PROSPECTUS
723,724 Shares
EMPLOYEE SOLUTIONS, INC.
Common Stock
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The 723,724 shares of no par value common stock ("Common
Stock") of Employee Solutions, Inc., an Arizona corporation (the "Company"),
covered by this Prospectus are being offered by certain selling shareholders
(the "Selling Shareholders"). See "Selling Shareholders." The Company will not
directly receive any part of the proceeds from the sale of Common Stock by the
Selling Shareholders; however, see "Certain Relationships with Selling
Shareholders."
The Selling Shareholders may sell the Common Stock from time to
time directly or indirectly through designated agents in open market
transactions, including block trades, on the Nasdaq National Market ("Nasdaq
National Market"), in negotiated transactions or in any combination of such
methods of sale or through dealers or underwriters also to be designated or by
pledgees or donees of the Common Stock also to be designated, on terms to be
determined at the time of sale. To the extent required, the Common Stock to be
sold, the names of the Selling Shareholders, purchase price, offering price, the
name of any agent, dealer, underwriter, pledgee or donee and any applicable
commission or discount with respect to a particular offer or sale will be set
forth in an accompanying prospectus supplement. The aggregate proceeds to the
Selling Shareholders from sales of the Common Stock will be the purchase price
of the Common Stock sold less the aggregate agents' commissions and
underwriters' discounts, if any, and other expenses of issuance and
distribution. All of the registration expenses of this offering will be paid by
the Company. See "Plan of Distribution."
The Selling Shareholders and any broker-dealers, agents or
underwriters that participate with the Selling Shareholders in the distribution
of any of the Common Stock may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933, as amended (the "1933 Act"), and any commission
received by them and any profit on the resale of the Common Stock purchased by
them may be deemed to be underwriting commissions or discounts under the 1933
Act. See "Plan of Distribution" for indemnification arrangements.
The Common Stock is listed on the Nasdaq National Market. On
July 29, 1996, the last sale price of the Common Stock as reported on the Nasdaq
National Market was $17.125 per share, which price gives effect to the
two-for-one split of the Common Stock effective July 26, 1996. Other information
herein concerning the Common Stock does not give effect to that split.
PURCHASE OF THE COMMON STOCK IS SPECULATIVE, INVOLVES A HIGH
DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS
OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" ON PAGES 4 THROUGH 8.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is July 30, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange
Commission (the "Commission"), Washington, D.C., a Registration Statement on
Form S-3 (the "Registration Statement") under the 1933 Act with respect to the
securities offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement, certain items of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the securities offered by this
Prospectus, reference is made to such Registration Statement and the exhibits
thereto. Statements contained in this Prospectus as to the contents of any
contract or other documents are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement for a full statement of the provisions
thereof; each such statement contained herein is qualified in its entirety by
such reference.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "1934 Act") and, in accordance therewith,
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
public reference facilities of the Commission at 450 Fifth Street N.W.,
Washington, D.C. 20549; Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661; 7 World Trade Center, New York, New York 10048; and
5757 Wilshire Boulevard, Los Angeles, California 90036. Copies of such material
can be obtained from the Public Reference Section of the Commission at 450 Fifth
Street N.W., Washington, D.C. 20549 at prescribed rates. Additionally, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission, and the address of the Commission's site is
http//www.sec.gov.
The Company furnishes annual reports to its shareholders which
include audited financial statements.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed with the
Commission are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K, and the
Amendments No. 1 and No. 2 thereto on Form 10-K/A, for
the fiscal year ended December 31, 1995;
(2) The Company's Quarterly Report on Form 10-Q for the
fiscal period ended March 31, 1996;
(3) Proxy Statement for the Annual Meeting of Shareholders of
the Company on June 26, 1996;
(4) The Company's Report on Form 8-K dated February 8, 1996;
and
(5) Description of the Common Stock contained in the
Company's Registration Statement on Form 8-A dated
October 7, 1993.
All documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the 1934 Act subsequent to the date of this Prospectus and
prior to the termination of the offering made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of the filing of such documents. Any statement contained in this
Prospectus, in a supplement to this Prospectus or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed supplement
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to this Prospectus or in any document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each
person to whom a copy of this Prospectus has been delivered, on the written or
oral request of any such person, a copy of any or all of the documents referred
to above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents unless such exhibits are specifically
incorporated by reference in such documents. Written or oral requests for such
copies should be directed to Roy A. Flegenheimer, Chief Operating Officer,
Employee Solutions, Inc., 2929 East Camelback Road, Suite 220, Phoenix, Arizona
85016, telephone (602) 955-5556.
All share and per share information herein has been adjusted to
reflect a two-for-one stock split effected in the form of a 100% stock dividend
effective January 16, 1996. An additional two-for-one split to be effected in
the form of a 100% stock dividend has been announced and is scheduled to become
effective on July 26, 1996; the information set forth herein has not been
adjusted therefor.
THE COMPANY
Employee Solutions, Inc. (together with its subsidiaries, the
"Company") is engaged in the business of employee leasing wherein the Company
and the Company's "client company" agree that the Company will become the
"employer of record" for the client company's employees. As the employer of
record, the Company assumes designated payroll and personnel obligations, such
as payroll preparation, payment of payroll taxes, preparation and filing of
payroll tax reports and maintenance of employee health insurance and related
plans, including group term life insurance programs, pension plans, 401(k)
plans, accidental death and dismemberment insurance and risk management/workers'
compensation, while allowing the client in most cases to retain management
control of the employees, including supervision, hiring and firing, job
description and salary determinations. In 1995, the Company commenced providing
risk management/workers' compensation services to clients which are not
employee-leasing clients of the Company.
The Company was incorporated in Arizona on March 19, 1991.
As of June 1, 1996, the Company leased approximately 15,800
employees to approximately 1,000 clients located in approximately 40 states. As
of June 1, 1996, the Company also provided risk management/workers' compensation
services to approximately 15,000 additional workers who are not leased employees
of the Company.
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in the Risk Factors and Recent
Developments section of this Prospectus which are not historical facts are
forward-looking statements subject to risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements, including delay or inability to conclude acquisition transactions,
introductions of competing services, cancellations of contracts, changes in
applicable regulations, general market acceptance of the Company's employee
leasing services, fluctuations in margins, customers' reorganizations and demand
fluctuations. Readers of this Prospectus are also urged to review carefully and
consider the various disclosures made by the Company which attempt to advise
interested parties of the factors which affect the Company's business in the
Company's periodic reports on Forms 10-K, 10-Q and 8-K filed with the
Commission.
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RISK FACTORS
In evaluating an investment in the Company, prospective
investors should consider carefully the following factors in addition to the
other information presented in, and incorporated by reference into, this
Prospectus.
Management of Rapid Growth. The Company's success will, in
part, be dependent upon its ability to manage growth effectively. Since its
formation, the Company has experienced rapid growth, which potentially places
strains on the Company's management and personnel resources and systems. As part
of its business strategy, the Company intends to pursue the continuation of this
growth through means such as further development of its sales and marketing
capabilities and acquisitions. The Company is unable to predict whether or when
any prospective acquisition candidate will become available or the likelihood
that any acquisition will be completed. The Company competes for acquisition and
expansion opportunities with many entities which may have substantially greater
resources. There can be no assurance that the Company will be able to identify
suitable acquisition candidates, complete acquisitions, integrate acquired
businesses into its operations, or expand into new markets. Once integrated,
acquisitions may not achieve comparable levels of revenues, profitability or
productivity as the existing businesses of the Company or otherwise perform as
expected.
A substantial portion of the Company's historical and
anticipated growth is attributable to its risk management/workers' compensation
insurance services program. The potential risks associated with rapid growth in
this area include lack of experience relating to new geographic markets and
industries served, lack of experienced and trained personnel, and the need to
upgrade operating systems.
While management believes that significant growth can be
achieved in the future, no assurance can be made that historical growth rates
are sustainable. The Company recently established sales programs including a
joint venture with a national insurance wholesaler targeted at potential clients
through which it would provide risk management/workers' compensation services to
non-leased employees, though there can be no assurance as to the rate at which
such clients will be added. The growth of the program currently is substantially
dependent upon the efforts of the wholesaler, and the prospects for the program
will be materially adversely affected if the wholesaler's participation is
ineffective or withdrawn. Part of the Company's strategy is to convert new risk
management/workers' compensation services clients into employee leasing clients
when appropriate. No assurance can be made as to the potential success of this
strategy.
Dependence on Reliance. The Company believes that its risk
management/workers' compensation services program has been and will continue to
be the key competitive factor in its growth and profitability. Effective June 1,
1995, the Company's risk management/workers' compensation services program is
being conducted in coordination with Reliance National Risk Specialists
("RNRS"), a division of Reliance Insurance Company. The Company and RNRS are
currently involved in the process of finalizing certain remaining terms of the
program. While the Company does not anticipate that it will be materially
adversely affected by the outcome of the negotiations with respect to these
points, there can be no assurance that this will be the case. The Company would
be materially adversely affected by a termination of its arrangements with
Reliance or by a failure to finalize the current negotiations successfully, or
by a failure to accomplish a renewal of its relationship with Reliance on
satisfactory terms upon expiration of the current program.
Adequacy of Loss Reserves. Under its workers' compensation
arrangements with Reliance, the Company is responsible for the first $250,000 of
each workers' compensation claim with no aggregate to limit the Company's
liability. Under its health insurance arrangements with Nationwide Life
Insurance Company and John Alden Life Insurance Company, the Company is
responsible for the first $100,000 and $75,000 per covered individual per year,
respectively. The Company's aggregate liability limit (applicable to its health
insurance arrangements but not its workers compensation arrangements) is based
upon a formula tied to anticipated claims.
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The reserves for losses and loss adjustment expenses established by the Company
with respect to its workers' compensation and health insurance programs are
estimates of amounts needed to pay reported and unreported claims and related
loss adjustment expenses based on facts and circumstances then known, including
industry data and historical experience. However, the establishment of
appropriate reserves is an inherently uncertain process, and there can be no
assurance that the Company's ultimate liability will not materially exceed its
loss and loss adjustment expense reserves. This uncertainty is compounded in the
Company's case by its rapid growth and limited experience. If the Company's
reserves should be inadequate, the Company will be required to increase reserves
or corresponding loss payments with a corresponding reduction in the Company's
net income in the period in which the deficiency is identified. Losses in any
particular period may be severe.
Fluctuations in Quarterly Operating Results. The Company's
revenues have generally increased on a quarter to quarter basis, though there
can be no assurance this trend can be maintained. Leasing revenues in the fourth
quarter of each year include the effects of bonus payrolls of leased employees,
which are higher in December of each year. Gross profit margin relating to
leasing revenues generally improves from quarter to quarter within a year, with
the first quarter generally the least favorable and the fourth quarter the most
favorable. Employment related taxes are based on the cumulative earnings of
individual employees up to a specified wage level. Therefore, these expenses
tend to decline over the course of the year. Since the Company's revenues for an
individual client are generally earned and collected at a relatively constant
rate throughout each year, payment of such unemployment tax obligations has an
impact on the Company's working capital and results of operations during the
first three months of each year. Other factors affecting the primary components
of direct cost have enhanced or mitigated this tendency. Examples of these
factors include the effects of trends in medical and workers' compensation
claims, adjustments to benefit plans, and other factors. See "Adequacy of Loss
Reserves," above.
The Company's gross profit margin percentage is also materially
affected by the mix of revenues attributable to employee leasing clients and
clients to which the Company provides risk management/workers' compensation
services, and the mix of such business is subject to variation from quarter to
quarter. Gross profit margin percentage on revenues derived from risk
management/workers' compensation services provided to non- leased employees
tends to be significantly higher than gross profit margin percentage on revenues
derived from the Company's employee-leasing clients because the gross profit
margin percentage calculation with respect to employee leasing clients includes
significant (and substantially offsetting) revenue and expense items relating to
payroll and payroll-related costs associated with the leased employees.
Quarterly results are also subject to fluctuation depending upon such factors as
the timing of acquisitions, new contracts and contract terminations. The Company
conducts a limited credit investigation as determined on a case-by-case basis
prior to accepting most new clients and may encounter collection problems which
would adversely affect its cash flow and results.
Government Regulation. The Company is regulated by numerous
federal laws relating to labor, tax and employment matters. Generally, these
laws prohibit race, age, sex, disability and religious discrimination, mandate
safety regulations in the workplace, set minimum wage rates and regulate
employee benefits. Because many of these laws were enacted prior to the
development of non-traditional employment relationships, such as employee
leasing services, many of these laws do not specifically address the obligations
and responsibilities of non-traditional employers. As a result, interpretive
issues concerning the definition of the term "employer" in various federal laws
have arisen pertaining to the employment relationship. Unfavorable resolution of
these issues could have a material adverse effect on the Company's results of
operations or financial condition. Compliance with these laws and regulations is
time consuming and expensive. The Company's standard form of agreement provides
that the client company is responsible for compliance with employment and
employment-related laws and regulations, and that the parties are obligated to
indemnify each other against breaches of the agreement. However, some legal
uncertainty exists with respect to the potential scope of the Company's
liability in the event of violations by its clients of employment,
discrimination and other laws.
The IRS has formed a Market Segment Study Group to examine
whether professional employment organizations, including employee-leasing firms
such as the Company, are the employers of leased employees under
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the Code provisions applicable to employee benefit plans and consequently are
able to offer to leased employees benefit plans that qualify for favorable tax
treatment. The Market Segment Study Group is also examining whether client
company owners are employees of professional employment organizations under Code
provisions applicable to employee benefit plans. The loss of tax-qualified
status for 401(k) or various other benefit plans maintained by the Company could
materially adversely affect the Company.
The Company is subject to regulation by local and state
agencies pertaining to a wide variety of labor related laws. As is the case with
federal regulations discussed above, many of these regulations were developed
prior to the emergence of the employee leasing industry and do not specifically
address non-traditional employers. While many states do not explicitly regulate
employee leasing companies, 15 states have passed laws that have licensing or
registration requirements and at least four states are considering such
regulation. Such laws vary from state to state but generally provide for
monitoring the fiscal responsibility of employee-leasing firms. There can be no
assurance that the Company will be able to satisfy licensing requirements or
other applicable regulations of any particular state from time to time.
Government Regulation Relating to Workers' Compensation
Program. Camelback Insurance, Ltd. ("Camelback"), a captive offshore insurance
company formed by the Company and chartered in Bermuda, is subject to the
insurance laws and regulations of Bermuda, which generally are designed to
protect the interests of policyholders, as opposed to the interests of
shareholders. Such laws and regulations, among other things, relate to capital
and surplus levels, levels of dividends payable by subsidiaries to their parent
companies, financial disclosure, reserve requirements, investment parameters and
premium rates. In general, the regulatory authorities in Bermuda have broad
administrative authority over Bermuda-domiciled insurers. Among other
requirements and limitations, Bermuda law requires that Camelback must maintain
statutory capital and surplus in an amount equal to at least 20% of the net
premiums written through the Company's fronting arrangements, provided that the
percentage requirement is reduced to 10% at such time as premium volume reaches
at least $6 million. The Company is subject to additional requirements pursuant
to its arrangements with Reliance. Bermuda also places certain limitations upon
the transfer of statutory capital and surplus from Camelback to its parent
company (whether via dividend or otherwise), and regulates the circumstances
under which Camelback is permitted to loan funds to its parent company.
The Company's risk management/workers' compensation services
program is conducted via "fronting" arrangements with RNRS. The National
Association of Insurance Commissioners ("NAIC") recently adopted a model act
concerning "fronting" arrangements. No determination can be made as to whether,
or in what form, such act may ultimately be adopted by any state. The model act
requires reporting and prior approval of reinsurance transactions relating to
these arrangements, and limits the amount of premiums that can be written under
certain circumstances. At this stage, the Company is unable to predict whether
the model act will affect its relationships with Reliance.
State regulation requires licensing of any individual or entity
soliciting the sale of workers' compensation insurance within that state.
Licenses may be residential or non-residential and for both individuals and
entities. The Company formed ESI Risk Management Agency ("RMA") in 1995 to
address state regulation and licensing issues and act as the Company's sales and
marketing arm for stand-alone risk management/workers' compensation services.
Although RMA is not required to be licensed in any state since it is not
directly soliciting the sale of workers' compensation insurance, RMA has
voluntarily undertaken to become licensed in all 50 states and the District of
Columbia. Currently, RMA is applying for and has received some state licenses.
Health Care Reform Proposals. Various proposals for national
health care reform have been under discussion in recent years, including
proposals to extend mandatory health insurance benefits to virtually all classes
of employees. Certain reform proposals have called for the inclusion of workers'
compensation coverage in the reform package. While the Company is unable to
predict whether or in what form health care reform will
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be enacted, aspects of such reform, if enacted, may have an adverse effect upon
the Company's medical and workers' compensation insurance programs.
Legal Uncertainties. There are many legal uncertainties about
employee leasing, such as the extent of the leasing company's liability for
violations of employment and discrimination laws. The Company may be subject to
liability for violations of these or other laws even if it does not participate
in such violations. The Company's form of client service agreement establishes
the contractual division of responsibilities between the Company and its clients
for various personnel management matters, including compliance with and
liability under various governmental regulations. However, because the Company
acts as a co-employer, the Company may be subject to liability for violations of
these or other laws despite these contractual provisions and even if it does not
participate in such violations. Although the client generally is required to
indemnify the Company for any liability attributable to the conduct of the
client, the Company may not be able to collect on such a contractual
indemnification claim and thus may be responsible for satisfying such
liabilities. In addition, employees of the client may be deemed to be agents of
the Company, subjecting the Company to liability for the actions of such
employees.
Economic Uncertainties. State unemployment taxes and workers'
compensation expense are, in part, determined by the Company's claims
experience. Inflationary pressures on health care costs have been significant in
the last several years. Claims experience also greatly impacts the Company's
health insurance rates and claims cost from year to year. Should the Company
experience a large increase in claims activity for unemployment, workers'
compensation and/or health care, then costs in these areas would increase.
Increased claims under partially self-insured and large deductible plans would
immediately impact negatively on the Company's earnings, while such increases in
fully-insured plans would raise the cost of such insurance at renewal. The
Company would then have to determine how much of such increases to pass on to
subscribers and leased employees. The Company may then have difficulty competing
with the leasing companies that offer lower rates to clients. The Company has
obtained accidental death and dismemberment insurance in an amount up to
$250,000 per claim to limit its exposure to certain categories of serious
claims.
The Company has received a letter from The Arizona Department
of Economic Security indicating that the Company has been assigned a higher
state unemployment tax rate for the year ended December 31, 1994 than the
Company believes it is entitled to. In consultation with legal counsel the
Company believes that based on Arizona Revised Statutes it is entitled to the
lower rate. The Company recorded expenses in 1994 based on the lower rate. If it
were ultimately determined that the higher rate applies, the Company would owe
approximately $500,000 (before interest and the income tax effect) more than is
reflected in the Company's March 31, 1996 and December 31, 1995 financial
statements. As of March 31, 1996, the compounded interest on such amount totaled
approximately $95,000. The Company would be required to record these amounts as
an additional expense and liability if, at any time in the future, it became
apparent that it was probable that the Company would not prevail in this matter.
Inflation. Fees charged to the Company's clients under the
Company's workers' compensation insurance program and partially self-insured
medical insurance program are established before the amounts of losses and loss
adjustment expenses, or the extent to which inflation may affect such amounts,
are known. While the Company attempts to anticipate the potential impact of
inflation in establishing its fees and reserves, actual inflation may be greater
than anticipated.
Dependence Upon Certain Officers and Directors. The Company is
highly dependent upon the services of Marvin D. Brody, its Chief Executive
Officer; Roy A. Flegenheimer, its Chief Operating Officer; Edward L. Cain Jr.,
its Vice President of Sales; Morris C. Aaron, its Chief Financial Officer; and
Ward Phelan, its Vice President of Risk Management. The loss of services of any
of these individuals would have a material adverse effect upon the Company. The
Company has employment agreements with Messrs. Flegenheimer and Cain.
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No Cash Dividends. The Company has not paid any cash dividends
on its Common Stock and does not intend to pay any cash dividends in the
foreseeable future.
Possible Volatility of Securities Prices. The market price of
the Company's securities may be highly volatile. Factors such as the Company's
operating results or other announcements by the Company or its competitors may
have a significant effect on the market price of the Company's securities. In
addition, market prices for securities of many companies have experienced wide
fluctuations in response to variations in quarterly operating results and
general economic indicators and conditions, as well as other factors beyond the
control of the Company.
Dilution from Acquisitions. The Company's business strategy
includes expanding its business through acquisitions under appropriate
circumstances. In this regard, the Company may issue shares of Common Stock as
payment for the entities it may acquire. Although the Company does not intend to
complete acquisitions that would have a negative impact on earnings, there can
be no assurance that future acquisitions by the Company will not have a dilutive
effect on the interests of the Company's shareholders.
Control by Existing Shareholders. Certain officers and
directors of the Company beneficially own nearly 20% of the outstanding shares
of Common Stock as of the date hereof. Because of such share ownership, these
shareholders will continue to be able to influence the election of members of
the Company's Board of Directors and to determine corporate actions.
Shares Eligible for Future Sale; Warrants and Options;
Potential for Adverse Effect on Stock Price; Registration Rights. As of the date
hereof, 15,252,877 shares of Common Stock are outstanding, substantially all of
which may either be freely sold, sold under registration statements relating to
secondary sales or sold as "restricted securities" under Rule 144 promulgated
under the Securities Act. In general, Rule 144 allows a person who has owned
restricted shares of Common Stock beneficially for at least two years, to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares of the same class or, if
the Common Stock is quoted on certain stock exchanges and other markets,
including the Nasdaq National Market, the average weekly trading volume during
the four calendar weeks preceding the sale. A person who has not been an
affiliate of the Company for at least the three months immediately preceding the
sale and who has beneficially owned shares of Common Stock for at least three
years is entitled to sell such shares under Rule 144 without regard to any of
the limitations described above. Under the Company's employee stock option
plans, the Company has issued options to purchase Common Stock at prices which
are below current market and may issue options to purchase additional shares of
Common Stock in the future. The likelihood that substantial amounts of Common
Stock may be sold below the then-current market price may adversely affect the
market prices of the Common Stock and could impair the Company's ability to
raise capital through the sale of its equity securities.
Authorization of Preferred Stock; Convertible Preferred Stock.
The Company's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of Preferred Stock with such rights and preferences as may be
determined from time to time by the Board of Directors. No shares of Preferred
Stock are currently outstanding. Accordingly, under the Articles of
Incorporation, the Board of Directors may, without shareholder approval, issue
Preferred Stock with dividend, liquidation, conversion, voting, redemption or
other rights which could adversely affect the voting power or other rights of
the holders of the Company's Common Stock. The issuance of any shares of
Preferred Stock having rights superior to those of the Company's Common Stock
may result in a decrease of the value or market price of the Common Stock and
could further be used by the Board as a device to prevent a change in control of
the Company. Holders of the Preferred Stock may have the right to receive
dividends, certain preferences in liquidation and conversion rights.
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USE OF PROCEEDS
The shares of Common Stock being offered hereby are being sold
by the Selling Shareholders, and the Company will not directly receive any part
of the proceeds from the sale of Common Stock by the Selling Shareholders;
however, see "Certain Relationships with Selling Shareholders."
SELLING SHAREHOLDERS
This Prospectus covers offers and sales from time to time of
Common Stock owned by the Selling Shareholders. The table below sets forth
information furnished to the Company as of July 10, 1996 with respect to the
name of each Selling Shareholder, the number of shares of Common Stock owned of
record and beneficially by each Selling Shareholder as of the date of this
Prospectus, the number of shares of Common Stock being offered by each Selling
Shareholder pursuant to this Prospectus, and the number of shares of Common
Stock and percentage of the class of Common Stock to be owned by each Selling
Shareholder upon completion of the offering, if all shares are sold.
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned After
the Offering
Common Stock Common Stock
Beneficially Owned Prior Being Offered
Selling Shareholder to the Offering Hereby Number Percentage(1)
- ---------------------------- ----------------------------- ------------------ ------------- ----------------
<S> <C> <C> <C> <C>
Wayne Wickard 401,724 399,724 2,000 *
Edward L. Cain, Jr. 329,500 324,000 5,500 *
Total shares being
offered: 723,724
=======
</TABLE>
- ---------------------------
* Less than 1% of the outstanding Common Stock.
(1) Unless otherwise indicated, the Selling Shareholders have sole voting and
sole investment control, except to the extent that authority is shared by
spouses under applicable law, with respect to all shares beneficially owned.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to shares.
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CERTAIN RELATIONSHIPS WITH SELLING SHAREHOLDERS
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. 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.
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. Cain 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, if no registration statement is filed during such
period, 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 has signed 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.
Effective January 1, 1995, the Company acquired Employment
Services of Michigan, Inc. (subsequently renamed Employee Solutions - Midwest,
Inc. ("ESM")), of which Wayne Wickard was a principal. Employment Services of
Michigan, Inc. was a dormant company that was previously in the employee leasing
business. Pursuant to the purchase agreement as amended, the purchase price was
$1.6 million paid in the form of 399,724 shares of the Company's Common Stock as
defined in the purchase agreement. Wayne Wickard received piggyback registration
rights with respect to such shares from July 1, 1996 through December 31, 1996
and, if no registration statement is filed during such period, one demand
registration right exercisable during 1997. Pursuant to the amended purchase
agreement (and in consideration of the purchase price payable thereunder (as
described above)), the Company also acquired Pokagon Office Services, Inc.
("Pokagon") effective January 1, 1996. Pokagon is an employee leasing company
focusing on the transportation industry, with clients located principally in
Ohio. Mr. Wickard serves as President of ESM.
ESM has entered into a management agreement with Phoenix
Capital Management, Inc. ("PCM"), a corporation owned by Mr. Wickard, whereby
PCM handles administrative services, benefits and payroll processing for all ESM
employees for a fee generally equal to a per check charge plus 25% of ESM's
pre-tax profits (as defined), less certain tax payments. PCM received payments
of $577,804 pursuant to this arrangement in the year ended December 31, 1995.
In connection with providing management services to ESM, PCM is
involved in credit decisions with regard to ESM clients. In this regard, PCM has
agreed to reimburse ESM under certain circumstances should collectability issues
arise with regard to designated ESM receivables. Pursuant to this arrangement,
PCM has agreed to reimburse ESM in the amount of approximately $668,330 in
connection with a receivable due from a former ESM client which recently
commenced bankruptcy proceedings.
In the first quarter of 1996, PCM converted certain accounts
payable to ESM into a promissory note with ESM in the amount of $148,524.
Payments of principal and interest at 8% per annum are due monthly commencing
July 1, 1996. The note is secured by shares of the Company's Common Stock
offered hereby. All amounts under the note are due and payable by February 28,
1997.
In 1995, the Company performed certain risk management services
for two companies which are controlled by Mr. Wickard. The Company billed
$205,000 for such services, which were collected in March 1996.
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PLAN OF DISTRIBUTION
The Common Stock may be sold from time to time by the Selling
Shareholders in open market transactions, including block trades on the Nasdaq
National Market, in negotiated transactions or in any combination of such
methods of sale. Alternatively, the Selling Shareholders may from time to time
offer the Common Stock through underwriters, dealers or agents, who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Shareholders or the purchasers of the Common Stock for whom
they may act as agent. The Common Stock may also be sold by pledgees or donees
of the Common Stock who acquire such shares from the Selling Shareholders
pursuant to such pledge or donation. The Common Stock may be sold at a fixed
offering price, which may be changed, at varying prices determined at the time
of sale or at negotiated prices. The Selling Shareholders and any such
underwriters, dealers, agents, pledgees or donees that participate in the
distribution of the Common Stock may be deemed to be underwriters, and any
profit on the sale of the Common Stock by them and any discounts, commissions or
concessions received by any such underwriters, dealers or agents might be deemed
to be underwriting discounts and commissions under the Securities Act. At the
time a particular offer of the Common Stock is made, to the extent required, a
prospectus supplement will be distributed that will set forth the aggregate
amount of Common Stock being offered and the terms of the offering, including
the name or names of any underwriters, dealers, agents, pledgees or donees and
any discounts, commissions and other items constituting compensation from the
Selling Shareholders and any discounts, commissions or concessions allowed or
reallowed or paid to dealers, including the proposed selling price to
purchasers. The Company will not receive directly any of the proceeds from the
sale by the Selling Shareholders of the Common Stock offered hereby. All of the
registration expenses of the offering will be paid by the Company.
The Company has agreed to indemnify in certain circumstances
the Selling Shareholders and any underwriter, selling brokers, dealer managers
or similar persons who participate in the distribution of the Common Stock, if
any, and certain persons related to the foregoing persons, against certain
liabilities, including liabilities under the Securities Act. The Selling
Shareholders have agreed to indemnify in certain circumstances the Company and
certain persons related to the Company against certain liabilities, including
liabilities under the Securities Act.
In order to comply with certain states' securities laws, if
applicable, the Common Stock will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may not be sold unless it has been registered or qualified for sale
in such state or an exemption from registration or qualification is available
and is complied with.
See also "Certain Relationships with Selling Shareholders" for
information regarding certain restrictions on sales of shares of Common Stock
included in this Prospectus.
RECENT DEVELOPMENTS
Acquisition of Leaseway Personnel Corp. The Company has signed
a definitive purchase agreement to acquire the assets and assume certain
liabilities of Cleveland-based Leaseway Personnel Corporation ("LPC") from
Leaseway Transportation Corp. Closing of the transaction is expected to occur in
August 1996 and is contingent upon finalization of due diligence and financing
arrangements. LPC currently leases approximately 2,000 permanent employees and
300 temporary employees to its client base consisting primarily of private
carriage fleets, select common carriers, and contract carriers. LPC provides
permanent and temporary truck drivers, as well as non-driver employees,
including warehouse workers, mechanics, dispatchers, and administrative
personnel. LPC currently serves approximately 180 clients in 41 states. The
acquisition is expected to add approximately $100 million in annualized revenue.
Acquisition of TEAM Services. The Company has acquired TEAM
Services, a Burbank, California-based company specializing in leasing commercial
talent, musicians and recording engineers to the music and advertising segments
of the entertainment industry. With estimated current annualized revenues of
approximately $65 million, TEAM Services provides staff leasing services to
approximately 11,000 leased employees. Prior to the acquisition, ESI had been
providing stand-alone risk management/workers' compensation services for leased
employees of TEAM Services, all of whom have been converted to full staff
leasing through this acquisition. Jeffery Colby, one of ESI's outside directors,
has served as chief executive officer of TEAM Services since 1993, and he will
continue to serve in both roles.
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<PAGE>
Acquisition of Ashlin Transportation Services, Inc. The Company
completed the acquisition of Ashlin Transportation Services, Inc., an
Indiana-based employee leasing company specializing in the transportation
industry, effective June 1, 1996. The acquisition is expected to add annualized
revenue of approximately $48 million.
OTHER INFORMATION
Provisions for indemnification of officers and directors of the
Company are contained in the Company's Articles of Incorporation.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
LEGAL MATTERS
Quarles & Brady, Phoenix, Arizona, counsel for the Company, has
rendered an opinion on the legality of the shares being offered hereby.
EXPERTS
The financial statements of the Company as of and for the year
ended December 31, 1995 included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and the year ended December 31, 1994 included
in the Company's Annual Report on Form 10-KSB/A for the year ended December 31,
1994, which are incorporated by reference in the Registration Statement of which
this Prospectus forms a part, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are incorporated by reference herein in reliance upon the authority
of said firm as experts in giving said reports.
The financial statements of the Company as of and for the year
ended December 31, 1993 included in the Company's Annual Report on Form 10-KSB/A
for the year ended December 31, 1994, which is incorporated by reference in the
Registration Statement of which this Prospectus forms a part, have been audited
by Semple & Cooper, P.L.C. ("Semple & Cooper"), independent public accountants,
as indicated in its report with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving said report. The Company has agreed to indemnify Semple & Cooper for
costs and expenses that Semple & Cooper might incur in successfully defending
itself against litigation resulting from the incorporation by reference of its
report in the Registration Statement of which this Prospectus forms a part. Such
indemnification, however, shall be null and void should Semple & Cooper be found
by a court to be liable for professional malpractice.
12
<PAGE>
No dealer, salesman or other person has been authorized to give
any information or to make any representations other than contained in this
Prospectus in connection with the Offering described herein, and if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell,
or the solicitation of an offer to buy, the securities offered hereby to any
person in any state or other jurisdiction in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale hereunder shall,
under any circumstances, create any implication that there has been no change in
the affairs of the Company since the date hereof.
Page
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Available Information......................................................2
Incorporation of Certain
Documents by Reference...................................................2
The Company................................................................3
Safe Harbor Statement under the
Private Securities Litigation
Reform Act of 1995.......................................................3
Risk Factors...............................................................4
Use of Proceeds............................................................9
Selling Shareholders.......................................................9
Certain Relationships with
Selling Shareholders....................................................10
Plan of Distribution......................................................11
Recent Developments.......................................................11
Other Information ........................................................12
Legal Matters.............................................................12
Experts...................................................................12
723,724 Shares of
Common Stock
EMPLOYEE SOLUTIONS, INC.
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PROSPECTUS
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July 30, 1996
