SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_| Confidential, for Use of the
Commission Only (as permitted
|X| Definitive Proxy Statement by Rule 14a-6(e)(2))
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or 14a-12
EMPLOYEE SOLUTIONS, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2) or Item 22(a)(2) of Schedule 14A.
|_| $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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|X| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[LOGO]
2929 East Camelback Road, Suite 220
Phoenix, Arizona 85016
------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
June 26, 1996
------------------------------------
TO THE SHAREHOLDERS:
The Annual Meeting of Shareholders of Employee Solutions,
Inc., an Arizona corporation (the "Company"), will be held on Wednesday, June
26, 1996 at 9:00 a.m. local time, at The Phoenician, 6000 East Camelback Road,
Scottsdale, Arizona for the following purposes:
(1) To elect five directors to serve until the 1997 Annual
Meeting of Shareholders (unless Proposal 6 is adopted and a classified board
comes into effect prior to the 1997 meeting) or until their successors are
elected;
(2) To consider and act upon a proposal to amend the Company's
1995 Stock Option Plan to increase the number of shares of Common Stock
available for grant thereunder by 750,000 shares;
(3) To consider and act upon a proposal to amend the Company's
1995 Stock Option Plan to reduce the size and change the timing of automatic
formula grants awarded to nonemployee directors;
(4) To consider and act upon a proposal to amend the Articles
of Incorporation of the Company (the "Articles") to increase the authorized
number of shares of Common Stock from 20,000,000 shares to 75,000,000 shares,
which amendment is set forth in Article 4 of the proposed Amended and Restated
Articles of Incorporation of the Company, as set forth in Exhibit A to this
Proxy Statement (the "Amended and Restated Articles");
(5) To consider and act upon a proposal to amend the Articles
to increase the maximum number of members of the Board of Directors from seven
to nine directors, the exact number of directors to be determined from time to
time by resolution adopted by the Board of Directors, which amendment is set
forth in Article 5 of the Amended and Restated Articles;
(6) To consider and act upon a proposal to amend the Articles
to provide for the division of the Board of Directors into classes of directors
with staggered terms, which amendment is set forth in Article 5.1 of the Amended
and Restated Articles;
(7) To consider and act upon a proposal to amend the Articles
to provide for removal of directors only for cause, which amendment is set forth
in Article 6 of the Amended and Restated Articles;
(8) To consider and act upon a proposal to amend the Articles
to provide that special meetings of shareholders may be called by the Chairman
of the Board, the Chief Executive Officer, the Board of Directors or
shareholders owning 50% or more of the Company's issued and outstanding capital
stock, which amendment is set forth in Article 7 of the Amended and Restated
Articles.
(9) To consider and act upon a proposal to amend the Articles
in certain other respects described herein, primarily to conform the Articles to
current Arizona law and to delete obsolete or superfluous provisions; and
(10) To transact such other business as may properly come
before the Annual Meeting or any adjournment thereof.
The foregoing items of business are more fully described in
the Proxy Statement accompanying this Notice.
Only shareholders of record at the close of business on May
10, 1996 are entitled to notice of and to vote at the Annual Meeting.
All shareholders are cordially invited to attend the Annual
Meeting in person.
By order of the Board of Directors
[Signature]
Roy A. Flegenheimer
Secretary
Phoenix, Arizona
May 15, 1996
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IMPORTANT: It is important that your shareholdings be represented at this
meeting. Whether or not you expect to attend the Meeting, please complete, date
and sign the enclosed Proxy and mail it promptly in the enclosed envelope to
assure representation of your shares. No postage need be affixed if mailed in
the United States.
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<PAGE>
[LOGO]
2929 East Camelback Road, Suite 220
Phoenix, Arizona 85016
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PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
June 26, 1996
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SOLICITATION, EXECUTION AND REVOCATION OF PROXIES
Proxies in the accompanying form are solicited on behalf, and at the
direction, of the Board of Directors of Employee Solutions, Inc. (the "Company")
for use at the Annual Meeting of Shareholders to be held on June 26, 1996 or any
adjournment thereof (the "Annual Meeting"). All shares represented by properly
executed proxies, unless such proxies have previously been revoked, will be
voted in accordance with the direction on the proxies. If no direction is
indicated, the shares will be voted in favor of the proposals to be acted upon
at the Annual Meeting. The Board of Directors is not aware of any other matter
which may come before the meeting. If any other matters are properly presented
at the meeting for action, including a question of adjourning the meeting from
time to time, the persons named in the proxies and acting thereunder will have
discretion to vote on such matters in accordance with their best judgment.
When stock is in the name of more than one person, the proxy is valid
if signed by any of such persons unless the Company receives written notice to
the contrary. If the shareholder is a corporation, the proxy should be signed in
the name of such corporation by an executive or other authorized officer. If
signed as attorney, executor, administrator, trustee, guardian or in any other
representative capacity, the signer's full title should be given and, if not
previously furnished, a certificate or other evidence of appointment should be
furnished.
This Proxy Statement and the form of proxy which is enclosed are being
mailed to the Company's shareholders commencing on or about May 20, 1996.
A shareholder executing and returning a proxy has the power to revoke
it at any time before it is voted. A shareholder who wishes to revoke a proxy
can do so by executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of the Company prior to the vote at the Annual
Meeting, by written notice of revocation received by the Secretary prior to the
vote at the Annual Meeting or by appearing in person at the Annual Meeting,
filing a written notice of revocation and voting in person the shares to which
the proxy relates.
In addition to the use of the mails, proxies may be solicited by
personal interview, telephone and telegram by the directors, officers and
regular employees of the Company. Such persons will receive no additional
compensation for such services. Arrangements will also be made with certain
brokerage firms and certain other custodians, nominees and fiduciaries for the
forwarding of solicitation materials to the beneficial owners of Common Stock
held of record by such persons, and such brokers, custodians, nominees and
fiduciaries will be reimbursed for their reasonable out-of-pocket expenses
incurred in connection therewith. It is not anticipated that any other persons
will be engaged to solicit proxies. However, the Company may seek services of an
outside proxy solicitor in the event such services become necessary. All
expenses incurred in connection with this solicitation will be borne by the
Company.
1
<PAGE>
The mailing address of the principal corporate office of the Company is
2929 East Camelback Road, Suite 220, Phoenix, Arizona 85016.
All share and per-share information in this Proxy Statement has been
adjusted to reflect a two-for-one stock split effected in the form of a 100%
stock dividend effective January 16, 1996.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on May 10, 1996
(the "Record Date") will be entitled to vote at the meeting. On the Record Date,
there were issued and outstanding 15,212,211 shares of Common Stock. Each holder
of Common Stock is entitled to one vote, exercisable in person or by proxy, for
each share of the Company's Common Stock held of record on the Record Date. The
presence of a majority of the shares of Common Stock entitled to vote, in person
or by proxy, is required to constitute a quorum for the conduct of business at
the Annual Meeting. The affirmative vote of a majority of such quorum is
required with respect to the approval of Proposals 2 and 3 set forth herein.
The affirmative vote of a majority of the shares of Common Stock
entitled to vote, in person or by proxy, is required with respect to the
approval of Proposals 4 through 9 regarding the proposed Amendment and
Restatement of the Company's Articles of Incorporation.
Each shareholder present, either in person or by proxy, will have
cumulative voting rights with respect to Proposal 1 - Election of Directors.
Under cumulative voting, each shareholder is entitled to as many votes as is
equal to the number of shares of Common Stock of the Company held by the
shareholder on the Record Date multiplied by the number of directors to be
elected, and such votes may be cast for any single nominee or divided among two
or more nominees. The five nominees, or such fewer number of nominees as may
stand for election, receiving the highest number of votes will be elected to the
Board of Directors. There are no conditions precedent to the exercise of
cumulative voting rights. Unless otherwise instructed in any proxy, the persons
named in the form of proxy which accompanies this Proxy Statement (the "Proxy
Holders") will vote the proxies received by them for the Company's five nominees
set forth in Proposal 1 - Election of Directors below. If additional persons are
nominated for election as directors, the Proxy Holders intend, unless otherwise
instructed in any proxy, to vote all proxies received by them in such manner in
accordance with cumulative voting as will assure the election of as many of the
Company's nominees as possible, and, in such event, the specific nominees for
whom votes will be cast will be determined by the Proxy Holders. If authority to
vote for any nominee of the Company is withheld in any proxy, the Proxy Holders
intend, unless otherwise instructed in such proxy, to vote the shares
represented by such proxy, in their discretion, cumulatively for one or more of
the other nominees of the Company.
The Inspector of Election appointed by the Chairman of the
Board of Directors shall determine the shares represented at the meeting and the
validity of proxies and ballots, and shall count all proxies and ballots.
Abstentions and broker non-votes are each included in the
determination of the number of shares present for quorum purposes.
Because abstentions represent shares entitled to vote, the effect of an
abstention will be the same as a vote cast against a proposal, except with
respect to the election of directors, for which only affirmative votes are
relevant. A broker non-vote, on the other hand, will not be regarded as
representing a share entitled to vote on the proposal and, accordingly, will
have no effect on the voting for such proposal, except with respect to Proposals
4 through 9, for which a broker non-vote will have the same effect as a vote
cast against the proposal.
2
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock at April 26, 1996 with respect to (i)
each person who beneficially owns more than 5% of the Company's outstanding
Common Stock, (ii) each director of the Company and each person nominated to
become a director at the Annual Meeting, (iii) each of the executive officers
listed in the Summary Compensation Table below and (iv) all directors and
executive officers of the Company as a group.
Shares Beneficially Owned (1)
-----------------------------
Number Percent
------ -------
Marvin D. Brody (2) 1,254,544 8.2%
2929 East Camelback Road, Suite 220
Phoenix, Arizona 85016
Harvey A. Belfer (3) 1,115,240 7.3%
2929 East Camelback Road, Suite 220
Phoenix, Arizona 85016
Robert L. Mueller 40,000 *
121 Shadow Mountain Drive
Sedona, Arizona 86336
Roy A. Flegenheimer (4) 127,332 *
2929 East Camelback Road, Suite 220
Phoenix, Arizona 85016
Edward L. Cain, Jr. 334,465 2.2%
2929 East Camelback Road, Suite 220
Phoenix, Arizona 85016
Jeffery A. Colby 14 *
1023 North Hollywood Way, Suite 200
Burbank, California 91505
All executive officers and directors 2,899,928 19.2%
as a group (8 persons) (2)(3)(4)(5)
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission ("SEC") and generally includes voting or
investment power with respect to securities. In accordance with SEC
rules, shares which may be acquired upon conversion or exercise of stock
options, warrants or convertible securities which are currently
exercisable or which become exercisable within 60 days of the date of the
table are deemed beneficially owned by the optionee. Except as indicated
by footnote, and subject to community property laws where applicable, the
persons or entities named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Includes shares held by a limited partnership, of which Mr. Brody and his
spouse are the general partners and Mr. Brody, his spouse and adult
children are the limited partners. Excludes 200,000 shares of Common
Stock beneficially owned by Mr. Brody's spouse, for which Mr. Brody
disclaims beneficial ownership.
(3) Voting and investment power shared with spouse.
(4) Includes 123,332 shares Mr. Flegenheimer has the right to acquire upon
the exercise of stock options.
3
<PAGE>
(5) Includes 28,333 shares issuable upon the exercise of stock options held
by Bertram Danzig, Chief Executive Officer of ESI America, Inc., a
wholly-owned subsidiary of the Company ("ESI America").
PROPOSAL 1
ELECTION OF DIRECTORS
Five directors are to be elected at the Annual Meeting. Unless
otherwise instructed, the Proxy Holders will vote the Proxies received by them
for the Company's nominees, Marvin D. Brody, Harvey A. Belfer, Edward L. Cain,
Jr., Robert L. Mueller and Jeffery A. Colby. Each director will hold office
until the next annual meeting of shareholders (unless Proposal 6 is adopted and
a classified board comes into effect prior to such meeting) or until his
successor is elected and has qualified. Cumulative voting is permitted under
Arizona law in the election of directors.
If any nominee of the Company is unable or declines to serve as a
director at the time of the Annual Meeting, the proxies will be voted for any
nominee who shall be designated by the present Board of Directors to fill the
vacancy. It is not expected that any nominee will be unable or will decline to
serve as a director.
The names of the nominees for director and certain information
about them are set forth below.
Director
--------
Name Age Position with Company Since
- ---- --- --------------------- -----
Marvin D. Brody 52 Chairman of the Board, Chief
Executive Officer and Director 1991
Harvey A. Belfer 58 President and Director 1991
Edward L. Cain, Jr. 36 Vice President of Sales and
Director 1995
Robert L. Mueller 68 Director 1995
Jeffery A. Colby 42 Director 1995
Marvin D. Brody co-founded the Company in 1991. He has been a Director
of the Company since its inception and became the Company's Chief Executive
Officer in November 1994. Prior to becoming the Company's Chief Executive
Officer, Mr. Brody was engaged in the private practice of law since 1973. He
graduated from John Marshall Law School with a Juris Doctorate degree in 1969.
Mr. Brody served as an outside director of Prime Financial Partners M.L.P. since
1987 and has resigned effective April 23, 1996. Mr. Brody will assume the
position of President of the Company upon the retirement of Harvey A. Belfer on
June 26, 1996.
Harvey A. Belfer co-founded the Company in 1991 and has been a Director
and President since the Company's inception. He was also the Company's Chief
Executive Officer from its founding until November 1994. From 1984 until 1991,
Mr. Belfer was an executive officer of Contract Personnel Systems, Inc. and
Corporate Personnel Services, Inc., firms engaged in the employee leasing
business. Mr. Belfer has announced his intention to retire as President
effective June 26, 1996.
Edward L. Cain, Jr. has been a Director of the Company since July 1995
and has been the Company's Vice President of Sales since April 1995. Mr. Cain
has been President of Employee Solutions-East, Inc. ("ESEI") since June 1994.
From 1990 until June 1994 he was the Director of Sales and Marketing for
Personal Benefits Group, an Atlanta-based company that brokered employee leasing
services. From 1987 to 1990, he was a sales agent in CIGNA's individual
financial service division in Springfield, Massachusetts and later in Grand
Rapids, Michigan.
Robert L. Mueller has been a Director of the Company since February
1995. Mr. Mueller has been an independent consultant since 1993. From 1987 to
1993, he was the President, Chief Operating Officer and a Director of Proler
International Corp., a steel recycler in Houston, Texas.
4
<PAGE>
Jeffery A. Colby has been a Director of the Company since November
1995. Mr. Colby founded TEAM Services, L.P., an employee leasing services
company in the music and advertising industries, in 1992 and has been its Chief
Executive Officer since 1994 and President since January 1996. Since December
1986, Mr. Colby has served as President of Consolidated Traffic, Inc., a
Chicago-based company which provides consulting, audit and freight bill payment
services for the transportation industry. From 1975 to 1986, Mr. Colby was a
principal at the Chicago-based law firm of Fox & Grove.
Compliance with Section 16(a) Reporting Requirements
Under the securities laws of the United States, the Company's
directors, its executive officers, and persons holding more than 10% of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission (the "Commission"). Specific due dates for
these reports have been established and the Company is required to disclose any
failure to file by these dates. The Company believes that all of these filing
requirements were satisfied during the year ended December 31, 1995, except Paul
Janssens and Harvey A. Belfer each failed to file on a timely basis one report
with respect to one transaction, and Marvin D. Brody failed to file on a timely
basis three reports with respect to three transactions. All of these reports
have since been filed with the Commission. In making these disclosures, the
Company has relied solely on written representations of its directors and
executive officers and copies of the reports that they have filed with the
Commission.
Board Meetings and Committees
The Board held a total of three meetings during the fiscal year ended
December 31, 1995. No director attended fewer than 75% of the aggregate of all
meetings of the Board of Directors and any committee on which such director
served during the period of such service. In addition, the Board acted by
unanimous written consent on numerous occasions.
The Board presently has an Audit Committee. The Audit Committee was
appointed in November 1995 and consists of Jeffery A. Colby and Robert L.
Mueller. The Audit Committee had its first meeting in March 1996. The Audit
Committee meets independently with representatives of the Company's independent
auditors and with representatives of senior management. The Committee reviews
the general scope of the Company's annual audit, the fee charged by the
independent auditors and other matters relating to internal control systems. In
addition, the Audit Committee is responsible for reviewing and monitoring the
performance of non-audit services by the Company's auditors. The Committee is
also responsible for recommending the engagement or discharge of the Company's
independent auditors.
The Company currently does not have a Compensation Committee or a
committee performing similar functions. Functions of such committee are
performed by the full Board of Directors. A Compensation Committee was appointed
by the Board on April 30, 1996 and consists of Jeffery A. Colby and Robert L.
Mueller, both of whom are outside directors. The Compensation Committee will
commence functioning on June 26, 1996. The Compensation Committee will review
and approve salary and other benefits to be paid or awarded to key executives,
review and approve new compensation and stock plans and changes to existing
plans, and administer the incentive compensation plans, stock option and other
stock-based plans and other employee benefit plans.
The Board appointed a Stock Option Committee on April 6, 1995. The
Stock Option Committee will be replaced by the Compensation Committee on June
26, 1996. The Stock Option Committee met three times during the fiscal year
ended December 31, 1995 and consists of Harvey A. Belfer and Marvin D. Brody.
The Stock Option Committee administers the Company's stock option plans with a
view to insure that the Company attracts and maintains highly qualified
employees and directors and encourages extraordinary effort through grants under
option plans.
The Company does not have a nominating committee or a committee
performing similar functions. Nominations of persons to be directors are
considered by the full Board of Directors.
5
<PAGE>
SHAREHOLDER RETURN COMPARISON
Set forth below is a graph comparing the percentage change in the
cumulative total shareholder return on the Company's Common Stock with the
cumulative total return of the Standard & Poor's 500 Stock Index and a Peer
Group (as defined below) for the period commencing August 12, 1993 (the date on
which trading in the Company's Common Stock commenced) and ending December 31,
1995. Shareholder returns are calculated based on the closing price of the
Company's Common Stock on the relevant dates for each measurement period. The
graph assumes that $100 was invested on August 12, 1993 in Company Common Stock,
in the Standard & Poor's 500 Stock Index and the Peer Group and that, as to such
indices, dividends were reinvested. The Company has not, since its inception,
paid any dividends on the Common Stock.
The peer group used for this chart consists of AccuStaff Inc.,
Automatic Data Processing, Inc., Barrett Business Services, Inc., Career
Horizons, Inc., Digital Solutions, Inc. and Paychex Inc. (the "Peer Group").
Although the Company does not consider the companies in the Peer Group to be
direct competitors operating in exactly the same line of business as the
Company, many analysts of the Company view the temporary services and payroll
processing businesses to be most comparable to the employee leasing business.
Accordingly, the Company has selected a Peer Group composed of companies engaged
in such businesses.
Historical stock price performance shown on the graph is not
necessarily indicative of future price performance.
Measurement Period Employee Standard + Peer Group
(Fiscal Year Covered) Solutions, Inc. Poor's 500 ----------
- --------------------- --------------- ----------
Commencing
August 12, 1993 $100.00 $100.00 $100.00
1993 $150.00 $105.39 $113.14
1994 $145.00 $106.78 $146.90
1995 $680.00 $146.90 $171.12
6
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors performed the functions of a compensation
committee during 1995. The members of the Board of Directors include Harvey A.
Belfer, Marvin D. Brody, Robert L. Mueller, Edward L. Cain, Jr. and Jeffery A.
Colby. In addition to being directors of the Company, Marvin D. Brody is the
Company's Chief Executive Officer, Harvey A. Belfer is the President of the
Company and Edward L. Cain, Jr. is the Company's Vice President of Sales and the
President of ESEI. During portions of the Company's fiscal year ended December
31, 1995, Todd P. Belfer (son of Harvey A. Belfer) and Arnold J. Diamond were
also members of the Board of Directors. In addition to being Directors of the
Company, Todd P. Belfer was Vice President, Investor Relations and Secretary of
the Company, and Arnold J. Diamond was Vice President Sales - Western Region of
the Company. Todd Belfer resigned from his positions as Director and officer in
December 1995. Arnold J. Diamond's service as Director ended at the July 12,
1995 Annual Meeting. On April 30, 1996, the Board appointed a Compensation
Committee which is comprised of Robert L. Mueller and Jeffery A. Colby, both of
whom are outside directors. The Compensation Committee will commence functioning
on June 26, 1996.
Certain of the members of the Board of Directors have engaged in
certain relationships and related transactions with the Company, which are
described below.
The Company has incurred legal fees and consulting fees to Marvin D.
Brody, now the Company's Chief Executive Officer and a Director, aggregating
$245,584 and $15,000, respectively, for the year ended December 31, 1993 and
$154,200 and $0, respectively, for the year ended December 31, 1994. The legal
services consisted of preparation of corporate documents, corporate minutes and
contracts, together with all required documentation of the Company's acquisition
of The Prescott Group, Inc. ("TPG") and Pro Pay. The consulting services related
to analyzing prospects for expanding the Company's business into Utah, Nevada,
New Mexico, California and New York; liaison work with insurance agents,
attorneys and accountants; and general business advice. The fees paid for the
consulting services were pursuant to a three-year consulting agreement setting
an annual consulting fee of $100,000 plus health insurance and automobile
expenses. Mr. Brody waived $85,000 and $100,000, respectively, of the consulting
fees for the years ended December 31, 1993 and December 31, 1994. He also waived
reimbursement of automobile expenses until the second half of 1994. The
consulting agreement was terminated on January 1, 1995, at which time Mr. Brody
commenced receiving compensation as the Company's Chief Executive Officer. No
such legal or consulting fees were outstanding during fiscal 1995. See
"Executive Compensation."
Effective January 1, 1996, the Company, which has held a 1% equity
interest in ESEI since its formation in June 1994, acquired the remaining 99%
equity interest in ESEI from Mr. Edward L. Cain, Jr. ESEI is a joint venture
based in Atlanta, Georgia through which the Company conducts substantially all
of its sales and marketing activities in relation to its employee leasing
business. The base purchase price consisted of 324,000 unregistered shares of
the Company's Common Stock. Mr. Cain received piggyback registration rights as
to these shares during the period July 1 through December 31, 1996 and one
demand registration right exercisable during 1997. Mr. Cain serves as ESEI's
president pursuant to an employment agreement which, as amended, provides for
the payment of commissions based on employee-leasing business placed through or
managed by ESEI after the effective date of the acquisition. In connection with
the employment agreement, Mr. Cain had previously received options to acquire
200,000 shares of the Company's Common Stock at an exercise price of $4.25 per
share (the fair market value of the Company's Common Stock on the date of grant)
which expire through November 10, 2004 and which, among other terms and
conditions, become exercisable in November 1999 subject to continued employment.
Mr. Cain was elected to the Company's Board of Directors in 1995 and has served
as its Vice President of Sales since April 1995. Mr. Cain continues to serve the
Company in these capacities following completion of the acquisition. Mr. Cain is
required to sign a promissory note in connection with the acquisition in the
principal amount of $385,624 together with interest at 8% per annum payable on
December 31, 1996 to reimburse the Company for certain expenses incurred by
ESEI.
In January 1995, the Company filed a Registration Statement on Form S-3
pursuant to the Securities Act of 1933 which registered the shares of several
shareholders, including Marvin D. Brody (800,000 shares), Harvey A. Belfer
(466,666 shares), Todd P. Belfer (66,668 shares) and Arnold Diamond (30,000
shares).
7
<PAGE>
Marvin D. Brody, Harvey A. Belfer and Todd P. Belfer were indebted to
the Company during 1995. Mr. Brody made payments on his indebtedness of $12,149
in cash and $194,896 in the Company's Common Stock. Mr. Harvey Belfer made
payments on his indebtedness of $52,904 in cash and $11,629 in the Company's
Common Stock. Mr. Todd Belfer made payments on his indebtedness of $89,447 in
the Company's Common Stock. At December 31, 1995, Mr. Brody was indebted to the
Company in the amount of $3,764, which indebtedness has subsequently been paid.
Mr. Harvey Belfer and Mr. Todd Belfer were no longer indebted to the Company at
December 31, 1995. Mr. Brody's indebtedness was pursuant to a $200,000 revolving
line of credit promissory note bearing interest at 7% per year and due on
demand. Harvey Belfer's indebtedness was pursuant to a $75,000 revolving line of
credit promissory note bearing interest at 7% per year with principal due 30
days after written demand by the Company, interest payable each June 30 and
December 31, and secured by shares of the Company's Common Stock. Todd Belfer's
indebtedness was pursuant to an open receivable. All of the borrowing
arrangements with Mr. Brody, Mr. Harvey Belfer and Mr. Todd Belfer described
above have been terminated.
During 1995, Harvey A. Belfer and Marvin D. Brody were part owners of
Houston Enterprises, L.L.C. ("Houston"), a company which utilizes the Company's
employee leasing services. Houston made payments of $746,951.39 to the Company
during 1995. Mr. Brody sold his interest in Houston during 1995.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
For the fiscal year ended December 31, 1995, the Board of Directors
performed the functions of a compensation committee and was responsible for:
(1) reviewing and approving the annual salary, bonus and other
benefits, direct and indirect, including perquisites and
personal benefits, to be paid or awarded to key executives;
(2) reviewing and approving new compensation and stock plans and
changes to existing plans; and
(3) administering the incentive compensation plans, stock option and
other stock-based plans and other employee benefit plans of the
Company and its subsidiaries or establishing committees to
perform such functions.
The Board appointed a Stock Option Committee on April 6, 1995 which was
comprised of Harvey A. Belfer, President of the Company, and Marvin D. Brody,
Chief Executive Officer of the Company. The Board delegated its responsibility
for administering the incentive compensation plans, stock option and other
stock-based plans to the Stock Option Committee. The Board of Directors
appointed a Compensation Committee on April 30, 1996 which is comprised of
Jeffery A. Colby and Robert L. Mueller, both of whom are outside directors. The
Compensation Committee will begin functioning on June 26, 1996, at which time it
will replace the Stock Option Committee and assume the compensation functions of
the Board of Directors.
The Board of Directors, with Mr. Brody abstaining, decides on all
aspects of the compensation for the Chief Executive Officer.
In light of the foregoing, this Report has been prepared by the entire
Board of Directors.
Compensation Philosophy
The general philosophy of the Company's executive compensation program
is to offer key executives compensation that is competitive in the marketplace
yet also based on the Company's performance and the employee's individual
contribution and performance. The Company's executive compensation policies are
intended to motivate and reward executives for long-term strategic management
and the enhancement of shareholder value through cash payments (salary) and
equity incentives (in the form of stock options). The executive compensation
objectives of the Company are to attract and retain highly qualified managers
through competitive salary and benefit programs, encourage extraordinary effort
on the part of management through well-designed incentive opportunities and
contribute to the short- and long-term interests of the Company's shareholders.
8
<PAGE>
The Company's executive compensation program consists of two key
elements, an annual component (salary) and a long-term component (stock
options). The Company's policies with respect to each of these elements, as well
as the basis for determining the compensation of Mr. Brody, are described below.
Salary
Salaries for executive officers are determined by evaluating several
factors, including the executive's individual performance, experience and level
of responsibility, as well as compensation data for executives with comparable
responsibilities in the Company. The Company did not utilize an independent
consulting firm in formulating compensation decisions. Executive officer
salaries for fiscal 1995 were set by the Board of Directors on a case by case
basis, generally through the use of employment agreements. The Company's Vice
President of Sales is compensated by commissions and does not receive a salary.
The Company believes this arrangement provides incentives appropriate for such
position.
The Chief Executive Officer's salary for fiscal 1995 was set by the
Board of Directors, with Mr. Brody abstaining. Several factors were considered
in determining the Chief Executive Officer's salary, primarily including Mr.
Brody's equity ownership position in the Company, his individual performance,
experience and level of responsibility, and the Company's financial situation.
The Board of Directors did not utilize any particular mathematical formula or
other objective standards in determining Mr. Brody's current salary.
The Company did not award cash bonuses to its executive officers in
1995. However, in 1996 the Company intends to consider the use of cash bonuses
as an additional method of linking an executive officer's compensation to
individual and/or Company performance.
Stock Options
Stock-based compensation is viewed as a critical incentive component of
the Company's overall executive compensation program because it directly ties an
executive's compensation to the value realized by the Company's shareholders and
because it permits the Company to recruit and retain top talent. Grants of stock
options are made under two plans, each of which has been approved by the
Company's shareholders. With respect to the option grants made to employees and
executive officers of the Company, the existing number of options held by each
proposed optionee is considered, with a goal of increasing the equity incentive
of the optionees.
In April 1993, the Company's Board of Directors adopted and the
Company's shareholders approved the 1993 Employee Incentive Stock Option Plan
(the "1993 Option Plan") under which incentive stock options and nonqualified
stock options may be granted to executive officers, other key employees,
nonemployee directors and others whose participation is deemed to be in the
Company's best interest. During fiscal 1995, options to purchase a total of
126,000 shares of the Company's Common Stock were granted under the 1993 Option
Plan to the Company's employees. No such stock options were granted to the
Company's executive officers named in the Summary Compensation Table herein.
In April 1995, the Company's Board of Directors adopted the 1995 Stock
Option Plan (the "1995 Option Plan"), which was approved by the Company's
shareholders in July 1995. Under the 1995 Option Plan, incentive stock options
and nonqualified stock options may be granted to executive officers, other key
employees, nonemployee directors and others whose participation is deemed to be
in the Company's best interest. In light of the 1995 Option Plan's significance
to the Company's overall compensation strategy and the fact that its continued
operation will require additional shares to be available for the issuance upon
exercise of options granted thereunder in light of the Company's recent growth,
the Board approved, on April 30, 1996, an increase by 750,000 of the number of
shares available pursuant to the 1995 Option Plan, subject to approval by the
Company's shareholders at the 1996 Annual Meeting. During fiscal 1995, options
to purchase a total of 906,500 shares of the Company's Common Stock were granted
under the 1995 Option Plan to the Company's employees, of which 380,000 were
granted to the executive officers named in the Summary Compensation Table
herein.
Because of their significant ownership interests in the Company, no
stock options have been granted to the Company's Chief Executive Officer, Marvin
D. Brody, or its President, Harvey A. Belfer. The Compensation Committee may
consider the award of options to Mr. Brody in the future depending on the nature
of his overall compensation arrangements.
9
<PAGE>
Other Compensation
In addition to salaries and stock options, the Company provides
compensation in the form of automobile, health club and telephone expenses and
term life and health insurance premiums to its Chief Executive Officer,
President and certain of its executive officers.
Section 162(m)
Section 162(m) of the Internal Revenue Code limits, to one million
dollars, the deductibility by a publicly held corporation of compensation paid
in a taxable year to the Chief Executive Officer and any other executive officer
whose compensation is required to be reported in the Summary Compensation Table.
Qualified performance-based compensation will not be subject to the deduction
limit if certain conditions are met, including a condition that the performance
goals under which the compensation is paid must be established by a committee
comprised solely of two or more "outside directors". The Board of Directors and
the Stock Option Committee as comprised during 1995 did not satisfy that
requirement. Due to recent increases in the price of the Company's Common Stock
as quoted on the NASDAQ National Market, it is possible that executive
compensation could exceed the Section 162(m) deductibility limit in certain
cases, subject to the timing of exercises of stock options and the market prices
of the Company's Common Stock at the time of such exercises. The Board of
Directors appointed a Compensation Committee on April 30, 1996 which is
comprised of Jeffery A. Colby and Robert L. Mueller, both of whom are outside
directors, and which will replace the Stock Option Committee. Effective June 26,
1996, the Compensation Committee will assume the functions of the current Stock
Option Committee and the compensation functions of the Board of Directors.
Another condition to qualified deductibility is shareholder approval of the
Company's performance-based compensation plans, which is a reason that the
shareholders are being asked to vote on the amendment to the 1995 Option Plan at
the Annual Meeting.
Respectfully submitted,
Harvey A. Belfer
Marvin D. Brody
Robert L. Mueller
Edward L. Cain, Jr.
Jeffery A. Colby
10
<PAGE>
Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth, with respect to the years ended
December 31, 1995, 1994 and 1993, compensation awarded to, earned by or paid to
(i) the Company's Chief Executive Officer and (ii) the three other executive
officers who were serving as executive officers at December 31, 1995 and whose
total salary and bonus exceeded $100,000.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------------- ------------
Other Annual Securities All Other
Name and Compensation Underlying Compensation
Principal Position Year Salary ($) ($) Options/SARs ($)
- ------------------ ---- ---------- --- ------------ -------------
(#)(1)
------
<S> <C> <C> <C> <C> <C>
Marvin D. Brody, 1995 165,992 20,493 (4) - 5,244 (5)
Chief Executive 1994 - 10,394 (4) - 4,366 (5)
Officer (2)(3)
Harvey A. Belfer 1995 109,646 18,398 (6) - 5,438 (5)
President 1994 100,000 20,908 (6) - 4,604 (5)
1993 100,000 23,475 (6) - 4,360 (5)
Roy A. 1995 151,699 (8) 180,000 (10) 5,508 (5)
Flegenheimer, Chief 1994 138,846 (8) 80,000 4,663 (5)
Operating Officer(7) 1993 106,451 (8) 90,000 (10) 3,364 (5)
Edward L. Cain, Jr., 1995 184,555 - 200,000 (11) -
Vice President of 1994 22,391 - 200,000 (11) -
Sales (9)
</TABLE>
(1) Consist entirely of stock options; no stock appreciation rights ("SARs")
were granted or are outstanding.
(2) Commenced employment in November 1994; commenced receiving compensation as
Chief Executive Officer in January 1995. For information regarding
consulting and legal fees to Mr. Brody, see "Compensation Committee
Interlocks and Insider Participation."
(3) Mr. Belfer has announced his intention to retire as President on June 26,
1996. At that time, Mr. Brody will assume the title and functions of
President and Mr. Brody's 1996 annualized salary rate will be increased
from $225,000 to $325,000.
(4) Automobile lease.
(5) Term life and health insurance premiums.
(6) Automobile, health club and telephone expenses.
(7) Commenced employment in February 1993.
(8) Auto allowance in an amount less than 10% of the total of annual salary.
(9) Commenced employment in June 1994.
(10) Includes options to purchase 80,000 shares of Common Stock issued in April
1993 which were canceled in April 1995 and simultaneously replaced by
options to acquire the same number of shares.
11
<PAGE>
(11) Includes warrants to purchase 200,000 shares of Common Stock issued in
June 1994 which were canceled in April 1995 and simultaneously replaced by
options to acquire the same number of shares.
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1)
The following table sets forth information about stock option
grants during the last fiscal year to the executive officers named in the
Summary Compensation Table receiving grants during such period. Neither the
Company's Chief Executive Officer, Marvin D. Brody, nor its President, Harvey A.
Belfer, received stock option grants during fiscal 1995.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term (2)
-------------------------------------------------------------- ----------------------------
Number of % of Total
Securities Option/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
- ------------------- ----------- ----------- ----------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Roy A. Flegenheimer 30,000 (3) 3% $3.75 01-16-00 $31,200 $68,682
Roy A. Flegenheimer 80,000 (4) 8% 4.25 04-05-00 55,647 159,258
Roy A. Flegenheimer 70,000 (5) 7% 6.563 10-10-00 126,927 280,474
Edward L. Cain, Jr. 200,000 (6) 20% 4.25 11-10-04 352,279 977,409
</TABLE>
(1) Consist entirely of stock options and do not include SARs.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% or 10% compounded
annually from the date the respective options were granted to their
expiration date and are not presented to forecast possible future
appreciation, if any, in the price of the Common Stock. The potential
realizable value of the foregoing options is calculated by assuming that
the market price of the underlying security appreciates at the indicated
rate for the entire term of the option and that the option is exercised at
the exercise price and sold on the last day of its term at the appreciated
price.
(3) Exercisable in equal annual increments over three years commencing January
17, 1995.
(4) Issued in April 1995 in replacement of options to acquire the same number
of shares exercisable at $4.8437, which prior options were simultaneously
canceled. These options were fully vested when granted.
(5) Exercisable in equal annual increments over three years commencing October
11, 1995.
(6) Issued in April 1995 in replacement of warrants to acquire the same number
of shares exercisable at the same price which prior warrants were
simultaneously canceled. These options become exercisable on November 11,
1999.
12
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUE TABLE (1)
The following table sets forth information with respect to the
executive officers named in the Summary Compensation Table concerning option
exercises during the last fiscal year and the number and value of options
outstanding at the end of the last fiscal year. The Company's Chief Executive
Officer, Marvin D. Brody, and its President, Harvey A. Belfer, do not hold any
stock options.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End (#) at FY-End ($)(2)
---------------------------- ----------------------------
Shares Acquired Value Realized
Name on Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Roy A. 40,000 $350,000 123,332 106,668 $1,636,814 $1,237,776
Flegenheimer
Edward L. Cain, Jr. 0 0 0 200,000 0 2,550,000
</TABLE>
(1) No SARs are outstanding.
(2) Based on the last trade of the Company's Common Stock on the
NASDAQ Small Cap Market on December 29, 1995. The Company's
Common Stock commenced trading on the NASDAQ National Market in
January 1996.
TEN-YEAR OPTION/SAR REPRICINGS (1)
<TABLE>
<CAPTION>
Number of Exercise Length of
Securities Market Price Price at Original
Underlying of Stock at Time of Option Term
Options/ Time of Repricing Remaining at
SARs Repricing or or New Date of
Repriced or Amendment Amendment Exercise Repricing or
Name Date Amended (#) ($) ($) Price ($) Amendment
- ---- ---- ----------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Roy A. April 6, 80,000 $3.875 $4.8437 $4.25 3 years
Flegenheimer, 1995
Chief
Operating
Officer
</TABLE>
(1) Consist entirely of stock options; no SARs were repriced or are outstanding.
13
<PAGE>
STOCK OPTION COMMITTEE REPORT ON OPTION REPRICING
From April 6, 1995 to April 30, 1996, the Stock Option Committee of the
Company's Board of Directors was responsible for administering the incentive
compensation plans, stock option and other stock-based plans of the Company. On
April 6, 1995, the Stock Option Committee effected a repricing of Roy
Flegenheimer's outstanding options to purchase 80,000 shares of Common Stock
exercisable at $4.8437 issued in 1993 by canceling such options and
simultaneously replacing such options with options to acquire the same number of
shares exercisable at $4.25 issued under the 1995 Option Plan. This was a
one-time adjustment to bring the exercise price of these options into conformity
with the exercise price range of other options granted during the same general
time period.
Respectfully submitted,
Harvey A. Belfer
Marvin D. Brody
Employment Contracts, Termination of Employment, and
Change-in-Control Arrangements
Harvey A. Belfer entered into a five-year employment agreement with the
Company effective January 1, 1993 and currently receives an annual salary of
$135,000. Mr. Belfer's employment agreement allows the Company's Board of
Directors to increase his salary based upon performance, in the sole discretion
of the Board of Directors. Mr. Belfer also agreed not to engage in certain
activities that compete with the Company until two years after the termination
of the employment agreement. Mr. Belfer has announced his intention to retire as
President effective June 26, 1996, at which time his employment agreement will
be terminated. The Board of Directors will replace Mr. Belfer's employment
agreement with a five-year consulting agreement which will provide for
compensation of $35,000 per year and will contain non-competition provisions.
Roy A. Flegenheimer and the Company entered into an employment
agreement on April 21, 1993, which employment agreement has subsequently been
amended to revise Mr. Flegenheimer's compensation. The third amendment to Mr.
Flegenheimer's employment agreement became effective on October 1, 1995. The
third amendment set Mr. Flegenheimer's salary for the period from February 8,
1995 to September 30, 1995 at $98,807.64, from October 1, 1995 to February 7,
1996 at $60,576.93, from February 8, 1996 to February 7, 1997 at $175,000.00,
and from February 8, 1997 to February 7, 1998 at $185,000. The term of Mr.
Flegenheimer's employment agreement ends February 7, 1998, unless earlier
terminated.
Edward L. Cain, Jr., the Company and ESEI entered into an Amended and
Restated Employment Agreement effective January 1, 1996. The agreement provides
for compensation in the form of commissions based upon administrative fees
collected from the Company's employee leasing business and contains
non-competition provisions which include certain exceptions during the term of
the employment agreement and thereafter. The term of Mr. Cain's employment
agreement ends June 23, 1999, unless earlier terminated.
The Company's 1995 Option Plan provides that in the event of a merger,
consolidation or reorganization with another corporation in which the Company is
not the surviving corporation, appropriate provision shall be made with respect
to outstanding and unexercised options to either (a) substitute on an equitable
basis appropriate shares of the surviving corporation for such options or (b)
cancel such options upon payment of the fair market value of such options to the
respective holders.
The Company's 1993 Option Plan provides that in the event of a merger,
consolidation or reorganization with another corporation in which the Company is
not the surviving corporation, appropriate provision shall be made with respect
to outstanding and unexercised options to either (a) substitute on an equitable
basis appropriate shares of the surviving corporation for such options or (b)
accelerate the vesting and permit the exercise of all such options prior to such
event.
14
<PAGE>
Compensation of Directors
The Company's directors who do not receive a salary or commissions from
the Company receive $500 per each quarterly meeting attended, plus reimbursement
for reasonable out-of-pocket expenses incurred in attending Board of Directors'
meetings. Nonemployee directors of the Company are eligible for the grant of
stock options pursuant to the 1993 Option Plan, and are eligible under certain
circumstances for option grants under a formula grant provision of the 1995
Option Plan. Under the current provisions of the 1995 Option Plan, every
nonemployee director of the Company is automatically granted options to acquire
40,000 shares of the Company's Common Stock upon becoming a director, and
subsequently is automatically granted an additional 40,000 options at the fifth
annual meeting of shareholders following the initial grant if such director is
still a nonemployee director of the Company at that time. If adopted, Proposal 3
of this Proxy Statement will alter the five-year formula grant provision for
nonemployee directors.
In 1995, Robert L. Mueller and Jeffery A. Colby, both nonemployee
directors, were each granted 40,000 stock options, with an exercise price equal
to the fair market value of the Company's Common Stock on the date of grant. Mr.
Mueller's options were immediately exercisable, and Mr. Colby's options vest in
equal installments on the first three anniversaries of the date of grant.
Certain Relationships and Related Transactions
For disclosure concerning certain relationships and related
transactions with the Company by members of the Board of Directors of Company
during fiscal 1995, see "Compensation Committee Interlocks and Insider
Participation."
On October 2, 1995, the Company completed the acquisition of the
principal assets of Hazar, Inc. and certain of its subsidiaries (collectively,
"Hazar"). The Company acquired Hazar through a wholly-owned subsidiary, ESI
America, Inc. ("ESI America"). ESI America has entered into a three-year
employment agreement with Bertram Danzig, Hazar's former President and Chief
Executive Officer, which provides for base compensation of $135,000 per year and
an initial grant of options to acquire 120,000 shares of the Company's Common
Stock at $6.625 per share. One-third of the options vested upon grant, with the
balance vesting over three years in six month increments subject to continued
employment. Mr. Danzig is entitled to receive additional options at the end of
each of the three years of his employment agreements subject to achievement of
profitability targets. Such additional options will be granted upon being earned
and will be exercisable at the fair market value of the Company's Common Stock
at the date of grant.
Mr. Danzig executed a personal promissory note dated December 21, 1995
payable to the Company in the principal amount of $30,000 together with interest
at 6.0% per annum payable on December 21, 1996. Mr. Danzig repaid the note in
April 1996.
In January 1995, the Company filed a Registration Statement on Form S-3
pursuant to the Securities Act of 1933 which registered the shares of several
shareholders, including 623,334 shares beneficially owned by Paul Janssens, who
formerly held in excess of 5% of the Company's outstanding Common Stock.
In August 1995 the Company filed a Registration Statement on Form S-3
pursuant to the Securities Act of 1933 which registered an additional 556,666
shares beneficially owned by Mr. Janssens.
PROPOSAL 2
APPROVAL OF AN AMENDMENT OF THE EMPLOYEE SOLUTIONS, INC. 1995
STOCK OPTION PLAN INCREASING SHARES AVAILABLE FOR GRANT BY 750,000
SHARES
The Employee Solutions, Inc. 1995 Option Plan was adopted by the Board
of Directors on April 6, 1995 and was approved by the Company's shareholders on
July 12, 1995.
Stock options play a key role in the Company's ability to recruit,
reward and retain executives and key employees. The Company believes that equity
based incentive programs help insure a tight link between the interests of its
shareholders and employees and enhance the Company's ability to continue
recruiting and retaining top talent. The
15
<PAGE>
Company believes that the continued operation of the 1995 Option Plan in light
of the Company's recent growth necessitates an increase in the shares available
for grant under the 1995 Option Plan.
All share and per-share information with respect to the 1995 Option
Plan have been adjusted to reflect the two-for-one stock split effected by the
Company in the form of a 100% stock dividend effective January 16, 1996. As a
result of such stock split, the number of shares reserved for issuance under the
1995 Option Plan was increased automatically from 500,000 to 1,000,000. On April
30, 1996, the Board of Directors amended the 1995 Option Plan subject to
shareholder approval to increase the shares reserved for issuance from 1,000,000
to 1,750,000. Accordingly, if this Proposal 2 is approved by the Company's
shareholders, the total number of shares reserved for issuance under the 1995
Option Plan will be 1,750,000 shares, and the total number of shares available
for issuance will be 1,685,000 (reflecting the previous issuance of 65,000
shares of Common Stock upon exercise of options granted under the 1995 Option
Plan).
As discussed under Proposal 4, the Company recently announced plans to
implement a two-for-one stock split to be effected in the form of a 100% stock
dividend as soon as practicable following the Annual Meeting, contingent upon
approval of Proposal 4. The number of shares available for issuance upon
exercise of stock options under the 1995 Option Plan is automatically adjusted
for stock splits, as is the exercise price and number of shares issuable upon
exercise of outstanding options. Accordingly, if the split is implemented, the
number of shares available for issuance under the 1995 Option Plan will be
3,370,000 if this Proposal 2 is approved at the Annual Meeting, and 1,870,000 if
this Proposal 2 is not approved. Implementation of the split will similarly
affect the 1993 Option Plan.
Summary of 1995 Option Plan
The summary of the 1995 Option Plan included in this Proxy Statement is
qualified in its entirety by the specific language of the 1995 Option Plan.
Copies of the 1995 Option Plan are available to any shareholder upon request
addressed to Investor Relations Department, Employee Solutions, Inc., 2929 East
Camelback Road, Suite 220, Phoenix, Arizona 85016.
Purposes. The purposes of the 1995 Option Plan are to attract and
retain the best available employees, directors and third parties who can provide
valuable services to the Company or any parent, subsidiary or affiliate, to
provide additional incentive to such persons, and to promote the success of the
Company's business.
Administration and Share Reserve. A total of 1,000,000 shares of the
Company's Common Stock currently are reserved for issuance under the 1995 Option
Plan, and, as of April 26, 1996, 65,000 shares have been issued upon exercise of
stock options. As of April 26, 1996, a total of 879,000 shares were subject to
outstanding options granted under the 1995 Option Plan. This proposal seeks
shareholder approval to increase the number of shares that may be issued under
the 1995 Option Plan by 750,000. The 1995 Option Plan is administered by the
Board of Directors or by a committee of directors appointed by the Board and
constituted so as to permit the 1995 Option Plan to comply with the
"disinterested administration" provisions under Rule 16b-3 ("Rule 16b-3") under
the Securities Exchange Act of 1934. The administering body is referred to
herein as the "Committee". The Committee determines those persons to whom stock
options will be granted, the terms of such grants and the number of shares
subject to options. The 1995 Option Plan provides for the grant of options which
qualify as "incentive stock options" (sometimes referred to herein as "ISOs")
under Section 422 of the Internal Revenue Code (the "Code") and nonstatutory
stock options which do not specifically qualify for favorable income tax
treatment under the Code (sometimes referred to herein as "NSOs").
Eligibility. Any employee of the Company or any parent, subsidiary or
affiliate is eligible to receive options under the 1995 Option Plan, provided
that incentive stock options may only be granted to employees of the Company or
any parent or subsidiary of the Company. Nonstatutory options may also be
granted to other persons who are not officers, directors or employees, but whose
participation is deemed to be in the Company's best interests. As of April 26,
1996, approximately 129 employees (including six executive officers) and two
nonemployee directors were eligible to participate in the 1995 Option Plan.
Nonemployee directors automatically receive nonqualified options to
acquire 40,000 shares of the Company's Common Stock upon their initial election
and, at the fifth annual meeting of shareholders following a previous automatic
grant, a subsequent grant to acquire 40,000 shares. Options granted pursuant to
the automatic grant provision have a 10-
16
<PAGE>
year term and vest in equal installments on each of the first three
anniversaries of the date of grant subject to continued board service. This
formula grant provision is proposed to be amended by Proposal 3.
Stock Option Programs. Certain employees of ESEI, ESI Risk Management
Agency ("RMA") and ESI America, wholly-owned subsidiaries of the Company, are
eligible to receive grants of stock options under the 1995 Stock Option Plan
pursuant to stock option programs. Pursuant to the ESEI stock option program,
regional vice presidents of ESEI are eligible to receive stock options based on
their production, subject to conditions with respect to the level of ESEI's
ongoing employee leasing client business. Stock options granted to the regional
vice presidents under the ESEI stock option program vest based on years of
continuous service as a regional vice president. Pursuant to the RMA stock
option program, the National Marketing Director of RMA is eligible to receive
stock options based on volume of workers' compensation premium. Stock options
granted to the National Marketing Director under the RMA stock option program
are exercisable for five years after the date of issue. Two officers of ESI
America (one of whom is Bertram Danzig, ESI America's Chief Executive Officer)
are entitled to receive options at the end of each of the three years of their
employment agreements (which commenced effective October 2, 1995), subject to
achievement of profitability targets. All options granted under these programs
will have an exercise price not less than the fair market value of the Company's
Common Stock on the date of grant. If earned, initial grants under these
programs will be awarded in early 1997 based on 1996 performance.
Stock Subject to the 1995 Option Plan. The aggregate number of shares
which may be issued pursuant to the exercise of options granted under the 1995
Option Plan currently is 1,000,000 shares of the Company's Common Stock, subject
to adjustments in certain circumstances, including reorganizations, stock
splits, reverse stock splits, stock dividends, spin-offs and other distributions
of assets to shareholders. If any outstanding option grant under the 1995 Option
Plan for any reason expires or is terminated, the shares of Common Stock
allocable to the unexercised portion of the option grant shall again be
available for options under the 1995 Option Plan as if no options had been
granted with respect to such shares.
Terms and Conditions of Options. Stock options granted under the 1995
Option Plan may have a maximum term of 10 years (five years in the case of
incentive stock options granted to a holder of more than 10% of the Company's
stock). The per-share exercise price of incentive stock options may not be less
than the fair market value of the Common Stock (110% of the fair market value in
the case of a holder of more than 10% of the Company's stock) on the date of
grant. The exercise price of nonstatutory stock options may be any amount as
determined by the Committee in its discretion. The aggregate fair market value
of shares with respect to which incentive stock options are exercisable for the
first time, during any calendar year by any holder of incentive stock options,
cannot exceed $100,000, with the fair market value of such shares determined as
of the time the incentive stock options for such shares were granted. Options
are not transferable except that the Committee in its discretion may grant
options that are transferable to immediate family members of the optionee or to
trusts or partnerships for such family members. Options can be exercised only
while an optionee is providing services for the Company or any parent,
subsidiary or affiliate, except that an option may be exercised within certain
periods of time after termination of employment other than for cause and in the
event of retirement, death or permanent disability.
Payment of the exercise price may be made in cash, or, if permitted by
the grant, by transferring to the Company shares of the Company's Common Stock
at fair market value on the date of exercise, provided that the optionee held
the shares for at least six months. At the discretion of the Committee, the
Company may extend credit to finance option exercises. Subject to certain
limitations, the Committee may modify, extend or renew outstanding options,
reduce the exercise price of options, accept the surrender of outstanding
options and grant new options in substitution. Each option may have additional
terms and conditions consistent with the 1995 Option Plan as determined by the
Committee.
Accelerating Events. Unless otherwise provided in the grant letter, in
the event of a merger, consolidation or reorganization with another corporation
in which the Company is not the surviving organization, shares subject to
outstanding options may be substituted with shares from the surviving
corporation, or options may be canceled and the optionee paid the excess of fair
market value over the exercise price multiplied by the number of shares subject
to options. Upon dissolution or liquidation of the Company, the optionee shall
receive a cash payment computed in the manner described in the preceding
sentence.
17
<PAGE>
Termination or Amendment of the 1995 Option Plan. The 1995 Option Plan
provides that the Board may at any time terminate or amend the 1995 Option Plan
without shareholder approval except where doing so would result in
non-compliance with Rule 16b-3, the Code, or other applicable laws or
regulations. The provisions for automatic grants to nonemployee directors can
not be amended more than once every six months other than to comport with
changes in applicable law or regulations. Unless sooner terminated by the Board
or by the purchase of all stock subject to the 1995 Option Plan, the 1995 Option
Plan will expire in April 2005.
Certain Federal Income Tax Consequences
The following is a brief summary of the Company's understanding of the
principal Federal income tax consequences of grants or awards made under the
1995 Option Plan based upon the applicable provisions of the Code in effect on
the date hereof.
Nonqualified Stock Options. An optionee will not recognize taxable
income at the time an NSO is granted. Upon exercise of an NSO, an optionee will
recognize compensation income in an amount equal to the difference between the
exercise price and the fair market value of the shares at the date of exercise.
The amount of such difference will be a deductible expense to the Company for
tax purposes. On a subsequent sale or exchange of shares acquired pursuant to
the exercise of an NSO, the optionee will recognize a taxable gain or loss,
measured by the difference between the amount realized on the disposition and
the tax basis of such shares. The tax basis will, in general, be the amount paid
for the shares plus the amount treated as compensation income at the time the
shares were acquired pursuant to the exercise of the option.
When the NSO exercise price is paid in stock, the exercise is treated
as: (a) a tax-free exchange of the shares of stock (without recognizing any
taxable gain with respect thereto) for a like number of new shares (with such
new shares having the same basis and holding period as the old); and (b) an
issuance of a number of additional shares having a fair market value equal to
the "spread" between the exercise price and the fair market value of the shares
for which the NSO is exercised. The optionee's basis in the additional shares
will equal the fair market value of the shares on the date of exercise and the
holding period for such shares will begin on the date the optionee acquires
them. This mode of payment does not affect the ordinary income tax liability
incurred upon exercise of the NSO described above.
Incentive Stock Options. An optionee will not recognize taxable income
at the time an ISO is granted. Further, an optionee will not recognize taxable
income upon exercise of an ISO if the optionee complies with two separate
holding periods: shares acquired upon exercise of an ISO must be held for at
least two years after the date of grant and for at least one year after the date
of exercise. The difference between the exercise price and the fair market value
of the stock at the date of exercise is, however, an alternative minimum tax
preference item. When the shares of stock received pursuant to the exercise of
an ISO are sold or otherwise disposed of in a taxable transaction and the
optionee has complied with the appropriate holding periods, the optionee will
recognize a capital gain or loss, measured by the difference between the
exercise price and the amount realized.
Ordinarily, an employer granting ISOs will not be allowed any business
expense deduction with respect to stock issued upon exercise of an ISO. However,
if all the requirements for an ISO are met except for the holding period rules
set forth above, the optionee will be required, at the time of the disposition
of the stock, to treat the lesser of the gain realized or the difference between
the exercise price and the fair market value of the stock at the date of
exercise as ordinary income and the excess, if any, as capital gain. The Company
will be allowed a corresponding business expense deduction to the extent of the
amount of the optionee's ordinary income.
Valuation
As of May 9, 1996, the last trade price for the Company's Common Stock,
as reported by the NASDAQ National Market, was $40.625 per share.
Option Grants
As of April 26, 1996, Robert L. Mueller, Edward L. Cain, Jr., Jeffery
A. Colby, Roy A. Flegenheimer, Morris Aaron and Bertram Danzig have been granted
options for an aggregate of 40,000 shares, 200,000 shares, 40,000 shares,
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150,000 shares, 40,000 shares and 120,000 shares under the 1995 Option Plan,
respectively; all current executive officers as a group (six persons) have been
granted options for 510,000 shares under the 1995 Option Plan; all current
directors (who are not executive officers) as a group (two persons) have been
issued options for 80,000 shares under the 1995 Option Plan; and all employees
as a group (not including executive officers or nonemployee directors) have been
issued options for 354,000 shares under the 1995 Option Plan. Marvin D. Brody
and Harvey A. Belfer have not been granted options under the 1995 Option Plan.
As of the date of this proxy statement, there has been no determination
by the Committee with respect to future awards under the 1995 Option Plan. The
table of option grants under "Executive Compensation -- Option/SAR Grants in the
Last Fiscal Year" provides information with respect to the grant of options
under the 1995 Option Plan during the last fiscal year to the executive officers
named in the Summary Compensation Table. For information regarding the options
granted to the non-executive officer directors during the past fiscal year, see
"Executive Compensation -- Compensation of Directors."
Recommendation
The Board of Directors unanimously recommends that the
shareholders vote FOR approval of this proposal to amend the Employee Solutions,
Inc. 1995 Stock Option Plan to increase the number of shares of Common Stock
available for grant under the 1995 Option Plan by 750,000 shares.
PROPOSAL 3
APPROVAL OF AN AMENDMENT OF THE FORMULA GRANT
PROVISION OF THE EMPLOYEE SOLUTIONS, INC. 1995 STOCK OPTION PLAN
The Employee Solutions, Inc. 1995 Option Plan is summarized in Proposal
2 above. The summary of the 1995 Option Plan included in Proposal 2 of this
Proxy Statement is qualified in its entirety by the specific language of the
1995 Option Plan. Copies of the 1995 Option Plan are available to any
shareholder upon request addressed to Investor Relations Department, Employee
Solutions, Inc., 2929 East Camelback Road, Suite 220, Phoenix, Arizona 85016.
The Board of Directors has declared advisable and directed that there
be submitted to the shareholders of the Company at the meeting an amendment to
the 1995 Option Plan which modifies the formula grant provision applicable to
outside directors as set forth in paragraph 12 therein. Under the current
version of paragraph 12, each person who becomes an outside (or "nonemployee")
director automatically receives options to acquire 40,000 shares of the
Company's Common Stock which have an exercise price equal to the fair market
value of the Common Stock on the date of grant. Such options vest in equal parts
on the first three anniversaries of the date of grant, and the nonemployee
director is entitled to receive options exercisable for an additional 40,000
shares of the Company's Common Stock every five years thereafter (subject to
continued board service).
The Board of Directors believes that the current provision potentially
provides a greater number of options than is desirable in light of splits
affecting or potentially affecting the Company's Common Stock, and that such
provision would be improved by linking the grants more directly to the director
election cycle.
Under the proposed amendment, options would be granted to each
nonemployee director at each Annual Meeting at which such director is elected.
The number of options would equal 2,500 multiplied by the number of years of the
term to which the director is elected, and the options would vest at the rate of
2,500 on the date of each Annual Meeting following the date of grant, subject to
continued board service. As provided in the current version of paragraph 12, the
options would have a 10-year term (subject to immediate termination in the event
a director is removed from the board for cause) and an exercise price equal to
the fair market value of the Company's Common Stock on the date of grant. Under
the proposed amendment to paragraph 12, the number of options to be granted
would not be adjusted for forward stock splits or similar occurrences effected
during the year ending December 31, 1996, though options granted prior to such
an event would be adjusted therefor. Provisions similar to those described above
govern grants of options to nonemployee directors initially elected between
Annual Meetings.
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The 1995 Option Plan defines "Nonemployee Director" to mean any
director who is not an employee of the Company or the member of any group
consisting of the Company and any entity that is an "affiliate," a "parent" or a
"subsidiary" of the Company.
Current nonemployee directors (Messrs. Colby and Mueller) are not
eligible for grants under amended paragraph 12 until the 2000 Annual Meeting of
Shareholders.
The text of the proposed amendment to paragraph 12 is as follows:
12. Automatic Grants to Certain Directors
a. Grant. Each person who is elected as a
Nonemployee Director at any Annual Meeting of
Shareholders automatically shall be granted, effective as
of the date of such Annual Meeting, options to acquire
2,500 shares of the Company's Common Stock for each year
of the term to which such Nonemployee Director is
elected. Options granted pursuant to this paragraph 12
shall become exercisable at the rate of 2,500 shares of
the Company's Common Stock upon the date of each Annual
Meeting following the date of grant, provided that the
Nonemployee Director has served as such throughout the
preceding year. Notwithstanding anything herein to the
contrary, any person who is a Nonemployee Director as of
April 30, 1996 shall not be entitled to receive any grant
under this paragraph 12 until the 2000 Annual Meeting of
Shareholders.
b. Certain Option Terms. Options granted pursuant to
this paragraph 12 shall have a 10-year term from the date
of grant, provided that any option held by a Nonemployee
Director who is removed from the Board for cause shall
expire on the date of such removal. The exercise price of
all options granted pursuant to this paragraph 12 shall
be the fair market value of the Company's Common Stock on
the date of grant.
c. Election to Board of Directors between Annual
Meetings. Any person who initially becomes a Nonemployee
Director at any time other than on the date of an Annual
Meeting of Shareholders shall automatically be granted
options exercisable for 2,500 shares of Common Stock for
each full and partial year of the term to which such
Nonemployee Director is elected. Vesting and other terms
of such options shall be as set forth elsewhere in this
paragraph 12.
d. Stock Splits. Notwithstanding anything in the
Plan to the contrary, the number of options to be granted
pursuant to paragraphs 12(a) and 12(c) shall not be
adjusted for forward stock splits or similar occurrences
which are effected during the year ending December 31,
1996, provided that options granted pursuant to
paragraphs 12(a) or 12(c) prior to the effective date of
any such occurrence shall be subject to adjustment in the
same manner as other options granted pursuant to the
Plan.
e. Limitation on Amendment. This paragraph 12 shall
not be amended more than once every six months other than
to comport with changes in the Code, the Employee
Retirement Income Security Act, or the rules thereunder.
Recommendation
The Board of Directors unanimously recommends that the shareholders
vote FOR approval of this proposal to amend paragraph 12 of the 1995 Option Plan
as described above.
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PROPOSALS 4 TO 9
AMENDMENT AND RESTATEMENT OF ARTICLES OF INCORPORATION
The Board of Directors has declared advisable and directed that there
be submitted to the shareholders of the Company at the meeting amendments to the
Articles of Incorporation of the Company (the "Articles") which amendments are
incorporated into the Amended and Restated Articles of Incorporation of the
Company (the "Amended and Restated Articles"). The separate amendments to the
Company's Articles are set forth below for separate vote by the shareholders.
The information contained in this Proxy Statement with respect to the proposed
amendments to the Articles is qualified in its entirety by reference to the text
of the Amended and Restated Articles, which are attached hereto as Exhibit A and
are incorporated herein by reference.
Some of the amendments to the Company's Articles set forth below
reflect changes allowed or required by the new Arizona Business Corporation Act
(the "ABCA"), which the Arizona legislature has adopted effective January 1,
1996. The new ABCA replaces in its entirety the former corporations statute. The
proposed amendments which conform certain statutory references with appropriate
sections of the ABCA, or reflect changes allowed by the ABCA, are identified
below.
If any or all of the proposed amendments to the Articles are approved,
the appropriate officers of the Company will execute and file with the Arizona
Corporate Commission an Amended and Restated Articles of Incorporation
reflecting such amendments and other documents as are necessary to effect the
amendment and restatement of the Articles.
POTENTIAL ANTI-TAKEOVER EFFECTS OF CERTAIN
PROPOSED AMENDMENTS TO THE COMPANY'S ARTICLES OF INCORPORATION
Although neither the Board of Directors nor the management of the
Company is aware of any actual or threatened change in control of the Company,
Proposals 4 through 9 under "Matters to be Considered at the Company's Annual
Meeting" may discourage certain types of activity that in the future might
involve an actual or threatened change in control.
Proposal 4 could have certain anti-takeover effects. For example,
although the Company has no present intent to do so, shares of Common Stock
could be issued by private placement or public offering, or rights to purchase
such shares could be issued to create voting impediments to or to frustrate
persons seeking to effect a takeover or otherwise to gain control of the
Company. In addition, the proposed amendment, together with the staggered terms
of the directors, could discourage an attempt by a person to acquire control of
the Company by a tender offer or other means. It could therefore deprive
shareholders of the benefit that could result from such an attempt, such as the
realization of a premium over the market price that such an attempt could cause.
The Board of Directors is not aware of any present effort to gain control of the
Company.
Proposals 5 through 7 make it more difficult and time-consuming to
change majority control of the Board of Directors of the Company and thus reduce
the vulnerability of the Company to an unsolicited proposal for the takeover of
the Company that does not contemplate the acquisition of all of the Company's
outstanding shares at a fair price, or an unsolicited proposal for the
restructuring or sale of all or part of the Company.
In a public corporation such as the Company, third parties can
accumulate substantial stock positions and then use their stock positions to
force a restructuring, merger or consolidation of that corporation or to force
the corporation to repurchase the third parties' stock at a premium. Such
actions are often taken without advance notice to or consultation with the board
of directors or management of the corporation. In many cases, such third parties
seek representation on the corporation's board of directors in order to increase
the likelihood that the corporation will implement their proposals. If the
corporation resists the efforts to obtain representation on the corporation's
board, such third parties may commence proxy contests to have themselves or
their nominees elected to the board of directors in place of certain directors
or the entire board. These contests can be a prelude to a third party's takeover
attempt of the corporation. In some cases, the third party may not be interested
in taking over the corporation, but uses the threat of a proxy fight or takeover
bid as a means of forcing the corporation to repurchase the third party's
holdings at a substantial premium over market price.
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The Board of Directors of the Company believes that the threat of
removal of the Company's directors in such situations would curtail the Board's
ability to negotiate effectively with such persons. Management would be deprived
of the time and information necessary to evaluate the takeover proposal, to
study alternative proposals and to help ensure that the best price is obtained
in any transaction involving the Company that may ultimately be undertaken.
The adoption of Proposals 5 through 7 by the shareholders of the
Company would have the effect of making it more difficult to change the
composition of the Board of Directors and therefore help to assure the
continuity and stability of the Company's management and policies. A classified
Board of Directors upon which directors serve three-year terms, when coupled
with a provision prohibiting removal of directors except for "cause", requires
at least two annual shareholder meetings in order to effect a change in control
of the Board. Currently, a change in control of the Board of Directors could be
effected at one shareholder meeting.
By stabilizing the composition of the Board of Directors, the proposed
amendments are designed to encourage any person who might seek to acquire
control of the Company to consult first with the Company's Board of Directors
and to negotiate the terms of any proposed business combination or tender offer.
The Board of Directors believes that any takeover attempt or business
combination in which the Company is involved should be thoroughly studied by the
Board of Directors to assure that all of the Company's shareholders are treated
fairly.
Takeovers or changes in the Company's directors that are proposed and
effected without prior consultation and negotiation with the Company's Board of
Directors may not necessarily be detrimental to the Company and its
shareholders, and the adoption of the proposed amendments could discourage or
frustrate future attempts to acquire control of the Company that are not
approved by the incumbent Board of Directors, but which a majority of
shareholders might deem to be in their best interests. To the extent that the
proposed changes enable the Board of Directors to resist a takeover or change of
control of the Company, they would have the effect of enhancing the tenure of
the existing Board of Directors. The proposed amendments could also render more
difficult or discourage a merger, tender offer, proxy contest, or assumption of
control of the Company by a large shareholder or group of shareholders. Tender
offers or other non-open market acquisitions of stock are usually made at prices
above the prevailing market price of a corporation's stock. In addition,
accumulations of stock through market purchases for the purpose of acquiring
control may cause the market price of the stock to reach levels that are higher
than would otherwise be the case. The proposed amendments may discourage such
purchases, particularly those for less than all of the Company's shares, and may
therefore deprive holders of the Company's stock of the opportunity to sell
their stock at a temporarily higher market price. However, the Board of
Directors feels that the benefits of seeking to protect its ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to take over or
restructure the Company outweigh the disadvantages of the proposed amendments.
Proposal 8 may also have certain anti-takeover effects. The requirement
that special meetings of shareholders may only be called by shareholders at the
request in writing of shareholders owning 50% or more of the Company's issued
and outstanding capital stock makes it difficult for shareholders to call a
special meeting unless a high percentage of holders of the Company's shares
request the meeting.
In addition to the anti-takeover effects described herein, there are
anti-takeover provisions applicable to all Arizona corporations under Arizona
law. Protections under the Arizona Corporate Takeover Act (the "ACTA")
include,without limitation, anti-greenmail provisions, restrictions on
increasing compensation to officers or directors during a tender offer,
disclosure requirements and potential voting restrictions for control share
acquisitions, and restrictions on engaging in business combinations with certain
significant shareholders. The anti-greenmail provisions of the ACTA prohibit a
company from purchasing any shares of capital stock from any beneficial owner of
more than 5% of the voting power of the company (a "5% Owner") at a per share
price in excess of the average market price (during the 30 trading days prior to
the purchase) unless the 5% Owner beneficially owned his or her shares for three
years or more, the purchase is approved by the company's shareholders (excluding
the 5% Owner) or the company makes an offer of at least equal value on a per
share basis to all holders of shares of such class or series (including holders
of any class or series in which the shares may be converted).
The ACTA also contains a provision which generally provides that if any
person or group of persons (an "Acquiring Person") acquires shares of an issuing
public company that, when added to all other shares of the company beneficially
owned by the Acquiring Person, entitles the Acquiring Person immediately to
exercise or direct the exercise of a percentage of the company's voting power
that has increased above certain specified levels (20%, 33 1/3% or 50%) of the
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shares of the company (a "Control Share Acquisition"), then the Acquiring Person
will not have the right to vote the shares in excess of that level, except for
the election of directors. In addition, within ten (10) days after a Control
Share Acquisition, an Acquiring Person is required to deliver to the company an
information statement containing certain information about the Acquiring Person.
The Acquiring Person must also include in the information statement a good faith
estimate of the range of voting power, described above, that resulted or would
result from the Control Share Acquisition. In the event that an Acquiring Person
has entered into a definitive financing agreement pursuant to which the
Acquiring Person would obtain the necessary third-party funds to finance the
Control Share Acquisition, the Acquiring Person may require the Company to call
a special meeting of the Company's shareholders for the purpose of considering
the voting rights to be accorded the shares acquired by the Acquiring Person.
The Acquiring Person may require the company to call a special meeting of the
company shareholders for the purpose of considering the voting rights to be
accorded to the shares acquired by the Acquiring Person.
The ACTA also contains a provision which prohibits a company from
engaging in a business combination (as defined in the ACTA) or authorizing any
subsidiary to engage in any business combination with an Interested Shareholder
(as defined below) for a period of three years after the date that the
Interested Shareholder first acquired the shares of common stock that qualify
him or her as an Interested Shareholder, unless either the business combination
or the Interested Shareholder's acquisition of shares is approved by a committee
of the company's board of directors before the Interested Shareholder first
acquired the shares that qualify such shareholder as an Interested Shareholder.
The ACTA defines an "Interested Shareholder" as any person that either (a)
beneficially owns 10% or more of the voting power of the outstanding shares of
the company or (b) is an affiliate or associate of the company and who, at any
time within the three-year period preceding the transaction, was the beneficial
owner of 10% or more of the voting power of the outstanding shares of the
company together with such persons, affiliates and associates. In addition to
the three-year prohibition described above, a company may not engage in any
business combination or authorize any subsidiary to engage in any business
combination with an Interested Shareholder or affiliate or associate of an
Interested Shareholder after such three-year period unless the business
combination is approved by the company's shareholders, excluding the Interested
Shareholders, at a meeting called after such three-year period, or unless the
business combination satisfies certain statutory requirements.
Although Arizona corporations may opt out of any or all of the
provisions of the ACTA by amending their articles of incorporation, the Board
has not proposed to so amend the Company's Articles. The ACTA is set forth at
Arizona Revised Statutes ss.10-2701 et seq.
The Company does not presently intend to propose anti-takeover measures
in future proxy solicitations and does not consider the proposed amendments to
be part of any plan to establish a series of such measures.
Proposal 4
Increase in Number of Authorized Shares of Common Stock
The Board of Directors has declared advisable and directed that there
be submitted to the shareholders of the Company at the meeting a proposed
amendment to the Articles to effect an increase in the number of shares of the
Company's Common Stock, having no par value, from 20,000,000 shares to
75,000,000 shares. The amendment will not affect the present amount of
authorized preferred stock (10,000,000 shares). The number of shares of Common
Stock issued as of April 26, 1996 was 15,259,673 (which includes 47,462 shares
of treasury stock) and an additional 935,000 and 337,607 shares were as of that
date available for issuance under the 1995 Option Plan and the 1993 Option Plan,
respectively, reflecting the previous issuance of 65,000 shares of Common Stock
upon exercise of options granted under the 1995 Option Plan and 262,393 shares
of Common Stock upon exercise of options granted under the 1993 Option Plan,
respectively. A total of 1,685,000 shares will be available for issuance under
the 1995 Option Plan if Proposal 2 is adopted at this meeting.
The additional shares of Common Stock for which authorization is sought
are necessary, in part, in light of the reduction in the number of available
authorized shares resulting from the two-for-one stock split effected in the
form of a 100% stock dividend effective January 16, 1996, and the increase in
the number of shares of Common Stock available for grant under Plan by 750,000,
which is submitted as Proposal 2 in this Proxy Statement.
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The additional shares of Common Stock for which authorization is sought
would be identical to the presently authorized shares of the Company's Common
Stock. Holders of Common Stock do not have preemptive rights to subscribe to
additional securities which may be issued by the Company.
If approved, the increased number of authorized shares of Common Stock
will be available for use from time to time for such purposes and consideration
as the Board of Directors may approve and no further vote of shareholders of the
Company will be required, except as provided under Arizona law or the rules of
any national securities exchange or automated quotation system on which the
Common Stock of the Company is at the time listed. The availability of
additional shares for issue, without the delay and expense of obtaining the
approval of shareholders at a special meeting, will afford the Company greater
flexibility in acting upon proposed transactions. Such transactions could
include, without limitation, payment of stock dividends, subdivision of
outstanding shares through stock splits, issuance in public or private sales for
cash as a means of obtaining capital for use in the Company's business and
operations, issuance as part or all of the consideration required to be paid by
the Company for acquisitions of other businesses or properties, and issuance
under employee benefit plans. The Board of Directors does not intend to issue
any Common Stock to be authorized under this proposed amendment except upon
terms that the Board deems to be in the best interests of the Company and its
shareholders.
The Board of Directors of the Company has approved a two-for-one stock
split to be effected in the form of 100% stock dividend to be paid as promptly
as practicable after the annual meeting, subject to approval of this Proposal 4.
Upon completion of the split, approximately 30.4 million shares of Common Stock
will be outstanding.
The increase in the number of shares of the Company's Common Stock
outstanding as a consequence of the proposed stock split and the resulting
decreased price level may encourage interest in the Company's Common Stock and
possibly promote greater liquidity for the Company's shareholders. The Board
believes that the proposed stock split can make the Common Stock more attractive
to investors than it is at current market prices, create a broader market for
the stock, increase investor interest in the stock and thereby encourage future
growth in the value of the stock. There can, however, be no assurance that the
foregoing effects will occur or that the per share price level of the Common
Stock immediately after the proposed stock split will be maintained for any
period of time.
The number of shares available for issuance upon exercise of stock
options under the 1995 Option Plan is automatically adjusted for stock splits,
as is the exercise price and number of shares issuable upon exercise of
outstanding options. Implementation of the split will similarly affect the 1993
Option Plan. See "Proposal 2."
For a discussion concerning certain potential anti-takeover effects of
the foregoing proposal, see "Potential Anti-takeover Effect of Certain Proposed
Amendments to the Company's Articles of Incorporation."
The text of the amendment is set forth in Article 4 of the Amended and
Restated Articles.
Recommendation
The Board of Directors unanimously recommends that the shareholders
vote FOR approval of this proposal to amend the Articles to increase the number
of shares of Common Stock the Company has authority to issue from 20,000,000
shares to 75,000,000 shares.
Proposal 5
Increase Maximum Number of Directors from Seven to Nine
The Board of Directors has declared advisable and directed that there
be submitted to the shareholders of the Company at the meeting a proposed
amendment to the Articles to increase the maximum number of members of the Board
of Directors from seven to nine directors, the exact number of directors to be
determined from time to time by resolution adopted by the Board of Directors,
which amendment is set forth in Article 5 of the Amended and Restated Articles.
The Bylaws of the Company currently provide for a minimum of three and
a maximum of seven directors. The Articles provide that the Directors may set
the exact number of Directors from time to time without shareholder approval.
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However, the Board of Directors considers it advisable to move this provision
from the Bylaws to the Articles and solicit shareholder approval of this
increase because the increase gives the Company the opportunity to include
additional qualified Board members from whom the Company may benefit in the
future. The Company intends to add at least one additional nonemployee director,
subject to identification of suitable candidates for Board membership. The
addition of one director would trigger the Board classification described in
Proposal 6. An increase in the maximum size of the Board of Directors to nine
members allows the classification of the Board of Directors into three classes
and the staggering of Board terms described in Proposal 6, and this Proposal 5
may therefore have indirect anti-takeover effects.
For a discussion concerning certain potential anti-takeover effects of
the foregoing proposal, see "Potential Anti-Takeover Effect of Certain Proposed
Amendments to the Company's Articles of Incorporation".
The text of the amendment is set forth in Article 5 of the Amended and
Restated Articles.
Recommendation
The Board of Directors unanimously recommends that the shareholders
vote FOR approval of this proposal to amend the Articles to increase the maximum
number of members of the Board of Directors from seven to nine directors, the
exact number of directors to be determined from time to time by resolution
adopted by the Board of Directors.
Proposal 6
Classified Board of Directors and Staggered Terms
The Board of Directors has declared advisable and directed that there
be submitted to the shareholders of the Company at the meeting a proposed
amendment to the Articles to add a provision to allow the Board of Directors to
provide for the classification of the Board of Directors of the Company into
classes of directors with staggered terms, which amendment is set forth in
Article 5.1 of the Amended and Restated Articles.
In addition to providing for the classification of the Board of
Directors of the Company into classes of directors with staggered terms, the
Articles also provide that preferred stock directors, if any, will be divided
into classes only if the Articles or resolutions designating such preferred
stock so provide. The Amended and Restated Articles generally provide that the
Board of Directors may be divided into up to three classes of directors, each of
which shall consist of at least three directors, divided as equally as possible.
The terms of such classified directors will be staggered.
The Articles and Bylaws of the Company do not currently provide for
classification of directors or staggered terms. Section 10-806 of the new ABCA
provides that a Board of Directors may be divided into two, three or more
evenly-divided groups of three or more directors with staggered terms. The prior
ABCA had more restrictive provisions than the new ABCA.
The Board of Directors believes that a staggered Board of Directors,
among other things, would help to assure the continuity and stability of the
Company's management, policies and long-term business plans, since a majority of
directors will have prior experience as directors of the Company.
For a discussion concerning certain potential anti-takeover effects of
the foregoing proposal, see "Potential Anti-Takeover Effect of Certain Proposed
Amendments to the Company's Articles of Incorporation".
The text of the amendment is set forth in Articles 5.1 and 5.2 of the
Amended and Restated Articles.
Recommendation
The Board of Directors unanimously recommends that the
shareholders vote FOR approval of this proposal to amend the Articles add a
provision to allow for the classification of the Board of Directors of the
Company into classes of directors with staggered terms.
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Proposal 7
Removal of Directors Only For Cause
The Board of Directors has declared advisable and directed that there
be submitted to the shareholders of the Company at the meeting a proposed
amendment to the Articles to provide for removal of directors only for cause,
which amendment is set forth in Article 6 of the Amended and Restated Articles.
The current Articles do not address the removal of directors. Section
10-808 of the new ABCA provides that shareholders are able to remove directors
with or without cause unless the articles of incorporation provide that the
directors may be removed only for cause. Therefore, the shareholders may remove
directors with or without cause unless or until the articles of incorporation
provide for removal only for cause. The prior ABCA required that shareholders be
permitted to remove directors with or without cause, and did not allow a
provision in the articles of incorporation providing that directors may be
removed only for cause.
In addition to providing for the removal of directors only for cause,
the amendment provides that no director shall be removed if the number of votes
sufficient to elect the director under cumulative voting is voted against the
director's removal. The Amendment also provides that the removal of directors is
subject to the rights, if any, of holders of preferred stock.
The proposed amendment, if adopted, will make it more difficult for a
dissident shareholder to remove all incumbent directors without cause and to
elect a new Board of Directors comprised of that shareholder's nominees at the
same meeting of shareholders. If the proposed amendment is not adopted, in the
event the Company has a classified Board of Directors, as provided for in
Proposal 6, the dissident shareholder could then gain control of the Board of
Directors in less time than it would ordinarily take to replace a classified
Board of Directors, thereby circumventing the protections a classified board
would offer to the Company.
For a discussion concerning certain potential anti-takeover effects of
the foregoing proposal, see "Potential Anti-Takeover Effect of Certain Proposed
Amendments to the Company's Articles of Incorporation".
The text of the amendment is set forth in Article 6 of the Amended and
Restated Articles.
Recommendation
The Board of Directors unanimously recommends that the shareholders
vote FOR approval of this proposal to amend the Articles to provide for removal
of directors only for cause.
Proposal 8
Special Meetings of Shareholders
The Board of Directors has declared advisable and directed that there
be submitted to the shareholders of the Company at the meeting, an amendment to
the Articles which revises a provision concerning special meetings of the
shareholders.
The Bylaws of the Company currently provide that "Special meetings
of the shareholders for any purpose or purposes unless otherwise prescribed by
statute or by the Articles of Incorporation may be called by the President and
shall be called by the President or Secretary at the request in writing of
shareholders owning a majority amount of the entire capital shares of the
Corporation issued, outstanding and entitled to vote. Such request shall state
the purpose of the proposed meeting." The amendment provides that "Special
meetings of the shareholders of the Corporation for any purpose or purposes may
be called at any time only by the Chairman of the Board, the Chief Executive
Officer or the Board of Directors pursuant to a resolution approved by a
majority of the whole Board of Directors, or at the request in writing of
shareholders owning 50% or more in amount of the capital stock issued and
outstanding and entitled to vote.
26
<PAGE>
Special meetings of the shareholders may not be called by any other person or
persons. Business transacted at any special meeting of the shareholders shall be
limited to the purposes stated in the notice of such meeting."
The amendment moves the provision from the Bylaws to the Articles and
revises the provision to provide for the calling of special meetings by the
Chairman of the Board, the Chief Executive Officer or the Board of Directors
pursuant to resolutions approved by the majority of the whole Board of Directors
or at the request in writing of shareholders owning 50% or more an amount of the
capital stock issued and outstanding and entitled to vote. The amendment does
not change the majority shareholder requirements set forth in the current
Bylaws, but allows the directors and management more flexibility in calling such
meetings.
Although the proposed amendment does not change the majority
shareholder requirement set forth in the current Bylaws, such majority
shareholder requirement may not have been effective prior to the January 1, 1996
effective date of the new ABCA. Section 10-028 of the prior ABCA provided that
"Special meetings of the shareholders may be called by the Board of Directors,
the holders of not fewer than 1/10th of all the shares entitled to vote at the
meeting, or such other persons as may be authorized in the Articles of
Incorporation or the Bylaws". Section 10-702 of the new ABCA provides that a
special meeting only may be called by the Board of Directors or the person or
persons authorized to do so by the Articles of Incorporation or the Bylaws. The
new ABCA no longer entitles holders of 10% of the outstanding shares to call a
special meeting.
For a discussion concerning certain potential anti-takeover effects of
the foregoing proposal, see "Potential Anti-Takeover Effect of Certain Proposed
Amendments to the Company's Articles of Incorporation".
The text of the amendment is set forth in Article 6 of the Amended and
Restated Articles.
Recommendation
The Board of Directors unanimously recommends that the shareholders
vote for approval of this proposal to amend the Articles to provide that special
meetings of shareholders may be called by the Chairman of the Board, the Chief
Executive Officer, the Board of Directors or shareholders owning 50% or more of
the Company's issued and outstanding capital stock.
Proposal 9
Other Amendments
The Board of Directors has declared advisable and directed that there
be submitted to the shareholders of the Company at the meeting certain other
proposed amendments to the Articles which primarily are intended to conform the
Articles to current Arizona law and to delete obsolete or superfluous
provisions. The proposed amendments set forth in this Proposal 9 are not
otherwise intended to modify the Articles substantially. The amendments include
the following:
(a) Removing the designations of the Company's Non-Voting Convertible
Class A Preferred Stock, having no par value (the "Class A Preferred Stock")
from the Articles.
Pursuant to the Articles, of the 10,000,000 shares of the Company's
authorized preferred stock, there are 1,265,000 shares designated as Class A
Preferred Stock. The Articles entitled the holders of such Class A Preferred
Stock to convert each share of Class A Preferred Stock into one share of voting
Common Stock of the Company upon satisfaction of certain conditions. All of the
shares of the Class A Preferred Stock were converted into Common Shares by the
holders thereof in April 1995. No such shares are currently outstanding.
The proposed amendment would delete from the Articles obsolete
designations of the Class A Preferred Stock (and references thereto) which have
no present relevance for the Company.
(b) Revising a provision concerning the Board of Director's authority
to issue preferred stock to conform such provision with Arizona law.
27
<PAGE>
The Articles currently provide in Article V that "Pursuant to the
provisions of Section 10-016(D) of the Arizona Revised Statutes, the Board of
Directors shall have the authority to determine the series, designations,
preferences, privileges and voting powers of all other shares of preferred stock
(consisting of the remaining Eight Million Seven Hundred Thirty-Five Thousand
(8,735,000) shares of preferred stock which are not designated herein as
convertible Class A preferred stock and the restrictions and qualifications
thereof, to the extent that the same are not fixed and determined by the
provisions hereof." The Board of Directors has proposed the language in Article
4.1 to remove the reference to Section 10-106(D) of the prior ABCA, to delete
obsolete references to the Class A Preferred Stock described above, and update
language of the provision.
The text of the Amendment is set forth in Article 4.1 of the Amended
and Restated Articles.
(c) Revising a provision concerning director liability to conform to
Arizona law.
The Articles currently provide in Article VI that "Except for any
representations, warranties, covenants, obligations or liabilities agreed to, or
assumed by, a Director under contract or other legally binding agreement, a
Director of the corporation shall not be personally liable to the corporation or
its shareholders for monetary damages for breach of fiduciary duty as a Director
except for liability (i) for any breach of the Director's duty of loyalty to the
corporation or its shareholders; (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law; (iii) for
authorizing the unlawful payment of a dividend or other distribution on the
corporation's capital stock or the unlawful purchases of its capital stock; (iv)
for any transaction from which the Director derived any improper personal
benefit; or (v) for a violation of Arizona Revised Statutes Section 10-041. If
the Arizona Revised Statutes are amended after adoption of this Article to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the corporation
shall be eliminated or limited to the fullest extent permitted by the Arizona
Revised Statutes, as so amended."
The proposed amendment removes the first clause from the provision in
the current Articles because it is superfluous, corrects the reference to a
section of the old ABCA, and conforms to the new statutory language. The
deletion of the above clause is not intended to enlarge the liability of any
person.
The text of the Amendment is set forth in Article 14 of the Amended and
Restated Articles.
(d) Deleting a provision from the current Articles which provides that
shares may be issued for cash, services or property as determined by the Board.
Article V of the current Articles provides that "Subject to the
provisions hereof, the shares of this corporation may be issued for cash,
services or property, upon such conditions and terms as may be determined by the
Board of Directors, who shall have full power and authority to fix the value of
the property or services for which shares may be issued and whose valuations
shall be conclusive, and the shares so issued shall be fully paid and
non-assessable."
The proposed amendment would delete from the Articles a provision which
the Board of Directors considers superfluous. The amendment is not intended to
limit the powers of the Company or the Board of Directors with respect to the
issue of shares.
(e) Deleting a provision from the current Articles which allows the
Board to cause the Company to purchase its own shares.
Article V of the current Articles provides that "The Board of Directors
may from time to time cause the corporation to purchase its own shares to the
extent of the unreserved and unrestricted earned and capital surplus of the
corporation."
The proposed amendment would delete from the Articles a provision which
the Board of Directors no longer considers to be applicable in light of the new
ABCA. The amendment is not intended to limit the ability of the Company to
purchase its own shares.
(f) Deleting a provision from the current Articles which provides for a
private property exemption.
28
<PAGE>
Article IX of the current Articles provide that "The private property
of the shareholders, directors and officers of this corporation shall be forever
exempt from corporate debts and liabilities."
The proposed amendment would delete from the Articles a provision which
the Board of Directors considers superfluous. The amendment is not intended to
subject the property of any person to corporate debts or liabilities.
Recommendation
The Board of Directors unanimously recommends that the shareholders
vote FOR approval of this proposal to amend the Articles to revise certain other
provisions of the Articles, primarily to conform the Articles to current Arizona
law and to delete obsolete or superfluous provisions.
INDEPENDENT AUDITORS
The Board of Directors has appointed Arthur Andersen LLP as independent
auditors to audit the financial statements of the Company for the fiscal year
ending December 31, 1996. It is the Company's policy not to recommend to the
security holders an independent auditor for election, approval or ratification.
Arthur Andersen LLP's representatives are expected to be present at the Annual
Meeting with the opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions. Arthur Andersen
LLP has audited the Company's financial statements since November 30, 1994.
Semple & Cooper, P.L.C. was dismissed as the Company's independent
auditors to audit the Company's financial statements on November 30, 1994. On
this same date, Arthur Andersen LLP became the Company's independent auditors to
audit the Company's financial statements. For the Company's fiscal years ended
December 31, 1992 and 1993, Semple & Cooper, P.L.C.'s accountant's report on the
Company's financial statements did not contain an adverse opinion or disclaimer
of opinion, nor was it qualified or modified as to uncertainty, audit scope, or
accounting principles. The Company's decision to change accountants was approved
by the Board of Directors. During the Company's fiscal years ending December 31,
1992 and 1993 respectively, and through November 30, 1994, there were no
disagreements on any matter of accounting principles or practices, financial
disclosures or auditing scope or procedure. The Company has authorized Semple &
Cooper, P.L.C. to respond fully to inquiries of Arthur Andersen LLP.
During the months prior to engaging Arthur Andersen LLP, the Company
consulted with Arthur Andersen LLP regarding restatement of the Company's prior
periods' financial statements described in Notes 14, 5 and 5 in the Company's
amended filings on Form 10-KSB/A relating to the year ended December 31, 1993,
Form 10-QSB/A relating to the quarter ended March 31, 1994 and Form 10-QSB/A
relating to the quarter ended June 30, 1994, respectively. The reasons for the
restatements are set forth below. Based on facts provided by the Company and
Semple & Cooper, P.L.C. to Arthur Andersen LLP, Arthur Andersen LLP stated
orally that they agreed with the Company's conclusions relative to the
restatements. Semple & Cooper, P.L.C. was also consulted relative to the
restatements and concurred with the conclusions.
The Company's consolidated financial statements for the year ended
December 31, 1993 were restated to correct various errors. The restatement
consisted of recording a liability for incurred but not reported health
insurance claims payable in the amount of $20,175 as of December 31, 1993;
reducing a receivable for a workers' compensation dividend by the amount of
$65,665; recording a deferred tax asset at the time of the acquisition of TPG in
the amount of $67,010 arising from a covenant not-to-compete carried forward for
tax purposes, but not for book purposes; and to correct the tax accrual for the
above items. The effect of the restatement was to decrease net income for 1993
by $50,107, inclusive of income tax expense increases of $29,932. The income tax
effect is comprised of a decrease in income tax expense of approximately $9,000
from the accrued insurance claims deduction, and an increase in income tax
expense of approximately $39,000 for correction of an error relating primarily
to the non-deductibility of goodwill. The decrease in net income represents a
$.02 and $.01 per share decrease in primary and fully diluted earnings per
share, respectively. The corrections are summarized as follows:
29
<PAGE>
<TABLE>
<CAPTION>
Purchase
Price Income
Goodwill Statement
Adjustment Effect
------------------ -----------------
<S> <C> <C>
- - Incurred but not reported health insurance claims payable $ - $ (20,175)
- - Workers' compensation dividend receivable reduction - The 65,665
Prescott Group, Inc.
- - Covenant not-to-compete - deferred tax asset - The Prescott (67,010) -
Group, Inc.
- - Income tax effect as of December 31, 1993 - (29,932)
------------------- -----------------
$ (1,345) $ (50,107)
=================== =================
</TABLE>
The Company's consolidated financial statements for the three months
ended March 31, 1994 were restated (1) to correct errors in the Company's
December 31, 1993 financial statements and (2) to increase tax expense and
reduce net income by $28,779 to treat goodwill amortization as non-deductible
for tax purposes and to increase the Company's effective tax rate. The impact of
the 1993 restatement on the March 31, 1994 balance sheet was to reduce retained
earnings by $50,107, reduce long-term deferred tax liability by $42,150, reduce
current assets by $48,915, increase current liabilities by $41,997 and increase
other assets by $1,345. The decrease in net income did not change the previously
reported earnings per share.
The Company's consolidated financial statements for the six months
ended June 30, 1994 were restated (1) to correct errors in the Company's
December 31, 1993 financial statements and (2) to increase tax expense and
reduce net income by $30,212 to treat goodwill amortization as non-deductible
for tax purposes and to increase the Company's effective tax rate. The impact of
the 1993 restatement on the June 30, 1994 balance sheet was to reduce retained
earnings by $50,107, reduce long-term deferred tax liability by $42,150, reduce
current assets by $48,915, increase current liabilities by $41,997 and increase
other assets by $1,345. The decrease in net income did not change the previously
reported earnings per share.
The financial statement errors occurred, and were discovered as
follows:
- Regarding the incurred but not reported (IBNR) insurance claims
payable. When the health insurance policy in question was first reviewed, and
after speaking to representatives of the insurance agency to gain an
understanding of how the policy worked, the Company's management and Semple &
Cooper, P.L.C. concluded that the policy was a cash basis policy with all
aspects of the policy ending on December 31 of each year, therefore requiring no
IBNR liability at year end. After experience with the plan, management realized
that the previous conclusions were correct from the insurance company's point of
view, but also realized that an IBNR liability was required to properly state
the Company's financial statements and brought this to the attention of Semple &
Cooper, P.L.C.
- Regarding the two adjustments to goodwill relating to The Prescott
Group, Inc. acquisition. These were inadvertent offsetting errors in the
acquired company's beginning balance sheet. Late in 1994 management raised
several questions with respect to the treatment of the two items mentioned
above, and upon further research by Semple & Cooper, P.L.C. it was concluded
that these two items had not been handled correctly in the acquired Company's
financial statements.
- Regarding income tax accounting for goodwill. Management had been
accounting for goodwill as a non-deductible item. During the 1993 audit the
Company was informed by its auditors that the rules relating to the goodwill had
changed and that goodwill relating to the Company's acquisitions were deductible
for tax purposes. This was based on Semple & Cooper, P.L.C.'s preliminary tax
research which included reviewing the Committee Reports for the pending tax Act
as it related to deductibility of goodwill. The final wording in the Act
excluded stock purchases which was the format in which the ESI acquisitions were
structured. The Company treated goodwill as deductible in its 1993 year end and
first two quarters of 1994 financial statements. During preliminary discussions
with Arthur Andersen LLP it came
30
<PAGE>
to light that the tax code changes did not apply to the Company's acquisitions
and that the goodwill was in fact not deductible. Semple & Cooper, P.L.C. after
further research concurred.
The Company also consulted with Arthur Andersen LLP regarding
accounting for the Company's investment in ESEI. It is the Company's opinion
that the results of operations for ESEI should be consolidated because the
Company will have a majority profit sharing interest in and will control the
operations of ESEI. Based on facts provided by the Company and Semple & Cooper,
P.L.C., Arthur Andersen LLP concurred with the Company's proposed accounting
treatment. Semple & Cooper, P.L.C. was also consulted about this matter and they
also concurred with the Company's proposed accounting treatment.
OTHER MATTERS
The Company knows of no other matters to be submitted at the Annual
Meeting. If any other matter properly comes before the Annual Meeting, it is the
intention of the persons named in the enclosed proxy card to vote the shares
they represent as the Board of Directors may recommend.
SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company which are intended to be
presented by such shareholders at the Company's Annual Meeting for the fiscal
year ending December 31, 1996 must be received by the Company no later than
January 21, 1997 in order that they may be considered for inclusion in the proxy
statement and form of proxy relating to that meeting. Additionally, if a
shareholder wishes to present to the Company an item for consideration as an
agenda item for a special meeting, the shareholder must give reasonable notice
to the Secretary and give a brief description of the business desired to be
discussed.
May 15, 1996 THE BOARD OF DIRECTORS
31
<PAGE>
EXHIBIT A
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
EMPLOYEE SOLUTIONS, INC.
1. Name. The name of the corporation is Employee Solutions, Inc.
(the "Corporation").
2. Purpose. The purpose for which the Corporation is organized is
the transaction of any or all lawful business for which corporations may be
incorporated under the laws of the State of Arizona, as they may be amended from
time to time.
3. Initial Business. The business initially conducted by the
Corporation was the leasing employees to professional and non-professional
businesses.
4. Authorized Capital. The Corporation shall have authority to
issue 85,000,000 shares, consisting of 75,000,000 shares of Common Stock, having
no par value (the "Common Stock") and 10,000,000 shares of preferred stock,
having no par value (the "Preferred Stock").
4.1 Preferred Stock. The board of directors is authorized, subject
to limitations prescribed by law and these Articles of Incorporation, to provide
for the issuance of the shares of preferred stock in series, and by filing a
certificate pursuant to the applicable law of the State of Arizona, to establish
from time to time the number of shares to be included in each such series, and
to fix the designation, powers, preferences and rights of the shares of each
such series and the qualifications, limitations or restrictions thereof,
including, without limitation, any rights of such series with respect to the
election of directors.
5. Number of Directors. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of Directors
consisting of not less than one director nor more than nine directors, the exact
number of directors to be determined from time to time by resolution adopted by
the Board of Directors.
5.1 Classification and Terms of Directors. In the event the size
of the Board of Directors is fixed at six to eight directors, the directors
shall be divided into two classes designated Class I and Class II. In the event
the size of the Board of Directors is fixed at nine directors, the directors
shall be divided into three classes, designated Class I, Class II and Class III.
Each class shall consist of at least three directors, and, as nearly as may be
possible, of one-half of the total number of directors constituting the entire
Board of Directors in the case of six to eight directors, and one-third of the
total number of directors constituting the entire Board of Directors in the case
of nine directors. The Board of Directors shall have discretion to assign
individual directors among the classes so created, taking into account such
factors as it deems relevant. The term of office of Class I directors shall
expire at the first annual shareholders' meeting following their election, the
term of office of the Class II directors shall expire at the second annual
shareholders' meeting following their election, and the term of office of the
Class III directors shall expire at the third annual shareholders' meeting
following their election. At each annual meeting of shareholders at which the
term of a class of directors expires, successors to the class of directors whose
term expires at that annual meeting shall be elected for a two-year term if
there are two classes of directors, and for a three-year term if there are three
classes of directors. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes by the Board of Directors so as
to maintain the number of directors in each class as nearly equal as possible,
and in any event the size of each class shall be at least three directors. In
the event there are three classes of directors and the number of directors is
changed to a number less than nine but greater than six, there shall no longer
be Class III directors and such directors shall be apportioned among Class I and
Class II by the Board of Directors. In the event there are two classes of
directors and the number of directors is changed to a number of directors less
than six, there shall be no classification or staggered terms of directors. Any
additional director of any class elected to fill a vacancy resulting from an
increase in such class shall
A-1
<PAGE>
hold office for a term that shall coincide with the remaining terms of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director. A director shall hold office until the annual
meeting for the year in which his term expires and until his successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office. Any vacancy on the Board of
Directors that results from an increase in the number of directors may be filled
by a majority of the whole Board of Directors, and any other vacancy may be
filled by a majority of the directors then in office, even if less than a
quorum, or by a sole remaining director. In the event of a vacancy in any class,
such vacancy shall be filled prior to the next meeting of directors. If the
vacancy is not so filled, the Board of Directors shall reapportion the classes
as described elsewhere in this paragraph 5.1.
5.2 Preferred Stock Directors. Notwithstanding the foregoing,
whenever the holders of any one or more classes or series of Preferred Stock
issued by the Corporation shall have the right, voting separately by class or
series, to elect directors at an annual or special meeting of the shareholders,
the election, term of office, filling of vacancies, nomination, terms of removal
and other features of such directorships shall be governed by the terms of these
Articles of Incorporation or the resolution or resolutions adopted by the Board
of Directors pursuant to Article 4 applicable thereto, and such directors so
elected shall not be divided into classes pursuant to this Article 5 unless
expressly provided by such terms.
6. Removal of Directors. Subject to the rights, if any, of the
holders of shares of Preferred Stock then outstanding, any or all of the
directors of the Corporation may be removed from office at any time, but only
for cause and only by the affirmative vote of the holders of a majority of the
outstanding shares of the Corporation then entitled to vote generally in the
election of directors, considered for purposes of this Article 6 as one class.
If less than the entire Board is to be removed, a director shall not be removed
if the number of votes sufficient to elect the director under cumulative voting
is voted against the director's removal.
7. Special Meetings. Special meetings of the shareholders of the
Corporation for any purpose or purposes may be called at any time only by the
Chairman of the Board, the Chief Executive Officer or the Board of Directors
pursuant to a resolution approved by a majority of the whole Board of Directors,
or at the request in writing of shareholders owning 50% or more in amount of the
capital stock issued and outstanding and entitled to vote. Special meetings of
the shareholders may not be called by any other person or persons. Business
transacted at any special meeting of the shareholders shall be limited to the
purposes stated in the notice of such meeting.
8. Known Place of Business. The known place of business of the
Corporation is 2929 East Camelback Road, Suite 220, Phoenix, Arizona 85016.
9. Incorporators. The incorporators of the Corporation were Harvey
A. Belfer and Sandy Belfer. The address for both was 3833 North 60th Place,
Scottsdale, Arizona 85251. All powers, duties and responsibilities of the
incorporators ceased at the time of delivery of the original Articles of
Incorporation to the Arizona Corporation Commission for filing.
10. Director Liability. A director of the Corporation shall not be
personally liable to the Corporation or its shareholders for monetary damages
for any action taken or any failure to take any action as a director, except for
liability (i) for the amount of a financial benefit received by a director to
which the director is not entitled (ii) for an intentional infliction of harm on
the Corporation or the shareholders, (iii) for an intentional violation of
criminal law, or (iv) for a violation of Section 10-833 of the Arizona Business
Corporation Act. If the Arizona Business Corporation Act is amended after
approval by the shareholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Arizona Business Corporation Act, as so amended.
Any repeal or modification of the foregoing paragraph by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification. No amendment to the Arizona Revised Statutes that further
limits the acts, omissions or transactions for which elimination or limitation
of liability is permitted shall affect the liability of a director for any act,
omission or transaction which occurs prior to the effective date of such
amendment.
A-2
<PAGE>
PROXY
EMPLOYEE SOLUTIONS, INC.
2929 EAST CAMELBACK ROAD, SUITE 220
PHOENIX, ARIZONA 85016
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Marvin D. Brody and Roy A.
Flegenheimer, and each or either of them, as Proxies, each with the power to
appoint his substitute, and hereby authorizes each or either of them to
represent and to vote, as designated below, all the shares of Common Stock of
Employee Solutions, Inc. held of record by the undersigned on May 10, 1996, at
the Annual Meeting of Shareholders to be held on June 26, 1996 or any
adjournment thereof.
1. ELECTION OF DIRECTORS
The Board of Directors unanimously recommends that the shareholders vote FOR
election of the nominees listed below.
|_| FOR the nominees listed below (except as marked to the contrary below)
|_| WITHHOLD AUTHORITY to vote for the nominees listed below
Marvin D. Brody, Harvey A. Belfer, Edward L. Cain, Jr., Robert L. Mueller,
Jeffery A. Colby
INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name on the following line.
----------------------------------------------------------------------------
This proxy also grants to the proxy holders the discretionary power to vote
the proxy for a substitute nominee in the event any nominee becomes
unavailable, to vote the shares represented cumulatively for one or more,
but less than all, of the nominees named above if additional persons are
nominated for election as directors, and to vote such shares cumulatively
for one or more of the nominees named above other than those (if any) for
whom authority to vote is withheld.
2. PROPOSAL TO APPROVE AN AMENDMENT OF THE COMPANY'S 1995 STOCK OPTION PLAN TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK AVAILABLE FOR GRANT THEREUNDER
BY 750,000 SHARES.
The Board of Directors unanimously recommends that the shareholders vote FOR
approval of this proposal.
|_| FOR |_| AGAINST |_| ABSTAIN
----------------- ----------------
3. PROPOSAL TO AMEND THE FORMULA GRANT PROVISION OF THE COMPANY'S 1995 STOCK
OPTION PLAN AS APPLICABLE TO NONEMPLOYEE DIRECTORS.
The Board of Directors unanimously recommends that the shareholders vote FOR
approval of this proposal.
|_| FOR |_| AGAINST |_| ABSTAIN
----------------- ----------------
4. PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION OF THE COMPANY (THE
"ARTICLES") TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK FROM
20,000,000 SHARES TO 75,000,000 SHARES.
The Board of Directors unanimously recommends that the shareholders vote FOR
approval of this proposal.
|_| FOR |_| AGAINST |_| ABSTAIN
----------------- ----------------
<PAGE>
5. PROPOSAL TO AMEND THE ARTICLES TO INCREASE THE MAXIMUM NUMBER OF MEMBERS OF
THE BOARD OF DIRECTORS FROM SEVEN TO NINE DIRECTORS, THE EXACT NUMBER OF
DIRECTORS TO BE DETERMINED FROM TIME TO TIME BY RESOLUTION ADOPTED BY THE
BOARD OF DIRECTORS.
The Board of Directors unanimously recommends that the shareholders vote FOR
approval of this proposal.
|_| FOR |_| AGAINST |_| ABSTAIN
----------------- ----------------
6. PROPOSAL TO AMEND THE ARTICLES TO PROVIDE FOR THE DIVISION OF THE BOARD OF
DIRECTORS OF THE COMPANY INTO CLASSES OF DIRECTORS WITH STAGGERED TERMS.
The Board of Directors unanimously recommends that the shareholders vote FOR
approval of this proposal.
|_| FOR |_| AGAINST |_| ABSTAIN
----------------- ----------------
7. PROPOSAL TO AMEND THE ARTICLES TO PROVIDE FOR REMOVAL OF DIRECTORS ONLY FOR
CAUSE.
The Board of Directors unanimously recommends that the shareholders vote FOR
approval of this proposal.
|_| FOR |_| AGAINST |_| ABSTAIN
----------------- ----------------
8. PROPOSAL TO AMEND THE ARTICLES TO ADD A PROVISION CONCERNING CALLING SPECIAL
MEETINGS OF SHAREHOLDERS TO ALLOW FOR SPECIAL MEETINGS TO BE CALLED BY THE
CHAIRMAN OF THE BOARD, THE CHIEF EXECUTIVE OFFICER OR THE BOARD OF
DIRECTORS, OR SHAREHOLDERS OWNING 50% OR MORE OF THE COMPANY'S ISSUED AND
OUTSTANDING CAPITAL STOCK.
The Board of Directors unanimously recommends that the shareholders vote FOR
approval of this proposal.
|_| FOR |_| AGAINST |_| ABSTAIN
9. PROPOSAL TO AMEND THE ARTICLES IN CERTAIN OTHER RESPECTS DESCRIBED IN THE
PROXY STATEMENT PRIMARILY TO CONFORM THE ARTICLES TO CURRENT ARIZONA LAW AND
TO DELETE OBSOLETE OR SUPERFLUOUS PROVISIONS.
The Board of Directors unanimously recommends that the shareholders vote FOR
approval of this proposal.
|_| FOR |_| AGAINST |_| ABSTAIN
----------------- ----------------
10. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
----------------- ----------------
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE
NOMINEES AND FOR PROPOSALS 2 THROUGH 9.
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<PAGE>
Please sign exactly as name appears
below. When shares are held by more
than one owner, all should sign.
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If
a corporation, please sign in full
corporate name by president or
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
Dated:_______________ , 1996
(Be sure to date this Proxy)
__________________________________
Signature
__________________________________
Signature
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