PROXY
STATEMENT
GENERAL
SOLICITATION OF
PROXIES. This proxy statement is being furnished to the stockholders
of Pacific Health Care Organization, Inc., a Utah corporation, in connection
with the solicitation of proxies by our board of directors for use at
the Special Meeting of Stockholders to be held at the Little America Hotel,
located at 500 South Main Street in Salt Lake City, Utah on April 11, 2008
at 12:00 p.m., local time or at any adjournment thereof. A copy
of the notice of meeting accompanies this proxy statement. It is
anticipated that the mailing of this proxy statement will commence on or about
March 17, 2008.
COST OF SOLICITATION. We
will bear the costs of soliciting proxies. In addition to the use of
the mails, certain directors or officers of our Company may solicit proxies by
telephone, telegram, facsimile, cable or personal contact. Upon
request, we will reimburse brokers, dealers, banks and trustees, or their
nominees, for reasonable expenses incurred by them in forwarding proxy material
to beneficial owners of shares of our common stock.
OUTSTANDING VOTING
SHARES. Our stockholders of record at the close of business on
February 22, 2008 will be entitled to notice of and to vote at the
meeting. On the record date, we had 15,427,759 shares of common stock
outstanding, which are our only securities entitled to vote at the meeting, each
share being entitled to one vote.
VOTE REQUIRED FOR
APPROVAL. Shares of common stock will vote with respect to each
proposal. Under our Bylaws, Proposals 1 and 2 each require the
affirmative vote of a majority of the votes eligible to be voted by holders of
shares represented at the Special Meeting in person or by proxy. With
respect to Proposals 1 and 2, votes may be cast by a stockholder in favor or
against the Proposals or a stockholder may elect to abstain. Since
votes withheld and abstentions will be counted for quorum purposes and are
deemed to be present for purposes of the respective proposals, they will have
the same effect as a vote against each matter.
Under the NASD Rules of Fair Practice,
brokers who hold shares in street name have the authority, in limited
circumstances, to vote on certain items when they have not received instructions
from beneficial owners. A broker will only have such authority if (i)
the broker holds the shares as executor, administrator, guardian, trustee or in
a similar representative or fiduciary capacity with authority to vote or (ii)
the broker is acting under the rules of any national securities exchange of
which the broker is also a member. Broker abstentions or non-votes
will be counted for purposes of determining the presence or absence of a quorum
at the meeting. Abstentions are counted in tabulations of the votes
cast on proposals presented to stockholders, but broker non-votes are not
counted for purposes of determining whether a proposal has been
approved.
VOTING YOUR PROXY. Proxies
in the accompanying form, properly executed and received by our President prior
to the Special Meeting and not revoked, will be voted as directed. In
the absence of direction from the stockholder, properly executed proxies
received prior to the Special Meeting will be voted FOR Proposals 1 and
2. You may revoke your proxy by giving written notice of revocation
to the Corporate Secretary at any time before it is voted, by submitting a
later-dated proxy or by attending the Special Meeting and voting your shares in
person. Stockholders are urged to sign and date the enclosed proxy
and return it as promptly as possible in the envelope enclosed for that
purpose.
PROPOSAL
I
DIRECTORS’
PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION
OF
PACIFIC HEALTH CARE ORGANIZATION, INC. TO EFFECT A
REVERSE
STOCK SPLIT FOLLOWED BY A FORWARD
STOCK
SPLIT OF PHCO'S COMMON STOCK
SUMMARY
The board of directors has authorized,
and recommends for your approval a reverse 1-for-50 stock split followed by a
forward 2.5-for-1 stock split of the common stock of the Company.
IN THE DISCUSSION BELOW, THE TERM
“MINIMUM NUMBER” MEANS 50 PRE-REVERSE SPLIT COMMON SHARES.
The proposed transaction will be
carried out on a per shareholder basis. The proposed transaction is
comprised of a 1 share for 50 shares reverse stock split (the “Reverse Split”),
with no shareholder holding at least the Minimum Number of shares of common
stock being reversed below 40 post reverse split shares, followed by a
subsequent forward stock split (the “Forward Split”) pursuant to which each
whole share of common stock outstanding following completion of the Reverse
Split will be converted into 2.5 shares of common stock. There will
be no change in the Company’s authorized common stock or the par value of the
Company’s common stock as a result of the Proposed Transaction. As
permitted under Utah law, shares of common stock that would be converted into a
fractional share, (less than a whole share), in the Reverse Split will not be
included in the Forward Split. Rather, all fractional shares will be
converted into the right to receive a cash payment as described below (we refer
to the Reverse Split, the Forward Split, the cash-out of fractional shares and
these cash payments, collectively, as the “Proposed
Transaction.”) Any fractional shares resulting from the Forward Split
will be rounded up to the next whole share.
The Company is submitting this proposal
to approve, and the board of directors recommends that shareholders approve, the
Proposed Transaction described above.
We believe that the Proposed
Transaction will result in significantly reduced shareholder record keeping and
mailing expenses for the Company and provide holders of fewer than the Minimum
Number of shares with an efficient, cost-effective way to cash-out their
investments.
The board of directors is soliciting
shareholder approval for the Proposed Transaction. If approved by
shareholders the Reverse Split and Forward Split will become effective on such
date or dates as may be determined by the board of directors upon the filing of
the necessary amendments to the Company’s Articles of Incorporation with the
Secretary of State of the State of Utah. We anticipate that some
period of time, perhaps several days to several weeks, may elapse between the
time the Reverse Split occurs and the Forward Split occurs to allow our transfer
agent to properly record the effects of the Reverse and Forward
Splits. The forms of proposed amendment to our Articles of
Incorporation necessary to effect the Reverse Split and the Forward Split are
attached to this Proxy Statement as Annexes A and B,
respectively. The highlights of the Proposed Transaction are as
follows.
EFFECT
ON SHAREHOLDERS
If approved by shareholders at the
Special Meeting and implemented by the board, the Proposed Transaction will
affect our shareholders as follows:
Shareholder
Before Completion of the Proposed Transaction
|
|
Net
Effect After Completion of the Proposed Transaction
|
|
|
|
Registered
shareholders holding the Minimum Number of more shares of common
stock.
|
|
The
Net effect of the Proposed Transaction is that shareholders holding the
Minimum Number will realize an effective 1-for-20 reverse
split.
|
|
|
|
Registered
shareholders holding fewer than the Minimum Number of shares of common
stock.
|
|
Shares
will be converted into the right to receive cash (see “Determination of
Cash-out Price” at page 9 and “Stock Certificates” at page
11.)
|
|
|
|
Shareholders
holding common stock in street name though a nominee (such as a bank or
broker).
|
|
We
intend for the Proposed Transaction to treat shareholders holding common
stock in street name through a nominee (such as a bank or broker) in the
same manner as shareholders whose shares are registered in their
names. Nominees will be instructed to effect the Proposed
Transaction for their beneficial holders. However, nominees may
have different procedures and shareholders holding shares in street name
should contact their nominees.
|
REASONS
FOR THE PROPOSED TRANSACTION
The board of directors recommends that
shareholders approve the Proposed Transaction described herein for the following
reasons. These, and other reasons, are described in detail under
“Background and Purpose of the Proposed Transaction” below.
Issue
|
|
Solution
|
|
|
|
The
Company has a large number of shareholders that own relatively few
shares. Specifically, as of February 22, 2008 of our
approximately 1,077 registered shareholders, approximately 760 hold fewer
than 50 shares of common stock in their accounts. Continuing to
maintain accounts for these shareholders, including costs associated with
required shareholder mailings costs the Company thousands of dollars per
year.
In
addition, continuing to distribute required mailings to shareholders with
fewer than 50 shares of common stock held in street name through a nominee
(i.e., a bank or broker) also costs the Company each year.
|
|
The
Proposed Transaction will reduce the number of shareholders with small
accounts and result in cost savings for the Company.
|
|
|
|
As
a result of transaction costs associated with the sale of shares of our
common stock, in many cases may be prohibitively expensive for
shareholders with fewer than 50 shares to sell their shares on the open
market.
|
|
The
Reverse Split cashes out shareholders with small accounts without
transaction costs such as brokerage fees. However, if these
shareholders do not want to cash out their holdings of common stock, they
may purchase additional shares on the open market to increase the number
of shares of common stock in their account to 50 shares of common
stock.
|
STRUCTURE
OF THE PROPOSED TRANSACTION
The Proposed Transaction includes both
a reverse stock split and a forward stock split of our common
stock. The Proposed Transaction will not, however, result in a change
to the Company’s authorized common stock or the par value of its common
stock. If the Proposed Transaction is approved by shareholders and
implemented by the board, the Reverse Split is expected to occur at 5:00 p.m. on
the Effective Date, which will be determined by the board of directors in its
sole discretion. Following the necessary adjustments to the Company’s
transfer books giving effect to the Reverse Split, the Forward Split will
occur. We anticipate several days to several weeks could elapse
between the Effective Date of the Reverse Split and the Effective Date of the
Forward Split.
Upon consummation of the Reverse Split,
each registered shareholder on the Effective Date will receive one share of
common stock for each Minimum Number of shares of common stock held in his or
her account at that time. No shareholder holding at least the Minimum
Number of shares of common stock immediately prior to the Effective Date of the
Reverse Split will be reversed below 40 post reverse split
shares. Any fractional shares resulting from the Reverse Split will
be cashed out after the Reverse Split.
Any shareholder who holds fewer than
the Minimum Number of shares of common stock in his or her account at the time
of the Reverse Split (also referred to as a “Cashed-Out Shareholder”) will
receive the right to receive a cash payment instead of fractional
shares. All shareholders holding fractional shares and
whole shares immediately following the Reverse Split will receive their
whole shares and will also receive a right to receive a cash payment
for their fractional shares. No shareholder will receive fractional
shares. This amount of the cash payment will be determined and paid as
described below under “Determination of Cash-out Price” at page 9 and “Stock
Certificates” at page 11. Following the Reverse Split, the
shares of all shareholders who are not Cashed-Out Shareholders will be Forward
Split on a 2.5-for-1 basis. Any fractional shares resulting from the
Forward Split will be rounded up to the next whole share.
We intend for the Proposed Transaction
to treat shareholders holding common stock in street name through a nominee
(such as a bank or broker) in the same manner as shareholders whose shares are
registered in their names, and nominees will be instructed to effect the
Proposed Transaction for their beneficial holders. Accordingly, we
also refer to those street name holders who will hold only fractional shares
immediately following the reverse split and will, therefore, receive the
right to receive a cash payment instead of fractional shares as “Cashed-Out
Shareholders.” However, nominees may have different procedures, and
shareholders holding shares in street name should contact their
nominees.
In general, the Proposed Transaction
can be illustrated by the following examples:
Hypothetical
Scenario
|
|
Result
|
|
|
|
Mr.
Brown is a registered shareholder who holds 27 shares of common stock in
his account prior to the Proposed Transaction.
|
|
Instead
of receiving a fractional share of common stock immediately after the
Reverse Split, Mr. Brown’s shares will be converted into the right to
receive cash. If the procedure described below under
“Determination of Cash-out Price” resulted in a per share price of $0.08
per share, Mr. Brown would receive $2.16 ($0.08 per share x 27
shares).
Note:
If Mr. Brown wants to continue his investment in the Company, he can,
prior to the Effective Date, buy at least 23 more shares and hold them in
his account. Mr. Brown would have to act far enough in advance of the
Proposed Transaction so that the purchase is completed and the additional
shares are credited in his account by the close of business (eastern time)
on the Effective Date of the Reverse Split.
|
|
|
|
Ms.
Green has two separate accounts. Immediately prior to the
Effective Date of the Reverse Split, she holds 26 shares of common stock
held of record in her own name and 25 shares of common stock in street
name in a brokerage account.
|
|
As
described above, Ms. Green will receive a right to receive a cash payment
equal to the cash-out price of her common stock held of record in her own
name and in street name in her brokerage account instead of receiving
fractional shares. Assuming a cash-out price of $0.08 per
share, Ms. Green would receive $4.08 (26 shares x $0.08 per share = $2.08;
25 shares x $0.08 per share = $2.00; $2.08 + $2.00 = $4.08.)
Note:
If Ms. Green wants to continue her investment in the Company, she can
consolidate or transfer her two accounts prior to the Effective Date into
an account with at least the Minimum Number of shares of common stock.
Alternatively, she can buy at least 24 more shares in her own name and 25
more shares in her brokerage account and hold them. She would have to act
far enough in advance of the Proposed Transaction so that the
consolidation or the purchase is completed by the close of business
(eastern time) on the Effective Date of the Reverse
Split.
|
|
|
|
Mr.
Red holds 35 shares in of common stock in the record name of “John Red”
and 40 shares of common stock in the record name of “John J.
Red”
|
|
Even
though in total Mr. Red is the beneficial owner of more than the Minimum
Number of shares of common stock because those shares are held of record
in two distinct names, Mr. Red will receive a right to a cash payment
equal to the cash-out price of the common stock instead of receiving
fractional shares. Assuming a cash-out price of $0.08 per
share, Mr. Red would receive a total of $6.00 (35 shares x $0.08 per share
= $2.80; 40 shares x $0.08 per share = $3.20; $2.80 + $3.20 =
$6.00.)
Note:
If Mr. Red wants to continue his investment in the Company, he can
consolidate or transfer his certificates into one record name prior to the
Effective Date with at least the Minimum Number of shares of common stock.
Alternatively, he can buy at least 15 more shares in the record name
of “John Red” and 10 more shares in the record name of "John J. Red”
and hold them. He would have to act far enough in advance of the Proposed
Transaction so that the consolidation or the purchase is completed by the
close of business (eastern time) on the Effective Date of the Reverse
Split.
|
|
|
|
Ms.
Blue holds 2,000 shares of common stock as of the Effective
Date.
|
|
After
the Proposed Transaction, Ms. Blue will own 100 shares of common
stock.
|
|
|
|
Mr.
Orange holds six shares of common stock in a brokerage account as of the
Effective Date.
|
|
The
Company intends for the Proposed Transaction to treat shareholders holding
common stock in street name through a nominee (such as a bank or broker)
in the same manner as shareholders whose shares are registered in their
names. Nominees will be instructed to effect the Proposed
Transaction for their beneficial holders. However, nominees may have
different procedures and shareholders holding common stock in street name
should contact their nominees.
|
BACKGROUND
AND PURPOSE OF THE PROPOSED TRANSACTION
The Company currently has a shareholder
base of approximately 1,077 registered shareholders. A large number
of our shareholders hold small shareholdings. As of February 22,
2008, approximately 760 registered holders held fewer than 50 shares of our
common stock and approximately 886 held fewer than one round lot. As
of February 22, 2008, shareholders holding fewer than 50 and 100 shares
represented approximately 71% and 82%, respectively, of the total number of
registered holders of our common stock, but these accounts represented
approximately only 0.1% and 0.2%, respectively, of the total number of
outstanding shares of our common stock.
We expect to benefit from cost savings
as a result of the Proposed Transaction. The cost of administering each
registered shareholder’s account is the same regardless of the number of shares
held in that account. Therefore, our costs to maintain such small
accounts are disproportionately high when compared to the total number of shares
involved. We expect that these costs will only increase over
time.
Moreover, the Proposed Transaction will
provide shareholders with fewer than the Minimum Number of shares of common
stock with a cost-effective way to cash out their investment in the Company,
because these shareholder will not incur transaction costs, such as
brokerage or service fees, in connection with the Proposed
Transaction. Otherwise, shareholders with small holdings would likely
incur brokerage fees which are disproportionately high relative to the market
value of their shares if they wanted to sell their stock in the
market. The Proposed Transaction will eliminate these problems for
most shareholders with small holdings.
In light of these disproportionate
costs, the board of directors believes that it is in the best interests of the
Company and its shareholders as a whole to eliminate the administrative burden
and costs associated with such small accounts.
If our shareholders do not approve the
Proposed Transaction, we may pursue alternative methods of reducing our
shareholder base, including odd-lot tender offers and programs to facilitate
sales by shareholders of odd-lot holdings. However, there can be no assurance
that we will decide to pursue any such transaction.
EFFECT
OF THE PROPOSED TRANSACTION ON COMPANY SHAREHOLDERS
Registered Shareholders with
Fewer than the Minimum Number of Shares of Common Stock
If we complete the Proposed Transaction
and you are a Cashed-Out Shareholder (i.e., a shareholder holding fewer than the
Minimum Number of shares of common stock immediately prior to the Reverse
Split):
·
|
You
will not receive fractional shares of stock as a result of the Reverse
Split in respect of your shares being cashed
out.
|
·
|
Instead
of receiving fractional shares, you will receive the right to receive a
cash payment in respect of your affected shares. See “Determination of
Cash-out Price” at page 9 and “Stock Certificates” at page
11.
|
·
|
After
the Reverse Split, you will have no further interest in the Company with
respect to your cashed-out shares. These shares will no longer entitle you
to the right to vote as a shareholder or share in the Company’s assets,
earnings, or profits or in any dividends paid after the Reverse Split. In
other words, you will no longer hold your cashed-out shares, you will have
only the right to receive cash for these shares. In addition,
you will not be entitled to receive interest with respect to the period of
time between the Effective Date and the date you receive your payment for
the cashed-out shares.
|
·
|
You
will not have to pay any service charges or brokerage commissions in
connection with the Proposed
Transaction.
|
·
|
As
soon as practicable after the time we effect the Reverse Split, you will
receive a payment for the cashed-out shares you held immediately prior to
the Reverse Split in accordance with the procedures described
below.
|
·
|
If
you are a Cashed-Out Shareholder with a stock certificate representing
your cashed-out shares, you will receive a transmittal letter as soon as
practicable after the Effective Date of the Reverse Split. The letter of
transmittal will contain instructions on how to surrender your certificate
or certificates to our transfer agent, Pacific Stock Transfer Company, for
your cash payment. YOU WILL NOT RECEIVE YOUR CASH PAYMENT UNTIL YOU
SURRENDER YOUR OUTSTANDING CERTIFICATE OR CERTIFICATES TO PACIFIC STOCK
TRANSFER COMPANY, TOGETHER WITH A COMPLETED AND EXECUTED COPY OF THE
LETTER OF TRANSMITTAL. Please do not send your certificates until you
receive your letter of transmittal. For further information, see “Stock
Certificates” below.
|
·
|
All
amounts owed to you will be subject to applicable federal income tax and
state abandoned property laws.
|
·
|
You
will not receive any interest on cash payments owed to you as a result of
the Proposed Transaction.
|
Registered Shareholders with
the Minimum Number or More Shares of Common Stock
If you are a registered shareholder
with the Minimum Number or more, of shares of common stock as of 5:00 p.m. on
the Effective Date of the Reverse Split, we will first reclassify your shares
into one-fiftieth (1/50
th
) of the
number of shares you held immediately prior to the Reverse Split, although no
holder of at least the Minimum Number will be reversed below 40 post reverse
split shares. If as a result of the Reverse Split, you become the
holder of whole shares and fractional shares:
·
|
You
will not receive the fractional shares of stock as a result of the Reverse
Split.
|
·
|
Instead
of receiving fractional shares, you will receive a right to receive a cash
payment in respect of your fractional shares. See “Determination of
Cash-out Price” at page 9 and “Stock Certificates” at page
11.
|
·
|
After
your fractional shares are cashed-out, you will have no further interest
in said fractional shares. The fractional shares will no longer entitle
you to the right to vote as a shareholder or share in the Company’s
assets, earnings, or profits or in any dividends paid after the Reverse
Split. In other words, you will no longer hold your cashed-out shares, you
will have only the right to receive cash for these shares. In
addition, you will not be entitled to receive interest with respect to the
period of time between the Effective Date and the date you receive your
payment for the cashed-out shares. You will, however, still
maintain all your rights as a shareholder with respect to the whole shares
of the Company you own.
|
·
|
You
will not have to pay any service charges or brokerage commissions in
connection with the Proposed
Transaction.
|
·
|
As
soon as practicable after the time we effect the Reverse Split, you will
receive a payment for the fractional shares you hold immediately following
the Reverse Split in accordance with the procedures described
below.
|
·
|
If
as a result of the Reverse Split you become the holder of fractional
shares, you will receive a transmittal letter as soon as practicable after
the Effective Date of the Reverse Split. The letter of transmittal will
contain instructions on how to surrender your certificate or certificates
to our transfer agent, Pacific Stock Transfer Company, for your cash
payment. YOU WILL NOT RECEIVE YOUR CASH PAYMENT UNTIL YOU SURRENDER YOUR
OUTSTANDING CERTIFICATE OR CERTIFICATES TO PACIFIC STOCK TRANSFER COMPANY,
TOGETHER WITH A COMPLETED AND EXECUTED COPY OF THE LETTER OF TRANSMITTAL.
Please do not send your certificates until you receive your letter of
transmittal. For further information, see “Stock Certificates”
below.
|
·
|
All
amounts owed to you will be subject to applicable federal income tax and
state abandoned property laws.
|
·
|
You
will not receive any interest on cash payments owed to you as a result of
the Proposed Transaction.
|
Following completion of the adjustments
to the Company’s transfer books to reflect the effects of the Reverse Split, at
5:00 p.m. on the Effective Date of the Forward Split, we will reclassify your
shares in the Forward Split into 2.5 times the number of shares you held after
the Reverse Split, which will result in you holding approximately one-twentieth
(1/20
th
) of the
number of shares you held prior to the Reverse Split. To illustrate, if you held
2,000 shares of common stock immediately prior to the Reverse Split, your shares
would be converted into 40 shares in the Reverse Split and then converted to 100
shares in the Forward Split.
Street Name Holders of
Common Stock
We intend for the Proposed Transaction
to treat shareholders holding common stock in street name through a nominee
(such as a bank or broker) in the same manner as shareholders whose shares are
registered in their names. Nominees will be instructed to effect the
Proposed Transaction for their beneficial holders. However, nominees may have
different procedures and shareholders holding common stock in street name should
contact their nominees.
Current and Former Company
Employees and Directors
If you are a current or former employee
or director of the Company, you may hold options to purchase our common
stock through Company stock option plans. The number of shares you
may purchase under your options and the exercise price will be adjusted
accordingly to reflect the effects of the Proposed Transaction. In
the event the Reverse Split or the Forward Split would result in a current or
former Company employee or director receiving the right to acquire a fractional
share, such right to acquire a fractional share shall be rounded up to the next
whole share rather than a right to receive a cash payment in lieu of a
fractional share.
DETERMINATION
OF CASH-OUT PRICE
In order to provide a cost effective
method for shareholders holding fewer than the Minimum Number of shares of our
common stock to receive value for their shares which they might not otherwise
realize, and to avoid the expense and inconvenience of issuing fractional shares
to shareholders who will hold less than one share of our common stock after the
Reverse Split, under Utah state law the Company may pay in money the value of
each fractional share. If shareholders approve the Proposed Transaction at the
Special Meeting and the Proposed Transaction is completed, the Company will pay
cash for the fair value of the fractional shares resulting from the Reverse
Split. The fractional shares will be retired and returned to the
authorized common stock of the Company available for future
issuance. All Cashed-Out Shareholders will cease to be shareholders
of the Company.
Section 16-10a-604(1)(a) of the Utah
Revised Business Corporation Act provides that a corporation may, “issue
fractions of a share
or pay in
money the value of fractions of a share
” (emphasis added). The
board of directors has determined it to be in the best interest of the Company
and its shareholders to pay in money the value of the fractional shares
rather then issue fractional shares. Under Utah law, the component
elements of the determination of value of shares are:
·
|
asset
value of the corporation;
|
·
|
market
of value of the stock; and
|
While all three elements are to be
considered, for reasons discussed in more detail below, the weighting of each
element in reaching a determination of value, may not be equal.
Asset
Value
Utah courts have stated that asset
value should not be heavily weighted in stock valuation unless the valuation is
being made for liquidation purposes, because the real value of a company is as a
going concern. The courts have also held that asset value, in and of
itself is the least reliable of the three factors in value
determination. A review of the Company’s balance sheet indicates the
Company has an asset value of approximately $800,000. Dividing this
amount by the total outstanding shares of common stock of the Company discloses
and asset value of $0.05 per share. As a service company, the Company
has modest assets. Therefore, an asset valuation will yield the
lowest value per share of any of the three valuations.
Market
Value
The market value of a stock that is
publicly traded is typically considered to be the price at which the stock may
be purchased in the open market. In the case of the Company, the
public market price for a share of Company common stock has for some time ranged
between $0.06 and $0.08 per share.
The reliability of market price as a
measure of fair value, however, must be evaluated on a case-by-case basis.
Courts typically hold that a free and open market that is characterized by a
substantial volume of transactions on a large well-known exchange tends to make
the market price a fair and accurate reflection of the value of the
stock. The more sporadic the trading in the stock, or the smaller or
less well-reputed the exchange or market in which the stock trades or is quoted,
the less reliable market price becomes as an indicator of value. In
the present case, the Company’s common stock is quoted on the Over-the-Counter
Bulletin Board (“OTCBB”) and is thinly traded. Therefore, the market
price of the Company’s common stock as quoted on the OTCBB may be an indicative,
but not a dispositive, indicator of the value of the Company’s common
stock.
Investment
Value
Utah courts have taken the position
that generally investment value is the central component of fair value because
the assets of a corporation are of value chiefly because of their earnings
capacity. Investment value represents an estimate of a corporation’s
earning capacity and is fixed in a two-step process. First, an
average annual earnings figure is calculated based on the corporation’s recent
earnings history, excluding unusual gains or losses. Second, a
capitalization ratio or earnings multiplier is selected. The
investment value of a corporation is the product of the capitalization ratio and
the average earnings figure.
In determining an average annual
earnings figure the Company considered earnings for the fiscal years 2004
through 2007, excluding all unusual gains or losses including the extraordinary
legal expenses incurred by the Company from 2004 to 2006 in defending itself
against a lawsuit brought by certain shareholders of the
Company. This yielded an average annual earnings figure of
approximately $129,322.
Valuation experts calculate
capitalization ratio based on a series of factors deemed appropriate for the
corporation being valued, its prospects and its perceived risk
profile. The capitalization ratio calculation begins with a basic
“risk-free” rate of return. Most valuation experts rely on the
20-year U.S. Treasury Bill rate as its measure of the risk-free rate of
return. The current 20-year U.S. Treasury Bill rate of return is
4.6%. To this risk-free rate, valuation experts add an “equity risk
premium” based on the market capitalization of the corporation being
valued. The equity risk premium for “micro capitalization”, or
“micro-cap” companies, such as PHCO, is currently 13.4%
1
.
Next,
an “industry risk” is assigned based on the specific industry in which the
Company operates. Currently, the primary industry risk to the Company
is falling workers’ compensation insurance premiums in
California. Based on research of the Company’s Chief Financial
Officer, the Company believes a 2.0% “industry risk” premium is
appropriate. The subtotal of the risk-free rate, the equity risk
premium and the industry risk equals 20.0% (4.6% + 13.4% +
2.0%). From this subtotal is subtracted an estimated long-term
growth rate to arrive at the final capitalization ratio of the corporation
being valued. Based on past results, including the inconsistent
historic earnings of the Company and anticipated future results, including
currently declining workers’ compensation insurance premiums and economic
recession, the Company is currently estimating its long-term growth rate to be
5.0%. Deducting the estimated long-term growth rate from the subtotal
of the risk-free rate, the equity risk premium and the industry risk provides a
capitalization ratio of 15.0%. A capitalization ratio of 15.0% yields
an earnings multiplier of 6.7%.
Multiplying the average annual earnings
figure by the earnings multiplier yields an investment value of $862,575 or
$0.06 per share.
Given the reluctance of Utah courts to
place significant weight on asset value except in the case of a liquidation, the
board of directors has determined not to rely on asset value in determining
cash-out price. The board of directors has considered both the
investment value and the market value of the Company’s common stock and has
determined to pay to the Cashed-Out Shareholders the higher of the two
valuations. Therefore, the Cash-Out Price per share will be
$0.08.
1
See
Ibbotson
Associates,
Stocks, Bonds, Bills and Inflation
Valuation Edition 2007 Yearbook
(Chigaco, Morningstar, Inc., 2007
).
EFFECT
OF THE PROPOSED TRANSACTION ON THE COMPANY
The Proposed Transaction will not
affect the public registration of our common stock with the United States
Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of
1934, as amended. Similarly, we do not expect that the Proposed
Transaction will affect the continued quotation of our common stock on
the OTCBB.
The number of authorized shares of
Company common stock will not change as a result of the Reverse and Forward
Splits. On February 22, 2008 there were 15,427,759 shares of Common
Stock issued and outstanding. As a result of the Reverse and Forward
Splits and the cashing-out of fractional shares as discussed herein, the total
number of shares that will be cashed-out and the total cash to be paid by us is
unknown at this point in time. However, by way of example, if the
1-for-50 Reverse Split had been completed as of February 22, 2008, when the fair
value of our common stock was $0.08 per share, then the cash payments that would
have been issued to our registered holders who would become Cashed-Out
Shareholders, would have been approximately $1,500. We do not know
how many street name shareholders will be cashed-out or how that might effect
the amount we will pay to Cashed-out Shareholders. The actual amounts
will depend on the number of Cashed-Out Shareholders on the Effective Date of
the Reverse Split, which may vary from the number of such shareholders on
February 22, 2008.
The par value of our common stock will
remain at $0.001 per share after the Proposed Transaction.
STOCK
CERTIFICATES
All certificates will be affected by the Proposed Transaction. If you
hold at least the Minimum Number of shares immediately preceding the Proposed
Transaction your certificate or certificates will be adjusted in accordance with
the Proposed Transaction. You will not be required to tender your
stock certificate or certificates as a result of the Proposed Transaction.
Your current certificate or certificates will continue to evidence ownership of
common stock in the Company on an adjusted basis.
Any Cashed-Out Shareholder with a share
certificate or certificates will receive a letter of transmittal after the
Reverse Split is completed. The letter of transmittal will contain
instructions on how to surrender your certificate or certificates to our
transfer agent, Pacific Stock Transfer Company, for your cash payment. YOU WILL
NOT RECEIVE YOUR CASH PAYMENT UNTIL YOU SURRENDER YOUR OUTSTANDING STOCK
CERTIFICATE OR CERTIFICATES TO PACIFIC STOCK TRANSFER COMPANY, TOGETHER WITH A
COMPLETED AND EXECUTED COPY OF THE LETTER OF TRANSMITTAL. Please do not
send your certificates until you receive your letter of
transmittal.
CERTAIN
FEDERAL INCOME TAX CONSEQUENCES
We have summarized below certain
federal income tax consequences to you and the Company resulting from the
Proposed Transaction. This summary is based on U.S. federal income
tax law existing as of the date of this Proxy Statement, and such tax laws may
change, even retroactively. This summary does not discuss all aspects
of federal income taxation which may be important to you in light of your
individual circumstances. Many shareholders (such as financial
institutions, insurance companies, broker-dealers, tax-exempt organizations, and
foreign persons) may be subject to special tax rules. Other
shareholders may also be subject to special tax rules, including but not limited
to: shareholders who received common stock as compensation for services or
pursuant to the exercise of an employee stock option, or shareholders who have
held, or will hold, stock as part of a straddle, hedging, or conversion
transaction for federal income tax purposes. In addition, this
summary does not discuss any state, local, foreign, or other tax
considerations. This summary assumes that you are a U.S. citizen and
have held, and will hold, your shares as capital assets under the
Code. You should consult your tax advisor as to the particular
federal, state, local, foreign, and other tax consequences, in light of your
specific circumstances.
Federal Income Tax
Consequences to Shareholders who are not Cashed Out by the Proposed
Transaction
If you (i) continue to hold common
stock immediately after the Proposed Transaction, and (ii) receive no cash as a
result of the Proposed Transaction, you will not recognize any gain or loss in
the Proposed Transaction and you will have the same adjusted tax basis and
holding period in your common stock as you had in such stock immediately prior
to the Proposed Transaction.
Federal Income Tax
Consequences to Cashed-Out Shareholders
If you receive cash as a result of the
Proposed Transaction, your tax consequences will depend on whether, in addition
to receiving cash, you or a person or entity related to you continues to hold
common stock immediately after the Proposed Transaction, as explained
below.
|
Shareholders
Whose Shares are Completely Cashed-Out as a Result of the Proposed
Transaction
|
If you (i) receive cash in exchange for
a fractional share as a result of the Proposed Transaction, (ii) do not continue
to hold any common stock immediately after the Proposed Transaction, and (iii)
are not related to any person or entity which holds common stock immediately
after the Proposed Transaction, you will recognize capital gain or loss. The
amount of capital gain or loss you recognize will equal the difference between
the cash you receive for your cashed-out stock and your aggregate adjusted tax
basis in such stock.
If you are related to a person or
entity who continues to hold common stock immediately after the Proposed
Transaction, you will recognize gain in the same manner as set forth in the
previous paragraph, provided that your receipt of cash either (i) is “not
essentially equivalent to a dividend,” or (ii) is a “substantially
disproportionate redemption of stock,” as described below.
·
|
“Not
Essentially Equivalent to a Dividend.” You will satisfy the
“not essentially equivalent to a dividend” test if the reduction in your
proportionate interest in the Company resulting from the Proposed
Transaction is considered a “meaningful reduction” given your particular
facts and circumstances. The Internal Revenue Service has ruled that a
small reduction by a minority shareholder whose relative stock interest is
minimal and who exercises no control over the affairs of the corporation
will meet this test.
|
·
|
“Substantially
Disproportionate Redemption of Stock.” The receipt of cash in
the Proposed Transaction will be a “substantially disproportionate
redemption of stock” for you if the percentage of the outstanding shares
of common stock owned by you immediately after the Proposed Transaction is
less than 80% of the percentage of shares of common stock owned by you
immediately before the Proposed
Transaction.
|
In applying these tests, you will be
treated as owning shares actually or constructively owned by certain individuals
and entities related to you. If the taxable amount is not treated as
capital gain under any of the tests, it will be treated first as ordinary
dividend income to the extent of your ratable share of our undistributed
earnings and profits, then as a tax-free return of capital to the extent of your
aggregate adjusted tax basis in your shares, and any remaining gain will be
treated as capital gain.
Shareholders
Who Both Receive Cash and Continue to Hold Common Stock Immediately After the
Proposed Transaction
If you both receive cash as a result of
the Proposed Transaction and continue to hold common stock immediately after the
Proposed Transaction, you generally will recognize gain, but not loss, in an
amount equal to the lesser of (i) the excess of the sum of aggregate fair market
value of your shares of common stock plus the cash received over your adjusted
tax basis in the shares, or (ii) the amount of cash received in the Proposed
Transaction. In determining whether you continue to hold common stock
immediately after the Proposed Transaction, you will be treated as owning shares
actually or constructively owned by certain individuals and entities related to
you. Your aggregate adjusted tax basis in your shares of common stock
held immediately after the Proposed Transaction will be equal to your aggregate
adjusted tax basis in your shares of common stock held immediately prior to
the
Proposed
Transaction, increased by any gain recognized in the Proposed Transaction, and
decreased by the amount of cash received in the Proposed
Transaction.
Any gain recognized in the Proposed
Transaction will be treated, for federal income tax purposes, as capital gain,
provided that your receipt of cash either (i) is “not essentially equivalent to
a dividend” with respect to you, or (ii) is a “substantially disproportionate
redemption of stock” with respect to you. (Each of the terms in quotation marks
in the previous sentence is discussed above under the heading “Shareholders
whose Shares are Completely Cashed-Out as a Result of the Proposed
Transaction.”) In applying these tests, you may possibly take into account sales
of shares of common stock that occur substantially contemporaneously with the
Proposed Transaction. If your gain is not treated as capital gain under any of
these tests, the gain will be treated as ordinary dividend income to you to the
extent of your ratable share of our undistributed earnings and profits, then as
a tax-free return of capital to the extent of your aggregate adjusted tax basis
in your shares, and any remaining gain will be treated as a capital
gain.
YOU
SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR FEDERAL, STATE, LOCAL,
FOREIGN, AND OTHER TAX CONSEQUENCES OF THE PROPOSED TRANSACTION IN LIGHT OF YOUR
SPECIFIC CIRCUMSTANCES.
ACCOUNTING
CONSEQUENCES
The
fractional shares resulting from the reverse stock split will be retired and
returned to the authorized common stock of the Company available for future
issuance. The per-share common stock net income or loss and net book
value will be increased because there will be fewer shares of our common stock
outstanding. Any fractional shares that are redeemed by the
Cashed-Out Shareholders will result in a decrease in paid in capital and cash.
We do not anticipate that any other accounting consequences would arise as a
result of the Proposed Transaction.
APPRAISAL
RIGHTS
Shareholders do not have appraisal
rights under Utah state law or under the Company’s Articles of Incorporation or
Bylaws in connection with the Proposed Transaction.
RESERVATION
OF RIGHTS
We reserve the right to abandon the
Proposed Transaction without further action by our shareholders at any time
before the filing of the necessary amendments to our Articles of Incorporation
with the Utah Secretary of State, even if the Proposed Transaction has been
authorized by our shareholders at the Special Meeting. By voting in
favor of the Proposed Transaction you are also expressly authorizing us to
determine not to proceed with the Proposed Transaction if we should so
decide.
THE BOARD
OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO AMEND THE ARTICLES OF
INCORPORATION OF PACIFIC HEALTH CARE ORGANIZATION, INC. TO EFFECT THE PROPOSED
TRANSACTION.
OTHER
MATTERS
The Board of Directors knows of no
other matters that are to be presented for action at the Special Meeting of
Stockholders other than those set forth above. If any other matters
properly come before the Special Meeting of Stockholders, the person named in
the enclosed proxy form will vote the shares represented by proxies in
accordance with their best judgment on such matters.
It is important that your shares be
represented at the annual meeting, regardless of the number of shares you
hold. Therefore, you are urged to execute and return the accompanying
proxy in the enclosed envelope at your earliest convenience.
|
By
order of the board of directors
|
|
|
|
|
|
|
|
|
March 12
, 2008
|
Tom
Kubota, President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
ARE REQUESTED TO MARK, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE
ENCLOSED, SELF-ADDRESSED ENVELOPE. NO POSTAGE IS REQUIRED IF
MAILED IN THE UNITED STATES. YOUR PROMPT RESPONSE WILL BE HELPFUL, AND YOUR
COOPERATION WILL BE APPRECIATED.
ANNEX
A
ARTICLES
OF AMENDMENT TO THE
ARTICLES
OF INCORPORATION OF
PACIFIC
HEALTH CARE ORGANIZATION, INC.
Pacific Health Care Organization, Inc.,
a corporation organized under the laws of the State of Utah, on April 17, 1970,
hereby adopts the following amendment to its Articles of Incorporation pursuant
to the provisions of Section 16-10a-1006 of the Utah Revised Business
Corporation Act (the “Act”).
I
The Articles of Incorporation shall be
amended to read as follows:
ARTICLE
VI
The Corporation hereby approves and
adopts a reverse split of the issued and outstanding common stock of the
Corporation on a one (1) share for fifty (50) shares basis, and that said
reverse split shall occur on a per shareholder basis, provided that no
shareholder holding of record at least 50 pre-split shares shall be reversed
below 40 post-split shares. There are 15,427,759 pre-split common
shares issued and outstanding. All fractional shares resulting from
the reverse split shall be cashed-out. The Corporation will issue no
fractional shares. Following the reverse split and cash-out of
fractional shares there will be approximately __________ common shares issued
and outstanding.
II
The date of shareholder approval and
adoption of the foregoing amendment was March __, 2008. The number of
shares outstanding in the Corporation and entitled to vote, as of the record
date, on the foregoing amendment was 15,427,759. All common stock in
the Corporation is entitled to one vote per share for each matter coming before
the shareholders. A majority of the shares constitutes a quorum of
the shareholders. The number of shares that approved the foregoing
amendment was __________ or ___% of the outstanding shares, which is sufficient
to approve the foregoing amendment.
|
Dated
this ___ day of March, 2008
|
|
|
|
PACIFIC
HEALTH CARE ORGANIZATION, INC.
|
|
|
|
|
|
By:
|
|
|
|
Tom Kubota,
President
|
|
|
ANNEX
B
ARTICLES
OF AMENDMENT TO THE
ARTICLES
OF INCORPORATION OF
PACIFIC
HEALTH CARE ORGANIZATION, INC.
Pacific Health Care Organization, Inc.,
a corporation organized under the laws of the State of Utah, on April 17, 1970,
hereby adopts the following amendment to its Articles of Incorporation pursuant
to the provisions of Section 16-10a-1006 of the Utah Revised Business
Corporation Act (the “Act”).
I
The Articles of Incorporation shall be
amended to read as follows:
ARTICLE
VI
The Corporation hereby approves and
adopts a forward split of the issued and outstanding common stock of the
Corporation on a two and one-half (2.5) shares for one (1) share basis, and that
said forward split shall occur on a per shareholder basis. There are
_____________ pre-split common shares issued and outstanding. All
fractional shares resulting from the forward split shall be rounded up to the
next whole share. Following the forward split there will be
approximately __________ common shares issued and outstanding.
II
The date of shareholder approval and
adoption of the foregoing amendment was March __, 2008. The number of
shares outstanding in the Corporation and entitled to vote, as of the record
date, on the foregoing amendment was 15,427,759. All common stock in
the Corporation is entitled to one vote per share for each matter coming before
the shareholders. A majority of the shares constitutes a quorum of
the shareholders. The number of shares that approved the foregoing
amendment was __________ or ___% of the outstanding shares, which is sufficient
to approve the foregoing amendment.
|
Dated
this ___ day of March, 2008
|
|
|
|
PACIFIC
HEALTH CARE ORGANIZATION, INC.
|
|
|
|
|
|
By:
|
|
|
|
Tom Kubota,
President
|
|
|
Proxy
–
Pacific Health Care Organization,
Inc.
Special
Meeting of Stockholders – April 11, 2008
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The
undersigned hereby appoints Tom Kubota and Frank Hough, severally, as Proxies,
each with the power to appoint his substitute, and hereby authorizes them to
represent and to vote, as designated on the reverse side, all of the shares of
Common Stock of PACIFIC HEALTH CARE ORGANIZATION, INC., of record in the name of
the undersigned at the close of business on February 22, 2008, which the
undersigned is entitled to vote at the Special Meeting of Stockholders of the
Company and at any and all adjournments thereof, with respect to the matters set
forth on the reverse side and described in the Notice of Special Meeting and
Proxy Statement dated March 12, 2008, receipt of which is
acknowledged.
This Proxy when properly executed
will be voted in the manner directed herein by the undersigned stockholder(s).
IF NO INDICATION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 and
2.
PLEASE
MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED POSTAGE
PRE-PAID ENVELOPE.
(Please
See Reverse Side)
Proxy
–
Pacific Health Care Organization,
Inc.
Special
Meeting of Stockholders – April 11, 2008
[Name and
address of shareholder]
|
|
|
|
|
|
|
|
|
o
|
|
Mark this box
with an X if you have made changes to your name or address details
above.
|
|
|
|
The Board
of Directors recommends a vote FOR the following proposals.
|
|
|
|
For
|
|
Against
|
|
Abstain
|
1.
|
|
AMENDMENT
TO THE COMPANY’S ARTICLES OF INCORPORATION TO EFFECT A 1-FOR-50 REVERSE
SPLIT OF THE ISSUED AND OUTSTANDING SHARES OF COMMON STOCK OF THE
COMPANY, WITH A CASH-OUT OF THE RESULTING FRACTIONAL SHARES, FOLLOWED
BY A 2.5-FOR-1 FORWARD SPLIT OF ISSUED AND OUTSTANDING SHARES OF COMMON
STOCK OF THE COMPANY.
|
|
o
|
|
o
|
|
o
|
|
|
|
|
|
|
|
|
|
2.
|
|
IN
THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY AND ALL
ADJOURNMENTS THEREOF.
|
|
o
|
|
o
|
|
o
|
|
|
|
|
|
Authorized Signatures - Sign
Here - This section must be completed for your instructions to be
executed
.
|
Please
sign exactly as name appears hereon. When shares are held by joint tenants, both
should sign. When signing as an attorney, executor, administrator, trustee or
guardian, please give full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
|
|
|
|
|
Signature
1 - Please keep signature within the box
|
|
Signature
2 - Please keep signature within the box
|
|
Date
(mm/dd/yyyy)
|
[
]
|
|
[ ]
|
|
[
/
/
]
|