations of
the Securities and Exchange Commission (the "Commission").
Subject to applicable law (including Rule 13e-4(e)(2) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which requires
that material changes be promptly disseminated to holders in a manner reasonably
calculated to inform them of such change) and without limiting the manner in
which the Company may choose to make a public announcement, if any, of any
extension, amendment, waiver or termination of the Exchange Offer, the Company
shall have no obligation to publish, advertise, or otherwise communicate any
such public announcement, other than by making a timely press release.
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If, prior to the Expiration Date, the Company should decide to decrease
the number of Series 2 Shares being sought or to increase or decrease the
consideration being offered in the Exchange Offer and, at the time notice of any
such decrease in the number of Series 2 Shares being sought or of such decrease
or increase in the consideration being offered is first published, sent or given
to holders of such shares, the Exchange 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 Exchange Offer
will be extended at least until the expiration of such ten business day period.
For purposes of the Exchange 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.
Dividends on Series 2 Shares
Holders of Series 2 Shares accepted for exchange will not receive any
separate payment in respect of unpaid dividends. As of the date of this Offer to
Exchange, the amount of accrued but unpaid dividends on Series 2 Shares is $4.95
per share.
How to Tender in the Exchange Offer
A holder electing to tender Series 2 Shares in the Exchange Offer
should either (i) complete and sign the Letter of Transmittal or a facsimile
thereof and mail or otherwise deliver the completed Letter of Transmittal, or
such facsimile, together with certificates for Series 2 Shares, and any other
required documents to the Exchange Agent at its address set forth on the back
cover page of this Offer to Exchange or effect the tender of Series 2 Shares
pursuant to the procedure for book-entry transfer as set forth below, or (ii)
request his broker, dealer, commercial bank, trust company or other nominee to
effect the transaction for him.
The term "holder" with respect to the Series 2 Shares means any person
in whose name Series 2 Shares are registered on the books of the Company or any
other person who has obtained a properly completed stock power from the
registered holder.
In order for a tender of Series 2 Shares to constitute a valid tender,
holders should complete and deliver the Letter of Transmittal to the Exchange
Agent on or prior to the Expiration Date.
Tenders -- General
The tender by a holder of Series 2 Shares pursuant to one of the
procedures set forth herein will constitute an agreement between such holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
The method of delivery of the Series 2 Shares and Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of each holder. Except as otherwise provided herein, such delivery will be
deemed made only when actually received by the Exchange Agent. INSTEAD OF
EFFECTING DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR
HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO
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DOCUMENTS SHOULD BE SENT TO THE COMPANY OR THE TRANSFER AGENT FOR THE SERIES 2
SHARES.
The Exchange Agent will make a request promptly after the date of this
Offer to Exchange to establish accounts with respect to the Series 2 Shares at
the Depository Trust Company ("DTC"), referred to as the "Book Entry Transfer
Facility" for the purpose of facilitating the Exchange Offer. Any financial
institution that is a participant in any of the Book Entry Transfer Facility
systems may make book entry delivery of the Series 2 Shares by causing DTC to
transfer such Series 2 Shares into the Exchange Agent's account in accordance
with such Book Entry Transfer Facility's procedure for such transfer. Although
delivery of Series 2 Shares may be effected through book entry transfer into the
Exchange Agent's account at DTC, the Letter of Transmittal (or facsimile
thereof), with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received or confirmed by the
Exchange Agent at its address as set forth on the back cover of this Offer to
Exchange prior to 5:00 P.M., New York City time, on the Expiration Date.
DELIVERY OF DOCUMENTS TO A BOOK ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Any beneficial holder whose Series 2 Shares are registered in the name
of his broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender Series 2 Shares should contact such registered holder promptly
and instruct such registered holder to tender Series 2 Shares on his behalf. If
such beneficial holder wishes to tender Series 2 Shares on his own behalf, such
beneficial holder must either make appropriate arrangements to register
ownership of the Series 2 Shares in such holder's name or obtain a properly
completed stock power from the registered holder reflecting the change in
ownership. The transfer of record ownership of Series 2 Shares may take
considerable time and, depending on when such transfer is requested, may not be
accomplished prior to the Expiration Date.
Signatures on each Letter of Transmittal must be guaranteed unless the
Series 2 Shares delivered pursuant thereto are delivered (i) by a registered
holder of Series 2 Shares who has not completed the boxes on the Letter of
Transmittal entitled "Special Issuance and Delivery Instructions" or (ii) for
the account of an Eligible Institution (as defined below). In the event that
signatures are required to be guaranteed, such guarantees must be by a firm that
is a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or by a commercial bank or
trust company having an office in the United States (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder, such certificate(s) must be endorsed or accompanied by
appropriate stock powers bearing the signature of the registered holder or
holders exactly as the name or names appeared on the certificate(s).
If the Letter of Transmittal or any other certificates, stock powers or
proxies are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
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All questions as to the validity, form, eligibility (including time of
receipt), acceptance, withdrawal and revocation of tendered Series 2 Shares will
be resolved by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any and all tenders and
withdrawals of Series 2 Shares that are not in proper form or the acceptance of
which would, in the opinion of the Company or counsel for the Company, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to particular Series 2 Shares. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding. Unless
waived, any irregularities in connection with tenders and withdrawals of Series
2 Shares must be cured within such time as the Company shall determine. Neither
the Company nor the Exchange Agent shall be under any duty to give notification
of defects in such tenders, withdrawals, deliveries or revocations or shall
incur any liability for failure to give such notification. Tenders and
withdrawals of Series 2 Shares will not be deemed to have been made until such
irregularities have been cured or waived. Any Series 2 Shares received by the
Exchange Agent that are not properly tendered or delivered and as to which the
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders of Series 2 Shares unless otherwise provided in
the Letter of Transmittal as soon as practicable following the Expiration Date.
Although it does not expect to do so, in the event the Company should
increase the consideration offered for the Series 2 Shares in the Exchange
Offer, such increased consideration will be paid to all holders whose Series 2
Shares are accepted in the Exchange Offer, including those Series 2 Shares
tendered before the announcement of the increase.
Guaranteed Delivery Procedures
If a holder of Series 2 Shares desires to tender Series 2 Shares and
the certificate(s) representing such shares are not immediately available, or
time will not permit such holder's certificate(s) or other required documents to
reach the Exchange Agent before 5:00 P.M., New York City time, on the Expiration
Date, or if such holder cannot complete the procedure for book-entry transfer on
a timely basis, a tender may be effected if:
(a) the tender is made through an Eligible Institution; and
(b) prior to 5:00 P.M., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by telegram, telex, facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder of Series 2 Shares and the number of Series 2 Shares to be delivered,
stating that the delivery is being made thereby and guaranteeing that within
three Nasdaq trading days after the Expiration Date, the certificate(s)
representing the Series 2 Shares, the Letter of Transmittal and any other
documents required thereby will be deposited by the Eligible Institution with
the Exchange Agent; and
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(c) the certificate(s) for all tendered Series 2 Shares, or a
confirmation of a book entry transfer of such Series 2 Shares into the Exchange
Agent's applicable account at the Book-Entry Transfer Facility as described
above, the Letter of Transmittal, and all other documents required thereby are
received by the Exchange Agent within three Nasdaq trading days after the
Expiration Date.
Withdrawal of Tenders
Tenders of Series 2 Shares may be withdrawn at any time until the
Expiration Date and, if not otherwise accepted for exchange by the Company, at
any time after June 19, 1998.
Any holder of Series 2 Shares who has tendered Series 2 Shares or who
succeeds to the record ownership of Series 2 Shares in respect of which such
tender previously had been given, may withdraw such Series 2 Shares by delivery
of a written notice of withdrawal. To be effective, a written or facsimile
transmission notice of withdrawal must (i) be timely received by the Exchange
Agent at its address specified on the back cover of this Offer to Exchange
before the Expiration Date, (ii) specify the name of the registered holder of
the Series 2 Shares to be withdrawn, (iii) contain the certificate number(s)
shown on the particular certificate(s) evidencing the Series 2 Shares to be
withdrawn and the number of Series 2 Shares to be withdrawn, and (iv) be signed
by the registered holder of such Series 2 Shares in the same manner as the
original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the transfer agent for the Series 2 Shares register the transfer of such
Series 2 Shares into the name of the person withdrawing Series 2 Shares. The
signature(s) on the notice of withdrawal must be guaranteed by an Eligible
Institution unless such Series 2 Shares have been tendered (i) by a registered
holder of Series 2 Shares who has not completed the boxes on the Letter of
Transmittal entitled "Special Issuance and Delivery Instructions" or (ii) for
the account of an Eligible Institution. If the Series 2 Shares to be withdrawn
have been delivered or otherwise identified to the Exchange Agent, a signed
notice of withdrawal is effective immediately upon receipt of written or
facsimile transmission notice of withdrawal even if physical release is not yet
effected.
Any Series 2 Shares which have been tendered for exchange but which are
not exchanged will be returned to the holder thereof without cost to such holder
as soon as practicable following the Expiration Date. Properly withdrawn Series
2 Shares may be retendered at any time prior to the Expiration Date by following
one of the procedures described under "--How to Tender in the Exchange Offer."
Conditions
Notwithstanding any other provisions of the Exchange Offer, the Company
shall not be required to accept for exchange or exchange Series 2 Shares
tendered pursuant to the Exchange Offer, and may terminate or amend the Exchange
Offer and may postpone the acceptance for exchange of, and exchange of, Series 2
Shares tendered, if any time on or after the date of this Offer to Exchange and
prior to the acceptance for exchange of Series 2 Shares, any of the following
conditions shall occur:
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(a) there shall have been instituted, pending or threatened any action
or proceeding before any court or governmental, administrative or regulatory
authority or agency, domestic or foreign, (i) challenging or seeking to make
illegal, materially delay or otherwise directly or indirectly restrain or
prohibit or make materially more costly the Exchange Offer, or the acceptance
for exchange of, or exchange of, any Series 2 Shares by the Company in exchange
for Series A Shares, or seeking to obtain material damages in connection with
any transaction contemplated by the Exchange Offer, (ii) seeking to impose or
confirm limitations on the ability of any stockholder of the Company or any
affiliate of any stockholder of the Company to exercise effectively full rights
of ownership of any shares of Common Stock, Series 2 Shares or Series A Shares;
(iii) seeking to require divestiture by any stockholder of the Company or any
affiliate of any stockholder of the Company of any shares of Common Stock,
Series 2 Shares or Series A Shares; or (iv) that otherwise is or is reasonably
likely to be materially adverse to the business, operations, properties,
condition (financial or otherwise), assets or liabilities or prospects of the
Company and its subsidiaries taken as a whole;
(b) there shall have been any action taken, or any statute, rule,
regulation, legislation, interpretation, judgment, order or injunction enacted,
entered, enforced, promulgated, amended, issued or deemed applicable to (i) the
Company or any subsidiary or affiliate of the Company or (ii) any transaction
contemplated by the Exchange Offer, by any legislative body, court, government
or governmental, administrative or regulatory authority or agency, domestic or
foreign, that is or is reasonably likely to result, directly or indirectly, in
any of the consequences referred to in clauses (i) through (iv) of paragraph (a)
above;
(c) there shall have occurred any change, condition, event or
development that is or is reasonably likely to be materially adverse to the
business, operations, properties, condition (financial or otherwise), assets or
liabilities or prospects of the Company and its subsidiaries taken as a whole;
or
(d) there shall have occurred (i) any general suspension of, or
limitation on prices for, trading in securities on the Nasdaq National Market or
any national securities exchange, (ii) any decline, measured from the date of
this Offer to Exchange in the Standard & Poor's 500 Index by an amount in excess
of 25%, (iii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States by New York or federal banking
authorities, (iv) any limitation (whether or not mandatory) by any government or
governmental, administrative or regulatory authority or agency, domestic or
foreign, on, or other event that, in the judgment of the Company, might affect,
the extension of credit by banks or other lending institutions, (v) a
commencement of a war or armed hostilities or other national or international
calamity directly or indirectly involving the United States or any material
escalation thereof, or (vi) in the case of any of the foregoing existing on the
date of this Offer to Exchange, a material acceleration or worsening thereof;
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 exchange or exchange.
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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
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its reasonable discretion. The failure by the Company
at any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right; the waiver of any such right with respect to particular facts
and 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.
If any of the conditions listed above is not satisfied, the Company may
(i) refuse to accept any Series 2 Shares and return all tendered Series 2 Shares
to exchanging and tendering holders, (ii) extend the Exchange Offer and retain
all Series 2 Shares tendered prior to the expiration of the Exchange Offer,
subject to withdrawal rights of tendering holders of Series 2 Shares described
herein, or (iii) waive or amend certain of such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Series 2 Shares.
If such waiver or amendment constitutes a material change to the Exchange Offer,
the Company will promptly disclose such waiver in a manner reasonably calculated
to inform holders of Series 2 Shares of such waiver or amendment, and the
Company will extend the Exchange Offer for a period which the Company in its
discretion deems appropriate, depending on the significance of the waiver or
amendment and the manner of disclosure to holders of Series 2 Shares.
Exchange Agent
Continental Stock Transfer & Trust Company has been appointed as
Exchange Agent for the Exchange Offer. Questions and requests for assistance may
be directed to the Exchange Agent at its address and telephone number set forth
on the Letter of Transmittal.
Fees and Expenses
The expenses of soliciting tenders of Series 2 Shares will be borne by
the Company. The principal solicitation is being made by mail; however,
additional solicitations may be made by telegraph, telephone or in person by
officers and regular employees of the Company, who will not receive additional
compensation. Arrangements may also be made with brokerage houses and other
custodians, nominees and fiduciaries to forward the material regarding the
Exchange Offer to the beneficial owners of Series 2 Shares. The Company will
reimburse such forwarding agents for reasonable out-of-pocket expenses incurred
by them, but no compensation will be paid for their services. In addition, the
Company has retained Richter & Co., Inc. for advisory services. Richter & Co.,
Inc. is being paid a fee of $50,000 in cash and receiving 250,000 shares of
Common Stock for such services that led up to the Exchange Offer, provided that
it will not solicit tenders in the Exchange Offer and has not and will not opine
on the fairness of the Exchange Offer.
The total cash expenditures to be incurred by the Company in connection
with the Exchange Offer, including printing, accounting and legal fees and the
fees and expenses of the Exchange Agent and Richter & Co., Inc., are
collectively estimated to be approximately $100,000 and 250,000 shares of Common
Stock.
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DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of the Company consists of 20,000,000
shares of Common Stock and 12,000,000 shares of Preferred Stock, including
1,000,000 Series 2 Shares, $.01 par value per share. As of the date of this
Offer to Exchange, there are issued and outstanding 4,021,126 shares of Common
Stock and 388,180 of Series 2 Shares. Options and warrants for an additional
5,290,000 shares of Common Stock are issued and outstanding, with exercise
prices of between $0.40 and $1.00 per share.
Series 2 Shares accepted in the Exchange Offer will have the status of
authorized and unissued shares of Preferred Stock, undesignated as to class or
series, and may be redesignated and reissued as part of any class or series of
Company Preferred Stock. Although the Company does not presently intend to issue
any additional Series 2 Shares or Series A Shares, the Company may issue one or
more series of Preferred Stock in the future that will have preference over the
Common Stock, the Series 2 Shares and/or the Series A Shares with respect to the
payment of dividends and upon liquidation, dissolution or winding-up of the
Company or otherwise. There is no current intention to issue any shares other
than Common Stock.
Common Stock
Each share of Common Stock has one vote on all matters on which
shareholders of the Company are entitled to vote, including the election of
directors. Holders of Common Stock are entitled to participate ratably in any
distribution of assets to shareholders in liquidation after the payment in full
of all preferential amounts to which holders of any class of Preferred Stock are
or may be entitled, have no redemption or conversion rights and have no
preemptive or other subscription rights.
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying any cash dividend on its Common Stock in the foreseeable
future. The Company's policy is to retain earnings for the foreseeable future
for reinvestment in its businesses and if possible pay dividends on the Series A
Shares. Future dividends, if any, will be declared at the discretion of the
Board of Directors.
Preferred Stock - General
Preferred Stock may be issued by the Board of Directors of the Company
from time to time in one or more series for such consideration and with such
relative rights and preferences as the Board of Directors may determine.
Accordingly, the Board of Directors has the power to fix the dividend rate and
to establish the provisions, if any, relating to voting rights, redemption rate,
sinking fund, liquidation preferences and conversion rights for any series of
Preferred Stock issued. Any Preferred Stock that may be issued in the future
could be given voting and conversion rights that could dilute the voting power
and equity of holders of Common Stock or then outstanding series of Preferred
Stock.
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Series 1 Preferred
The Company previously had a class of Series 1 Preferred Stock which is
no longer outstanding and has been canceled and has the status of authorized and
unissued shares of Preferred Stock.
Series 2 Shares
In May 1989, the Company authorized 1,000,000 Series 2 Shares.
The Series 2 Shares accrue a cumulative quarterly cash dividend at the
fixed annual rate of $.90 per share. If declared, such dividends are payable
fifteen days after the conclusion of each calendar quarter to holders of record
at the conclusion of each calendar quarter. If the Company does not pay all or
any part of any such dividends, they will accumulate. No dividends may be paid
on Common Stock unless and until all accrued and unpaid dividends have been paid
on the Series 2 Shares. No dividends may be paid on the Series 2 Shares unless
and until all accrued and unpaid dividends have been paid on the Series A
Shares.
The Series 2 Shares have a liquidation preference which entitles the
holders thereof to receive, upon liquidation of the Company, out of the assets
thereof , and after distributions on the Series A Shares, the amount of $10 per
share plus all accrued and unpaid dividends, before any amounts are distributed
to the holders of Common Stock. In addition, each Series 2 Share is convertible
at any time at the option of the holder into the number of shares of Common
Stock of the Company that results from dividing the conversion price per share
in effect at the time of conversion into $10. The initial conversion price is
$4.00 per share and will be adjusted for stock splits and combinations, stock
dividends, reclassifications, exchanges or substitutions relating to the
Company's Common Stock, and any reorganization, merger, consolidation or sale of
assets of the Company.
Under the Certificate of Designation, the Company may redeem Series 2
Shares at any time, in its sole discretion, upon payment of the amount of $10
per share plus all accrued and unpaid dividends.
The holders of the Series 2 Shares are not entitled to vote, except as
required by law. On matters subject to vote by holders of the Series 2 Shares,
the holders are entitled to one vote per share.
The foregoing information regarding the Series 2 Shares is qualified by
the information set forth herein regarding such class and the Series A Shares.
Series 3 Preferred
The Company previously had Series 3 Preferred Stock which is no longer
outstanding and has the status of authorized and unissued shares of Preferred
Stock.
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Series A Shares
In February, 1998 the Board considered, and then on April 24, 1998, the
Company authorized 1,000,000 Series A Shares. The Series A Shares are offered
hereby in the Exchange Offer for Series 2 Shares. The Certificate of Designation
is attached as an Annex and incorporated herein.
The Series A Shares pay a cumulative semi-annual cash dividend fixed at
the annual rate of $.3375 per share. If declared, the dividend is payable
fifteen days after the conclusion of each fiscal six-month period to holders of
record at the conclusion of each such period beginning June 1, 1998, i.e., the
first dividend, if declared, will be payable on December 15, 1998. No dividends
may be paid on Common Stock or Series 2 Shares or any other newly created junior
securities unless and until all accumulated accrued and unpaid dividends have
been paid on the Series A Shares and until the earlier to occur of (i) all
Series A Shares have been redeemed or converted, (ii) any day after May 31,
2005, or (iii) the commencement of any fiscal year after two consecutive fiscal
years in which the Company had net income and net cash flow in each year in
excess of $1.5 million and the Company's tangible net equity at the end of the
second fiscal year is at least $5 million (as determined by the Company's books
and records).
The Series A Shares have a liquidation preference which entitles the
holder thereof to receive upon liquidation of the Company out of the assets
thereof the amount of $3.75 per share plus all accrued and unpaid dividends,
before any amounts are to be distributed to the holders of Series 2 Shares or
Common Stock. In addition each share of Series A Shares is convertible any time
at the option of the holder of the Series A Shares into 10 shares of Common
Stock (to be adjusted for stock splits and combinations, stock dividends,
reclassifications, exchanges or substitutions relating to the Company's Common
Stock and any reorganization, merger, consolidation or sale of assets of the
Company).
The Company may redeem shares of the Series A Shares at any time, in
its sole discretion, in whole or in part, upon the payment of $3.75 per share
plus all accrued and unpaid dividends provided that (i) the average closing high
bid price of the Common Stock for at least 30 calendar days prior to the date of
action of such redemption is equal to or in excess of $.75 per share (as
determined by quoted prices on the Nasdaq electronic bulletin board or another
exchange or by the good faith determination of the Company if no such market
quotation is available) or (ii) such notice of redemption is given after May 31,
2005 or (iii) the commencement of any fiscal year after two consecutive fiscal
years in which the Company had net income and net cash flow in each year in
excess of $1.5 million and the Company's tangible net equity at the end of the
second fiscal year is at least $5 million (as determined by the Company's books
and records). The Company reserves the right to include additional conditions in
any redemption notice. There is no current intention to redeem Series A Shares.
Reports to Shareholders
The Company furnishes annual reports to its holders of Common Stock and
Preferred Stock containing consolidated financial statements of the Company
examined by independent certified public accountants. The Company may distribute
other reports as it deems appropriate.
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Stock Transfer Agent
Continental Stock Transfer & Trust Company is the transfer agent for
the Common Stock and Series 2 Shares of the Company and will serve as transfer
agent for the Series A Shares.
Change in Preference and Priority; Change in Voting Rights; Certain Limitations
The Series 2 Shares have preference over the Common Stock with respect
to the payment of dividends and upon liquidation, dissolution or winding-up of
the Company. If the Exchange Offer is consummated, the Series 2 Shares owned by
holders who elect to exchange their shares in the Exchange Offer will be
exchanged for Series A Shares with senior rights over the Series 2 Shares
outstanding.
In any liquidation or reorganization of the Company under the United
States Bankruptcy Code, the Common Stock, as equity securities of the Company,
would not represent bankruptcy claims ranking prior to other equity securities
(including the Series 2 Shares) and would rank below all debt claims. All claims
by Series A Shares, Series 2 Shares and Common Stock would rank below all debt
claims.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Set forth below is a summary of the material Federal income tax
considerations applicable to the Company and to holders whose Series 2 Shares
are tendered and accepted in the Exchange Offer if the Exchange Offer is
consummated. This summary does not discuss all aspects of Federal income
taxation that may be relevant to a particular holder of Series 2 Shares in light
of the holder's personal investment circumstances or to certain types of holders
of Series 2 Shares subject to special treatment under the Federal income tax
laws (for example, life insurance companies, tax-exempt organizations, foreign
corporations and individuals who are not citizens or residents of the United
States) and does not discuss any aspect of state, local or foreign taxation. The
discussion with respect to exchanging or non-tendering holders is limited to
those who have held the Series 2 Shares as "capital assets" and who will hold
the Series A Shares as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Internal Revenue Code of
1986, as amended (the "Code"). The summary is based upon laws, regulations,
rulings and decisions now in effect and upon proposed regulations, all of which
are subject to change (possibly with retroactive effect) by legislation,
administrative action or judicial decision.
THE SUMMARY IS NOT BASED UPON A LEGAL OPINION OF TAX COUNSEL. THE
FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER ARE COMPLEX. THE SUMMARY
IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. EACH HOLDER OF SERIES 2 SHARES
SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO
SUCH HOLDER OF THE EXCHANGE OFFER, INCLUDING THE APPLICATION AND EFFECT OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. THE COMPANY IS NOT REQUESTING A TAX
OPINION OR A TAX RULING FROM THE INTERNAL REVENUE SERVICE ("IRS") ON ANY ISSUE
CONNECTED WITH THE EXCHANGE OFFER. NO
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ASSURANCE CAN BE GIVEN THAT THE IRS WOULD AGREE WITH ANY OF THE TAX CONSEQUENCES
DESCRIBED HEREIN.
The Company believes that an exchange of Series 2 Shares for Series A
Shares will constitute a tax-free recapitalization under the Code. However,
there can be no assurance that the IRS will not contend that the exchange is a
taxable transaction because the Series A Shares (but not the Series 2 Shares)
are nonqualified preferred stock. The Series A Shares would be nonqualified
preferred stock if, as of the issue date of such shares, it was more likely than
not that the Company would exercise its redemption rights with respect to such
shares. The Company believes that it would be treated other than as being more
likely than not to exercise its redemption rights and that the Series A Shares
will not be nonqualified preferred stock. However, because of the inherently
factual nature of such a determination, the tax consequences of both
characterizations are described below.
Exchange of Series 2 Shares for Series A Shares -- If the Exchange is a Tax-free
Recapitalization
General. An exchange of Series 2 Shares for Series A Shares pursuant to
the Exchange Offer will constitute a recapitalization under Section 368(a)(1)(E)
of the Code. A holder who exchanges Series 2 Shares for Series A Shares will not
recognize any gain or loss on the exchange. The Series A Shares received by such
a holder will have an initial tax basis equal to the adjusted tax basis of the
Series 2 Shares exchanged therefor. The Series A Shares will have a holding
period that includes the period during which the holder held the Series 2 Shares
exchanged therefor.
Section 306 Stock. As a result of the Exchange Offer, the IRS may
contend that the Series A Shares are "Section 306 Stock" under Section 306 of
the Code. Subject to numerous exceptions discussed below, Section 306 Stock
includes preferred stock issued in a recapitalization. Because the exceptions
are subjective and due to a lack of definitive guidance from the IRS, no
assurance can be given that the Series A shares will not be Section 306 Stock.
If the Series A Shares were Section 306 Stock, a holder could recognize
(i) ordinary income on the subsequent sale or disposition (other than a
redemption) of the Series A Shares or (ii) a dividend on the subsequent
redemption of the Series A Shares. If the Series A Shares were Section 306
Stock, in the event of a sale or disposition (other than a redemption), the
amount received would be treated (i) as ordinary income to the extent of the
Series A Share's pro rata portion of the Company's accumulated earnings and
profits or its earnings and profits for the year in which the Series A Shares
are issued, (ii) then as a recovery of basis, and (iii) finally as gain from a
sale or exchange. If the Series A Shares are issued in the fiscal year ending
May 31, 1998, it is estimated by the Company that the pro rata portion of such
earnings and profits would be approximately between $.60 to $1.00 per Series A
Share. If the Series A Shares were Section 306 Stock and were subsequently
redeemed by the Company, the amount received would be treated (i) as a dividend
to the extent of the Series A Share's pro rata portion of the current or
accumulated earnings and profits of the Company as of the year of redemption,
(ii) then as a recovery of basis, and (iii) finally as gain from a sale or
exchange. Loss would not be recognized on the sale, redemption or other
disposition of Section 306 Stock. Rather, any unrecovered basis would probably
be reallocated to any remaining Series A Shares or Common Stock held by the
selling or redeeming shareholder.
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There are a number of complicated exceptions to the Section 306 rules.
Preferred stock issued in connection with the recapitalization is not Section
306 Stock if the recapitalization and the subsequent disposition or redemption
do not have as one of their principal purposes the avoidance of federal income
tax. Although the Company believes that the Exchange Offer does not have as a
principal purpose the avoidance of federal income tax, there is no assurance
that the IRS could not successfully contend that such a purpose exists in
connection with either the distribution or the subsequent disposition or
redemption. In addition, the Series A Shares would not be Section 306 Stock if
the payment of cash in lieu of the distribution of the Series A Shares would not
have been treated as a dividend, in whole or in part. Therefore, a holder of
Series 2 Shares that exchanges all of the holder's Series 2 Shares for Series A
Shares and who does not own, directly or indirectly by attribution, other Series
2 Shares that are not exchanged or any Common Stock of the Company, will not
receive Section 306 Stock in the Exchange Offer. It is also possible, although
not certain, that a holder of Series 2 Shares who owns, directly or indirectly
by attribution, only a small minority interest in the Company's stock and who
does not exercise any control over the operations of the Company would not
receive Section 306 Stock in the exchange. Finally, even if the Series A Shares
were to constitute Section 306 Stock, Section 306 would not apply to a
subsequent disposition if the Series A Shares were disposed of in a transaction
which constituted a complete termination of the holder's interest in the
Company. A complete termination would require the disposition of all of the
Series A Shares and all of the other stock of the Company owned, directly or
indirectly by attribution, by the holder.
If the Series A Shares were Section 306 Stock, any shares received on
the conversion of the Series A Shares into Common Stock would be treated as
Section 306 Stock.
Attribution of Ownership of Shares. Section 318 of the Code contains a
complex set of rules which attribute to a holder of shares in the Company those
Company shares held by (i) family members, (ii) partnerships in which the holder
is a partner, (iii) estates and trusts in which the holder is a beneficiary, and
(iv) certain corporations in which the holder is also a shareholder. If a holder
were to dispose of Section 306 Stock in a transaction intended to qualify as a
complete termination of the shareholder's interest in the Company but shares
owned by others were still treated as owned by the holder due to the attribution
rules, under certain limited circumstances the holder could avoid the
attribution of the ownership of shares of family members (but not others) by
filing a waiver with the IRS.
Exchange of Series 2 Shares for Series A Shares -- If the Nonqualified Preferred
Stock Rules Apply
Nonqualified Preferred Stock. The Company has the right, but not the
obligation, to redeem the Series A Shares under certain circumstances. If, as of
the issue date of the Series A Shares, the Company were more likely than not to
exercise those rights, the Series A Shares would constitute "nonqualified
preferred stock." The Company has no present intention to exercise those rights
and believes that it would be treated other than as being more likely than not
to exercise those rights. Nevertheless, the IRS may contend that, as of the
issue date of the Series A Shares, it is more likely than not that the Company
will exercise those rights and that, therefore, the Series A Shares are
nonqualified preferred stock. If the Series A Shares were nonqualified preferred
stock, then unless the Series 2 Shares were also nonqualified preferred stock,
the exchange would not be a tax-free exchange. (Even if the Series A Shares were
nonqualified preferred stock, if the Series 2 Shares
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were also nonqualified preferred stock, then the exchange would be a tax-free
recapitalization as described above. The Series 2 Shares would be nonqualified
preferred stock if as of the issue date of the Series 2 Shares the Company was
more likely than not to exercise its redemption rights.) The exchange by a
holder of Series 2 Shares who exchanges all of the holder's Series 2 Shares and
who does not own, directly or indirectly pursuant to the attribution rules
discussed above, other Series 2 Shares or any Common Stock of the Company would
be treated as a sale on which gain or loss would be recognized. It is also
possible, although not certain, that a holder of Series 2 Shares who owns,
directly or indirectly by attribution, only a small minority interest in the
Company's stock and does not exercise any control over the operations of the
Company would also receive sale treatment in the exchange. Gain, if any, would
be a capital gain. Loss, if any, would be a capital loss. In the case of an
individual, the capital loss deduction is limited to the individual's capital
gains plus $3,000 of ordinary income. The balance of any capital loss incurred
by an individual may be carried forward until it is utilized as described in the
preceding sentence. Holders of Series 2 Shares who own, directly or indirectly
by attribution, more than a minority interest in the Company's stock or who
exercise control over the operations of the Company could receive dividend
treatment (i.e., ordinary income treatment) to the extent of their ratable
shares of the Company's earnings and profits and would not recognize gain or
loss. It is not clear what would happen to the basis of the Series 2 Shares of a
holder described in the immediately preceding sentence. Possibly the basis would
be reattributed to other Company shares owned directly by the holder or, if
there were no other Company shares owned directly by the holder, reattributed to
shares owned indirectly by the holder, or, perhaps, lost.
Other Consequences of Nonqualified Preferred Stock Rules. If gain or
loss were recognized under the nonqualified preferred stock rules, the Series A
Shares would not be Section 306 Stock, the Series A Shares would have an initial
basis equal to their fair market value as of the Expiration Date, and the
holding period of such shares would start on that date.
Treatment of Non-exchanging Holders
The Exchange Offer will not result in the recognition of income, gain
or loss to holders of Series 2 Shares who do not participate in the Exchange
Offer, and such Series 2 Shares will not be treated as Section 306 Stock.
Tax Consequences to The Company
Section 382 of the Code limits the use of net operating loss carryovers
by a corporation that has been subject to an "ownership change." The taxable
income of such a corporation which is available for offset by pre-ownership
change net operating loss carryovers is limited each year to the long term
tax-exempt rate (published monthly by the Internal Revenue Service) multiplied
by the value of the equity of the corporation on the date immediately preceding
an ownership change. Similar limitations apply in respect of carryovers of other
beneficial tax attributes. The Company believes that an ownership change will
not occur as a result of the Exchange Offer and that it will therefore have full
utilization of its existing net operating loss carryovers to offset future
taxable income.
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ADDITIONAL INFORMATION
The Company has filed a Schedule 13E-4 Issuer Tender Offer Statement
(the "Schedule 13E-4") with the Commission with respect to the Exchange Offer.
As permitted by the rules and regulations of the Commission, this Offer to
Exchange omits certain information and exhibits contained in the Schedule 13E-4.
Such additional information and exhibits can be inspected at and obtained from
the Commission in the manner set forth below or from the Company at no cost. For
further information with respect to the securities offered hereby and the
Company, reference is made to the Schedule 13E-4 and the exhibits thereto.
Statements contained in this Offer to Exchange as to the terms of any contract
or other document are not necessarily complete, and, in each case, reference is
made to the copy of each such contract or other document that has been filed as
an exhibit to the Schedule 13E-4, each such statement being qualified in all
respects by such reference.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files periodic reports and other information with the
Commission. Such reports and other information filed with the Commission, as
well as the Schedule 13E-4, can be inspected and copied at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices located at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, New York,
New York 10048. Copies of such material may also be obtained by mail, upon
payment of the Commission's customary charges, from the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains a Web site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Copies of the Certificate of Designation and the Indenture may also
be obtained from the Company upon request to the Company at its principal
executive offices.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's 1997 Form 10-KSB and the Company's February 28, 1998 Form
10-QSB previously filed with the Commission pursuant to the Exchange Act are
incorporated by reference in this Offer to Exchange and made a part hereof. A
copy of the Form 10-KSB is enclosed herewith as Annex B and is being sent to all
shareholders.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Offer to
Exchange of which it is a part to the extent that a statement contained herein
modifies, supersedes or replaces such statement. Any statements modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Offer to Exchange.
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ANNEX A
Certificate of Designation for the
Series A Shares
A-1
<PAGE>
Class A, Senior Nonvoting Cumulative Convertible
Preferred Stock, Series A
of
Avesis Incorporated
STATEMENT OF DESIGNATION
------------------------------------------------
Introduction. Each share of Class A, Senior Nonvoting Cumulative
Convertible Preferred Stock, Series A ("Series A Shares") of Avesis Incorporated
(the "Company") shall be governed by the preferences, privileges, voting powers,
restrictions and qualifications set forth herein.
Part 1. Par Value.
Each of the Series A Shares shall have a par value of $.01 per share.
Part 2. Dividends.
2A. General Obligation. Holders of the Company's Series A Shares (the
"Stockholders") shall be entitled to receive, when and as declared by the
Company's board of directors (the "Board of Directors"), out of the funds of the
Company legally available therefor, semi-annual cash dividends at the annual
rate of thirty three and 75/100 cents ($.3375) per share and any such payment
shall be rounded to the nearest cent. Dividends accrued through the last day of
each semi-annual period shall be payable to holders of record on the last day of
such semi-annual period (the "Record Date") not later than fifteen days after
the Record Date, commencing June 1, 1998 provided the first "Dividend Payment
Date" shall be December 15, 1998. Each date on which dividends are payable
hereunder shall be referred to herein as a "Dividend Payment Date." Cash
dividends on the Series A Shares shall accrue and shall be cumulative from the
date of the original issue of each Series A Share. The dividends shall accrue
whether or not declared and whether or not there are profits, surplus or other
funds legally available for payment of dividends.
2B. Distribution of Partial Dividend Payments. No provision in this
Part 2 shall be deemed to preclude the Company from paying a dividend of less
than the semi-annual dividend set forth in subpart 2A hereof on any Dividend
Payment Date, provided that any partial payment is paid pro rata to all holders
of the Series A Shares based on the number of shares held, and further provided
that the balance of the unpaid dividend accrues and is cumulative.
2C. Preference upon Distribution of Dividend Payment. Until the earlier
of (i) as long any Series A Share remains outstanding, (ii) any date after May
31, 2005 or (iii) the first date of any new fiscal year after two consecutive
fiscal years in which the Company had net income and net cash flow in each year
in excess of $1.5 million and the Company's tangible net equity amount at the
end
<PAGE>
of the second year is at least $5 million, the Company shall not declare or pay
any dividend, whether in cash or other property (other than in shares of stock
junior to the Series A Shares in the payment of dividends), on the Company's
Class A, Nonvoting Cumulative Convertible Preferred Stock, Series 2, par value
$.01 (the "Series 2 Shares") or the common stock of the Company, par value $.01
per share (the "Common Stock"), or any other stock of the Company junior to or
in parity with the Series A Shares in the payment of dividends and thereafter
shall not pay dividends on such classes, unless the full dividends on the Series
A Shares for all past dividend periods and the then current dividend period
shall have been paid or declared and a sum set aside for payment therefor.
Accumulations of dividends on the Series A Shares shall not bear interest.
Part 3. Redemption At The Option Of The Company.
3A. Redemption Price. The Series A Shares may be redeemed by the
Company, in whole or in part, without premium, at the option of the Company upon
resolution of the Board of Directors, at any time or from time to time at the
price of Three Dollars and 75 Cents ($3.75) per share, together in each case
with accrued and unpaid dividends to the date set for redemption, whether or not
declared, provided one of the following events has occurred: (i) the Common
Stock is then quoted at $.75 or more (based on the highest closing bid price)
over a 30 day average period prior to the redemption notice, if listed on an
exchange or quoted on the Nasdaq bulletin board or another market or exchange
or, if not quoted or listed on an exchange, then valued by the Board of
Directors in their good faith judgment at $.75 or more per share (with the $.75
price subject to adjustment in accordance with the provisions of Section 7B-F)
(the "Redemption Price"), (ii) any time after May 31, 2005, or (iii) the
commencement of any fiscal year after two consecutive fiscal years in which the
Company had net income and net cash flow in each year in excess of $1.5 million
and the Company's tangible net equity at the end of the second fiscal year is at
least $5 million (as shown by the books and records of the Company).
3B. Partial Redemption Allowed. If less than all Series A Shares
outstanding are to be redeemed at any one time pursuant to this Part 3, the
Company shall effect the redemption in its discretion among all the holders of
the Series A Shares as determined by the Board of Directors.
3C. Notice of Redemption. Not less than thirty (30) nor more than sixty
(60) days prior to the date fixed for redemption of the Series A Shares, a
notice specifying the time and place for redemption shall be given by first
class mail, postage prepaid, to the Stockholders of record on a date designated
by the Company at their respective addresses as the same appear on the record
books of the Company. The notice of redemption, if mailed in the manner herein
provided, shall be conclusively presumed to have been duly given, whether or not
the Stockholder receives such notice. In any case, failure to give such notice
by mail or any defect in the notice to any Stockholder shall not affect the
validity of the proceedings for the redemption of Series A Shares held by any
other Stockholder. The Company may include additional conditions or terms in any
notice of redemption.
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3D. Reissuance of Redeemed Stock. All Series A Shares redeemed pursuant
to this Part 3 shall assume the status of authorized but unissued shares of
preferred stock, subject to reissuance by the Company as shares of any class or
series of preferred stock.
Part 4. Voting Rights.
The holders of the Series A Shares shall not be entitled to vote on any
matter, except as otherwise required by law.
Part 5. Liquidation Preference.
In the event of the liquidation, dissolution, or winding up of the
affairs of the Company, whether voluntary or involuntary, the rights, powers and
preferences, and the qualifications, restrictions and limitations of the Series
A Shares shall be as follows:
(A) The holders of the Series A Shares shall be entitled to
receive out of the assets of the Company, except as otherwise hereinafter
provided, before any assets of the Company shall be distributed among or paid
over to the holders of the Series 2 Shares or the Common Stock of the Company or
any other junior securities, the amount of Three Dollars and Seventy Five Cents
($3.75) per share, plus an amount equal to all dividends accrued thereon and
unpaid to the date of final distribution, whether or not earned or declared.
Holders of the Series A Shares shall not receive any payments upon the
liquidation, dissolution or winding up of the affairs of the Company, whether
voluntary or involuntary, except as set forth above.
(B) If the assets of the Company are not sufficient to provide
to the holders of Series A Shares the full payment specified in subpart (A)
above (the "liquidation preference" of each share of Series A Shares) and to the
holders of any other series of preferred stock having liquidation rights in
parity with the Series A Shares the full payment specified for the series upon
liquidation, dissolution or winding up as provided by the Board of Directors in
connection with the creation of the series (the "liquidation preference" of each
share of the series of preferred stock), then the assets of the Company shall be
distributed to the holders of all such series of preferred stock according to
their respective liquidation preferences, and the distribution shall be pro rata
to the Stockholders within such series based upon the number of shares of each
series owned.
(C) Neither the merger nor the consolidation of the Company
with or into another corporation, nor the merger or consolidation of any other
corporation with or into the Company, nor the sale, lease or conveyance of all
or part of assets of the Company shall be deemed to be a liquidation,
dissolution or winding up of the Company within the meaning of this Part 5.
Part 6. Additional Notice Provisions.
6A. Special Occurrences. Except as otherwise provided in this Statement
of Designation, in case:
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<PAGE>
(1) the Company shall propose to pay any dividend in stock
upon its Common Stock or to make any other distribution, other than cash
dividends, to the holders of its Common Stock; or
(2) the Company shall propose to offer to the holders of its
Common Stock rights to subscribe to any additional shares, including but not
limited to additional shares of Series A Shares, of any class or any other
rights or options; or
(3) the Company shall propose to effect any reclassification
of its Common Stock or to effect any capital reorganization, or shall propose to
consolidate with or merge into another corporation, or to sell, transfer or
otherwise dispose of all or substantially all of its property, assets or
business; or
(4) the Company shall propose to liquidate, dissolve or wind
up its business affairs;
then in each such case, the Company shall mail to the holders of the Series A
Shares at their respective addresses then appearing on the record books of the
Company (a) at least 10 days' prior written notice of the date on which the
books of the Company shall close or a record shall be taken for such dividend,
distribution or subscription rights and (b) in the case of any reclassification,
reorganization, consolidation, merger, sale, disposition, liquidation,
dissolution or winding up, at least 10 days' prior written notice of the date or
the estimated date when the same shall take place. The notice in accordance with
the foregoing clause (a) shall also specify, in the case of any dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto, and the notice in accordance with the foregoing
clause (b) shall also specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, sale, disposition, liquidation, dissolution or winding up, as the case
may be.
6B. Inapplicable to Employment-Related Shares or Dividend Reinvestment
Plans. The notice required by subpart Part 6A hereof shall not be applicable to
shares or rights issued to any person in connection with his employment nor to
shares issued in accordance with any present or future dividend reinvestment
plan.
6C. Defects in Notice. The notice required by subpart 6A shall be
mailed by first class mail, postage prepaid, and, if mailed in the manner herein
provided, shall be conclusively presumed to have been duly given, whether or not
the Stockholder receives such notice. In any case, failure to give such notice
by mail or any defect in the notice to any Stockholder shall not affect the
validity of the actions described in subpart 6A with respect to any other
Stockholder.
-4-
<PAGE>
Part 7. Conversion.
Each Series A Share may be converted at any time, at the option of the
holder thereof, into shares of Common Stock of the Company, on the terms and
conditions set forth in this Part 7.
7A. Conversion Ratio. Series A Shares shall initially be convertible
into 10 shares of Common Stock (the "Conversion Ratio"), which is subject to
adjustment as provided herein.
7B. Adjustment for Stock Splits and Combinations. If the Company shall
at any time or from time to time after the original issue date of the Series A
Shares effect a subdivision of the outstanding Common Stock, the Conversion
Ratio then in effect immediately before that subdivision shall be
proportionately decreased, and conversely, if the Company shall at any time or
from time to time after the original issue date of the Series A Shares combine
the outstanding shares of Common Stock, the Conversion Ratio then in effect
immediately before the combination shall be proportionately increased. Any
adjustment under this subpart 7B shall become effective at the close of business
on the date the subdivision or combination becomes effective.
7C. Adjustment for Certain Dividends and Distributions. If the Company
at any time, or from time to time after the original issue date for the Series A
Shares shall make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in additional shares of Common Stock, then and in each such event the
Conversion Ratio for the Series A Shares then in effect shall be decreased as of
the time of the issuance or, in the event such a record date shall have been
fixed, as of the close of business on the record date, by multiplying the
Conversion Ratio for the Series A Shares then in effect by a fraction: (1) the
numerator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of the issuance or the close of
business on the record date, and (2) the denominator of which shall be the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of the issuance or the close of business on the record date, plus the
number of shares of Common Stock issuable in payment of the dividend or
distribution; provided, however, if the record date shall have been fixed and
the dividend is not fully paid or if the distribution is not fully made on the
date fixed therefor, the Conversion Ratio for the Series A Shares shall be
recomputed accordingly as of the close of business on the record date and
thereafter the Conversion Ratio for the Series A Shares shall be adjusted
pursuant to this subpart 7C as of the time of actual payment of the dividend or
distribution.
7D. Adjustments for Other Dividends and Distributions. If the Company
at any time or from time to time after the original issue date for the Series A
Shares shall make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Company other than shares of Common Stock, then and
in each such event provision shall be made so that the holders of the Series A
Shares shall receive upon conversion thereof in addition to the number of shares
of Common Stock receivable thereupon, the amount of securities of the Company
that they would have received had their Series A Shares been converted into
Common Stock on the date of the event and had thereafter, during the period from
-5-
<PAGE>
the date of the event to and including the Conversion Date, retained the
securities receivable by them as aforesaid during the period giving application
to all adjustments called for during the period, under this Part 7 with respect
to the rights of the holders of the Series A Shares.
7E. Adjustment for Reclassification, Exchange, or Substitution. If the
Common Stock issuable upon the conversion of the Series A Shares shall be
changed into the same or a different number of shares of any class or classes of
stock, whether by capital reorganization, reclassification, or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
above, or a reorganization, merger, consolidation, or sale of assets provided
for elsewhere in this Part 7), then and in each such event the holder of each
share of Series A Shares shall have the right thereafter to convert such share
into the kind and amount of shares of stock and other securities and property
receivable upon such reorganization, reclassification, or other change, by
holders of the number of shares of Common Stock into which the Series A Shares
might have been converted immediately prior to the reorganization,
reclassification, or change, all subject to further adjustment as provided for
herein.
7F. Reorganization, Mergers, Consolidations, or Sales of Assets. If at
any time or from time to time there shall be a capital reorganization of the
Common Stock (other than a subdivision, combination, reclassification, or
exchange of shares provided for elsewhere in this Part 7) or a merger or
consolidation of the Company with or into another corporation, or the sale of
all or substantially all of the Company's properties and assets to any other
person (other than to a wholly owned subsidiary of the Company) then, as a part
of such reorganization, merger, consolidation, or sale, provision shall be made
so that the holders of the Series A Shares shall thereafter be entitled to
receive upon conversion of the Series A Shares, the number of shares of stock or
other securities or property of the Company, or of the successor corporation
resulting from such merger or consolidation or sale, to which a holder of Common
Stock deliverable upon conversion would have been entitled on such capital
reorganization, merger, consolidation, or sale. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Part 7
with respect to the reorganization, merger, consolidation, or sale to the end
that the provisions of this Part 7 (including adjustment of the Conversion Ratio
then in effect and the number of shares purchasable upon conversion of the
Series A Shares) shall be applicable after that event as nearly equivalent as
may be practicable.
7G. Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of the Series A Shares. In lieu of any fractional shares
to which the holder would otherwise be entitled, the Company shall pay cash
equal to the product of such fraction multiplied by the fair market value of one
share of the Company's Common Stock on the date of conversion, as determined in
good faith by the Board.
7H. Reservation of Stock Issuable Upon Conversion. The Company shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock, solely for the purpose of effecting the conversion of the
Series A
-6-
<PAGE>
Shares, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding Series A Shares, and if
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding Series A
Shares, the Company will take all corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to a number of shares that shall be sufficient for such purpose.
7I. Payment of Taxes. The Company will pay all transfer or stamp taxes
that may be imposed in respect of the issuance or delivery of shares of Common
Stock upon conversion of Series A Shares except as set forth in Section 7J
hereof.
7J. Mechanics of Conversion. The holder of any Series A Shares may
exercise the holder's option to convert such shares into shares of Common Stock
by surrendering for conversion to the Company, at its principal office or at
such other office or agency maintained by the Company for that purpose, a
certificate or certificates representing the Series A Shares to be converted
accompanied by a written notice stating that the holder elects to convert all or
a specified whole number of the holder's shares in accordance with the
provisions of this Part 7 and specifying the name or names in which the holder
wishes the certificate or certificates for shares of Common Stock to be issued.
If the notice specifies a name or names other than that of the holder, the
notice shall be accompanied by payment of all transfer taxes payable upon the
issuance of shares of Common Stock in such name or names. As promptly as
practicable, and in any event within fifteen (15) business days after the
surrender of the certificates and the receipt of the notice relating thereto
and, if applicable, payment of all transfer taxes, the Company shall deliver or
cause to be delivered (a) certificates representing the number of validly
issued, fully paid and nonassessable shares of Common Stock of the Company to
which the holder of the Series A Shares so converted shall be entitled and (b)
if less than the full number of the Series A Shares evidenced by the surrendered
certificate or certificates is converted, a new certificate or certificates, of
like tenor, for the number of shares evidenced by the surrendered certificate or
certificates less the number of shares converted. Such conversion shall be
deemed to have been made at the close of business on the date of giving of
notice and of surrender of the certificate or certificates representing the
Series A Shares to be converted so that the rights of the holder thereof shall
cease except for the right to receive Common Stock of the Company in accordance
herewith, and the converting holder shall be treated for all purposes as having
become the record holder of such Common Stock of the Company at such time.
7K. Conversion and Redemption. Series A Shares may not be converted
after the close of business on the third business day preceding the date fixed
for redemption of such shares pursuant to Part 3 hereof.
7L. Conversion and Dividends. Upon conversion of the Series A Shares,
the holder thereof shall not be entitled to receive any accumulated, accrued or
unpaid dividends in respect of the shares so converted, provided that the holder
shall be entitled to receive any dividends on such Series A Shares declared
prior to such conversion if such holder held such shares on the record date
fixed for the determination of holders of the Series A Shares entitled to
receive payment of such dividend.
-7-
<PAGE>
Part 8. Replacement.
Upon receipt of evidence reasonably satisfactory to the Company (an
affidavit of the registered holder will be satisfactory) of the ownership and
the loss, theft, destruction or mutilation of any certificate evidencing Series
A Shares, and in the case of any such loss, theft or destruction, upon receipt
of indemnity reasonably satisfactory to the Company or, in the case of any such
mutilation upon surrender of the certificate, the Company shall (at its expense)
execute and deliver in lieu of the certificate a new certificate of like kind
representing the number of Series A Shares represented by the lost, stolen,
destroyed or mutilated certificate, and dividends shall accrue on the Series A
Shares represented by the new certificate from the date to which dividends have
been fully paid on the lost, stolen, destroyed or mutilated certificate.
Part 9. Amendment and Waiver.
No amendment, modification or waiver shall be binding or effective with
respect to any provision without the affirmative vote of the holders of a
majority of the then outstanding Series A Shares or the prior written consent of
the holders of a majority of the then outstanding Series A Shares at the time
such action is taken; provided that no change in the terms hereof may be
accomplished by merger or consolidation of the Company with another corporation
unless first approved by an affirmative vote of the holders of a majority of the
then outstanding Series A Shares or unless the Company has obtained the prior
written consent of the holders of a majority of the then outstanding Series A
Shares.
Part 10. Other Rights.
Subject to all of the rights of the Series A Shares, dividends may be
paid on the Common Stock of the Company, as and when declared by the Board of
Directors, out of any funds of the Company legally available for the payment of
such dividends.
Part 11. Registration of Transfer.
The Company shall keep a register for the registration of Series A
Shares at its principal office or at another office or agency maintained by the
Company for such purpose. Upon the surrender of any certificate representing
Series A Shares at such place and the payment of any applicable transfer tax by
the surrendering holder, the Company shall, at the request of the record holder
of the certificate, cause to be executed and delivered (at the Company's
expense, except for the aforementioned transfer tax) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
Series A Shares represented by the surrendered certificate. Each new certificate
shall be registered in the name and shall represent the number of Series A
Shares as is requested by the holder of the surrendered certificate and shall be
substantially identical to the surrendered certificate, and dividends shall
accrue on the Series A Shares represented by the new certificate from the date
to which dividends have been fully paid on the Series A Shares represented by
the surrendered certificate.
-8-
<PAGE>
ANNEX B
Form 10-KSB for year ended May 31, 1997 (separately delivered)
B-1
TO HOLDERS OF OUR SERIES 2 SHARES
Avesis Incorporated hereby offers to exchange one share of its Class A,
Senior Nonvoting Cumulative Convertible Preferred Stock, Series A, par value
$.01, for each outstanding share of the Class A, Nonvoting Cumulative
Convertible Preferred Stock, Series 2, par value $.01 share ("Series 2 Shares")
of the Company. This exchange offer is explained in detail in the enclosed Offer
to Exchange and Letter of Transmittal. We encourage you to read these materials
carefully before making any decision with respect to the exchange offer. If you
desire to exchange your Series 2 Shares, the instructions on how to tender
shares are also explained in the accompanying materials.
As described in the Offer to Exchange, the purpose of this offer is to
eliminate or significantly reduce the number of Series 2 Shares outstanding and
to adjust the Company's capital structure.
Neither Avesis Incorporated nor its Board of Directors makes any
recommendations to any shareholders whether to tender or refrain from tendering
their shares. Each shareholder must make the decision whether to tender shares
and if so, how many shares. The Company has been advised that all of its
directors and executive officers intend to exchange their shares in the exchange
offer.
Please note that the exchange offer will expire at 5:00 p.m., New York
City time, on May 27, 1998, unless it is extended. Questions with respect to the
exchange offer should be referred to the Company at 800-522-0258 x204 (toll free
throughout the U.S.)
Sincerely,
Kenneth L. Blum, Sr.
LETTER OF TRANSMITTAL
TO ACCOMPANY CERTIFICATES OF
CLASS A, NONVOTING CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES 2
OF
AVESIS INCORPORATED
PURSUANT TO THE OFFER TO EXCHANGE DATED APRIL 23, 1998
- --------------------------------------------------------------------------------
THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
WEDNESDAY, MAY 27, 1998 UNLESS
THE OFFER IS EXTENDED.
- --------------------------------------------------------------------------------
TO: CONTINENTAL STOCK TRANSFER & TRUST COMPANY:
<TABLE>
<S> <C> <C>
By Mail: Facsimile Transmission: By Hand:
(for Eligible Institutions
Continental Stock Transfer Only) Continental Stock Transfer
& Trust Company (212) 509-5150 & Trust Company
2 Broadway Confirm by Telephone: 2 Broadway, 19th Floor
New York, NY 10004 (212) 509-4000, ext. 535 New York, NY 10004
Attn: Reorganization Department Attn: Reorganization Department
</TABLE>
Delivery of this instrument and all other documents to any address or
transmission of instructions to an address other than as set forth above does
not constitute a valid delivery.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL, INCLUDING THE ACCOMPANYING
INSTRUCTIONS, CAREFULLY BEFORE CHECKING ANY BOX BELOW.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
DESCRIPTION OF SERIES 2 SHARES TENDERED
(SEE INSTRUCTIONS 3 AND 4)
- --------------------------------------------------------------------------------------------------------------
Name(s) and Address(es) of Registered Holder(s) Tendered Certificates
(Please use pre-addressed label or fill in exactly as name(s) (Attach Signed Additional List if
appear(s) on certificate(s)) Necessary)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Certificate Number of Number of
Number(s)* Series 2 Series 2
Shares Shares
Tendered**
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
Total
Series 2
Shares
Tendered
- --------------------------------------------------------------------------------------------------------------
* DOES NOT need to be completed if Series 2 Shares are tendered by book-entry transfer.
** If you desire to tender fewer than all Series 2 Shares evidenced by any certificates listed
above, please indicate in this column the number of Series 2 Shares you wish to tender. Otherwise,
all Series 2 Shares evidenced by such certificates will be deemed to have been tendered.
- --------------------------------------------------------------------------------------------------------------
[_] Check here if any of the certificates representing Series 2 Shares that you own have been lost,
destroyed or stolen.
Number of Series 2 Shares represented by lost, destroyed or stolen certificates:_
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The undersigned hereby accepts the offer made to holders of Class A,
Nonvoting Cumulative Convertible Preferred Stock, Series 2, $.01 par value
("Series 2 Shares") of Avesis Incorporated, a Delaware corporation (the
"Company"), pursuant to the terms of the Offer to Exchange, dated April 23, 1998
("Offer to Exchange") and in the Letter of Transmittal, as they may be
supplemented or amended from time to time (collectively the "Exchange Offer").
The Series 2 Shares represented by the stock certificate(s) are herewith
surrendered to you in exchange for certificate(s) representing shares of Class
A, Senior Nonvoting Cumulative Convertible Preferred Stock, Series A, $.01 par
value ("Series A Shares"). The undersigned hereby represents that he or she has
full power and authority to submit, sell, assign and transfer the stock
certificates described above. Upon request, the undersigned will execute and
deliver any additional documents deemed appropriate or necessary by the Company
in connection with this exchange of such certificates.
This Letter of Transmittal is to be used only if certificates for Series
2 Shares are being forwarded herewith (or such certificates will be delivered
pursuant to a Notice of Guaranteed Delivery previously sent to the Company).
NOTE: For information on the Federal tax consequences of the Exchange,
see "Federal Income Tax Consequences" of the Offer to Exchange.
The undersigned hereby irrevocably constitutes and appoints the Company
as the true and lawful attorney-in-fact of the undersigned with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest) to exchange certificate(s) representing shares of
Series 2 Shares, together with all accompanying evidence of transfer and
authenticity, for certificate(s) representing shares of Series A Shares. All
authority conferred shall survive the death or incapacity of the undersigned,
and any obligation of the undersigned hereunder shall be binding on the heirs,
personal representatives, successors and assigns of the undersigned.
The Exchange Offer is being made to all holders of Series 2 Shares in the
states of Arizona, California, Colorado, Connecticut, Florida, Maryland, New
Jersey, New York and Tennessee. These are all the states where a holder of
Series 2 Shares is known by the Company to reside. The Company is not aware of
any state where a shareholder resides and the making of the Exchange Offer is
prohibited by administrative or judicial action pursuant to a valid state
statute. If the Company becomes aware of any valid state statute prohibiting the
making of the Exchange Offer or a shareholder residing in a state other than
listed above, the Company will make a good faith effort to comply with such
statute and regulations. If, after such good faith effort, the Company cannot
comply with such statute, the Exchange Offer will not be made to, nor will
tenders be accepted from or on behalf of, holders of Series 2 Shares in such
state.
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
Shareholders who cannot deliver the certificates for their Series 2
Shares to the Company prior to the Expiration Date (as defined in the Offer to
Exchange) or who cannot complete the procedure for book-entry transfer on a
timely basis or who cannot deliver a Letter of Transmittal and all other
required documents to the Company prior to the Expiration Date must, in each
case, tender their Series 2 Shares pursuant to the guaranteed delivery procedure
set forth in the Offer to Exchange.
Delivery of documents to Book-Entry Transfer Facility does not constitute
delivery to the Company.
- --------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED SERIES 2 SHARES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER TO AN ACCOUNT MAINTAINED BY THE COMPANY WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution____________________________________________
Account Number___________________________________________________________
Transaction Code Number__________________________________________________
[_] CHECK HERE IF CERTIFICATES FOR TENDERED SERIES 2 SHARES ARE BEING
DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO
THE COMPANY AND COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s):__________________________________________
Date of Execution of Notice of Guaranteed Delivery:______________________
Name of Institution that Guaranteed Delivery:____________________________
Check Box and Give Account Number if Delivered by Book-Entry Transfer
[_] The Depository Trust Company
Account Number___________________________________________________________
- --------------------------------------------------------------------------------
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
The undersigned hereby tenders to Avesis Incorporated, a Delaware
corporation (the "Company"), the above described shares of the Company's Class
A, Nonvoting Cumulative Convertible Preferred Stock, Series 2, $.01 par value
per share (the "Series 2 Shares"), upon the terms and subject to the conditions
set forth in the Company's Offer to Exchange, dated April 23, 1998 (the "Offer
to Exchange"), receipt of which is hereby acknowledged, and in this Letter of
Transmittal, as they may be supplemented or amended (which together constitute
the "Exchange Offer").
-3-
<PAGE>
Subject to and effective upon acceptance for exchange of the Series 2
Shares tendered hereby in accordance with the terms and subject to the
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of such extension or amendment), the
undersigned hereby sells, assigns and transfers to, or upon the order of, the
Company all right, title and interest in and to all the Series 2 Shares that are
being tendered hereby and orders the registration of all such Series 2 Shares if
tendered by book-entry transfer and hereby irrevocably constitutes and appoints
the Company as the true and lawful agent and attorney-in-fact of the undersigned
(with full knowledge that said Company also acts as the agent of the Company)
with respect to such Series 2 Shares with full power of substitution (such power
of attorney being deemed to be an irrevocable power coupled with an interest),
to:
(a) deliver certificate(s) for such Series 2 Shares or transfer
ownership of such Shares on the account books maintained by the
Book-Entry Transfer Facility, together in either such case with all
accompanying evidences of transfer and authenticity, to, or upon the
order of, the Company, to exchange with respect to such Series 2 Shares;
(b) present certificates for such Series 2 Shares for cancellation and
transfer on the Company's books; and
(c) receive all benefits and otherwise exercise all rights of
beneficial ownership of such Series 2 Shares, subject to the next
paragraph, all in accordance with the terms of the Exchange Offer.
The undersigned hereby represents and warrants to the Company that:
(a) the undersigned understands that tenders of Series 2 Shares
pursuant to any one of the procedures described in the Offer to Exchange
and in the instructions hereto will constitute the undersigned's
acceptance of the terms and conditions of the Exchange Offer, including
the undersigned's representation and warranty that:
(i) the undersigned has a net long position in Series 2 Shares or
equivalent securities at least equal to the Series 2 Shares tendered
within the meaning of Rule 14e-4 under the Securities Exchange Act of
1934, as amended (the "1934 Act"), and
(ii) such tender of Series 2 Shares complies with Rule 14e-4 under
the 1934 Act;
(b) when and to the extent the Company accepts such Series 2 Shares for
exchange, the Company will acquire good, marketable and unencumbered
title to them, free and clear of all security interests, liens, charges,
encumbrances, conditional sales agreements or other obligations relating
to their sale or transfer, and not subject to any adverse claim;
(c) on request, the undersigned will execute and deliver any additional
documents the Company deems necessary or desirable to complete the
assignment, transfer and purchase of the Series 2 Shares tendered hereby;
and
(d) the undersigned has read and agrees to all of the terms of the
Exchange Offer.
-4-
<PAGE>
All authorities conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned, and any
obligation of the undersigned hereunder shall be binding upon the heirs,
personal representatives, executors, administrators, successors, assigns,
trustees in bankruptcy, and legal representatives of the undersigned. Except as
stated in the Offer to Exchange, this tender is irrevocable.
The name(s) and address(es) of the registered holder(s) should be printed
above, if they are not already printed above, exactly as they appear on the
certificate(s) representing Series 2 Shares tendered hereby. The class and
certificate numbers, the number of Series 2 Shares represented by such
certificate(s) and the number of Series 2 Shares that the undersigned wishes to
tender, should be set forth in the appropriate boxes above.
The undersigned understands that the Company will, upon the terms and
subject to the conditions of the Exchange Offer, exchange Series A Shares for
Series 2 Shares properly tendered and not withdrawn prior to the Expiration Date
pursuant to the Exchange Offer. The undersigned understands that all Series 2
Shares properly tendered will be exchanged upon the terms and subject to the
conditions of the Exchange Offer.
The undersigned recognizes that, under certain circumstances set forth in
the Offer to Exchange, the Company may terminate or amend the Exchange Offer or
may postpone the exchange. In any such event, the undersigned understands that
certificate(s) for any Series 2 Shares delivered herewith but not tendered or
not exchanged will be returned to the undersigned at the address indicated
above, unless otherwise indicated under the "Special Delivery Instructions"
boxes below. The undersigned recognizes that the Company has no obligation,
pursuant to the Special Delivery Instructions, to transfer any certificate for
Series 2 Shares from the name of its registered holder, or to order the
registration or transfer of Series 2 Shares tendered by book-entry transfer.
The undersigned understands that acceptance of Series 2 Shares by the
Company for exchange will constitute a binding agreement between the undersigned
and the Company upon the terms and subject to the conditions of the Exchange
Offer.
The new Series A Shares for such of the Series 2 Shares tendered hereby
will be issued to the order of the undersigned and mailed to the address
indicated above, unless otherwise indicated under the "Special Delivery
Instructions" boxes below.
-5-
<PAGE>
NOTE; SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS)
To be completed ONLY if certificates for Series A Shares issued in
the name of the undersigned, are to be mailed to someone other than the
undersigned or to the undersigned at an address other than that shown
above.
Mail:
[_] Certificates to:
Name(s)__________________________________________________________________
(Please Print)
Address__________________________________________________________________
(City, State)
_____________________________________________________________
(Zip Code)
_________________________________________________________________________
Signature
- --------------------------------------------------------------------------------
-6-
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Offer
GUARANTEE OF SIGNATURES. No signature guarantee is required if:
(a) this Letter of Transmittal is signed by the registered holder
of the Series 2 Shares (which term, for purposes of this document,
shall include any participant in Book-Entry Transfer a Facility whose
name appears on a security position listing as the owner of such Series
2 Shares) exactly as the name of the registered holder appears on the
certificate(s) tendered with this Letter of Transmittal and payment and
delivery are to be made directly to such owner; or
(b) such Series 2 Shares are tendered for the account of a firm or
other entity that is a member in good standing of a registered national
securities exchange, or a member of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having
an office, branch or agency in the United States (each such entity, an
"Eligible Institution").
In all other cases, including any case in which such owner has
completed the box entitled "Special Delivery Instructions" above, an Eligible
Institution must guarantee all signatures on this Letter of Transmittal. See
Instruction 1.
1. Guarantee of Signatures. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by a firm which is a
bank, broker, dealer, credit union, savings association, or other entity that is
a member in good standing of the Securities Transfer Agents Medallion Program
(each, an "Eligible Institution"). No signature guarantee is required on this
Letter of Transmittal (i) if this Letter of Transmittal is signed by the
registered holder(s) (which term, for purposes of this document, shall include
any participant in the Book-Entry Transfer Facility whose name appears on a
security position listing as the owner of Series 2 Shares) of Series 2 Shares
tendered herewith, unless such holder(s) has completed either the box entitled
"Special Delivery Instructions" included herein, or (ii) if such Series 2 Shares
are tendered for the account of an Eligible Institution. See Instructions.
2. Delivery of Letter of Transmittal and Certificates; Guaranteed
Delivery Procedures. This Letter of Transmittal is to be used only if
certificates for Series 2 Shares are delivered with it to the Company (or such
certificates will be delivered pursuant to a Notice of Guaranteed Delivery
previously sent to the Company) or if a tender for Series 2 Shares is being made
concurrently pursuant to the procedure for tender by book-entry transfer set
forth in the Offer to Exchange. Certificates for all physically tendered Series
2 Shares or confirmation of a book-entry transfer into the Company's account at
a Book-Entry Transfer Facility of Series 2 Shares tendered electronically,
together in each case with a properly completed and duly executed Letter of
Transmittal or duly executed and manually signed facsimile of it, and any other
documents required by this Letter of Transmittal, should be mailed or delivered
to the Company at the appropriate address set forth herein and must be delivered
to the Company on or before the Expiration Date (as defined in the Offer to
Exchange). DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT
CONSTITUTE DELIVERY TO THE COMPANY.
-7-
<PAGE>
Shareholders whose certificates are not immediately available or who
cannot deliver certificates for their Series 2 Shares and all other required
documents to the Company before the Expiration Date, or whose Series 2 Shares
cannot be delivered on a timely basis pursuant to the procedures for book-entry
transfer, must, in any case, tender their Series 2 Shares by or through any
Eligible Institution by properly completing and duly executing and delivering a
Notice of Guaranteed Delivery (or facsimile of it) and by otherwise complying
with the guaranteed delivery procedure set forth in Section 3 of the Offer to
Exchange. Pursuant to such procedure, certificates for all physically tendered
Series 2 Shares or book-entry confirmations, as the case may be, as well as a
properly completed and duly executed Letter of Transmittal (or facsimile of it)
and all other documents required by this Letter of Transmittal, must be received
by the Company within three (3) Nasdaq trading days after receipt by the Company
of such Notice of Guaranteed Delivery, all as provided in Section 3 of the Offer
to Exchange.
The Notice of Guaranteed Delivery may be delivered by hand or
transmitted by telegram, facsimile transmission or mail to the Company and must
include a signature guarantee by an Eligible Institution in the form set forth
in such Notice. For Series 2 Shares to be tendered validly pursuant to the
guaranteed delivery procedure, the Company must receive the Notice of Guaranteed
Delivery on or before the Expiration Date.
THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING CERTIFICATES FOR
SERIES 2 SHARES, IS AT THE OPTION AND RISK OF THE TENDERING SHAREHOLDER. IF
DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE DELIVERY.
All tendering shareholders, by execution of this Letter of Transmittal
(or a facsimile of it), waive any right to receive any notice of the acceptance
of their tender.
3. Inadequate Space. If the space provided in the box captioned
"Description of Series 2 Shares Tendered" is inadequate, the certificate
numbers, the class or classes, and/or the number of Series 2 Shares should be
listed on a separate signed schedule and attached to this Letter of Transmittal.
4. Signatures on Letter of Transmittal, Stock Powers and Endorsements.
(a) If this Letter if Transmittal is signed by the registered
holder(s) of the Series 2 Shares tendered hereby, the signature(s) must
correspond exactly with the name(s) as written on the face of the
certificate(s) without any change whatsoever.
(b) If any tendered Series 2 Shares are registered in the names of
two or more joint holders, each such holder must sign this Letter of
Transmittal.
(c) When this Letter of Transmittal is signed by the registered
holder(s) of the Series 2 Shares listed and transmitted hereby, no
endorsement(s) of certificate(s) representing such Series 2 Shares or
separate stock power(s) are required unless payment is to the made or
the certificate(s) for the Series 2 Shares not tendered or not
exchanged are to be issued to a person other than the registered
holder(s). If this Letter of Transmittal is signed by a person other
than the registered
-8-
<PAGE>
holder(s) of the certificate(s) listed, or if the exchange is to be
made to a person other than the registered holder(s), the
certificate(s) must be endorsed or accompanied by appropriate stock
power(s), in either case signed exactly as the name(s) of the
registered holder(s) appears on the certificate(s). SIGNATURE(S) ON
SUCH CERTIFICATE(S) OR STOCK POWER(S) MUST BE GUARANTEED BY AN ELIGIBLE
INSTITUTION. See Instruction 1.
(d) If this Letter of Transmittal or any certificate(s) or stock
powers(s) are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in
fiduciary or representative capacity, such persons should so indicate
when signing and must submit proper evidence satisfactory to the
Company of their authority to so act.
5. Stock Transfer Taxes. Except as provided in this Instruction 5, no
stock transfer tax stamps or funds to cover such stamps need accompany this
Letter of Transmittal. The Company will pay or cause to be paid any stock
transfer taxes payable on the transfer to it of Series 2 Shares exchanged
pursuant to the Exchange Offer. If, however:
(a) Series 2 Shares not exchanged or not accepted for exchange are
to be registered in the name(s) of any person(s) other than the
registered holder(s); or
(b) tendered certificates are registered in the name(s) of any
person(s) other than the person(s) signing this Letter of Transmittal;
then the Company will transfer only after payment the amount of any stock
transfer taxes (whether imposed on the registered holder, such other person or
otherwise) payable on account of the transfer to such person, unless
satisfactory evidence of the payment of such taxes or any exemption from them is
submitted.
6. Special Delivery Instructions. If certificate(s) for Series 2 Shares
not tendered or not exchanged in the name of a person other than the signer of
the Letter of Transmittal or to the signer at a different address, the box
captioned "Special Delivery Instructions" on this Letter of Transmittal should
be completed as applicable and signatures must be guaranteed as described in
Instruction 1.
7. Irregularities. All questions as to the number of Series 2 Shares to
be accepted and the validity, form, eligibility (including time of receipt) and
acceptance for exchange of any tender of Series 2 Shares will be determined by
the Company in its sole discretion, which determinations shall be final and
binding on all parties. The Company reserves the absolute right to reject any or
all tenders of Series 2 Shares it determines not to be in proper form or the
acceptance of which or payment for which may, in the opinion of the Company's
counsel, be unlawful. The Company also reserves the absolute right to waive any
of the conditions of the Exchange Offer and any defect or irregularity in the
tender of any particular Series 2 Shares, and the Company's interpretation of
the terms of the Exchange Offer (including these instructions) will be final and
binding on all parties. No tender of Series 2 Shares will be deemed to be
properly made until all defects and irregularities have been cured or waived.
Unless waived, any defects or irregularities in connection with tenders must be
cured within such time as the Company shall determine. Neither the Company nor
any other person is or will be obligated to give notice of any defects or
irregularities in tenders and none of them will incur any liability for failure
to give any such notice.
-9-
<PAGE>
8. Questions and Requests for Assistance and Additional Copies.
Questions and requests for assistance may be directed to, or additional copies
of the Offer to Exchange, the Notice of Guaranteed Delivery and this Letter of
Transmittal may be obtained from the Company at their address and telephone
number set forth at the beginning of this Letter of Transmittal or from your
broker, dealer, commercial bank or trust company.
9. Lost, Destroyed or Stolen Certificates. If any certificate(s)
representing Series 2 Shares has been lost, destroyed or stolen, the shareholder
should promptly notify the Company by checking the box provided in the box
titled "Description of Shares Tendered" and indicating the number of Series 2
Shares represented by the certificate(s) so lost, destroyed or stolen. The
shareholder will then be instructed by the Company as to the steps that must be
taken in order to replace the certificate(s). This Letter of Transmittal and
related documents cannot be processed until the procedures for replacing lost,
destroyed or stolen certificates have been followed. Please allow at least ten
to fourteen business days to complete such procedures.
10. Denomination of Certificate(s). Unless specific denominations are
requested at the time of exchange, a single certificate will be issued in
exchange for those surrendered with this Letter of Transmittal.
POSSIBLE NEGATIVE CONSEQUENCES: It is important that holders of Series
2 Shares be aware of certain possible negative consequences of tendering their
Series 2 Shares as well as the possible negative consequences of not tendering
Series 2 Shares under the Exchange Offer. Please see the Offer to Exchange under
the heading "Risk Factors" for details on possible negative consequences of
either choice.
IMPORTANT: This Letter of Transmittal or a facsimile hereof (together with
certificates for the Shares being tendered and all other required documents), or
a Notice of Guaranteed Delivery, must be received prior to 5:00 P.M., New York
City Time, on the Expiration Date.
-10-
NOTICE OF GUARANTEED DELIVERY
OF SHARES OF CLASS A, NONVOTING CUMULATIVE CONVERTIBLE
PREFERRED STOCK, SERIES 2
OF
AVESIS INCORPORATED
PURSUANT TO THE OFFER TO EXCHANGE DATED APRIL 23, 1998
This form or a facsimile hereof must be used to accept the Exchange
Offer (as defined below) if:
(a) certificates for shares of Class A, Nonvoting Cumulative
Convertible Preferred Stock, Series 2 (the "Series 2 Shares"), of Avesis
Incorporated, a Delaware corporation (the "Company"), cannot be delivered to the
Company prior to the Expiration Date (as defined in the Company's Offer to
Exchange, dated April 23, 1998 (the "Offer to Exchange")); or
(b) the procedure for book-entry transfer (set forth in the
Offer to Exchange) cannot be completed on a timely basis; or
(c) the Letter of Transmittal (or a facsimile thereof) and all
other required documents cannot be delivered to the Company prior to the
Expiration Date.
This form, properly completed and duly executed, may be delivered by
hand, mail or facsimile transmission to the Company. See the Offer to Exchange.
TO: CONTINENTAL STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
By Mail: Facsimile Transmission: By Hand:
(for Eligible Institutions
Continental Stock Transfer Only) Continental Stock Transfer
& Trust Company (212) 509-5150 & Trust Company
2 Broadway Confirm by Telephone: 2 Broadway, 19th Floor
New York, NY 10004 (212) 509-4000, ext. 535 New York, NY 10004
Attn: Reorganization Department Attn: Reorganization Department
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on
a 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.
Ladies and Gentlemen:
<PAGE>
The undersigned hereby tenders to the Company upon the terms and
subject to the conditions set forth in the Offer to Exchange and the related
Letter of Transmittal (which together constitute the "Exchange Offer"), receipt
of both of which is hereby acknowledged, Series 2 Shares pursuant to the
guaranteed delivery procedure set forth in the Offer to Exchange.
(Please type or print)
Certificate Nos. (if available):
________________________________________________________
________________________________________________________
Name(s)
________________________________________________________
________________________________________________________
Address(es)
________________________________________________________
________________________________________________________
Area Code(s) and Telephone Number(s)
SIGN HERE
________________________________________________________
Signature(s)
________________________________________________________
Dated:
If Series 2 Shares will be tendered by book-entry
transfer, check the box and fill in the applicable
account number, below:
[_] The Depository Trust Company
Account Number:_________________________________________
-2-
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned is a firm or other entity that is a member in good
standing of a registered national securities exchange, or a member of the
National Association of Securities Dealers, Inc. or a commercial bank or trust
company having an office, branch or agency in the United States and represents
that: (a) the above-named person(s) "own(s)" the Series 2 Shares tendered hereby
within the meaning of Rule 14e-4 promulgated under the Securities Exchange Act
of 1934, as amended, and (b) such tender of Series 2 Shares complies with such
Rule 14e-4, and guarantees that the Company will receive (i) certificates of the
Series 2 Shares tendered hereby in proper form for transfer, or (ii)
confirmation that the Series 2 Shares tendered hereby have been delivered
pursuant to the procedure for book-entry transfer (set forth in the Offer to
Exchange) into the Company's account at The Depository Trust Company, together
with a properly completed and duly executed Letter of Transmittal (or facsimile
thereof) and any other documents required by the Letter of Transmittal, all
within three Nasdaq trading days after the date the Company receives this Notice
of Guaranteed Delivery.
Authorized Signature:_______________________________________________
Name:_______________________________________________________________
(Please Print)
____________________________________________________________________
____________________________________________________________________
Title:______________________________________________________________
Name of Firm:_______________________________________________________
Address:____________________________________________________________
____________________________________________________________________
____________________________________________________________________
(Including Zip Code)
Area Code and Telephone Number:_____________________________________
Date:_________________________________________________________, 1998
DO NOT SEND CERTIFICATES WITH THIS FORM. YOUR STOCK CERTIFICATES MUST
BE SENT WITH THE LETTER OF TRANSMITTAL.
-3-
AVESIS INCORPORATED
Offer To Exchange Class A, Nonvoting Cumulative Convertible Preferred Stock,
Series 2
- --------------------------------------------------------------------------------
THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MAY
27, 1998, UNLESS THE OFFER IS EXTENDED.
- --------------------------------------------------------------------------------
To Our Clients:
Enclosed for your consideration are the Offer to Exchange, dated April
23, 1998, and the related Letter of Transmittal (which together, including any
supplements or amendments, constitute the "Exchange Offer") in connection with
the Exchange Offer by Avesis Incorporated, a Delaware corporation (the
"Company") to exchange all shares (or such lesser numbered shares as are
properly tendered) of its Class A, Nonvoting Cumulative Convertible Preferred
Stock, Series 2, par value $.01 per share ("Series 2 Shares") for its Class A,
Senior Nonvoting Cumulative Convertible Preferred Stock, Series A, par value
$.01 ("Series A Shares"), upon the terms and subject to the conditions set forth
in the Exchange Offer.
We are the owner of record of Series 2 Shares held for your account. As
such, we are the only ones who can tender such Series 2 Shares, and then only
pursuant to your instructions. WE ARE SENDING YOU THE ENCLOSED LETTER OF
TRANSMITTAL FOR YOUR INFORMATION ONLY; YOU CANNOT USE IT TO TENDER SERIES 2
SHARES WE HOLD FOR YOUR ACCOUNT.
Please instruct us as to whether you wish us to tender any or all of
the Series 2 Shares we hold for your account on the terms and subject to the
conditions of the Exchange Offer.
We call your attention to the following:
1. You may tender Series 2 Shares as indicated in the attached
Instruction Form.
2. The Exchange Offer is not conditioned upon any minimum number
of Series 2 Shares being tendered.
3. The Exchange Offer and withdrawal rights will expire at 5:00
P.M., New York City time on May 27, 1998, unless the Company
extends the Exchange Offer.
4. The Exchange Offer is for all Series 2 Shares.
5. Tendering shareholders will not be obligated to pay brokerage
fees or commissions or, except as set forth in the Letter of
Transmittal, transfer taxes on the exchange of Series 2 Shares
for Series A Shares pursuant to the Exchange Offer. A
tendering shareholder who holds securities with such
shareholder's broker may be required by such broker to pay a
service charge or other fee and the Company will not pay such
fee.
If you wish to have us exchange any or all of your Series 2 Shares,
please so instruct us by completing, executing, detaching and returning to us
the attached Instruction Form. An envelope to return
<PAGE>
your Instruction Form to us is enclosed. If you authorize us to exchange your
Series 2 Shares, we will tender all such Series 2 Shares unless you specify
otherwise on the attached Instruction Form.
YOUR INSTRUCTION FORM SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT
US TO SUBMIT A TENDER ON YOUR BEHALF ON OR BEFORE THE EXPIRATION DATE OF THE
EXCHANGE OFFER. THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON MAY 27, 1998, UNLESS THE COMPANY EXTENDS THE EXCHANGE
OFFER.
The Exchange Offer is being made to all holders of Series 2 Shares in
the states of Arizona, California, Colorado, Connecticut, Florida, Maryland, New
Jersey, New York and Tennessee. These are all the states where a holder of
Series 2 Shares is known by the Company to reside. The Company is not aware of
any state where a shareholder resides and the making of the Exchange Offer is
prohibited by administrative or judicial action pursuant to a valid state
statute. If the Company becomes aware of any valid state statute prohibiting the
making of the Exchange Offer or a shareholder residing in a state other than
listed above, the Company will make a good faith effort to comply with such
statute and regulations. If, after such good faith effort, the Company cannot
comply with such statute, the Exchange Offer will not be made to, nor will
tenders be accepted from or on behalf of, holders of Series 2 Shares in such
state.
- --------------------------------------------------------------------------------
Number of Series 2 Shares to be tendered pursuant to this Instruction Form:
__________ Series 2 Shares
- --------------------------------------------------------------------------------
THE METHOD OF DELIVERY OF THIS DOCUMENT IS AT THE OPTION AND RISK OF
THE TENDERING SHAREHOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE EXCHANGE OFFER.
HOWEVER, NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY
RECOMMENDATIONS TO SHAREHOLDERS AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING THEIR SERIES 2 SHARES.
<TABLE>
<S> <C>
- -------------------------------------------- --------------------------------------------
Signature(s):___________________________ Address:________________________________
________________________________________ ________________________________________
(City, State and Zip Code)
Name(s):________________________________
________________________________________ Area Code and Telephone Number:
(Please Print)
________________________________________
________________________________________
(Taxpayer Identification or Date:___________________________, 1998
Social Security Number)
- -------------------------------------------- --------------------------------------------
</TABLE>
2
AVESIS INCORPORATED
Offer to Exchange for Class A, Nonvoting Cumulative Convertible Preferred Stock,
Series 2
- --------------------------------------------------------------------------------
THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MAY
27, 1998, UNLESS THE OFFER IS EXTENDED.
- --------------------------------------------------------------------------------
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
Avesis Incorporated, a Delaware corporation (the "Company"), is offering
shareholders an opportunity to exchange its Class A, Nonvoting Cumulative
Convertible Preferred Stock, Series 2, par value $.01 (the "Series 2 Shares"),
for its Class A, Nonvoting Senior Cumulative Convertible Preferred Stock, Series
A Shares, par value $.01 ("Series A Shares"), upon the terms and subject to the
conditions set forth in its Offer to Exchange, dated April 23, 1998, and in the
related Letter of Transmittal (which together constitute the "Exchange Offer").
The Series A Shares have senior rights to payments of dividends and payments
upon liquidation as compared to the Series 2 Shares as well as more favorable
conversion terms, but have a lower liquidation amount and lower annual dividend
rate.
All Series 2 Shares properly tendered and not withdrawn will be
exchanged, upon the terms and subject to the conditions of the Exchange Offer.
See the Offer to Exchange.
THE EXCHANGE OFFER IS NOT CONDITIONED ON ANY MINIMUM NUMBER OF SERIES 2
SHARES BEING TENDERED. THE EXCHANGE OFFER IS, HOWEVER, SUBJECT TO CERTAIN OTHER
CONDITIONS. SEE THE OFFER TO EXCHANGE.
For your information and for forwarding to your clients for whom you
hold Series 2 Shares registered in your name or in the name of your nominee, we
are enclosing the following documents:
1. Offer to Exchange, dated April 23, 1998;
2. Letter to Clients which may be sent to your clients for
whose accounts you hold Series 2 Shares registered in your name or in
the name of your nominee, with space provided for obtaining such
clients' instructions with regard to the Exchange Offer;
3. Letter, dated April 23, 1998, from Kenneth L. Blum, Sr.,
Acting Chief Executive Officer of the Company, to shareholders of the
Company;
4. Letter of Transmittal for your use and for the information
of your clients; and
5. Notice of Guaranteed Delivery to be used to accept the
Exchange Offer if the Series 2 Shares certificates and all other
required documents cannot be delivered to the
<PAGE>
Company by the Expiration Date or if the procedure for book-entry
transfer cannot be completed on a timely basis.
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. THE
EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON MAY 27, 1998, UNLESS THE EXCHANGE OFFER IS EXTENDED.
No fees or commissions will be payable to brokers, dealers or any person
for soliciting tenders of Series 2 Shares pursuant to the Exchange Offer as
described in the Offer to Exchange. The Company will, however, upon request,
reimburse you for customary mailing and handling expenses incurred by you in
forwarding any of the enclosed materials to the beneficial owners of Series 2
Shares held by you as a nominee or in a fiduciary capacity. The Company will pay
or cause to be paid any stock transfer taxes applicable to its purchase of
Series 2 Shares, except as otherwise provided in Instruction 4 of the Letter of
Transmittal.
In order to take advantage of the Exchange Offer, a duly executed and
properly completed Letter of Transmittal and any other required documents should
be sent to the Company with either certificate(s) representing the tendered
Series 2 Shares or confirmation of their book-entry transfer, all in accordance
with the instructions set forth in the Letter of Transmittal and the Offer to
Exchange.
The Exchange Offer is being made to all holders of Series 2 Shares in
the states of Arizona, California, Colorado, Connecticut, Florida, Maryland, New
Jersey, New York and Tennessee. These are all the states where a holder of
Series 2 Shares is known by the Company to reside. The Company is not aware of
any state where a shareholder resides and the making of the Exchange Offer is
prohibited by administrative or judicial action pursuant to a valid state
statute. If the Company becomes aware of any valid state statute prohibiting the
making of the Exchange Offer or a shareholder residing in a state other than
listed above, the Company will make a good faith effort to comply with such
statute and regulations. If, after such good faith effort, the Company cannot
comply with such statute, the Exchange Offer will not be made to, nor will
tenders be accepted from or on behalf of, holders of Series 2 Shares in such
state.
As described in Section 2, "Procedures for Tendering Shares," of the
Offer to Exchange, tenders may be made without the concurrent deposit of stock
certificates or concurrent compliance with the procedure for book-entry transfer
if such tenders are made by or through a broker or dealer which is a firm or
other entity that is a member in good standing of a registered national
securities exchange, or a member of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office, branch or
agency in the United States. Certificates for Series 2 Shares so tendered,
together with a properly completed and duly executed Letter of Transmittal and
any other documents required by the Letter of Transmittal, must be received by
the Company within three (3) Nasdaq trading days after timely receipt by the
Company of a properly completed and duly executed Notice of Guaranteed Delivery.
2
<PAGE>
Any inquiries you may have with respect to the Exchange Offer or
requests for additional copies, should be addressed to the Company at the
address and telephone number set forth on the Offer to Exchange. Additional
copies may be obtained from the company at 800-522-0258 Extension 204 (Attn:
Joel Alperstein).
Very truly yours,
Avesis Incorporated.
Enclosures
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE
YOU OR ANY OTHER PERSON AS AN AGENT OF THE COMPANY OR ANY OF ITS AFFILIATES, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON
BEHALF OF ANY OF SUCH PERSONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN
THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.
