<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1997
REGISTRATION NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EMPLOYEE SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
ARIZONA 7361 86-0676898
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR (PRIMARY STANDARD INDUSTRIAL IDENTIFICATION
ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
AND ITS GUARANTOR SUBSIDIARIES:
<TABLE>
<S> <C> <C>
INDIANA ERC OF INDIANA, INC. 35-1724861
MINNESOTA ERC OF MINN, INC. 41-1860732
MICHIGAN ERC OF OHIO, INC. 38-2986964
NEVADA ESI AMERICA, INC. 94-3232050
NEVADA ESI-MIDWEST, INC. 86-0826071
ARIZONA ESI RISK MANAGEMENT AGENCY, INC. 86-0806066
INDIANA EMPLOYEE RESOURCES CORPORATION 38-3250667
GEORGIA EMPLOYEE SOLUTIONS-EAST, INC. 58-2118958
MICHIGAN EMPLOYEE SOLUTIONS-MIDWEST, INC. 38-2986965
INDIANA EMPLOYEE SOLUTIONS OF OHIO, INC. 35-1814397
TEXAS EMPLOYEE SOLUTIONS OF TEXAS, INC. 74-2617722
FLORIDA EMPLOYEE SOLUTIONS-SOUTHEAST, INC. 59-2474722
DELAWARE GCK ENTERTAINMENT SERVICES I, INC. 95-4353479
NEVADA LOGISTICS PERSONNEL CORPORATION 86-0802394
INDIANA PHOENIX CAPITAL MANAGEMENT, INC. 35-1814367
DELAWARE TALENT, ENTERTAINMENT AND MEDIA 95-4560704
SERVICES, INC.
(STATE OR OTHER JURISDICTION (EXACT NAME OF GUARANTOR (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) AS SPECIFIED IN ITS CHARTER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
<TABLE>
<S> <C>
PAUL M. GALES, ESQ.
EMPLOYEE SOLUTIONS, INC.
6225 NORTH 24TH STREET 6225 NORTH 24TH STREET
PHOENIX AZ 85016 PHOENIX AZ 85016
(602) 955-5556 (602) 955-5556
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (NAME, ADDRESS, INCLUDING ZIP CODE,
NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S AND TELEPHONE NUMBER INCLUDING AREA
PRINCIPAL EXECUTIVE OFFICES) CODE, OF AGENT FOR SERVICE)
</TABLE>
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT
SHOULD BE SENT TO:
<TABLE>
<S> <C>
KENNETH V. HALLETT, ESQ. WILLIAM R. KUNKEL, ESQ.
QUARLES & BRADY SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
411 EAST WISCONSIN AVENUE 333 WEST WACKER DRIVE
MILWAUKEE WI 53202 CHICAGO IL 60606
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
(Calculation of Registration Fee on Next Page)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED UNIT PRICE REGISTRATION FEE(1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series B 10% Senior Notes $85,000,000
Due 2004........................ principal amount $1,000 $85,000,000 $25,757.58
- --------------------------------------------------------------------------------------------------------------
Guarantees of each of the
Guarantor Subsidiaries.......... (2) (3) (3) None(3)
==============================================================================================================
</TABLE>
(1) Fee based upon 1/33rd of one percent of the aggregate offering amount.
(2) The Series B 10% Senior Notes Due 2004 (the "Exchange Notes") will be
guaranteed by each of the Guarantor Subsidiaries.
(3) No additional consideration will be paid by the recipients of the Exchange
Notes for the Guarantees. Pursuant to Rule 457(n), no separate fee is
payable for the Guarantees.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED OCTOBER 31, 1997
PROSPECTUS
[EMPLOYEE SOLUTIONS, INC.]
[EMPLOYEE SOLUTIONS, INC. LOGO]
OFFER TO EXCHANGE UP TO $85 MILLION IN PRINCIPAL AMOUNT
OF ITS SERIES B 10% SENIOR NOTES DUE 2004,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING $85 MILLION IN PRINCIPAL AMOUNT
OF 10% SENIOR NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME, ON , 199 , UNLESS EXTENDED
The Series B 10% Senior Notes due 2004 are being offered by Employee
Solutions, Inc., an Arizona corporation ("ESI" or the "Company"). ESI hereby
offers to exchange (the "Exchange Offer") up to $85 million in aggregate
principal amount of ESI's new Series B 10% Senior Notes due 2004 (the "Exchange
Notes") for $85 million in aggregate principal amount of ESI's outstanding 10%
Senior Notes due 2004 (the "Original Notes"). The Original Notes and the
Exchange Notes are sometimes referred to herein collectively as the "Notes."
The terms of the Exchange Notes are substantially identical in all respects
(including principal amount, interest rate and maturity) to the terms of the
Original Notes for which they may be exchanged pursuant to this Exchange Offer,
except that the Exchange Notes will be freely transferable by holders thereof
(other than as described herein) and issued free of any covenant restricting
transfer absent registration and will not have the right to earn additional
interest as Liquidated Damages (as defined) in the event of a failure to
register such Exchange Notes. The Exchange Notes will evidence the same debt as
the Original Notes and contain terms which are substantially identical to the
terms of the Original Notes for which they are to be exchanged. For a
description of the terms of the Notes, see "Description of the Notes." There
will be no cash proceeds to the Company from the Exchange Offer.
The Exchange Notes will bear interest from the most recent date to which
interest has been paid on the Original Notes, or if no interest has been paid on
the Original Notes, from October 21, 1997. Holders whose Original Notes are
accepted for exchange will not receive any payment in respect of interest on
such Original Notes otherwise payable on any interest payment date the record
date for which occurs on or after consummation of the Exchange Offer. See "The
Exchange Offer -- Terms of the Exchange Offer."
The Notes mature on October 15, 2004, unless previously redeemed. Interest
on the Notes is payable semiannually on April 15 and October 15, commencing
April 15, 1998. The Notes are redeemable at the option of the Company, in whole
or in part, on or after October 15, 2001, at the redemption prices set forth
herein, plus accrued and unpaid interest and Liquidated Damages on the Original
Notes (as defined), if any, to the redemption date. Upon a Change of Control (as
defined), the Company is required to offer to repurchase all outstanding Notes
at 101% of the principal amount thereof plus accrued and unpaid interest (and,
in the case of Original Notes, Liquidated Damages, if any), to the date of
repurchase.
The Notes are general unsecured obligations of the Company and rank senior
in right of payment to all existing and future Indebtedness (as defined) of the
Company that is subordinated to the Notes and will rank pari passu in right of
payment with all current and future senior indebtedness of the Company. The
Notes are unconditionally guaranteed on a senior basis (the "Guarantees") by
certain of the Company's current and future Subsidiaries (as defined) (the
"Guarantors"). The Guarantees are general unsecured obligations and will rank
senior in right of payment to all existing and future subordinated Indebtedness
of the Guarantors and will rank pari passu in right of payment with all other
existing and future senior Indebtedness of the Guarantors. Under the Amended
Credit Facility (as defined), the Company may borrow on a revolving basis or
draw letters of credit up to $20 million, which will be secured by substantially
all of the assets of the Company and guaranteed by the Guarantors, which
guarantees will be secured by substantially all of the assets of the Guarantors.
Accordingly, the Notes and the Guarantees are effectively subordinated to the
loans outstanding under the Amended Credit Facility and the guarantees of such
loans, respectively, to the extent of the value of the assets securing such
loans and guarantees. As of June 30, 1997, on a pro forma basis after giving
effect to the Offering and the application of the estimated net proceeds
therefrom, the Company had no senior Indebtedness outstanding other than the
Notes. See "Description of Notes."
The Original Notes were sold on October 21, 1997, in a transaction not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
in reliance upon the exemption provided in Section 4(2) of the Securities Act
(the "Offering"). Accordingly, the Original Notes may not be offered, resold or
otherwise pledged, hypothecated or transferred in the United States unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered to satisfy the obligations of the Company under a Registration
Rights Agreement relating to the Original Notes. See "The Exchange
Offer -- Purposes and Effects of the Exchange Offer." Exchange Notes issued
pursuant to the Exchange Offer in exchange for the Original Notes may be offered
for resale, resold or otherwise transferred by the holders thereof (other than
any holder which is an affiliate of the Company within the meaning of Rule 405
under the Securities Act and other than any broker-dealer that receives Exchange
Notes for its own account in exchange for Original Notes that were acquired as a
result of market-making activities or other trading activities) without
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holders' business and such holders are not engaged and do not
intend to engage, and have no arrangement or understanding with any person to
engage, in the distribution of such Exchange Notes. See "The Exchange
Offer -- Purpose and Effect of the Exchange Offer."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DESCRIPTION OF CERTAIN RISKS
RELATING TO ESI AND AN INVESTMENT IN ITS SECURITIES.
------------------------
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 , 1997.
<PAGE> 4
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by so delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Original Notes where
such Original Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company had agreed
that, for a period of up to 180 days after the date hereof (or longer under
certain circumstances), it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The Notes constitute securities for which there is no established trading
market. Any Original Notes not tendered and accepted in the Exchange Offer will
remain outstanding. The Company does not currently intend to list either the
Original Notes or the Exchange Notes on any securities exchange. To the extent
that any Original Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell Original Notes could be adversely affected. No
assurances can be given as to the liquidity of the trading market for either the
Original Notes or the Exchange Notes.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Original Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 P.M., New York time, on , 199 , unless extended (the
"Expiration Date"). The date of acceptance for exchange of the Original Notes
will be the first business day following the Expiration Date. Original Notes
tendered pursuant to the Exchange Offer may be withdrawn at anytime prior to the
Expiration Date, otherwise, such tenders are irrevocable. The Company will pay
all expenses incident to the Exchange Offer.
THE DISTRIBUTION OF THIS PROSPECTUS AND THE EXCHANGE OFFER DESCRIBED HEREIN
MAY BE RESTRICTED BY LAW IN CERTAIN JURISDICTIONS. PERSONS INTO WHOSE POSSESSION
THIS PROSPECTUS COMES MUST INFORM THEMSELVES ABOUT, AND OBSERVE, ANY SUCH
RESTRICTIONS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES TO ANY PERSON IN ANY JURISDICTION WHERE IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION 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 JURISDICTION WHERE, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
i
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Cautionary Statement Regarding Forward-Looking Information............................ ii
Available Information................................................................. ii
Documents Incorporated by Reference................................................... iii
Summary............................................................................... 1
Risk Factors.......................................................................... 9
The Exchange Offer.................................................................... 14
Certain Federal Income Tax Consequences............................................... 22
Use of Proceeds....................................................................... 23
Capitalization........................................................................ 24
Selected Consolidated Financial Information........................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 27
Business.............................................................................. 38
Industry Regulation................................................................... 50
Description of Notes.................................................................. 54
Plan of Distribution.................................................................. 75
Legal Matters......................................................................... 76
Experts............................................................................... 76
Index to Financial Statements......................................................... F-1
</TABLE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus which are not historical facts
(including statements in the future tense and statements using terms such as
"believe," "expect," "anticipate" and similar terms) 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 professional employer
organization services and other services, fluctuations in margins, customers'
reorganizations, demand fluctuations, and other factors. The other factors
include those set forth in connection with the forward-looking statements or
otherwise set forth herein, particularly in "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Readers of this Prospectus are also urged to review carefully and
consider the various disclosures herein which attempt to advise interested
parties of the factors which affect or may affect the Company's business.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information filed by the Company under the Exchange Act
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following Regional Offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material also may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Also, the Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants (such as the Company) that file
electronically with the Commission.
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission, for so long as any of the Notes remain
outstanding, it will furnish to the Holders of the Notes and file with the
Commission (unless the Commission will not accept such a filing) (i) all
quarterly and
ii
<PAGE> 6
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company were required to file
such forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants and
(ii) all reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports.
Certain provisions of various instruments, including the Indenture and the
Registration Rights Agreement (each as defined), and the Notes are summarized in
this Offering Memorandum, but prospective investors should be aware that the
summaries are qualified in their entirety by reference to the texts of the
original instruments, which will be made available to Holders without charge on
request. Requests for such documents should be submitted in writing to Paul M.
Gales, Senior Vice President, General Counsel and Secretary, at the Company's
principal executive offices at 6225 North 24th Street, Phoenix, Arizona 85016,
or by telephone at (602) 955-5556.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act (File No. 0-22600) are incorporated into this Offering
Memorandum by reference:
(a) Annual Report on Form 10-K for fiscal year ended December 31,
1996, as amended.
(b) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997 and June 30, 1997.
(c) Current Reports on Form 8-K dated as of March 15, 1997 and March
18, 1997 (relating to 1996 earnings) and October 21, 1997 (relating to the
sale of the Notes).
(d) The combined financial statements of Leaseway Personnel
Corporation and Leaseway Administrative Personnel, Inc. (together,
"Leaseway"), and related pro forma financial statements of the Company,
included in the Company's Current Report on Form 8-K dated August 1, 1996
(as amended by Amendment No. 1).
(e) All documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to
the completion of the Exchange Offer.
The information contained in this Prospectus does not purport to be
comprehensive and should be read together with the information contained in the
documents incorporated by reference herein. Any statement contained 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 other subsequently filed
document which 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 to constitute a part of this Prospectus, except as so
modified or superseded.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents which are incorporated herein by reference (other
than exhibits not specifically incorporated by reference into the text of such
documents). Requests should be directed to Paul M. Gales, Senior Vice President,
General Counsel and Secretary, at the Company's principal executive offices at
6225 North 24th Street, Phoenix, Arizona 85016, or by telephone at (602)
955-5556.
iii
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the consolidated financial statements and the notes thereto, appearing elsewhere
in this Prospectus. Unless the context otherwise indicates, references in this
Prospectus to the "Company" or "ESI" refer to Employee Solutions, Inc. and its
subsidiaries. Investors should carefully consider the information set forth
under the caption "Risk Factors."
THE COMPANY
The Company is one of the largest professional employer organizations
("PEO") and is the most geographically diverse PEO in the United States,
specializing in integrated employment outsourcing solutions for small and
mid-sized businesses. As of June 30, 1997, the Company served approximately
1,400 client companies representing 42,900 worksite employees in 46 states.
Through internal growth and strategic acquisitions, the Company has increased
annual revenues and EBITDA from 1992 to 1996 at compound annual growth rates of
150% and 293%, respectively.
The Company offers a broad array of integrated outsourcing solutions which
provide businesses throughout the United States with comprehensive and flexible
outsourcing services to meet their payroll, benefits and human resources needs
while helping manage their overall costs. The Company provides significant
benefits to its client companies and their worksite employees, including: (i)
managing escalating costs associated with workers' compensation, health
insurance, workplace safety and employment policies and practices; (ii)
enhancing employee recruiting and retention by providing employees with access
to a menu of healthcare and other benefits that are more characteristic of
larger employers; (iii) providing expertise in transportation personnel and in
labor relations; and (iv) reducing the time and effort required by the employer
to deal with an increasingly complex administrative, legal and regulatory
environment.
As a PEO, ESI and its "client company" typically agree that ESI will become
the "employer of record" for the client company's employees. ESI generally
assumes designated obligations for payroll processing and reporting, payment of
payroll taxes, human resources management and the provision of employee benefit
plans and risk management/workers' compensation services. Additionally, ESI may
provide other products and services directly to worksite employees, such as
employee payroll deduction programs for disability and specialty health
insurance, prepaid telephone cards and other personal financial services. The
client company generally retains management control of the worksite employees,
including hiring, supervision and termination and determining the employees' job
descriptions and salaries.
RECENT DEVELOPMENTS
Effective as of September 1, 1997, the Company acquired a PEO service
provider, Phoenix Capital Management, Inc. ("PCM"), and four affiliated PEO
companies (collectively referred to as "Employee Resources Corporation" or
"ERC"), for 752,587 restricted shares of Company Common Stock plus additional
restricted Common Stock to be determined based upon ERC earnings after the
acquisition. Since 1995, the Company has operated under an agreement whereby PCM
provided certain check processing services for the Company. The Company believes
that the acquisition of PCM will reduce its expenses by allowing the Company to
internally provide these services. The acquisition of ERC adds approximately 150
clients with 1,800 worksite employees, primarily in the transportation industry,
and annualized revenues of $29 million. In addition, effective September 1,
1997, the Company acquired Prompt Pay, Inc., a small PEO with 350 worksite
employees in six southwestern states.
1
<PAGE> 8
THE EXCHANGE OFFER
PURPOSE OF EXCHANGE........ The Original Notes were sold in the Private
Offering (the "Offering") by ESI to certain
accredited institutions through First Chicago
Capital Markets, Inc., who acted as the initial
purchaser (the "Initial Purchaser"). In connection
therewith, ESI executed and delivered, for the
benefit of the holders of the Original Notes, a
Registration Rights Agreement dated October 21,
1997 (the "Registration Rights Agreement"), which
is an exhibit to the Registration Statement of
which this Prospectus is a part, providing for,
among other things, the Exchange Offer so that the
Exchange Notes will be freely transferable by the
holders thereof without registration or any
prospectus delivery requirements under the
Securities Act, except that a "dealer" or any
"affiliate" of a "dealer" (as such terms are
defined under the Securities Act), who exchanges
Original Notes held for its own account (a
"Restricted Holder") will be required to deliver
copies of this Prospectus in connection with any
resale of the Exchange Notes issued in exchange for
such Original Notes. See "Risk
Factors -- Consequences of Failure to Exchange,
"The Exchange Offer -- Purposes and Effects of the
Exchange Offer" and "Plan of Distribution".
THE EXCHANGE OFFER......... ESI is offering to exchange pursuant to the
Exchange Offer up to $85 million aggregate
principal amount of ESI's new Series B 10% Senior
Notes due 2004 (the "Exchange Notes") for $85
million aggregate principal amount of ESI's
outstanding 10% Senior Notes due 2004 (the
"Original Notes"). The Original Notes and the
Exchange Notes are sometimes collectively referred
to herein as the "Notes." The terms of the Exchange
Notes are substantially identical in all respects
(including principal amount, interest rate and
maturity) to the terms of the Original Notes for
which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes are
freely transferable by holders thereof (other than
as provided herein), and are not subject to any
covenant regarding registration under the
Securities Act. See "The Exchange Offer -- Terms of
the Exchange Offer" and "The Exchange Offer --
Procedures for Tendering."
The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Original
Notes being tendered for exchange.
EXPIRATION DATE............ The Exchange Offer will expire at 5:00 p.m., New
York City time on , 199 , unless extended
to a date not later than 60 days from the effective
date of the Registration Statement of which this
Prospectus is a part (the "Expiration Date").
CONDITIONS OF THE
EXCHANGE OFFER............. ESI's obligation to consummate the Exchange Offer
will be subject to certain conditions. ESI will not
be required to accept for exchange any Original
Notes tendered and may terminate or amend the
Exchange Offer as provided herein before the
acceptance of such Original Notes, if, among other
things, certain legal actions or proceedings are
instituted or there shall have been proposed,
adopted or enacted any law, statutes or regulations
materially affecting the benefits of the Exchange
Offer. See "The Exchange Offer -- Conditions of the
Exchange Offer." ESI reserves the right to
terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of
any such conditions.
2
<PAGE> 9
PROCEDURES FOR TENDERING
ORIGINAL NOTES............. Each holder of Original Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Original Notes and any other required
documentation to the exchange agent (the "Exchange
Agent") at the address set forth herein. Original
Notes may be physically delivered, but physical
delivery is not required if a confirmation of a
book-entry of such Original Notes to the Exchange
Agent's account at The Depository Trust Company
("DTC" or the "Depository") is delivered in a
timely fashion. By executing the Letter of
Transmittal, each holder will represent to the
Company, among other things, (i) that the Exchange
Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business
of the person receiving such Exchange Notes,
whether or not such person is the holder, (ii) that
neither the holder nor any such other person is
engaged in, or intends to engage in, or has an
arrangement or understanding with any person to
participate in, the distribution of such Exchange
Notes and (iii) that neither the holder nor any
such other person is an "affiliate," as defined
under Rule 405 of the Securities Act, of ESI, or if
it is an affiliate, that it will comply with the
registration and prospectus delivery requirements
of the Securities Act, to the extent applicable.
Each broker or dealer that receives Exchange Notes
for its own account in exchange for Original Notes,
where such Original Notes were acquired by such
broker or dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
See "The Exchange Offer -- Procedures for
Tendering" and "Plan of Distribution."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS.......... Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal
and delivering the Original Notes, either make
appropriate arrangements to register ownership of
the Original Notes in such owner's name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time. See "The Exchange
Offer -- Procedures for Tendering."
GUARANTEED DELIVERY
PROCEDURES................. Holders of Original Notes who wish to tender their
Original Notes and whose Original Notes are not
entirely available or who cannot deliver their
Original Notes must complete, sign and deliver, the
Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date and
must tender their Original Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery Procedures."
3
<PAGE> 10
WITHDRAWAL RIGHTS.......... Tenders may be withdrawn at any time prior to 5:00
p.m. New York City time, on the Expiration Date.
See "The Exchange Offer -- Withdrawal of Tenders."
ACCEPTANCE OF ORIGINAL
NOTES AND DELIVERY OF
EXCHANGE NOTES............. ESI will accept for exchange any and all Original
Notes which are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
EXCHANGE AGENT............. The Huntington National Bank, Columbus, Ohio is
serving as Exchange Agent in connection with the
Exchange Offer. See "The Exchange Offer -- Exchange
Agent."
EFFECT ON HOLDERS OF THE
ORIGINAL NOTES............. As a result of the making of this Exchange Offer,
and upon acceptance for exchange of all validly
tendered Original Notes pursuant to the terms of
this Exchange Offer, ESI will have fulfilled one of
the covenants contained in the Registration Rights
Agreement and, accordingly, there will be no
increase in the interest rate on the Original Notes
pursuant to the applicable terms of the
Registration Rights Agreement due to the Exchange
Offer. Holders of the Original Notes who do not
tender their Original Notes will be entitled to all
the rights and limitations applicable thereto under
the Indenture dated as of October 15, 1997, among
ESI, the Guarantors, and The Huntington National
Bank, Columbus, Ohio, as trustee (the "Trustee")
relating to the Original Notes and the Exchange
Notes (the "Indenture"), except for any rights
under the Indenture or the Registration Rights
Agreement which by their terms terminate or cease
to have further effectiveness as a result of the
making of, and the acceptance for exchange of all
validly tendered Original Notes pursuant to, the
Exchange Offer. All indentured Original Notes will
continue to be subject to the restrictions on
transfer provided for in the Original Notes and in
the Indenture. To the extent that Original Notes
are tendered and accepted in the Exchange Offer,
the trading market for Original Notes could be
adversely affected.
USE OF PROCEEDS............ There will be no cash proceeds to ESI from the
exchange pursuant to the Exchange Offer.
TERMS OF THE NOTES
The Exchange Offer applies to the entire outstanding $85 million principal
amount of Original Notes. The terms of the Exchange Notes are identical in all
material respects to the Original Notes, except for certain transfer
restrictions and registration and other rights relating to the exchange of the
Original Notes for Exchange Notes. The Exchange Notes will evidence the same
debt as the Original Notes and will be entitled to the benefits of the Indenture
under which both the Original Notes were, and the Exchange Notes will be,
issued. See "Description of the Notes."
MATURITY DATE.............. October 15, 2004.
INTEREST PAYMENT DATES..... April 15 and October 15 each year, commencing April
15, 1998.
4
<PAGE> 11
GUARANTEES................. The Notes are unconditionally guaranteed (the
"Guarantees") on an unsecured senior basis by
certain existing and future Subsidiaries of the
Company (collectively, the "Guarantors"). See
"Description of Notes."
RANKING.................... The Notes and the Guarantees are general unsecured
obligations of the Company and the Guarantors,
respectively, and rank senior in right of payment
to all existing and future subordinated
Indebtedness of the Company and the Guarantors,
respectively. The Notes and the Guarantees rank
pari passu in right of payment with all senior
Indebtedness (as defined) of the Company and the
Guarantors, respectively. Loans and guarantees
under the Company's $20 million amended revolving
credit facility entered into as of October 21, 1997
(the "Amended Credit Facility") are secured by
substantially all of the assets of the Company and
the Guarantors and, accordingly, the Notes and the
Guarantees are effectively subordinated to the
loans and guarantees outstanding under the Amended
Credit Facility to the extent of the value of the
assets securing such loans and guarantees. As of
June 30, 1997, on a pro forma basis after giving
effect to the Offering of the Notes and the
application of the net proceeds therefrom, the
Company and its Subsidiaries would have had no
senior Indebtedness other than the Notes.
OPTIONAL REDEMPTION........ The Notes are redeemable, in whole or in part, at
the option of the Company at any time on or after
October 15, 2001, at the declining redemption
prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of redemption. See "Description of
Notes -- Optional Redemption."
CHANGE OF CONTROL.......... In the event of a Change of Control, Holders of the
Notes will have the right to require that the
Company repurchase the Notes in whole or in part at
a redemption price of 101% of the principal amount
thereof plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
repurchase. See "Description of Notes -- Certain
Covenants -- Repurchase of Notes at the Option of
the Holder Upon a Change of Control."
COVENANTS.................. The Indenture contains certain covenants, including
limitations on the ability of the Company and its
Subsidiaries to: (i) incur additional Indebtedness;
(ii) incur certain liens; (iii) engage in certain
transactions with affiliates; (iv) make certain
restricted payments; (v) agree to payment
restrictions affecting Subsidiaries; (vi) engage in
unrelated lines of business; or (vii) engage in
mergers, consolidations or the transfer of all or
substantially all of the assets of the Company to
another person. In addition, in the event of
certain Asset Sales (as defined), the Company will
be required to use the proceeds to reinvest in the
Company's business, to repay certain debt or to
offer to purchase Notes at 100% of the principal
amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, to the date of
purchase. See "Description of Notes -- Certain
Covenants."
EXCHANGE OFFER;
REGISTRATION RIGHTS........ Pursuant to a Registration Rights Agreement (the
"Registration Rights Agreement") between the
Company, the Guarantors and the Initial Purchaser,
the Company has agreed to file with the Commission,
within 45 days after the date of issuance of the
Notes (the "Issue Date"), a registration statement
under the Securities Act relating to an Exchange
5
<PAGE> 12
Offer for the Notes and will use its best efforts
to cause such registration statement to become
effective within 120 days after the Issue Date. In
the event of a Registration Default (as defined),
the Company would be required to pay Liquidated
Damages on the Original Notes, but such provisions
do not apply to the Exchange Notes. The
Registration Statement of which this Prospectus is
a part has been filed to satisfy the requirements
of the Registration Rights Agreement. See
"Description of Notes -- Registration Rights;
Liquidated Damages."
RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
an investment in the Notes, see "Risk Factors."
6
<PAGE> 13
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table presents for the periods indicated certain historical
consolidated financial information. The consolidated financial information as of
December 31, 1994, 1995 and 1996 and for the years then ended are derived from
the consolidated financial statements of the Company, which have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report included elsewhere herein. The unaudited consolidated financial
information as of June 30, 1996 and 1997 and for the six months then ended are
derived from the Company's unaudited interim consolidated financial statements
but, in the opinion of management, reflect all adjustments, consisting of only
normal recurring adjustments, necessary for a fair statement of the results for
such periods and as of such dates. This information should be read in
conjunction with "Selected Consolidated Financial Information" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................................... $74,334 $164,455 $439,016 $164,942 $422,024
Cost of revenues....................................... 71,068 150,675 400,862 148,446 399,871
------- -------- -------- -------- --------
Gross profit........................................... 3,266 13,780 38,154 16,496 22,153
Selling, general and administrative expenses........... 2,297 7,183 17,310 6,975 15,912
Depreciation and amortization.......................... 269 426 2,073 654 2,048
------- -------- -------- -------- --------
Income from operations................................. 700 6,171 18,771 8,867 4,193
Interest income........................................ 52 296 833 410 447
Interest expense....................................... (3) (25) (1,196) (7) (2,065)
Other income (expense)................................. 80 239 (1) -- (58)
------- -------- -------- -------- --------
Income before provision for income taxes............... 829 6,681 18,407 9,270 2,517
Income tax provision................................... 450 2,846 6,381 3,801 1,007
------- -------- -------- -------- --------
Net income............................................. $ 379 $ 3,835 $ 12,026 $ 5,469 $ 1,510
======= ======== ======== ======== ========
Net income per share:
Primary.............................................. $ .02 $ .16 $ .37 $ .17 $ .05
Fully diluted........................................ $ .02 $ .14 $ .37 $ .17 $ .05
OTHER DATA:
EBITDA(a).............................................. $ 1,101 $ 7,132 $ 21,676 $ 9,931 $ 6,630
Depreciation and amortization.......................... 269 426 2,073 654 2,048
Capital expenditures................................... 189 238 702 416 1,143
Ratio of earnings to fixed charges(b).................. 18.6x 93.8x 13.6x 83.0x 2.1x
At period end:
Number of worksite employees........................... 3,600 11,000 30,000 24,300 42,900
Number of client companies............................. 450 920 1,200 960 1,400
States with worksite employees......................... 20 40 46 43 46
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents and restricted cash.......... $ 1,998 $ 16,771 $ 22,480 $ 15,718 $ 24,609
Total assets........................................... 9,310 36,840 125,969 61,125 151,757
Total long-term debt................................... -- -- 42,800 -- 47,300
Total stockholders' equity............................. 6,401 19,943 46,507 36,368 49,619
</TABLE>
7
<PAGE> 14
(a) "EBITDA" represents the sum of income before income taxes, interest expense
and depreciation and amortization. Information regarding EBITDA is presented
because management believes that certain investors use EBITDA as one measure
of an issuer's ability to service its debt. EBITDA is not a measure of
performance or financial condition under generally accepted accounting
principles, but is presented to provide additional information related to
debt service capability. EBITDA should not be considered in isolation or as
a substitute for other measures of liquidity or financial performance under
generally accepted accounting principles. While EBITDA is frequently used as
a measure of operations and the ability to meet debt service requirements,
it is not necessarily comparable to other similarly titled captions of other
companies due to the potential inconsistencies in the method of calculation.
(b) The ratio of earnings to fixed charges is computed by dividing fixed charges
into income before income taxes plus fixed charges. Fixed charges include
interest expense, amortization of debt issuance costs and the estimated
interest component of rent expense. The ratios were 2.8x and 1.7x in 1992
and 1993, respectively.
8
<PAGE> 15
RISK FACTORS
Holders should consider carefully, in addition to the other information
contained in this Prospectus, the following factors in evaluating the Company
and its business before accepting the Exchange Offer.
Procedures for Tender of Original Notes. The Exchange Notes will be issued
in exchange for Original Notes only after timely receipt by the Exchange Agent
of such Original Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of Original
Notes desiring to tender such Original Notes in exchange for Exchange Notes
should allow sufficient time to ensure timely delivery. Neither the Exchange
Agent nor the Company is under any duty to give notification of defects or
irregularities with respect to tenders of Original Notes for exchange. Any
holder of Original Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Original Notes, where such
Original Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. See
"Plan of Distribution."
Consequences of Failure to Exchange Original Notes. The Original Notes
have not been registered under the Securities Act and are subject to substantial
restrictions on transfer. Original Notes that are not tendered in exchange for
Exchange Notes or are tendered but not accepted will, following consummation of
the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof. The Company does not currently anticipate that it will
register the Original Notes under the Securities Act. To the extent that
Original Notes are tendered and accepted in the Exchange Offer, the trading
market for indentured and tendered but unaccepted Original Notes could be
adversely affected. See "The Exchange Offer -- Consequences of Failure to
Exchange."
Substantial Leverage. The Company has incurred significant debt primarily
in connection with its expansion through acquisitions. As of June 30, 1997,
after giving pro forma effect to this Offering and the application of the net
proceeds therefrom, the Company would have had outstanding senior Indebtedness
of approximately $85 million, which would have consisted of the Notes, and
stockholders' equity of approximately $49.6 million.
The Company's ability to make scheduled principal payments in respect of,
or to pay the interest or Liquidated Damages, if any, on, or to refinance, any
of its indebtedness (including the Notes) will depend on its future performance,
which, to a certain extent, is subject to general economic, financial,
competitive, regulatory and other factors beyond its control. Based upon the
Company's current level of operations and anticipated growth, management
believes that cash flow from operations and other available cash, together with
available borrowings under the Amended Credit Facility, will be adequate to meet
the Company's anticipated future requirements for working capital expenditures,
scheduled lease payments and scheduled payments of interest on its indebtedness,
including the Notes, for the foreseeable future. The Company may, however, need
to refinance all or a portion of the principal of the Notes at or prior to
maturity. There can be no assurance that the Company's business will generate
sufficient cash flow from operations, that anticipated growth will occur or that
future borrowings will be available under the Amended Credit Facility or
otherwise in an amount sufficient to enable the Company to service or refinance
its indebtedness, including the Notes, or make anticipated capital expenditures
and lease payments. In addition, there can be no assurance that the Company will
be able to effect any such refinancing on commercially reasonable terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The degree to which the Company is leveraged could have important
consequences to Holders of the Notes, including, but not limited to, the
following: (i) a substantial portion of the Company's cash flow from operations
will be dedicated to debt service and will not be available for other purposes;
(ii) the Company's ability to obtain additional financing in the future could be
limited; and (iii) the Indenture and the Amended Credit Facility will contain
financial and restrictive covenants that will limit the ability of the Company
to, among other things, borrow additional funds. Failure by the Company to
comply with such covenants could
9
<PAGE> 16
result in an event of default which, if not cured or waived, could have a
material adverse effect on the Company's business and financial performance.
A substantial portion of the Company's business is conducted through its
Subsidiaries. As a result, the Company's ability to make scheduled payments of
principal and interest on its indebtedness, including the Notes, will depend on
the future operating performance and cash flows of its Subsidiaries and on the
ability of the Company's Subsidiaries to pay dividends or make loans to the
Company. Camelback Insurance Ltd. ("Camelback"), the Company's wholly owned
insurance subsidiary, is subject to certain statutory and contractual
restrictions which limit its ability to pay dividends or make loans to the
Company. The Notes and the Guarantees will be effectively subordinated to the
loans outstanding under the Amended Credit Facility and the guarantees of such
loans to the extent of the value of the assets securing such loans and
guarantees. The Indenture will permit the Company and its Subsidiaries to incur
additional indebtedness, some of which may be secured and to which the Notes
will be effectively subordinated. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Repurchase of Notes upon a Change of Control. In the event of a Change of
Control, the Company will be required to make an offer to repurchase the Notes
for cash at 101% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the repurchase date. Certain events
involving a Change of Control may result in an event of default under the
Amended Credit Facility or other indebtedness of the Company that may be
incurred in the future. Moreover, the exercise by the Holders of the Notes of
their right to require the Company to repurchase the Notes could cause an event
of default under the Amended Credit Facility and may cause a default under such
other indebtedness, even if the Change of Control does not. The Company's
obligations under this provision of the Indenture could delay, deter or prevent
a sale of the Company which might otherwise be advantageous to the Holders of
the Notes. There can be no assurance that the Company will have the financial
resources necessary to repurchase the Notes upon a Change of Control. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of
Notes -- Certain Covenants -- Repurchase of Notes at the Option of the Holder
Upon a Change of Control."
Management of Rapid Growth. The Company's success depends, in part, upon
its ability to achieve growth and manage this growth effectively. Since its
formation, the Company has experienced rapid growth which has challenged the
Company's management, personnel, resources and systems. As part of its business
strategy, the Company intends to pursue continued growth through its sales and
marketing capabilities, acquisitions and marketing alliances. Although the
Company has expanded its management, personnel, resources and systems to manage
future growth and to assimilate acquired operations, there can be no assurance
that the Company will be able to maintain or accelerate its growth in the future
or manage this growth effectively. Failure to do so could materially adversely
affect the Company's business and financial performance. To accommodate growth,
the Company is centralizing certain operations, which may result in temporary
disruptions in operations.
The Company has grown substantially in recent years through the acquisition
of other PEO and similar companies. Because the Company intends to focus in the
short term on further integrating prior acquisitions into the Company's
operations, the Company does not currently expect 1997 acquisition activity to
be as extensive as in 1996. However, a key component of the Company's long-term
growth strategy is to continue to pursue selective attractive acquisition
opportunities. There can be no assurance that the Company will be able to find
attractive acquisition candidates at reasonable prices or, if it does, that
other potential acquirers will not compete successfully with the Company for
these candidates. Any significant increase in the number of companies competing
with the Company to acquire PEOs would likely increase the cost of acquisitions
and thereby limit the Company's ability to grow profitably through acquisitions.
In addition, although the Company attempts to evaluate each acquisition
candidate thoroughly prior to an acquisition, there can also be no assurance
that, once acquired, the Company will be able to achieve acceptable levels of
revenues, profitability or productivity from the acquired company.
10
<PAGE> 17
A portion of the Company's historical growth is attributable to its risk
management/workers' compensation services program. The risks associated with
rapid growth in this area include the potential for inadequate underwriting due
to a lack of experience with new geographic markets and industries served, a
shortage of experienced and trained personnel, and the need for sophisticated
operating systems to help manage these risks. The Company recently converted its
risk management information system to a new operating system to support this
growth; there can be no assurance that this conversion will ultimately prove to
be successful, or that other future changes in systems or procedures will be
successfully completed. Any failure to manage growth in the risk
management/workers' compensation program could adversely affect the Company's
ability to underwrite profitable risks and efficiently resolve claims, which in
turn could have a material adverse effect on the Company's business and
financial performance.
Adequacy of Loss Reserves; Loss and Claims Experience. Under its present
workers' compensation arrangements, the Company is responsible for the first
$250,000 ($350,000 for certain transportation programs and $500,000 in two
states with "monopolistic" workers' compensation insurance structures) of each
occurrence with no aggregate limit to the number of losses for which the Company
may be liable. The Company's reserves for losses and loss adjustment expenses
under its workers' compensation are estimates of amounts needed to pay reported
and unreported claims and related loss adjustment expenses. Reserves are
estimates based on industry data and historical experience, and include
judgments of the effects that future economic and social forces are likely to
have on the Company's experience with the type of risk involved, circumstances
surrounding individual claims and trends that may affect the probable number and
nature of claims arising from losses not yet reported. Consequently, loss
reserves are inherently uncertain and are subject to a number of highly variable
and difficult to predict circumstances. This uncertainty is compounded in the
Company's case by its rapid growth and limited experience. For these reasons,
there can be no assurance that the Company's ultimate liability will not
materially exceed its loss and loss adjustment expense reserves. If the
Company's reserves prove to be inadequate, the Company will be required to
increase reserves or corresponding loss payments with a corresponding reduction,
which may be material, to the Company's operating results in the period in which
the deficiency is identified. See "Business -- Risk Management/Workers'
Compensation Program."
The Company has utilized its selective evaluation process, safety programs,
active claims management and maintenance of its accidental death and
dismemberment policy to manage its loss and claims experience. However, the
Company may experience adverse development on prior losses and may not be able
to maintain its current loss experience over time. Future loss experience could
increase due to weakened underwriting standards as a result of internal growth,
the loss experience of acquired operations, increased competition or other
factors which may affect the Company's standards, procedures or claims
experience. An increase in the Company's loss experience could materially
adversely affect the Company's business and financial performance.
State unemployment taxes are, in part, determined by the Company's
unemployment claims experience. Medical 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 its costs in these areas would
increase. In such a case, the Company may not be able to pass these higher costs
to its clients and would therefore have difficulty competing with the PEOs with
lower claims rates that may offer lower rates to clients.
Tax Treatment. The attractiveness to clients of a full-service PEO
arrangement depends in part upon the tax treatment of payments for particular
services and products under the Internal Revenue Code (the "Code") (for example,
the opportunity of employees to pay for certain benefits under a cafeteria plan
using pre-tax dollars). The Internal Revenue Service ("IRS") has formed a Market
Segment Study Group to examine whether PEOs, such as the Company, are for
certain tax purposes the "employers" of worksite employees under the Code. The
Company cannot predict either the timing or the nature of any final decision
that may be reached by the IRS with respect to the Market Segment Study Group or
the ultimate outcome of any such decision, nor can the Company predict whether
the Treasury Department will issue a policy statement with respect to its
position on these issues or, if issued, whether such statement would be
favorable or unfavorable to the Company. If the IRS were to determine that the
Company is not an "employer" under
11
<PAGE> 18
certain provisions of the Code, it could materially adversely affect the Company
in several ways. First, with respect to benefit plans, the tax qualified status
of the Company's 401(k) plans would be revoked, and the Company's cafeteria and
medical reimbursement plans may lose their favorable tax status. If an adverse
IRS determination were applied retroactively to disqualify benefit plans,
employees' vested account balances under 401(k) plans would become taxable, an
administrative employer such as the Company would lose its tax deductions to the
extent its matching contributions were not vested, a 401(k) plan's trust could
become a taxable trust and the administrative employer could be subject to
liability with respect to its failure to withhold applicable taxes and with
respect to certain contributions and trust earnings. In such event, the Company
also would face the risk of client dissatisfaction and potential litigation by
clients or worksite employees. See "Industry Regulation -- Taxes."
As the employer of record for many client companies and their worksite
employees, the Company must account for and remit payroll, unemployment and
other employment-related taxes to numerous federal, state and local tax, labor
and unemployment authorities, and is subject to substantial penalties for
failure to do so. From time to time, the Company has received notices or
challenges which may adversely affect its tax rates and payments.
In light of the IRS Market Segment Study Group and the general uncertainty
in this area, certain proposed legislation has been drafted to clarify the
employer status of PEOs in the context of the Code and benefit plans. However,
there can be no assurance that such legislation will be proposed and adopted or
in what form it would be adopted. Even if it were adopted, the Company may need
to change aspects of its operations or programs to comply with any requirements
which may ultimately be adopted. In particular, the Company may need to retain
increased sole or shared control over worksite employees if the legislation is
passed in its current form. See "Uncertainty of Extent of PEO's Liability;
Government Regulation of PEOs."
Litigation. The Company and several of its present and former executive
officers and directors have been named as defendants in several actions alleging
violations of securities laws with respect to the accuracy of certain statements
regarding Company reserves and other disclosures made by the Company and certain
of its directors and officers. These suits were filed following a significant
drop in the trading price of shares of the Company's Common Stock in March 1997.
The suits have been consolidated, or are being consolidated, before a single
judge of the U.S. District Court in Phoenix, Arizona. The Court has before it
motions by the plaintiffs for the appointment of representative plaintiffs and
approval of selection of lead counsel. Once these motions are ruled upon, it is
anticipated that a consolidated, amended complaint will be filed. See
"Business -- Legal Matters."
While the complaints do not specify alleged damages, the Company expects
the requests for damages to be substantial. The Company believes the claims are
without merit, and intends to defend these actions vigorously. However, the
ultimate resolution of these actions could have a material adverse effect on the
Company's results of operations and financial condition. In addition, publicity
relating to the litigation could have a negative effect on the Company's
relationships with its current and prospective clients, employees and suppliers.
Uncertainty of Extent of PEO's Liability; Government Regulation of
PEOs. Employers are regulated by numerous federal and state 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 PEO services, many of these laws do not
specifically address the obligations and responsibilities of non-traditional
"co-employers" such as the Company, and there are many legal uncertainties about
employee relationships created by PEOs, such as the extent of the PEO'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. 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. See "Industry Regulation."
12
<PAGE> 19
The Company's standard forms of client service agreement establish 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, and in some instances acts as sole employer (such as in the driver
leasing program), the Company may be subject to liability for violations of
these or other laws despite these contractual provisions, even if it does not
participate in such violations. The circumstances in which the Company acts as
sole employer may expose the Company to increased risk of such liabilities for
an employee's actions. The Company has been sued in tort actions alleging
responsibility for employee actions (which it considers to be incidental to its
business). Although it believes it has meritorious defenses, and maintains
insurance (and requires its clients to maintain insurance) covering certain of
such liabilities, there can be no assurances that the Company will not be found
to be liable for damages in any such suit, or that such liability would not have
a material adverse effect on the Company. Although the client generally is
required to indemnify the Company for any liability attributable to the conduct
of the client or employee, 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.
While many states do not explicitly regulate PEOs, fifteen states have
passed laws that have licensing or registration requirements and at least three
other states are considering such regulation. Such laws vary from state to state
but generally provide for monitoring the fiscal responsibility of PEOs. 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. See "Industry Regulation -- State and Local Regulation."
Government Regulation Relating to Workers' Compensation Program. As part
of its risk management/workers' compensation programs, the Company utilizes
Camelback, a wholly-owned insurance company subsidiary. Insurance companies such
as Camelback are subject to the insurance laws and regulations of the
jurisdictions in which they are chartered; such laws and regulations generally
are designed to protect the interests of policyholders rather than the interests
of shareholders such as the Company. In general, insurance regulatory
authorities have broad administrative authority over insurers domiciled in their
respective jurisdictions, including authority over insurers' capital and surplus
levels, dividend payments, financial disclosure, reserve requirements,
investment parameters and premium rates. The jurisdictions also limit the
ability of an insurer to transfer or loan statutory capital or surplus to its
affiliates. The regulation of Camelback could materially adversely affect the
Company's operations and results. See "Industry Regulation -- Workers'
Compensation."
Competition. The market for many of the services provided by the Company
is highly fragmented, with over 2,300 PEOs currently competing in the United
States. Many of these PEOs have limited operations with relatively few worksite
employees, but the Company believes that several are larger than or comparable
to the Company in size. The Company also competes with non-PEO companies whose
offerings overlap with some of the Company's services, including payroll
processing firms, insurance companies, temporary personnel companies and human
resource consulting firms. In addition, as the PEO industry becomes better
established, the Company expects that competition will continue to increase as
existing PEO firms consolidate into fewer and better competitors and
well-organized new entrants with potentially greater resources than the Company,
including some of the non-PEO companies described above, continue to enter the
PEO market. The Company's subscriber agreements with its clients generally may
be canceled upon 30 days written notice of termination by either party. The
short-term nature of most customer agreements means that a substantial portion
of the Company's business could be terminated upon short notice. In the
stand-alone risk management/workers' compensation services area, the Company
considers state insurance funds and other private insurance carriers to be its
primary competition. See "Business -- Competition."
Fraudulent Conveyance. Under federal or state fraudulent conveyance
statutes or other legal principles, the Notes and/or the Guarantees might be
subordinated to existing or future indebtedness of the Company or the
Guarantors, voided or found not to be enforceable in accordance with their
terms. Accordingly, under such fraudulent conveyance statutes, if a court in a
lawsuit on behalf of an unpaid creditor of the Company or any Guarantor or a
representative of creditors, such as a trustee in bankruptcy, were to find that
the Company or
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any Guarantor incurred the indebtedness represented by the Notes or the
Guarantee, respectively, with actual intent to hinder, delay or defraud
creditors, or received less than a reasonably equivalent value or fair
consideration for any of such indebtedness or obligation and at the time of such
incurrence: (i) was insolvent; (ii) was rendered insolvent by reason of such
incurrence; (iii) was engaged or about to engage in a business or transaction
for which its remaining assets constituted unreasonably small capital to carry
on its business; (iv) intended to incur, or believed that it would incur, debts
(including contingent obligations) beyond its ability to pay such debts as they
matured; or (v) was a defendant in an action for money damages, or had a
judgment for money damages docketed against it, if, in either case, after final
judgment, the judgment was unsatisfied, such court might permit such
indebtedness, or obligation, and prior payments thereon, to be voided by such
creditor or representative and permit such prior payments to be recovered from
the holders of such indebtedness, as the case may be.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. Generally, however, the
Company or any Guarantor would be considered insolvent if, at the time it
incurred such indebtedness or issued the Guarantees, either the fair market
value (or fair saleable value) of its assets was less than the amount required
to pay its total debts as they mature.
Absence of Public Market. The Exchange Notes will be a new class of
securities for which there currently is no established trading market. The
Original Notes are eligible for trading on the PORTAL market. The Company does
not intend to list the Notes on any national securities exchange or to seek the
admission thereof to trading on the Nasdaq National Market. The Company has been
advised by the Initial Purchaser that it currently intends to make a market in
the Notes. The Initial Purchaser is not obligated to do so, however, and any
market-making activities with respect to the Notes may be discontinued at any
time without notice. In addition, such market-making activity will be subject to
the limits imposed by the Securities Act and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and may be limited during the Exchange
Offer. Accordingly, no assurance can be given that an active public market will
develop for the Exchange Notes or as to the liquidity of the trading market for
the Exchange Notes.
If the trading market does not develop or is not maintained, Holders of the
Exchange Notes may experience difficulty in reselling the Notes or may be unable
to sell them at all. If a market for the Exchange Notes does develop, any such
market may be discontinued at any time. If a public trading market develops for
the Exchange Notes, future trading prices of such Exchange Notes will depend
upon many factors, including, among other factors, prevailing interest rates,
the Company's financial condition and results of operations and the market for
similar notes. Depending upon those and other factors, the Exchange Notes may
trade at a discount from their principal amount. Historically, the market for
noninvestment grade debt has been subject to disruptions that have caused
substantial volatility in the prices of such securities. There can be no
assurance that the market for the Exchange Notes will not be subject to similar
disruptions. Any such disruptions may have an adverse effect on Holders of the
Exchange Notes.
THE EXCHANGE OFFER
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The Original Notes were sold by ESI on October 21, 1997 to the Initial
Purchaser, who resold the Original Notes to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) and other institutional
"accredited investors" (as defined in Rule 501(a) under the Securities Act) in
the Private Offering. In connection with the sale of the Original Notes, ESI and
the Initial Purchaser entered into a Registration Rights Agreement dated as of
October 21, 1997 (the "Registration Rights Agreement") pursuant to which ESI
agreed to file with the Commission a registration statement (the "Exchange Offer
Registration Statement") with respect to an offer to exchange the Original Notes
for Exchange Notes within 45 days following the issuance of the Original Notes.
In addition, ESI agreed to use its best efforts to cause the Exchange Offer
Registration Statement to become effective under the Securities Act as soon as
practicable and to issue the Exchange Notes pursuant to the Exchange Offer. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
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<PAGE> 21
This Prospectus is a part of the Exchange Offer Registration Statement that
ESI has filed with the Commission as provided above. The Exchange Offer is being
made pursuant to the Registration Rights Agreement to satisfy ESI's obligations
thereunder. The term "Holder," with respect to the Exchange Offer, means any
person in whose name Original Notes are registered on the books of the Company
or any other person who has obtained a properly completed bond power from the
registered holder, or any person whose Original Notes are held of record by the
Depository. Upon completion of the Exchange Offer ESI generally will not be
required to file any registration statement to register any outstanding Original
Notes. Holders of Original Notes who do not tender their Original Notes or whose
Original Notes are tendered but not accepted generally will have to rely on
exemptions to registration requirements under the securities laws, including the
Securities Act, if they wish to sell their Original Notes.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties unrelated to ESI, ESI believes that
the Exchange Notes issued pursuant to the Exchange Offer in exchange for
Original Notes may be offered for resale, resold and otherwise transferred by
any holder of such Exchange Notes (other than a person that is an "affiliate" of
ESI within the meaning of Rule 405 under the Securities Act and except as set
forth in the next paragraph) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder is not engaged and does not intend to engage, and has no arrangement
or understanding with any person to engage, in the distribution of such Exchange
Notes.
If any person were to be participating in the Exchange Offer for the
purpose of distributing securities in a manner not permitted by the Commission's
interpretation (i) the position of the staff of the Commission enunciated in
interpretive letters would be inapplicable to such person and (ii) such person
would be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in exchange
for Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will ESI accept surrenders for
exchange from, Holders of Original Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or laws of such jurisdiction. Prior to the Exchange Offer, however,
ESI will use its best efforts to register or qualify the Exchange Notes for
offer and sale under the securities or laws of such jurisdictions as is
necessary to permit consummation of the Exchange Offer and do any and all other
acts or things necessary or advisable to enable the offer and sale in such
jurisdictions of the Exchange Notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, ESI will accept any and all
Original Notes validly tendered prior to 5:00 p.m., New York City time, on the
Expiration Date (as defined). ESI will issue up to $85 million aggregate
principal amount of Exchange Notes in exchange for a like principal amount of
outstanding Original Notes which are validly tendered and accepted in the
Exchange Offer. Subject to the conditions of the Exchange Offer described below,
the Company will accept any and all Original Notes which are so tendered.
Holders may tender some or all of their Original Notes pursuant to the Exchange
Offer.
The Exchange Offer is not conditioned upon any number of Original Notes
being tendered.
The form and terms of the Exchange Notes will be the same in all material
respects as the form and terms of Original Notes, except that the Exchange Notes
will be registered under the Securities Act and hence will not bear legends
restricting the transfer thereof. The Exchange Notes will not represent
additional indebtedness of ESI and will be entitled to the benefits of the
Indenture, which is the same Indenture as the one under which the Original Notes
were issued.
Interest on the Exchange Notes will accrue from the most recent date to
which interest has been paid on the Original Notes or, if no interest has been
paid, from October 21, 1997. Accordingly, registered holders of
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<PAGE> 22
Exchange Notes on the relevant record date for the first interest payment date
following the consummation of the Exchange Offer will receive interest accruing
from the most recent date to which interest has been paid or, if no interest has
been paid, from October 21, 1997. Original Notes accepted for exchange will
cease to accrue interest from and after the date of the consummation of the
Exchange Offer. Holders whose Original Notes are accepted for exchange will not
receive any payment in respect of interest on such Original Notes otherwise
payable on any interest payment date the record date for which occurs on or
after consummation of the Exchange Offer.
Holders of Original Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. ESI intends to
conduct the Exchange Offer in accordance with the provisions of the Registration
Rights Agreement. Original Notes which are not tendered for exchange or are
tendered but not accepted in the Exchange Offer will remain outstanding and be
entitled to the benefits of the Indenture, but generally will not be entitled to
any registration rights under the Registration Rights Agreement.
ESI shall be deemed to have accepted validly tendered Original Notes when,
as and if ESI has given oral or written notice thereof to the Exchange Agent for
the Exchange Offer. The Exchange Agent will act as agent for the tendering
holders for the purposes of receiving the Exchange Notes from ESI.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Original Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Original Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letters of Transmittal, transfer taxes with respect to the exchange of
Original Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses."
CONDITIONS OF THE EXCHANGE OFFER
In addition, and notwithstanding any other term of the Exchange Offer, ESI
will not be required to accept for exchange any Original Notes for any Exchange
Notes tendered and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Original Notes, if any of the following conditions
exist:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency or regulatory authority with
respect to the Exchange Offer which, in the judgment of the Company, could
reasonably by expected to materially impair the ability of ESI to proceed
with the Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer; or
(b) there shall have been proposed, adopted or enacted any law,
statute, rule, regulation or order which, in the judgment of ESI, could
reasonably be expected to materially impair the ability of ESI to proceed
with the Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer.
The foregoing conditions are for the sole benefit of ESI and may be
asserted by ESI regardless of the circumstances giving rise to such conditions
or may be waived by ESI in whole or in part at any time and from time to time in
its sole discretion. If ESI waives or amends the foregoing conditions, ESI will,
if required by applicable law, extend the Exchange Offer for a minimum of five
business days from the date that ESI first gives notice, by public announcement
or otherwise, of such waiver or amendment, if the Exchange Offer would otherwise
expire within such five business-day period. Any determination by ESI concerning
the events described above will be final and binding upon all parties.
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<PAGE> 23
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 P.M., New York City Time, on
, 199 , subject to extension by the Company by notice to the Exchange
Agent as herein provided (the "Expiration Date"). ESI reserves the right to so
extend the Exchange Offer at its discretion, in which event the term "Expiration
Date" shall mean the time and date on which the Exchange Offer as so extended
shall expire. The Company will notify the Exchange Agent of any extension by
oral or written notice and will make a public announcement thereof, each prior
to 9:00 A.M., New York City time, on the next business day after the previously
scheduled Expiration Date.
ESI reserves the right (i) to delay accepting for exchange any Original
Notes for any Exchange Notes or to extend or terminate the Exchange Offer and
not accept for exchange any Original Notes for any Exchange Notes if any of the
events set forth under the caption "Conditions of the Exchange Offer" shall have
occurred and shall not have been waived by ESI by giving oral or written notice
of such delay or termination to the Exchange Agent, or (ii) to amend the terms
of the Exchange Offer in any manner. Any such delay in acceptance for exchange,
extension or amendment will be followed as promptly as practicable by public
announcement thereof. If the Exchange Offer is amended in a manner determined by
ESI to constitute a material change, ESI will promptly disclose such amendment
in a manner reasonably calculated to inform the holder of Exchange Notes of such
amendment and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the amendment and the
manner of disclosure to the holders of the Exchange Notes, if the Exchange Offer
would otherwise expire during such five to ten business-day period. The rights
reserved by the Company in this paragraph are in addition to the Company's
rights set forth under the caption "Conditions of the Exchange Offer."
PROCEDURES FOR TENDERING
Only a holder of Original Notes may tender such Original Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Original Notes (unless such tender is being effected pursuant to the
procedure for book-entry transfer described below) and any other required
documents, to the Exchange Agent prior to 5:00 P.M., New York City time, on the
Expiration Date.
Any financial institution that is a participant in the Depositary's
Book-Entry Transfer Facility system may make book-entry delivery of the Original
Notes by causing the Depositary to transfer such Original Notes into the
Exchange Agent's account in accordance with the Depositary's procedure for such
transfer. Although delivery of Original Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Depositary, the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
or confirmed by the Exchange Agent at its addresses set forth in "Exchange
Agent" below prior to 5:00 P.M., New York City time, on the Expiration Date.
DELIVERY OF DOCUMENTS TO THE DEPOSITARY IN ACCORDANCE WITH ITS PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder of Original Notes will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
The method of delivery of Original Notes and the Letter of Transmittal and
all other required documents to the Exchange Agent is at the election and risk
of the holders. Instead of delivery by mail, it is recommended that holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the Expiration Date. No
Letter of Transmittal or Original Notes should be sent to the Company. Holders
may request their respective brokers, dealers, commercial banks, trust companies
or nominees to effect the tenders for such holders.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Original Notes tendered pursuant thereto are tendered
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<PAGE> 24
(i) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal, or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by a member
of a signature guarantee program within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the Letter of Transmittal or any Original Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by
ESI, evidence satisfactory to ESI of their authority to so act must be submitted
with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance and withdrawal of tendered Original Notes will be
determined by ESI in its sole discretion, which determination will be final and
binding. ESI reserves the absolute right to reject any and all Original Notes
not properly tendered or any Original Notes ESI's acceptance of which would, in
the opinion of counsel for the Company, be unlawful. ESI also reserves the right
to waive any defects, irregularities or conditions of tender as to particular
Original Notes. ESI's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Original Notes must be cured within such times as the
Company shall determine. Although ESI intends to request the Exchange Agent to
notify holders of defects or irregularities with respect to tenders of Original
Notes, neither ESI, the Exchange Agent nor any other person shall incur any
liability for failure to give such notification. Tenders of Original Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Original Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, ESI reserves the right in its sole discretion (subject to
limitations contained in the Indenture) (i) to purchase or make offers for any
Original Notes that remain outstanding subsequent to the Expiration Date and
(ii) to the extent permitted by applicable law, purchase Original Notes in the
open market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers could differ from the terms of the Exchange Offer.
By tendering, each holder will represent to ESI, among other things, (i)
that the Exchange Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, (ii) that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and (iii) that
neither the holder nor any such other person is an "affiliate", as defined in
Rule 405 under the Securities Act, of ESI or, if such person is an affiliate of
ESI, that such person will comply with the registration and prospectus delivery
requirements of the Securities Act, to the extent applicable. If the holder is a
broker-dealer that will receive Exchange Notes for its own account in exchange
for Original Notes that were acquired as a result of market-making activities or
other trading activities, such holder by tendering will acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original
Notes are not immediately available, or (ii) who cannot deliver their Original
Notes and other required documents to the Exchange Agent, or cannot complete the
procedure for book-entry transfer prior to the Expiration Date, may effect a
tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly competed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or
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<PAGE> 25
hand delivery) setting forth the name and address of the holder, the
certificate number(s) of such Original Notes (if available) and the
principal amount of Original Notes tendered together with a duly executed
Letter of Transmittal (or a facsimile thereof), stating that the tender is
being made thereby and guaranteeing that, within three business days after
the Expiration Date, the certificate(s) representing the Original Notes to
be tendered in proper form for transfer (or a confirmation of a book-entry
transfer into the Exchange Agent's account at the Depositary of Original
Notes delivered electronically) with any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) Such certificate(s) representing all tendered Original Notes in
proper form for transfer (or confirmation of a book-entry transfer into the
Exchange Agent's account at the Depositary of Original Notes delivered
electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three business days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to 5:00 P.M., New York City Time, on the Expiration
Date, unless previously accepted for exchange.
To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 P.M., New York City time, on
the Expiration Date, and prior to acceptance for exchange thereof by the
Company. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Original Notes to be withdrawn (the "Depositor"), (ii)
identify the Original Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Original Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Original Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee with respect to the Original Notes register the transfer of
such Original Notes into the name of the person withdrawing the tender, and (iv)
specify the name in which any such Original Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by ESI whose determination shall be final and binding on all parties.
Any Original Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Original Notes so withdrawn are validly re-tendered.
Any Original Notes which have been tendered but which are not accepted for
exchange or which are withdrawn will be returned to the holder thereof without
cost to such holder as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer. Properly withdrawn Original Notes may be
re-tendered by following one of the procedures described above under "Procedures
for Tendering" at any time prior to the Expiration Date.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by ESI. The principal solicitation for tenders pursuant to the Exchange
Offer is being made by mail; however, additional solicitation may be made by
telegraph, telephone or in person by officers and regular employees of ESI and
its affiliates.
ESI has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the Exchange Offer. ESI, however, will pay the Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith. ESI may also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus,
Letters of Transmittal and related documents to the beneficial owners of the
Original Notes and in handling or forwarding tenders for exchange. ESI will pay
the other expenses to be incurred in connection with the Exchange Offer,
including fees and expenses of the Trustee, accounting and legal fees and
printing costs.
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ESI will pay all transfer taxes, if any, applicable to the exchange of
Original Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Original Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Original Notes tendered,
or if tendered Original Notes are registered in the name of any person other
than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Original Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, ESI believes that the Exchange Notes
issued pursuant to the Exchange Offer in exchange Original Notes may be offered
for resale, resold and otherwise transferred by any holder of such Exchange
Notes (other than broker-dealers, as set forth below, and other than any such
holder which is "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's business and such holder does
not intend to participate and has no arrangement or understanding with any
person to participate in the distribution of such Exchange Notes. Any holder who
tenders in the Exchange Offer with the intention to participate, or for the
purpose of participating, in a distribution of the Exchange Notes may not rely
on the position of the staff of the Commission enunciated in Exxon Capital
Holdings Corporation (available May 13, 1988) and Morgan Stanley & Co.,
Incorporated (available June 5, 1991), or similar no-action letters, but rather
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. In addition, any such
resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K of the Securities Act. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Original Notes, where such Original
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution."
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is a holder,
(ii) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and (iii) the Holder and such other person acknowledge that if
they participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (a) they must, in the absence of an exemption therefrom, comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such holder incurring liability
under the Securities Act for which such holder is not indemnified by the
Company. Further, by tendering in the Exchange Offer, each holder that may be
deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of ESI
will represent to the Company that such holder understands and acknowledges that
the Exchange Notes may not be offered for resale, resold or otherwise
transferred by that holder without registration under the Securities Act or an
exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
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CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of making of this Exchange Offer, ESI will have fulfilled one
of its obligations under the Registration Rights Agreement and holders of
Original Notes who do not tender their Original Notes generally will not have
any further registration rights under the Registration Rights Agreement or
otherwise. Accordingly, any holder of Original Notes that does not exchange that
holder's Original Notes for Exchange Notes will continue to hold the untendered
Original Notes and will be entitled to all the rights and limitations applicable
thereto under the Indenture, except to the extent of such rights or limitations
that, by their terms, terminate or cease to have further effectiveness as a
result of the Exchange Offer (including the right to receive additional
interest, under certain circumstances, as Liquidated Damages).
The Original Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Original
Notes may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) pursuant to an effective registration statement under the
Securities Act, (iii) so long as the Original Notes are eligible for resale
pursuant to Rule 144A, to a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act in a transaction meeting the requirements of
144A, (iv) outside the United States to a foreign person pursuant to the
exemption from the registration requirements of the Securities Act provided by
Regulation S thereunder, (v) to an institutional accredited investor that, prior
to such transfer, furnishes to the Trustee a signed letter containing certain
representations and agreements relating to the restrictions on transfer of the
Original Notes evidenced thereby (the form of which letter can be obtained from
the Trustee) or (vi) pursuant to another available exemption from the
registration requirements of the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
Accordingly, if any Original Notes are tendered and accepted in the
Exchange Offer, the trading market for the untendered Original Notes could be
adversely affected. See "Risk Factors -- Consequences of Failure to Exchange
Original Notes" and "-- Termination of Certain Rights."
TERMINATION OF CERTAIN RIGHTS
Holders of the Notes will not be entitled to certain rights under the
Registration Rights Agreement following the consummation of the Exchange Offer.
The rights that generally will terminate are the right (i) to have the Company
file with the Commission and use its best efforts to have declared effective a
shelf registration statement to cover resales of the Original Notes by the
holders thereof and (ii) to receive additional interest as Liquidated Damages if
the registration statement of which this Prospectus is a part or the shelf
registration statement are not filed with, or declared effective by, the
Commission within certain specified time periods or the Exchange Offer is not
consummated within a specified time period.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Original Notes are urged to
consult their financial and tax advisors in making their own decision on what
action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of ESI or its subsidiaries since the respective dates as of which
information is given herein. The Exchange Offer is not being made to (nor will
tender be accepted from or on behalf of) holders of Original Notes in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, the
Company intends to take such action as it may deem necessary to make the
Exchange Offer in any such jurisdiction and extend the Exchange Offer to holders
of Original Notes in such jurisdiction.
21
<PAGE> 28
The Company may in the future seek to acquire indentured Original Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plans to acquire any Original
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any indentured Original Notes except to the
extent that it may be required to do so under the Registration Rights Agreement.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Original Notes, as reflected in ESI's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by ESI upon the consummation of the Exchange Offer. The expenses of
the Exchange Offer will be amortized by ESI over the term of the Exchange Notes
under generally accepted accounting principles.
EXCHANGE AGENT
The Huntington National Bank, Columbus, Ohio has been appointed as Exchange
Agent for the Exchange Offer. All correspondence in connection with the Exchange
Offer and the Letter of Transmittal should be addressed to the Exchange Agent,
as follows:
<TABLE>
<S> <C>
By Hand: By Overnight Courier/Mail:
The Huntington National Bank The Huntington National Bank
c/o The Bank of New York Attn: Corporate Trust
101 Barclay Street 41 South High Street, 11th Floor
New York, NY 10286 Columbus, OH 43215
Attn: Drop Window
</TABLE>
Facsimile Transmission:
(614) 480-5223
(For Eligible Institutions Only)
Confirm by Telephone:
(614) 480-3888
Requests for additional copies of this Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "Service") will not take a contrary view,
and no ruling from the Service has been or will be sought. Legislative, judicial
or administrative changes or interpretations may be forthcoming that could alter
nor modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders of either Original Notes or Exchange Notes. Certain
holders of the Original Notes (including insurance companies, tax exempt
organizations, financial institutions, broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) may be subject
to special rules not discussed below. EACH HOLDER OF AN ORIGINAL NOTE SHOULD
CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF
EXCHANGING SUCH HOLDER'S ORIGINAL NOTES FOR EXCHANGE NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
The issuance of the Exchange Notes to holders of the Original Notes
pursuant to the terms set forth in this Prospectus should not constitute a
recognition event for Federal income tax purposes. Consequently, no gain or loss
should be recognized by Holders of the Original Notes upon receipt of the
Exchange Notes. For
22
<PAGE> 29
purposes of determining gain or loss upon the subsequent sale or exchange of the
Exchange Notes, a Holder's basis in the Exchange Notes should be the same as
such Holder's basis in the Original Notes exchanged therefor. Holders should be
considered to have held the Exchange Notes from the time of their original
acquisition of the Original Notes.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of ESI's obligations
under the Purchase Agreement and the Registration Rights Agreement. The Company
will not receive any cash proceeds from the issuance of the Exchange Notes
offered hereby. In consideration for issuing the Exchange Notes contemplated in
this Prospectus, the Company will receive the Original Notes in like principal
amount, the form and terms of which are the same as the form and terms of the
Exchange Notes (which replace the Original Notes, except as otherwise described
herein). The Original Notes surrendered in exchange for the Exchange Notes will
be retired and canceled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase or decrease in the indebtedness
of ESI.
The Company received approximately $82 million of net proceeds of the
Offering of the Original Notes (after deduction of the Initial Purchaser's
discount and estimated Offering expenses). The Company employed the proceeds to
support its growth by using approximately $50 million to repay indebtedness
under its prior bank revolving credit facility (the "Prior Credit Facility")
incurred primarily in connection with recent acquisitions. The Company also
intends to utilize approximately $1.5 million to enhance operations by upgrading
its information systems and networks and to support centralization of certain
functions, and between $2 million and $4 million for deferred payments relating
to prior acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." The
remaining net proceeds will be used to provide funds for general corporate
purposes, including working capital, and for possible future acquisitions. The
Company has no current arrangements, and no pending agreements, for any such
acquisitions; there can be no assurance that appropriate acquisitions will be
identified or that any such transactions will be consummated.
23
<PAGE> 30
CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of the Company at June 30, 1997, and as adjusted to reflect the
sale by the Company of the Notes in the Offering and the application of the net
proceeds therefrom. This information should be read in conjunction with the
Company's consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents(1)........................................... $ 8,093 $ 42,793
Restricted cash and investments........................................ 14,000 14,000
------- --------
Total cash and investments........................................ $22,093 $ 56,793
======= ========
Total debt:
Prior Credit Facility................................................ $47,300 $ --
Amended Credit Facility(2)........................................... -- --
10% Senior Notes..................................................... -- 85,000
------- --------
Total debt........................................................ 47,300 85,000
------- --------
Stockholders' equity:
Class A Convertible Preferred Stock, no par value; 10,000,000 shares
authorized; none issued........................................... -- --
Common Stock, no par value........................................... 31,747 31,747
Retained earnings.................................................... 17,872 17,872
------- --------
Total stockholders' equity(3)..................................... 49,619 49,619
------- --------
Total capitalization......................................... $96,919 $ 134,619
======= ========
</TABLE>
- ---------------
(1) Cash and cash equivalents is decreased by approximately $2.5 million
representing bank overdrafts. Bank overdrafts represent outstanding checks
in excess of cash on hand at the applicable bank.
(2) At the closing of this Offering, the Company did not have any borrowings or
letters of credit outstanding under the Amended Credit Facility. The Amended
Credit Facility is secured by substantially all of the Company's assets.
(3) Does not include write-off of unamortized deferred financing costs on the
Prior Credit Facility of approximately $230,000.
24
<PAGE> 31
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein. The selected consolidated
financial information presented below as of December 31, 1994, 1995 and 1996 and
for the years then ended are derived from consolidated financial statements of
the Company, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report included elsewhere herein. The
selected consolidated financial information presented below as of December 31,
1992 and 1993 and for the years then ended are derived from consolidated
financial statements of the Company which have been audited by the Company's
former independent public accountants. The income statement and balance sheet
data as of June 30, 1996 and 1997 and for the six months then ended are derived
from the unaudited financial statements but, in the opinion of management,
reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of the results for such periods and as of such
dates. The results for the six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.............................. $11,191 $48,571 $74,334 $164,455 $439,016 $164,942 $422,024
Cost of revenues...................... 10,800 46,501 71,068 150,675 400,862 148,446 399,871
------- ------- ------- -------- -------- -------- --------
Gross profit.......................... 391 2,070 3,266 13,780 38,154 16,496 22,153
Selling, general and administrative
expenses............................ 299 1,471 2,297 7,183 17,310 6,975 15,912
Depreciation and amortization......... 24 128 269 426 2,073 654 2,048
------- ------- ------- -------- -------- -------- --------
Income from operations................ 68 471 700 6,171 18,771 8,867 4,193
Other income:
Interest income..................... 3 10 52 296 833 410 447
Interest expense.................... (5) (104) (3) (25) (1,196) (7) (2,065)
Other income (expense).............. (4) (169) 80 239 (1) -- (58)
------- ------- ------- -------- -------- -------- --------
Income before provision for income
taxes............................... 62 208 829 6,681 18,407 9,270 2,517
Income tax provision.................. 14 98 450 2,846 6,381 3,801 1,007
------- ------- ------- -------- -------- -------- --------
Net income............................ $ 48 $ 110 $ 379 $ 3,835 $ 12,026 $ 5,469 $ 1,510
======= ======= ======= ======== ======== ======== ========
Net income per share:
Primary............................. $ -- $ .01 $ .02 $ .16 $ .37 $ .17 $ .05
Fully diluted....................... $ -- $ .01 $ .02 $ .14 $ .37 $ .17 $ .05
OTHER DATA:
EBITDA(a)............................. $ 91 $ 440 $ 1,101 $ 7,132 $ 21,676 $ 9,931 $ 6,630
Depreciation and amortization......... 24 128 269 426 2,073 654 2,048
Capital expenditures.................. 50 46 189 238 702 416 1,143
Ratio of earnings to fixed
charges(b).......................... 2.8x 1.7x 18.6x 93.8x 13.6x 83.0x 2.1x
At period end:
Worksite employees.................... 700 2,200 3,600 11,000 30,000 24,300 42,900
Client companies...................... 160 250 450 920 1,200 960 1,400
States with worksite employees........ 15 15 20 40 46 43 46
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents and
restricted cash..................... $ 179 $ 1,049 $ 1,998 $ 16,771 $ 22,480 $ 15,718 $ 24,609
Working capital (deficit)............. (146) (36) 2,394 8,589 30,449 17,553 35,019
Total assets.......................... 664 6,399 9,310 36,840 125,969 61,125 151,757
Long-term debt........................ -- -- -- -- 42,800 -- 47,300
Stockholders' equity.................. 14 3,451 6,401 19,943 46,507 36,368 49,619
</TABLE>
25
<PAGE> 32
(a) "EBITDA" represents the sum of income before income taxes, interest expense
and depreciation and amortization. Information regarding EBITDA is presented
because management believes that certain investors use EBITDA as one measure
of an issuer's ability to service its debt. EBITDA is not a measure of
performance or financial condition under generally accepted accounting
principles, but is presented to provide additional information related to
debt service capability. EBITDA should not be considered in isolation or as
a substitute for other measures of liquidity or financial performance under
generally accepted accounting principles. While EBITDA is frequently used as
a measure of operations and the ability to meet debt service requirements,
it is not necessarily comparable to other similarly titled captions of other
companies due to the potential inconsistencies in the method of calculation.
(b) The ratio of earnings to fixed charges is computed by dividing fixed charges
into income before income taxes plus fixed charges. Fixed charges include
interest expense, amortization of debt issuance costs and the estimated
interest component of rent expense.
26
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Company's consolidated financial statements
and the notes thereto appearing elsewhere herein. Historical results are not
necessarily indicative of trends in operating results for any future period. See
also "Risk Factors" for certain matters which could affect the Company's future
performance in addition to those discussed in this section.
RESULTS OF OPERATIONS -- OVERVIEW
The following is a summary of certain factors which affect results of
operations and which have generally applied to the Company in all periods
presented.
Revenues. The most significant components of the Company's revenues are
payments received from customers for gross salaries and wages paid to PEO
worksite employees and the Company's service fee. The Company negotiates service
fees on a client-by-client basis based on factors such as market conditions,
client needs and services requested, the clients' workers' compensation and
benefit plan experience, Company administrative resources required, the expected
profit, and other factors. These fees are generally expressed as a fixed
percentage of the client's gross salaries and wages except for certain costs,
primarily employer's health care contributions, which are billed to clients on
an add-on basis. Because the service fees are negotiated separately with each
client and vary according to circumstances, the Company's service fees, and
therefore its gross margin, will fluctuate based on the Company's client mix.
Revenues from stand-alone risk management/workers' compensation services
consist primarily of gross premiums charged to clients for such services. The
Company also receives fee income for certain other types of services, such as
those in connection with its driver leasing program.
Costs of Revenues. The Company's primary direct costs of revenues include
salaries and wages paid to worksite employees, employment related taxes, costs
of health and welfare benefit plans, and workers' compensation insurance costs.
The largest component of direct costs is salaries and wages to worksite
employees. Although this cost is generally directly passed through to clients,
the Company is responsible for payment of these costs even if not reimbursed by
its clients. The Company extends credit terms to clients in certain industries.
Employment related taxes consist of the employer's portion of payroll taxes
required under the Federal Income Contribution Act ("FICA"), which includes
Social Security and Medicare, and federal and state unemployment taxes. The
federal tax rates are defined by the appropriate federal regulations. State
unemployment rates are subject to change each year based on claims histories and
size of payments, and vary from state to state.
Workers' compensation costs, whether relating to PEO worksite employees or
the Company's stand-alone risk management/workers' compensation program, include
the costs of claims up to the retention limits relating to the Company's
workers' compensation program, administrative costs, premium taxes and excess
reinsurance premiums, and accidental death and dismemberment insurance which the
Company maintains to limit certain of its losses. In its arrangements with the
Reliance Group of Insurance Companies ("Reliance") through the Company's
wholly-owned insurance subsidiary, the Company retains workers' compensation
liabilities up to certain specified amounts. The Company maintained a similar
program with Legion Insurance Company ("Legion") which it terminated effective
August 1, 1997 due to cost and capital considerations. Accrued workers'
compensation claims liability is based upon estimates of reported and unreported
claims and the related claims and claims settlement expenses in an amount equal
to the retained portion of the expected total incurred claim. The Company's
accrued workers' compensation reserves are primarily based on industry-wide
data, and to a lesser extent, the Company's past claims experience up to the
retained limits. The liability recorded may be more or less than the actual
amount of the claims when they are submitted and paid. While the Company
believes that its reserves are adequate for future claims expense, there can be
no assurance that this will be the case. Changes in the liability are charged or
credited to operations as the estimates are revised.
27
<PAGE> 34
Administrative costs include fees paid to Reliance and Legion and costs of
claims management by third party administrators. Premium taxes include taxes and
related fees paid to various states based on premiums written. Premium for
excess reinsurance relates to premium payments to the Company's insurers for the
retention of risks above specified limits.
Health care and other employee benefits costs consist of medical and dental
insurance premiums, payments of and reserves for claims subject to deductibles
and the costs of vision care, disability, life insurance and other similar
benefit plans. The Company's health care benefit plans consist of a mixture of
fully-insured programs and partially self-insured programs with specific and, in
one program, aggregate stop-loss insurance. The Company recognizes a liability
for partially self-insured health insurance claims at the time a claim is
reported to the Company by the third party claims administrator, and also
provides for claims incurred, but not reported based on industry-wide data and
the Company's past claims experience. The liability recorded may be more or less
than the actual amount of ultimate claims. While the Company believes that its
reserves are adequate for future claims expense, there can be no assurance that
this will be the case.
Selling, General and Administrative Expenses. The Company's primary
operating expenses are administrative personnel expenses, other general and
administrative expenses, and sales and marketing expenses. Administrative
personnel expenses include compensation, fringe benefits and other personnel
expenses related to the Company's internal administrative employees. Other
general and administrative expenses include rent, office supplies and expenses,
legal and accounting fees, insurance and other operating expenses. Sales and
marketing expenses include commissions to sales executives and related expenses.
Depreciation and Amortization. Depreciation and amortization consists
primarily of the amortization of goodwill and acquisition costs from the
Company's prior acquisitions. The Company amortizes goodwill and acquisition
costs over periods of three to thirty years, depending on the assets acquired,
using the straight-line method. Acquisitions generally result in considerable
goodwill because PEOs generally require few fixed assets to conduct their
operations.
Effective Tax Rates. The Company's effective tax rate will vary from time
to time depending primarily on the mix of profits derived from Camelback, the
Company's wholly-owned subsidiary, and the Company's various other profit
centers, the magnitude of nondeductible items relative to overall profitability
and other factors. The Company's estimated effective tax rate for financial
reporting purposes for 1997 and 1996 is also based on estimates of the following
items that are not deductible for tax purposes: (i) amortization of certain
goodwill; and (ii) one-half of the per diem allowance relating to meals paid to
truck drivers under a Company sponsored program. The tax rate used in each
quarterly reporting period is generally an estimate of the Company's effective
tax rate for the calendar year.
Acquisitions. Period-to-period comparisons are substantially affected by
the Company's recent substantial growth through acquisition of other companies
providing PEO services. The Company has accounted for its acquisitions using the
"purchase" method of accounting, and prior period financial statements therefore
have not been restated to reflect these acquired operations. In addition to
increasing revenues, acquisition activity can affect gross profits and margins
because the industry mix of the acquired companies may differ from that of the
Company and because of the transition period after an acquisition in which the
Company acts to implement pricing changes where appropriate and to eliminate
client relationships which do not meet the Company's risk or profitability
profiles.
Operating Results. Margin comparisons are affected by the relative mix of
stand-alone risk management/workers' compensation services and full PEO services
in any particular period. Significant numbers of conversions from stand-alone
risk management/workers' compensation to full-service PEO arrangements (such as
those which have occurred in connection with certain Company acquisitions) would
tend to increase gross profit amounts while decreasing gross margins because of
the addition of pass-through salaries and wages to both revenues and costs.
Certain 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 a year. Since the Company's revenues for an
individual client are generally earned and collected at a relatively constant
rate throughout
28
<PAGE> 35
each year, payment of such unemployment tax obligations has a decreasing impact
on the Company's working capital and results of operations as the year
progresses.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------
1994 1995 1996 1996 1997
------- -------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $74,334 $164,455 $439,016 $164,942 $422,024
Cost of revenues............................. 71,068 150,675 400,862 148,446 399,871
Gross profit................................. 3,266 13,780 38,154 16,496 22,153
Selling, general and administrative.......... 2,297 7,183 17,310 6,975 15,912
Depreciation and amortization................ 269 426 2,073 654 2,048
Interest income.............................. 52 296 833 410 447
Interest expense and other................... (77) (214) 1,197 7 2,123
Net income................................... 379 3,835 12,026 5,469 1,510
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO JUNE 30, 1996
Revenues. For the six months ended June 30, 1997, revenue was $422.0
million compared to $164.9 million for the six months ended June 30, 1996, an
increase of 156%. Acquisitions, and the addition of US Xpress, Inc. and
affiliates ("US Xpress") as a PEO client, primarily accounted for the increase
in revenues between the periods. Growth was in part offset by factors such as
attrition of clients, at the election of either the Company or the client, and
increased competition in the PEO and workers' compensation industry. Excluding
the effects of US Xpress and the full quarter benefit of companies acquired in
February 1997, internal growth, net of attrition, was not significant for the
quarter ended June 30, 1997, as compared to the first quarter. The number of
worksite employees increased to approximately 42,900 covering approximately
1,400 client companies at June 30, 1997 from approximately 24,300 covering 963
client companies at June 30, 1996. In addition, at June 30, 1997, the Company
provides stand alone risk management/workers' compensation services to
approximately 13,900 employees covering 64 employers as compared to
approximately 15,000 employees covering 65 employers at the same period last
year. Stand-alone policies, subject to renewal, in place at June 30, 1997
represent annualized premiums of approximately $11.3 million. A further decrease
in the average number of employees covered under the Company's risk
management/workers' compensation services was in part due to the conversion of
certain stand-alone clients to PEO clients due to an acquisition. Revenues
related to stand-alone risk management/workers' compensation services were $7.1
million for the six months ended June 30, 1997 (which included nonrecurring
revenue of approximately $1.0 million related to stand-alone workers'
compensation premiums that were under-billed for policies written in the
previous year) compared with revenues of $8.5 million for the six months ended
June 30, 1996. The Company began in late 1996 to experience the effects of
competition and a general weakening in the workers' compensation and employee
benefits markets, which slowed revenue growth. This trend has continued into
1997 and is continuing to be experienced by the Company. In addition, revenues
for risk management/workers' compensation services include approximately
$900,000 for the six month period ended June 30, 1997, related to a single
customer as to which disputes have arisen. The Company has provided reserves for
that amount and is considering what further action, including litigation, may be
necessary to collect these amounts. See "Liquidity and Capital Resources."
Cost of Revenues. For the six month period ended June 30, 1997 the cost of
revenues were $399.9 million compared to $148.4 million for the same period in
1996, representing a 169% increase. This increase is primarily due to the
increase in the Company's business as previously described and as described
below.
Included in the results for the six months ended June 30, 1997 are
reductions of $374,000 of workers' compensation expense and $100,000 of payroll
tax and related fees related to certain driver per diem/expense reimbursement
programs and approximately $1.1 million related to retrospective rate
adjustments on workers'
29
<PAGE> 36
compensation programs. The realization of the amount of expense savings related
to the per diem/expense reimbursement program is subject to successful
implementation of the program by the Company. Of the above amounts, a total of
approximately $900,000 relates to prior periods.
Workers' compensation losses for the six months ended June 30, 1997 were
$9.2 million. The Company believes that the overall results of the Company's
risk management/workers' compensation program as measured against industry data
can be attributed to the Company's selectivity in new client acceptance, the
effective use of safety inspections and safety programs and its ability to
manage and close open claims coupled with stop losses of $250,000 and $350,000
per occurrence, the maintenance of accidental death and dismemberment insurance
through the Chubb Group of Insurance Companies ("Chubb") and a 30-day
cancellation capability on PEO business. Although the Company believes its
internal method of establishing reserves continues to be appropriate, the
Company commissioned an independent third party actuarial review of the
Company's workers' compensation reserves at year end 1996, as it had for year
end 1995. In the 1996 review, the actuary primarily relied on industry-wide
data, while taking into account to a lesser extent than in past reviews the
Company's specific risk structure and philosophy in determining its findings.
Although the Company believes that determining reserves based more heavily upon
its actual historical experience is appropriate and adequately addressed its
exposure, it determined to adopt the reserve levels determined by the review for
the year ended December 31, 1996, and to use similar methodologies going forward
which may have an impact on future periods. The Company has also increased its
internal risk per occurrence to $500,000 in Ohio and Washington, as a result of
the Company becoming a self-insurer under those states' "monopolistic" workers'
compensation structures.
The following table provides an analysis of the Company's workers'
compensation reserves from its partially self-insured programs for the following
periods:
<TABLE>
<CAPTION>
SIX MONTHS
SEVEN MONTHS ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996 1997
------------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Reserve -- Beginning of period............. $ 0 $ 45 $ 1,052 $ 5,154
Provision for losses....................... 172 2,230 10,034 9,200
Payments................................... (127) (1,223) (5,932) (5,945)
---- ------ ------ ------
Reserve -- End of period................... $ 45 $ 1,052 $ 5,154 $ 8,409
==== ====== ====== ======
</TABLE>
The following table summarizes certain indicators of performance regarding
the Company's risk services department's ability to close out workers'
compensation claims incurred in each of the following periods:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE OPEN
TOTAL NUMBER OF CLAIMS JUNE 30,
CLAIMS 1997
--------------- ----------------
<S> <C> <C>
Year ended December 31, 1994................................... 100 0
December 31, 1995................................. 1,036 57
December 31, 1996................................. 3,408 659
Six months ended June 30, 1997................................. 2,280 1,407
------ ------
6,824 2,123
============ =============
</TABLE>
Gross Profit. The Company's gross profit margin for the six month period
ended June 30, 1997 of 5.2% was down from 10.0% for the six month period ended
June 30, 1996. This decrease primarily was attributable to the change in mix of
the Company's stand-alone risk management/workers' compensation program revenues
relative to the revenues derived from the Company's PEO business. In addition,
while a significant portion of the Company's six month 1997 revenue growth was
derived from US Xpress, as discussed previously, the gross profit contributed by
US Xpress was negligible for the six month period ended June 30, 1997. Increased
competition in certain areas of the Company's business along with higher
workers' compensation claims costs, as discussed previously, all negatively
affected the gross profit margin in 1997. The
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<PAGE> 37
Company generally earns a higher gross profit margin on revenues derived from
its stand-alone risk management/workers' compensation services than on revenues
derived from the Company's full-service PEO business, as PEO revenues generally
include significant (and substantially offsetting) revenue and expense items for
payroll and payroll-related costs for the worksite employees. Accordingly, the
Company's overall margin is affected in significant part by the mix of revenues
derived from full-service PEO clients and clients for which the Company provides
only risk management/workers' compensation services. Stand-alone risk
management/workers' compensation services revenue decreased by 3.6% of total
revenues for the first half of 1996 to 1.6% in the first half of 1997.
Selling, General and Administrative Expenses. For the six month period
ended June 30, 1997 and 1996, respectively, selling, general and administrative
expenses totaled $16.0 million, compared to $7 million, or a 128% increase.
Factors contributing to the increase in selling, general and administrative
expenses in 1997 over 1996 are the inclusion of the operations of various
acquisitions, an increase from 139 corporate employees at June 30, 1996 to 271
at June 30, 1997, and the relocation of the Company's office space. Included in
the increase in costs from acquisitions were expenses for TEAM Services and
Leaseway, acquired in the second and third quarter of 1996, respectively, and
which historically have maintained a higher ratio of selling, general and
administrative expense to gross profit than the Company. These factors which
caused increases in selling, general and administrative expense were partially
mitigated by improved systems utilization and economies of scale achieved within
the Company's operations. The Company's insurance costs have increased due
primarily to the Company's growth. The Company is reviewing the cost
effectiveness of all corporate insurance programs. Commission expenses increased
in the six months ended June 30, 1997 compared to the same period in 1996 due to
the increase in revenues discussed. Selling, general and administrative expenses
are expected to continue to increase to meet the needs of new business, though
the Company has initiated efforts to improve efficiencies. The most extensive
growth in selling, general and administrative expenses has been in the finance
and risk services departments. In addition, the Company signed a seven year
lease on new office space in Phoenix, Arizona containing significantly more
space at higher rates than its previous facilities. The annual rental increase
of approximately $1 million began in April 1997. The Company also expects that
costs for professional services will increase in 1997 as a result of litigation
recently brought against the Company.
Depreciation and Amortization. Depreciation and amortization represented
depreciation of property and equipment and amortization of organizational costs,
customer lists and goodwill. For the six month period ended June 30, 1997,
depreciation and amortization expense totaled $2.0 million compared to $654,000
for the six month period ended June 30, 1996. The increase was due primarily to
depreciation of new phone and computer systems and goodwill amortization
resulting from acquisitions, with Leaseway and the McClary-Trapp group of
companies ("McClary-Trapp") being the most significant. In addition, the Company
acquired ETIC Corporation d/b/a "Employers Trust" ("ETIC") and CMGR, Inc. and
Humasys, Inc. (collectively "CMGR") in February of 1997. Goodwill amortization
of these acquisitions was recognized from the date of acquisition. Because the
Company intends to focus in the short term on the further integration of prior
acquisitions, the Company does not currently expect 1997 acquisition activity to
be as extensive as in 1996.
Interest. For the six month period ended June 30, 1997 interest income
totaled $447,000 compared to $410,000 for the six months ended June 30, 1996.
The increase in interest income is primarily due to interest earned on both the
restricted cash and investments held for the future payment of workers'
compensation claims at Camelback and cash held at the corporate level. Interest
expense for the six month period ended June 30, 1997 totaled $2.1 million
compared to $7,000 for the six month period ended June 30, 1996. The increase in
interest expense is primarily due to interest accrued on the Prior Credit
Facility. The line was first utilized in August 1996 and had an average
outstanding balance of $46.6 million for the six months ended June 30, 1997. See
"Liquidity and Capital Resources."
Effective Tax Rate. The Company's effective tax rate provides for federal,
state and local income taxes. The effective tax rate for the six months ended
June 30, 1997 was 40% as compared to 41% for the six months ended June 30, 1996.
The tax rate used in each quarterly reporting period generally is an estimate of
the Company's effective tax rate for the calendar year. The 1997 rate reflects
the increased operations of the Company's wholly-owned subsidiary, Camelback,
which pays state premium tax rather than state income tax. Although the Company
believes that it has structured its Camelback arrangements to qualify for such
tax
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<PAGE> 38
treatment, any disallowance of this tax treatment could materially affect the
Company's results of operations for the current fiscal year and future fiscal
years, as well as past periods.
1996 COMPARED TO 1995
Net income for the year ended December 31, 1996, was $12.0 million, or $.37
per fully diluted share, reflecting significant growth from 1995 net income of
$3.8 million, or $.14 per fully diluted share. Revenues of $439.0 million for
the year ended December 31, 1996 were 167% higher than 1995. The growth was the
result of integration of several acquisitions; the growth in the Company's stand
alone risk management/workers' compensation program; direct PEO sales and
marketing efforts; and the efficient administration of existing business.
Revenues. Revenues increased from $164.5 million for the year ended
December 31, 1995 to $439.0 million for the year ended December 31, 1996, a 167%
increase. The increase in revenues was partially due to sales from the Company's
expanded PEO sales force. Acquisitions accounted for a significant increase in
revenues between the periods. The number of worksite employees increased from
approximately 11,000 at December 31, 1995, to approximately 30,000 at December
31, 1996. In 1995, the Company commenced placing risk management/workers'
compensation services to clients which are not full-service PEO clients of the
Company. As of December 31, 1996, the Company provided risk management/workers'
compensation services to approximately 13,500 workers as compared to 3,500 at
December 31, 1995. Revenues related to stand alone risk management/workers'
compensation services were $16.1 million in 1996 compared with $3.6 million for
1995. Stand alone policies in place at January 1, 1997 represented annualized
premiums of approximately $12 million.
Cost of Revenues. Cost of revenues increased 166% from $150.7 million for
the year ended December 31, 1995 to $400.9 million in the year ended December
31, 1996. This increase was primarily due to the increase in the Company's
business as explained in the section above and in the following discussion.
Workers' compensation expenses increased approximately 355% from $2.2
million in 1995 to $10.0 million in 1996, due primarily to the increase in
earned premiums on the stand alone risk management/workers' compensation program
and growth in the core PEO business, including acquisitions. See "Six months
ended June 30, 1997 compared to June 30, 1996 -- Cost of Revenues" for
information relating to the establishment of reserves, and in particular the
methodologies adopted in 1996.
Gross Profit. The Company's gross profit margin increased from 8.4% in the
year ended December 31, 1995 to 8.7% in the year ended December 31, 1996. This
increase primarily was attributable to the Company's stand-alone risk
management/workers' compensation program which was in place for the full year
ended December 31, 1996, versus only eight months in 1995. The eight-month
period included approximately 5,600 employees of Hazar, Inc. and affiliated
corporations ("Hazar") who were provided stand-alone risk management/workers'
compensation from May 1995 through September 1995, when the Hazar employees
became included in the Company's PEO business upon the acquisition of certain
assets of Hazar by the Company.
The Company also received the benefits of reduced administrative costs with
Camelback for the entire year ended December 31, 1996 as compared with the same
period in 1995 which only included seven months of benefit because Camelback was
not operative until June 1995. The Company also increased the number of workers'
compensation claims managers to 37 at December 31, 1996 compared to seven at
December 31, 1995. The Company believes that a continuous focus on maintaining a
low ratio of cases per claim manager is a significant factor in controlling
workers' compensation expense. In this regard, the Company continues to
implement a policy whereby the maximum number of active claims which each claims
manager may handle is 50. Based on industry data, the Company believes that this
maximum is significantly less than the industry average.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $10.1 million or 141% from $7.2 million for
the year ended December 31, 1995 to $17.3 million for the year ended December
31, 1996. As a percent of gross profit, selling, general and administrative
expenses decreased
32
<PAGE> 39
from 52% to 45% during the year ended December 31, 1995 and 1996, respectively.
Factors contributing to the increase in selling, general and administrative
expenses in 1996 over 1995 are the integration of the operations of various
acquisitions including an increase from 60 corporate employees at December 31,
1995 to 216 at December 31, 1996, resulting in a significant increase in
personnel costs, and the expansion of the Company's office space. Additionally,
the Company's results for the year reflected six months of expense for TEAM
Services and five months of expense for Leaseway, both acquisitions which
historically have maintained a higher ratio of selling, general and
administrative expense to gross profit than the Company. These factors which
caused increases in selling, general and administrative expense were partially
mitigated by improved systems utilization and economies of scale achieved within
the Company's operations, including consolidation of certain acquired companies'
administration. The Company's general liability insurance costs increased due in
part to the added corporate staff and increased costs for directors' and
officers' liability insurance. Commission expenses and bad debt expenses
increased in the year ended December 31, 1996 compared to 1995 due to the
increase in revenues discussed above. The most extensive growth in selling,
general and administrative expenses was in the risk management department.
Depreciation and Amortization. Depreciation and amortization represented
depreciation of property and equipment and amortization of organizational costs,
customer lists and goodwill in the year ended December 31, 1996 and 1995. The
increase was due primarily to depreciation of new phone and computer systems and
goodwill amortization resulting from acquisitions, with Hazar, Leaseway and
McClary-Trapp being the most significant. Amortization of goodwill from the
Hazar acquisition began in October 1995, and amortization of Leaseway and
McClary-Trapp began during 1996.
Interest. Interest income increased from $296,000 for the year ended
December 31, 1995 to $833,000 for the year ended December 31, 1996, primarily
due to interest earned on both the restricted cash and investments held for the
future payment of workers' compensation claims at Camelback and cash held at the
corporate level raised through the exercise of Common Stock purchase warrants
and through operations. Interest expense increased from $25,000 for the year
ended December 31, 1995 to $1.2 million for the year ended December 31, 1996,
primarily due to interest accrued on the Prior Credit Facility. The line was
first utilized in August 1996 and had an average outstanding balance of $34
million for the five months ended December 31, 1996. See "Liquidity and Capital
Resources."
Effective Tax Rate. The Company's effective tax rate provides for federal,
state and local income taxes. The effective tax rate for fiscal 1996 is 34.7% as
compared to 42.6% for the year ended December 31, 1995. The effective tax rate
for 1996 was positively impacted by a state tax benefit in the amount of
approximately $430,000 relating to a change in estimate for 1995 taxes. The
effective tax rate would have been approximately 37% without this benefit. This
downward year-to-year revision reflects a reduction resulting from the increased
operations of the Company's wholly owned subsidiary, Camelback, which pays state
premium tax rather than state income tax.
1995 COMPARED TO 1994
Net income for 1995 was $3.8 million or $.14 per fully diluted share,
reflecting significant growth from 1994 net income of $378,933 or $.02 per fully
diluted share. Revenues of $164.5 million in 1995 were 121% higher than in 1994
and were the most significant factor contributing to the increase in net income.
The growth results from the integration of the acquisitions of Employee Services
of Michigan, Inc. ("ESM") and Hazar, the success of direct sales and marketing
efforts and the efficient administration of existing business. The Company's
focus on managing operating expenses also played a role in maintaining profit
margins.
Revenues. Revenues increased 121% from $74.3 million in the year ended
December 31, 1994 to $164.5 million for the year ended December 31, 1995. The
increase in revenues was partially due to sales from the Company's sales force,
which expanded in June 1994, plus the full year impact in 1995 of new business
added throughout 1994. In addition, the acquisitions of ESM, effective January
1, 1995, and Hazar, effective October 2, 1995, accounted for revenues of $17.4
million and $35.8 million, respectively, in the year ended December 31, 1995.
The number of worksite employees increased from 3,600 at December 31, 1994 to
approximately 11,000 at December 31, 1995.
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<PAGE> 40
In 1995, the Company commenced providing risk management/workers'
compensation services to clients which were not PEO clients of the Company and a
portion of the increase in revenues during the year ended December 31, 1995 was
attributable to this program. A significant portion of the 1995 risk
management/workers' compensation services results reflects the inclusion of
approximately 5,900 worksite employees of Hazar from May 1, 1995 through October
2, 1995, at which time the Company completed its acquisition of Hazar and these
employees became worksite employees of the Company. As of December 31, 1995, the
Company provided stand-alone risk management/workers' compensation services to
approximately 3,500 non-PEO employees.
Cost of Revenues. Cost of revenues increased 112% from $71.1 million in
the year ended December 31, 1994 to $150.7 million in the year ended December
31, 1995. This increase was primarily due to the increase in the Company's
business as explained in the paragraph above. Workers' compensation costs
decreased on a per worksite employee basis during the year ended December 31,
1995 compared to 1994 due to the Company's ability to execute effectively its
risk management programs which include on-site safety programs, active claims
management and efficient execution of claims processing. In addition, the new
program utilizes the Company's wholly owned insurance subsidiary, Camelback,
which became operational in June 1995. The Company's state unemployment tax rate
in Arizona increased significantly in 1995 compared to 1994.
Gross Profit. The Company's gross profit margin increased from 4.4% in the
year ended December 31, 1994 to 8.4% in the year ended December 31, 1995. This
increase primarily was attributable to an increase in risk management/workers'
compensation services provided to employees of entities which were not full-
service PEO customers.
Revenues during the year ended December 31, 1995 include risk
management/workers' compensation revenues derived from Hazar, whose worksite
employees were not employees of the Company prior to the October 2, 1995
acquisition. These employees became worksite employees of the Company for
financial reporting purposes effective October 2, 1995, which affected the mix
of the Company's revenues for the quarter ended December 31, 1995 and reduced
the gross profit margin in the fourth quarter below that for the entire year. In
1995, the Company's gross profit margin was slightly impacted by the Company's
higher Arizona unemployment tax rate.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.9 million or 213% from $2.3 million in
the year ended December 31, 1994 to $7.2 million for the year ended December 31,
1995. Factors contributing to the increase in selling, general and
administrative expenses in 1995 over 1994 were the integration of ESM and Hazar
operations, an increase from 39 corporate employees at December 31, 1994 to 115
at December 31, 1995, resulting in a significant increase in personnel costs,
and the expansion of the Company's office space by 7,200 square feet to 17,350
square feet at December 31, 1995. These factors which caused increases in
selling, general and administrative expenses were partially mitigated by
improved systems utilization and economies of scale achieved within the
Company's operations. The Company's general liability insurance costs increased
due in part to the added corporate staff, and costs for directors and officers
liability insurance also increased. Costs to operate Employee Solutions - East,
Inc. ("ESEI"), the Company's subsidiary sales corporation which began operations
in mid-1994, increased in 1995 to support the growth in the Company's sales and
marketing efforts throughout the country. Commission expenses increased in 1995
compared to 1994 at a rate greater than the increase in revenue between the
periods because of the lower level of commissions applicable to the Company's
1994 revenue. In November 1994, Marvin D. Brody, Chairman of the Board, became
Chief Executive Officer of the Company. His compensation as CEO began January 1,
1995. Effective October 2, 1995 three executive officers received increases in
their compensation totaling $140,000 annually.
Depreciation and Amortization. Depreciation and amortization represented
depreciation of property and equipment and amortization of organizational costs,
customer lists and goodwill in the years ended December 31, 1994 and 1995. The
increase was due primarily to depreciation of new phone and computer systems and
goodwill amortization resulting from the acquisition of Hazar.
Interest. Interest income increased to $296,402 for the year ended
December 31, 1995 from $52,180 for the year ended December 31, 1994, primarily
due to interest earned on both the restricted cash held for the
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<PAGE> 41
future payment of workers' compensation claims at Camelback and cash held at the
corporate level raised through the exercise of Common Stock purchase warrants
and through operations.
Effective Tax Rate. The effective tax rate for 1995 was 42.6% compared
with 54.3% for 1994. The Company's tax expense in excess of statutory rates for
the year ended December 31, 1994 primarily was due to non-deductible goodwill,
as well as some non-deductible per diem expenses. The reduction in the Company's
effective tax rate in 1995 also resulted from an increased profit base over
which non-deductible goodwill and per diem allowances have less of an impact on
the tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company defines liquidity as the ability to mobilize cash to meet
operating, capital and acquisition financing needs.
Cash provided by operating activities was $2.8 million during the six
months ended June 30, 1997 compared to cash used in operating activities of $2.2
million during the same period of 1996. Cash used in operating activities was
$3.3 million during 1996. Cash provided by operating activities was $6.3 million
and $712,000 in 1995 and 1994. Operating cash flows are derived from customers
for full PEO services rendered by the Company and for stand-alone risk
management/workers' compensation services. Payments from PEO customers typically
are received on or within a few days of the date on which payroll checks are
delivered to customers, and cover the cost of the payroll, payroll taxes,
insurance, other benefit costs and the Company's administration fee. The 1996
acquisitions of TEAM Services, Leaseway and McClary-Trapp and the Company's
stand-alone program adversely affected the Company's operating cash flows as
these operations extend credit terms generally from 15 to 45 days as is
customary in their respective market segments. Stand-alone risk
management/workers' compensation services are billed in accordance with
individual policies. The Company also extends credit terms for certain of its
stand-alone risk management/workers' compensation clients by billing less than
the expected premium over the policy term, with the difference paid on a
deferred basis after the end of a policy year. In addition, accounts receivable
were increased because of the results of audits of stand-alone workers'
compensation policies which began in the first quarter of 1997. These audits
have indicated additional amounts due to the Company based upon changes during
the policy year, which are being billed to customers. The amounts due as a
result of the audits include $1.0 million recognized in the first quarter of
1997 which relate to prior periods. If the Company expands in these market
segments or enters into new market segments, or extends credit terms to
additional clients, its working capital requirements may increase. Included in
other assets is a net receivable of $2.9 million from a single customer as to
which disputes have arisen. The Company believes the amount is collectible, and
is considering its alternatives, including litigation, for collection of the
receivable.
The acquisitions of TEAM Services, Leaseway and McClary-Trapp plus growth
in the stand-alone program decreased the Company's operating cash flows in 1996
by approximately $15.1 million because these operations extend credit terms.
Cash used in operating activities was $3.3 million during 1996. Cash provided by
operating activities was $6.3 million and $712,000 in 1995 and 1994.
Cash used in investing activities was $8.0 million and $4.8 million in the
six months ended June 30, 1997 and 1996, respectively. For the first six months
of 1997 and 1996, capital expenditures were $1.1 million and $.4 million,
respectively. Capital expenditures in 1997 consisted primarily of personal
computers and other computer equipment to enhance the Company's ability to
support the Company's increasing client and employee base. In April 1997, the
Company relocated its Phoenix operations to a new facility. The leaseholds and
improvements will be financed by the landlord as a buildout allowance, and
subsequently reflected in rental payments. Moving costs and office furniture
represented cash outlays in the first six months of 1997 of approximately $1.0
million. During the remainder of 1997, the Company expects to continue to invest
in additional computer and technological equipment. Although the Company
continuously reviews its capital expenditure needs, management expects that 1997
capital expenditures will exceed those incurred in prior periods to meet the
needs of the Company's growing base of worksite employees.
Cash used in investing activities was $46.9 million, $2.2 million and $2.4
million in the years ended 1996, 1995 and 1994, respectively. The primary use of
cash in 1996 was for business acquisitions with Leaseway and
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<PAGE> 42
McClary-Trapp accounting for approximately $34.0 million of the $37.3 million
spent. For 1996, 1995 and 1994, capital expenditures were $702,000, $238,000 and
$189,000, respectively. Fiscal 1996 capital expenditures consisted primarily of
personal computers and other computer equipment to enhance the Company's ability
to support its increasing client and employee base.
Cash provided by financing activities was $4.8 million for the six months
ended June 30, 1997 compared to cash provided by financing activities of $3.7
million for the same period in 1996. Cash flows from financing activities during
1996 resulted primarily from the Company's acquisition financing (see below) and
the sale of the Company's Common Stock upon exercise of options.
Cash provided by financing activities was $47.2 million during 1996
compared to cash provided by financing activities of $8.0 million and $2.6
million in 1995 and 1994, respectively. Cash flows from financing activities
during 1996 resulted primarily from the Company's borrowing under the Prior
Credit Facility and the sale of the Company's Common Stock upon exercise of
warrants and options, offset by cash used to fund bank overdrafts of acquired
companies.
At June 30, 1997 and 1996, the Company had cash and cash equivalents of
$10.6 million and $10.7 million, respectively. At December 31, 1996 and December
31, 1995, the Company had cash and cash equivalents of $11.0 million and $14.0
million, respectively. Cash and cash equivalents are generally invested in high
investment grade instruments with maturities of less than 90 days. Certain
amounts of restricted cash and investments (see below) may have maturities
beyond 90 days but are highly liquid. The Company generally maintains large cash
balances to meet its daily payroll and payroll tax obligations. The Company is
implementing a nationwide cash management program to minimize the requirement
for cash on hand, though as the business continues to grow, cash requirements to
meet daily obligations will increase. The Company is required through its
fronting arrangements with Reliance to secure the future payment of workers'
compensation losses. The Company currently complies with this requirement by
maintaining restricted cash and investments in a trust fund. Such restricted
cash and investments have been calculated based on estimates of the future
growth in the Company's business and ultimate losses on such business. For this
purpose, ultimate losses are actuarially determined by the fronting carriers
utilizing industry-wide data and regulatory requirements which may not reflect
the Company's historical or expected ultimate losses. Restricted cash and
investments is classified as a current asset as the Company settles and pays
most workers' compensation claims within one year from occurrence. The Company
cannot access restricted cash and investments without the agreement of Reliance.
At June 30, 1997, December 31, 1996 and December 31, 1995, $14.0 million, $11.5
million and $2.7 million, respectively, was on deposit at Camelback as
restricted cash and investments. The Company may in the future replace these
requirements for restricted cash with a letter of credit under the Amended
Credit Facility.
At June 30, 1997, December 31, 1996 and December 31, 1995, the Company had
working capital of $35.0 million, $30.5 million and $8.6 million, respectively.
The significant growth in the Company's working capital is a direct result of an
increase in 1996 in restricted cash and investments of $8.8 million from 1995
which was financed from cash flows from operations, and an increase in third
party accounts receivable of approximately $15.1 million, of which $6.1 million
was financed out of the Company's operating cash flow and approximately $9.0
million was financed from borrowings under the line.
Assuming continued growth of the Company's full-service PEO business and
stand-alone risk management/workers' compensation services program, the Company
anticipates that it will be required under its arrangements with its insurers to
make further provision to secure claims payments, either by setting aside
additional funds for payment of claims and related administrative costs or
making arrangements for letters of credit.
Under Bermuda law, 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 annualized premium volume reaches $6 million. The
Company has applied for a new license under which the percentage requirement, if
such license is granted, will be reduced to 15%. Bermuda law also regulates the
circumstances under which Camelback may loan funds to its parent company. In the
six months ended June 30, 1997, the Company paid to Reliance
36
<PAGE> 43
approximately $10.7 million of which $6.6 million was ceded to the trust account
at Camelback for payment of claims and $2.1 million was ceded directly to
Camelback as unrestricted. For the same period the Company also paid to another
insurer approximately $2.6 million of which $1.7 million in loss funds will be
ceded to Camelback upon the establishment of a separate trust account for the
program. In the future, these factors may limit the ability of the Company to
execute its planned growth strategy and may limit the ability of Camelback to
transfer funds to the Company (whether via dividend or otherwise).
The Company had a $60 million revolving line of credit under the Prior
Credit Facility for acquisition financing, working capital and other general
corporate purposes. The Prior Credit Facility provided for various borrowing
rate options including borrowing rates based on a fixed spread of 25 basis
points over the prime rate or 250 basis points over the London Interbank Offered
Rate ("LIBOR"), as adjusted upward to reflect applicable reserve requirements.
The Company paid a commitment fee of 37.5 basis points on the unused portion of
the line.
Since the Company obtained its Prior Credit Facility in August 1996, the
$49.7 million drawn under the line at October 21, 1997 had been used primarily
for acquisition financing including $24.0 million for the acquisition of
Leaseway, $9.4 million for the acquisition of McClary-Trapp, $3.0 million for
CMGR, $.9 million for ETIC and approximately $10.0 million to finance accounts
receivable on such acquisitions. The Company repaid outstanding indebtedness
under the Prior Credit Facility with net proceeds of the Offering and replaced
it with the Amended Credit Facility. See "Amended Credit Facility" below.
The Company has financed its acquisitions through the issuance of Common
Stock, borrowings under the Prior Credit Facility, working capital and
assumption of acquired company obligations. The Prior Credit Facility restricted
its ability to consummate any acquisition prior to creditor approval. The
Company received a waiver under the Prior Credit Facility to enter into its
agreements to acquire Leaseway, McClary-Trapp, ETIC and CMGR.
AMENDED CREDIT FACILITY
In connection with the Offering of the Original Notes, the Company entered
into the Amended Credit Facility which provides for a revolving line of credit
of $20.0 million, including letters of credit drawn thereunder. The Amended
Credit Facility includes various borrowing rate options including borrowing
rates at the prime rate or 175 basis points over LIBOR. The Company will pay a
commitment fee of 25 basis points on the unused portion of the line and letter
of credit fees of 75 to 175 basis points per annum. The Amended Credit Facility
will mature on August 1, 1999. The principal loan covenants in the Amended
Credit Facility are as follows: current ratio of at least 1.3 to 1; minimum net
worth of at least $45 million as of June 30, 1997, adjusted by 75% of net income
and other factors each and every fiscal quarter thereafter; senior debt to
EBITDA (as defined therein) for the preceding four quarters of not more than 2.0
to 1 as of the end of each calendar quarter and maximum debt (as reduced by a
portion of available cash) to EBITDA of 4.0 to 1. The Amended Credit Facility
includes certain other customary covenants and is secured by substantially all
of the Company's assets.
INFLATION
The Company believes inflation has not had a significant impact on its
results of operations or financial condition.
37
<PAGE> 44
BUSINESS
THE COMPANY
The Company is one of the largest professional employer organizations
("PEO") and is the most geographically diverse PEO in the United States,
specializing in integrated employment outsourcing solutions for small and
mid-sized businesses. As of June 30, 1997, the Company served approximately
1,400 client companies representing 42,900 worksite employees in 46 states.
Through internal growth and strategic acquisitions, the Company has increased
annual revenues and EBITDA from 1992 to 1996 at compound annual growth rates of
150% and 293%, respectively.
The Company offers a broad array of integrated outsourcing solutions which
provide businesses throughout the United States with comprehensive and flexible
outsourcing services to meet their payroll, benefits and human resources needs
while helping manage their overall costs. The Company provides significant
benefits to its client companies and their worksite employees, including: (i)
managing escalating costs associated with workers' compensation, health
insurance, workplace safety and employment policies and practices; (ii)
enhancing employee recruiting and retention by providing employees with access
to a menu of healthcare and other benefits that are more characteristic of
larger employers; (iii) providing expertise in transportation personnel and in
labor relations; and (iv) reducing the time and effort required by the employer
to deal with an increasingly complex administrative, legal and regulatory
environment.
As a PEO, ESI and its "client company" typically agree that ESI will become
the "employer of record" for the client company's employees. ESI generally
assumes designated obligations for payroll processing and reporting, payment of
payroll taxes, human resources management and the provision of employee benefit
plans and risk management/workers' compensation services. Additionally, ESI may
provide other products and services directly to worksite employees, such as
employee payroll deduction programs for disability and specialty health
insurance, prepaid telephone cards and other personal financial services. The
client company generally retains management control of the worksite employees,
including hiring, supervision and termination and determining the employees' job
descriptions and salaries.
OPERATING STRATEGY
The Company's operating strategy is to enhance its position as a leading
nationwide PEO by being an innovative and cost effective provider of payroll,
benefits and human resources outsourcing solutions. The Company intends to
continue to grow the number of worksite employees and expand its product
offerings to existing clients and their worksite employees. The key components
of the Company's operating strategy are:
Provide comprehensive and flexible outsourcing solutions. The Company's
ability to customize a broad selection of bundled PEO services presents small to
mid-sized businesses with "one-stop shopping." The Company believes its
comprehensive and flexible outsourcing services are attractive to small
businesses seeking a full service, single-source solution to their payroll,
benefits and human resources needs. The Company's objective is to add value to
its client companies and worksite employees through tailored solutions that are
traditionally not available to small businesses on a cost effective basis.
Leverage nationwide operations and infrastructure. The Company is the most
geographically diverse PEO, operating in 46 states and serving multiple industry
sectors. Its nationwide presence provides the Company with substantial growth
opportunities while allowing for a highly selective approach in targeting and
accepting new clients which meet the Company's credit and insurance risk
criteria and facilitates the Company's ability to provide outsourcing solutions
to multi-state employers. This diversification also mitigates ESI's exposure to
regional business cycles, state legislative risk and industry specific
volatility.
Capitalize on economies of scale. As one of the largest nationwide PEOs
with one of the largest worksite employee bases, the Company achieves
significant economies of scale compared to its smaller competitors, including
enhanced purchasing power to source products, such as insurance. The Company
will continue to aggressively exploit its economies of scale to enhance its
profitability and to provide its clients and
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worksite employees with superior services at very competitive prices. The
Company's recently enhanced management information system and marketing
departments strengthen its platform for future growth.
Aggressively manage costs. The Company strives to maintain a low internal
cost structure. Among other things, the Company believes that its risk
management/workers' compensation claims management program allows it to minimize
operating costs and provide services at competitive rates. The Company maintains
a dedicated risk management department with regional field locations,
establishes proactive safety programs and promptly responds to and actively
manages workers' compensation claims. The Company's ongoing centralization of
certain of its functions, such as general management and check processing, is
expected to achieve further efficiencies through the elimination of redundant
functions in acquired companies.
Focus on superior client service. The Company believes that it retains
clients by providing superior service. The Company's client service teams
address payroll processing, benefits and human resources needs for individual
clients. The Company assigns a dedicated payroll specialist and a senior account
representative to each client. These primary contacts at ESI assist their
clients in meeting particular employment-related needs and designing effective
outsourcing solutions. The Company also provides electronic desktop payroll
processing services, payroll analysis, advanced time reporting options,
assistance with the preparation of employee manuals and handbooks and certain
benefits and human resources consulting services.
GROWTH STRATEGY
The Company has achieved significant growth in revenues and EBITDA by
utilizing its competitive strengths to capitalize on the accelerating trend
towards outsourcing by businesses throughout the United States. The key
components of the Company's growth strategy are:
Internal growth. The Company seeks to add new clients through aggressive
sales and marketing efforts and to increase revenues from existing clients. In
an effort to leverage its existing client base, the Company intends to develop
new products and services, as well as expand the services it provides directly
to worksite employees to include payroll deduction programs for various
products.
Strategic acquisitions. The Company follows an aggressive but disciplined
approach for identifying, evaluating and executing specific acquisitions. The
PEO industry is highly fragmented with over 2,300 PEOs operating in the United
States, according to the National Association of Professional Employer
Organization ("NAPEO"). Attractive opportunities for acquisitions are available
because, among other factors, small PEO owners have limited access to capital
and are subject to increasingly stringent regulatory requirements. The Company's
nationwide presence allows it to consider and evaluate acquisition opportunities
throughout the United States, carefully choosing the opportunities which it
believes to be most strategically beneficial. The Company believes that
strategic acquisitions are a practical, effective and economical means of growth
in the PEO industry.
Marketing alliances. The Company pursues strategic marketing alliances
which allow it to benefit with minimal financial investment from the experience,
industry expertise, geographic reach and customer contacts of other
organizations which can provide both parties with profitable business
opportunities. The Company believes these alliances will expand its customer
base and the services and products which it can offer to both client companies
and worksite employees.
INDUSTRY OVERVIEW
The PEO industry has undergone rapid growth in recent years. According to
NAPEO, the industry has grown at a compound rate of 29% from 1991 to 1996.
Industry analysts expect the PEO industry to continue to grow rapidly due to the
increased regulatory and administrative burden being experienced by all
employers and the ongoing requirements of businesses to manage their overall
employee related costs. For example, new tax legislation will require all
companies with annual payroll tax deposits in excess of $50,000 to settle such
taxes electronically or suffer monetary penalties. The Small Business
Administration estimated that in 1994 there were nearly 6 million businesses
with fewer than 500 employees which employ over 51 million employees with an
aggregate payroll of approximately $1.2 trillion. It is estimated that the
entire PEO industry currently has
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between two and three million worksite employees with annual payrolls of over
$17 billion. The large size of the potential client market leaves room for
substantial continued growth of the PEO industry.
The PEO industry began to evolve in the 1980s, primarily in response to the
increasing burdens on small to medium-sized employers resulting from a complex
regulatory and legal environment. While various service providers assisted these
businesses with specific tasks, PEOs began to emerge as providers of a more
comprehensive range of employment-related services. As the industry has evolved,
the term "professional employer organization" is used to describe an entity
which establishes a three-party relationship among the PEO, a client business,
and the employees of that client business. For client employers, PEOs can
perform the functions of human resources, payroll and benefits administration
departments of larger companies. The PEO offers employers a one stop shop with a
menu of choices for the client company to bundle the payroll and benefit related
services into one contract. The primary services performed by PEOs are payroll
administration, workers' compensation insurance, medical benefits and 401(k)
retirement plans. The growth of the PEO industry results, in significant part,
from the demand by relatively small businesses for assistance in administrative
aspects of the employer/employee relationship, as well as a means to allow
participation of their employees in attractive employee benefit programs. By
having their employees become part of a larger employee pool, employers often
can provide access to enhanced benefits, such as medical insurance, which would
not be economically available to relatively small employers.
The Company believes that an important aspect of the growth of the PEO
industry has been the increased recognition and acceptance of PEOs, and the
employer/employee relationships they create, by federal and state governmental
authorities. The concept of PEO services has become better understood by
regulatory authorities, as legitimate industry participants have overcome the
well-publicized earlier failures of some PEOs. The Company believes that the
regulatory environment has begun to shift to one of regulatory cooperation with
the industry, although significant issues (particularly tax-related) remain
unresolved. Through NAPEO, the Company and other industry leaders work with
government entities for the establishment of appropriate regulatory frameworks
to protect clients and employees and thereby promote the acceptance and further
development of the PEO industry. See "Industry Regulation."
CLIENTS
As of June 30, 1997, the Company's full-service PEO client base consisted
of approximately 1,400 client companies representing 42,900 worksite employees
in 46 states. At that date, the Company had clients in more than 12 specific
industries, based on Standard Industrial Classification ("SIC") codes. The
Company's approximate client distribution by major industry grouping as of June
30, 1997 is set forth below:
<TABLE>
<CAPTION>
INDUSTRY GROUP PERCENT OF CLIENTS
------------------------------------------ ------------------
<S> <C>
Service:.................................. 28
Professional............................ 14
Light Industrial........................ 6
Entertainment........................... 8
Transportation (PEO)...................... 23
Manufacturing............................. 9
Driver Leasing*........................... 9
Construction.............................. 10
Retail Trade.............................. 8
Wholesale Trade........................... 5
Real Estate............................... 3
Agriculture and Fishing................... 2
Other..................................... 3
--------
Total..................................... 100
========
</TABLE>
- ---------------
* Driver leasing is presented separately because it involves transport-related
services for clients in many SIC codes.
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As part of its business strategy, the Company targets a nationwide client
base composed primarily of transportation, light industrial, and blue collar
businesses, and to a lesser extent, white collar and professional. Although the
Company has targeted certain industries such as transportation, which it
believes particularly benefit from its services and expertise, the Company also
seeks to maintain an overall diversity of clients, in both industries and
geographical scope. This diverse base enables the Company to minimize its
exposure to cyclical downturns in specific industries and geographic regions.
The Company's average full-service PEO client had approximately 24
employees as of June 30, 1997 (excluding TEAM Services which employs a
substantial number of worksite employees in the entertainment industry on a
part-time or periodic basis), while the average client added through
internally-generated sales in 1996 exceeded 40 employees. The Company focuses
primarily on employers with fewer than 500 employees. However, the Company
believes that the benefits of PEO services remain attractive for larger
employers in many circumstances.
Effective January 1, 1997, the Company has entered into a PEO arrangement
with US Xpress, a publicly-held transportation company, currently with
approximately 4,000 employees who became Company worksite employees. The
addition of the worksite employees of US Xpress, which has become the Company's
largest single client, increased the average number of worksite employees per
client and the percentage of the Company's worksite employees in the
transportation industry.
The Company has benefitted from a high level of client retention, resulting
in a significant recurring revenue stream. NAPEO's standard for measuring
attrition is computed by dividing the number of clients lost during the period
by the sum of the number of clients at the beginning of the period plus the
number of clients added during the period ("Client Attrition Rate"). Based on
this standard, the Company's Client Attrition Rate was approximately 21%, 25%
and 22%, respectively, for the years ended December 31, 1996, 1995 and 1994.
The Company's Client Attrition Rate is attributable to a variety of
factors, including (i) termination by the Company because the client did not
make timely payments or failed to meet the Company's client risk profile, (ii)
client nonrenewal due to repricing, or service or price dissatisfaction and
(iii) client business failure, downsizing, or sale or acquisition of the client.
The general division of responsibilities between the Company and its client
as co-employers under the Company's standard forms of subscriber agreements for
PEO services is as follows:
<TABLE>
<CAPTION>
THE COMPANY CLIENT JOINT
- ------------------------------------- ---------------------------------------- ---------------------------------
<S> <C> <C>
Payroll preparation and reporting Supervision and direction of job Implementation of policies and
specific activities and designation of practices relating to the
Tax reporting and payment (state and job description and duties employer/employee relationship
federal withholding, FICA, FUTA,
state unemployment) Hiring, firing and disciplining of Employer liability under workers'
employees compensation
Workers' compensation compliance,
procurement, management, reporting Determination of salaries and wages
Employee benefit procurement, Selection of fringe benefits, including
administration and payment employee leave policies
Monitoring changes in certain Professional and business licensing and
governmental regulations governing permits
the employer/employee relationship
and updating the client when Compliance with immigration laws
necessary
Compliance with health, safety and work
laws and regulations
</TABLE>
The Company varies its standard contractual terms, including the apportioning of
responsibilities, when necessary to meet various states' regulatory requirements
or other circumstances. For example, Texas and Florida require the Company to
retain certain additional control rights over worksite employees as compared to
the Company's standard arrangements.
The Company's standard subscriber agreement may be canceled by either party
upon 30 days written notice and also may be canceled more quickly by the Company
under certain circumstances such as
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<PAGE> 48
nonpayment of fees by the client. The fee paid by the client to the Company
includes amounts for gross payroll and wages and a service fee (from which the
Company must pay employment taxes and benefits and workers' compensation
coverage). The specific service fee varies by client based on factors including
market conditions, client needs and services required, the clients' workers'
compensation and benefit plan experience and the administrative resources
required. The service fee generally is expressed as a fixed percentage of the
client's gross salaries and wages.
As a result of a 1996 acquisition, the Company began providing driver
leasing services in which the Company acts as sole employer of the worksite
employee. In such cases, the Company contracts with certain of its clients to
provide truck drivers who are sole employees of the Company. For these drivers,
the Company makes hiring, termination and placement decisions, and assumes more
related obligations than in the general "co-employer" situation. The Company may
also contract to provide additional services on a fee basis, such as negotiating
collective bargaining agreements on behalf of its clients, maintaining
department of transportation requirements and drug testing. The Company expects
that for certain industries this type of all-inclusive program will become a
more significant part of its business, which may expose the Company to greater
risk of liability for its employees' actions both because of the nature of the
employment relationship and because of the incidence of injuries inherent in a
transportation program (such as those from vehicle accidents).
In addition to its full-service PEO client customers, the Company also
provides stand-alone risk management/workers' compensation services to
approximately 64 employers, covering approximately 13,900 employees as of June
30, 1997. The Company's stand-alone risk management/workers' compensation
clients and employees are located in 41 states, primarily in the manufacturing,
construction, transportation and temporary services industries. See "Services
and Products -- Stand-Alone Risk Management/Workers' Compensation."
SERVICES AND PRODUCTS
The Company provides its clients with a comprehensive offering of
employment related services and products. The Company's flexible approach allows
its clients to select packages best suited for their needs. These services and
products generally cover five categories: payroll, human resources
administration, regulatory compliance, risk management/workers' compensation,
and benefits programs.
Payroll. As the employer of record, the Company assumes responsibility for
making payroll payments to the worksite employees and for payroll tax deposits,
payroll tax reporting, employee file maintenance, unemployment claims, and
monitoring and responding to changing laws and regulations relating to payroll
taxes. The Company typically bills a client company in advance of each payroll
date and reserves the right to terminate its agreement with the client if
payment is not received within two days of the billing date. In certain industry
segments where such practices are customary (such as those in the entertainment
industry and in certain parts of the transportation industries) the Company
extends to its clients payment terms ranging from 15 to 45 days. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Human Resources Administration. The Company's comprehensive human
resources services reduce the employment-related administrative burdens faced by
its clients. Worksite employer supervisors are provided with consulting
services, which can include employee handbook preparation, policy and procedure
review, job description development, and an analysis of performance review
processes and/or employment-related documentation procedures. The Company is a
party to collective bargaining agreements in its driver leasing programs, and is
available to provide other clients with assistance in collective bargaining upon
request. In certain market segments, the Company also provides placement
services.
Employer Regulatory Compliance. The Company, upon request, helps its
clients understand and comply with employment-related requirements. Laws and
regulations applicable to employers include state and federal tax laws, state
unemployment laws, federal and state job security/plant closing laws, workers'
compensation laws, occupational safety and health laws, laws governing benefits
plans such as ERISA and COBRA, immigration laws, the Americans with Disabilities
Act, family and medical leave laws, and discrimination, sexual harassment and
other civil rights laws.
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Risk Management/Workers' Compensation. The Company, through its
relationship with Reliance, offers a fully insured, first-dollar coverage
workers' compensation insurance program as part of its PEO benefit package. The
Company's risk management/workers' compensation program provides its clients
with access to safety programs through the Company's experienced safety
professionals, early return to work programs and access to managed care networks
for workers' compensation services as part of the PEO package.
Benefits Programs. The Company believes it generally can obtain employee
benefits, negotiate annual plan arrangements, and administer the plans and
related claims at rates generally not available to small and medium-sized firms
(depending upon geographic location, plan design and census demographics of the
group). The Company's benefits programs include (i) major medical indemnity,
preferred provider and health maintenance organization plans; (ii) group term
life and accidental death and dismemberment insurance; (iii) dental indemnity
and preferred provider insurance; (iv) vision care discount programs; (v) long
term disability insurance; and (vi) short term disability and other supplemental
insurance programs. Except for several partially self-insured health care
programs, these benefits programs of the Company are fully insured by
third-party insurers. See "Medical Programs" below. In addition, the Company
offers pre-tax health care spending plans, pre-tax premium conversion and
dependent care spending plans, and qualified retirement plans, such as 401(k)
plans, in which worksite employees may participate, and assists the client by
helping explain the advantages and mechanics of such programs to employees.
In June 1997, the Company entered into a strategic relationship with Aetna
U.S. Healthcare ("Aetna"), a national managed-care company, to offer Aetna's
high-quality, competitively priced medical and dental plans to the Company's
worksite employees nationally. The Company believes that the value and
comprehensiveness of Aetna's health benefit plans will allow the Company to
consolidate and simplify its benefit plan offerings, improve service and reduce
costs. The Company is in the process of beginning to offer Aetna products to its
worksite employees.
Stand-Alone Risk Management/Workers' Compensation. The Company also offers
its fully insured, first-dollar coverage workers' compensation insurance program
on a stand-alone basis. This stand-alone program permits the Company to leverage
its risk/management workers' compensation expertise and provide the benefits of
the program to clients for which the Company does not provide full PEO services.
The Company provides coverage on either a guaranteed cost basis or on a
"retrospective" basis in which premiums are adjusted after the end of the policy
term to reflect loss experience. Additionally, the Company also believes the
stand-alone program provides an opportunity to establish relationships with
companies which are not currently seeking PEO services but may be converted into
more comprehensive PEO service arrangements in the future.
Worksite Employee Services. The Company also provides benefits and
services directly to its worksite employees. The Company provides national and
regional bank affiliations to expedite payroll check cashing and direct deposit
services, and also offers credit union access to employees. The Company also
provides discount passes for a variety of recreational, entertainment, social
and cultural items across the United States, and for certain types of services.
The Company has introduced a payroll deduction program under which the Company
currently offers to worksite employees the ability to purchase pre-paid
telephone cards and specialized insurance at competitive prices. The Company
intends to offer in the future other goods and services such as homeowners,
automobile and other types of personal insurance and travel services.
SALES AND MARKETING
Although the PEO industry has grown significantly since its inception, it
has not yet achieved widespread customer familiarity in many markets. As a
result, the Company generally must first explain to potential clients what a PEO
does and the benefits a PEO generally offers before the Company can sell its
particular services to the potential client. The Company therefore believes that
its services can best be sold by experienced sales agents at individual,
face-to-face meetings with potential clients. The Company has developed an
internal sales and marketing capacity, and has entered into several strategic
marketing alliances to promote the Company's services.
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<PAGE> 50
Sales. The Company's national sales operation generates new business leads
through telemarketing operations located in Atlanta, Georgia. These leads are
then supported by a nationwide network of sales representatives. The operation
provides continuous training and sales support to all Company sales agents,
assists them in new client pricing, and manages new case flow between the field
and Company corporate offices in Phoenix.
The Company's field sales operations are coordinated by Regional Vice
Presidents of sales ("RVPs") located in various cities. These RVPs manage a
network of full-time sales agents and part-time sales brokers. In certain
circumstances, the Company appoints general agents who supervise several sales
agents and report to an RVP. Because of the need to educate prospective clients
as to the benefits of a PEO and the lead time necessary for a sales person to
become effective in the PEO industry, to assure a significant nationwide selling
presence, the Company believes it is appropriate to maintain a large sales
force. At June 30, 1997, the Company's sales force included 76 full-time RVPs,
general agents and sales agents.
The RVPs, general agents and the sales agents currently are compensated
primarily via commissions, subject to certain vesting and production
requirements. The RVPs and general agents also receive an override commission on
sales generated by sales agents which report to them. Each RVP, general agent
and sales agent is responsible for his or her own operating expenses such as
rent, hiring outside salespersons, permanent staff salaries, telephone, travel,
entertainment, training and other expenses, although the Company defrays a
portion of such expenses for the RVPs. Commissions may be payable after
termination in certain circumstances.
The Company's stand-alone risk management/workers' compensation services
generally are placed through ESI Risk Management Agency, Inc., a wholly owned
subsidiary of the Company ("RMA"). The Company established RMA as its
professional brokerage division to act as the Company's conduit for its
marketing alliance relationships with an insurance wholesaler. RMA is
responsible for recruiting and training a nationwide sales staff of independent
brokerage agencies or sales agents, providing effective communication channels
between the agencies and the Company's underwriting personnel, and developing
and managing sales compensation programs. RMA's independent agencies and sales
representatives receive compensation based on production.
Marketing. The Company's marketing operations provide comprehensive
marketing support for all of the Company's operations. This support focuses on
communications strategies, marketing research and analysis, product development
and strategic alliances. The marketing department also provides empirical data
for salespersons to assist in prospecting activities in targeted industries and
regions.
The marketing department has developed a communications strategy, which
encompasses the Company's various communication platforms and sales and
marketing materials, to provide continuity of the Company's message. This
strategy also seeks to expand the Company's contacts through new relationships
and expand relationships with current clients.
Marketing Alliances. The Company has entered into several strategic
alliances which it believes may enhance the marketing of its products and
services by allowing it to benefit from the experience, industry expertise,
geographical reach and customer contacts of the other organizations with minimal
financial investment. These alliances can provide the Company with profitable
business opportunities to either expand its customer base or expand the services
and products which the Company can offer.
The Company's current alliances include: arrangements by which Company PEO
and workers' compensation services are marketed by others in exchange for the
right to provide certain services for the Company; arrangements to offer prepaid
telephone cards and specialty insurance products to worksite employees; benefits
education for worksite employees; and a nationwide check-cashing program for
worksite employees.
COMPETITION
The market for many of the services provided by the Company is highly
fragmented with over 2,300 PEOs currently competing in the United States. Many
of these PEOs have limited operations and relatively few worksite employees, but
the Company believes that several are larger than or comparable to the Company
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<PAGE> 51
in size. As the PEO concept becomes better known and achieves greater market
penetration, the Company expects the PEO market to become substantially more
competitive. In areas of the country where PEOs have achieved greater market
recognition and penetration, competition has become intense. While price is the
principal competitive factor, service and the coverage and quality of benefits
programs are important ancillary competitive considerations. The Company's
subscriber agreements with its clients generally may be canceled upon 30 days
written notice of termination by either party. The short-term nature of most
customer agreements means that a substantial portion of the Company's business
could be terminated upon short notice.
The Company believes that currently its greatest competition is with the
traditional model in which clients provide employment-related services in-house
together with the use of independent insurance brokers. Further, certain large
insurance companies have become more aggressive in workers' compensation and
have reduced pricing in order to obtain market share. The Company also incurs
direct competition from numerous PEOs, some of which have greater resources,
greater assets and larger marketing staffs than the Company. The Company also
competes with payroll processing firms, temporary personnel companies and human
resource consulting firms. In addition, the Company expects that as the PEO
industry becomes better established, competition will increase because existing
PEO firms will likely consolidate into fewer and better competitors and well
organized new entrants with greater resources than the Company, including some
of the non-PEO companies described above, will enter the PEO market.
In the stand-alone risk management/workers' compensation services area, the
Company considers state insurance funds and other private insurance carriers to
be its primary competition.
INFORMATION SYSTEMS
The Company utilizes integrated payroll processing, billing and benefits
management information and processing systems. The Company also has recently
converted an advanced management system which allows for real time reporting of
worksite accidents and injuries and assists the Company in executing its risk
management program.
The Company has acquired various products installed at certain PEO client
locations to facilitate the transmission of payroll-related data. These include
a PC-based software product, electronic time clocks and direct dial-in modems.
INVESTMENT POLICY
The basic objectives of the Company's investment policy are the safety and
preservation of the invested funds, the liquidity of investments to meet cash
flow requirements (including future claims payments and related requirements for
its risk management/workers' compensation program), and the realization of a
maximum rate of return on investments consistent with capital preservation. The
investment policy defines eligible investments, investment limits and investment
maturities as guidelines to meet the policy's objectives. The Company has
appointed outside investment managers to assist in portfolio management. The
Company invests its available funds primarily in certificates of deposit rated
A-1/P-1 or better and other short term liquid investments.
PROPERTIES
The Company leases all of its offices. The Company's headquarters office
space at 6225 North 24th Street, Phoenix, Arizona consists of approximately
58,000 square feet, leased for a term expiring in 2004. The Company leased this
space beginning at April 1, 1997, allowing the Company to consolidate various
Phoenix operations and space for expansion.
The Company also leases smaller amounts of office space at various
locations in a number of other cities for its sales and operations offices. A
number of RVPs of the Company also rent space, at their own expense, for sales
offices. The Company believes that these facilities are adequate for its
existing operations, although further acquisitions or expansion could increase
its office space needs.
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Substantially all of the Company's assets are pledged to secure the
Existing Credit Facility and will be pledged to secure the Amended Credit
Facility.
LEGAL MATTERS
The Company and certain of its executive officers have been named as
defendants in ten actions filed between March 1997 and May 1997. While the exact
claims and allegations vary, they all allege violations by the Company of
Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, with
respect to the accuracy of statements regarding Company reserves and other
disclosures made by the Company and certain directors and officers. These suits
were filed after a significant drop in the trading price of the Company's Common
Stock in March 1997. Each of the actions seek certification of a class
consisting of purchasers of securities of the Company over specified periods of
time. Each of the complaints seeks the award of compensatory damages in amounts
to be determined at trial, including interest thereon, and costs of the action,
including attorneys fees. The suits have been consolidated, or are in the
process of being consolidated, before a single judge of the U.S. District Court
in Phoenix, Arizona. The Court has before it motions by the plaintiffs for the
appointment of representative plaintiffs and approval of selection of lead
counsel. Once these motions are ruled upon, it is anticipated that a
consolidated, amended complaint will be filed. The Company believes the actions
are without merit and intends to defend the cases vigorously. However, the
ultimate resolution of these actions could have a material adverse effect on the
Company's results of operations and financial condition.
There are many legal uncertainties about employee relationships created by
PEOs, such as the extent of the PEO'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 standard forms of client service agreement establish 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, and in some instances acts as sole 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.
The circumstances in which the Company acts as sole employer may expose the
Company to increased risk of such liabilities for an employees' actions. The
Company has been sued in actions alleging responsibility for employee actions
(which it considers to be incidental to its business). Although it believes it
has meritorious defenses, and maintains insurance (and requires its clients to
maintain insurance) covering certain of such liabilities, there can be no
assurances that the Company will not be found to be liable for damages in any
such suit, or that such liability would not have a materially adverse effect on
the Company. 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.
EMPLOYEES
At June 30, 1997, the Company employed 271 full-time corporate employees in
addition to the worksite employees. The Company considers its employee relations
to be good. None of the corporate employees are covered by collective bargaining
agreements.
RISK MANAGEMENT/WORKERS' COMPENSATION PROGRAM
Workers' compensation is a statutory system which requires employers to
purchase insurance or to self-insure in order to provide their employees with
medical care and other specified benefits for work-related injuries or
illnesses. Compensation is payable regardless of who is at fault and the
workers' compensation policy generally is the employee's sole source of
recovery. Four types of benefits typically are payable under workers'
compensation policies: medical benefits, indemnity payments for lost wages,
payments for job retraining and payments for permanent disabilities or death.
The amounts of disability and death benefits
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payable for claims are established by statute, but no dollar limitation is set
forth for medical benefits. Regulations governing workers' compensation vary by
state.
The overall premiums paid by employers for workers' compensation insurance
generally are governed in each state by statute. An employer's actual premium is
determined primarily by multiplying the employer's total payroll within each
industry classification by a statutory or manual premium rate for each
classification, and then increasing or decreasing that gross premium amount to
take into account the employer's actual and projected claims experience. A
company with a higher than average claims experience, for example, would
generally pay a higher premium than one with a lower than average claims
experience. This system (known as "experience modification" or "EMod") is
designed in part to reduce premium costs for employers that maintain safe
workplaces and to encourage safe workplaces.
Traditional Workers' Compensation Model. In a traditional workers'
compensation arrangement, the workers' compensation insurance company
administers claims itself or through a third-party claims administrator ("TPA").
The employer generally is required to notify the insurer or the TPA of every
claim, and the insurer or the TPA then evaluates the claim, maintains contact
with the worker, medical providers and the employer, makes any required payments
and estimates the appropriate initial reserve for the claim. Under this system,
a PEO has little direct control over the main components of its premium costs:
losses and loss administration expenses. Losses can be controlled to some extent
by the PEO's client, which manages the worksite, and the TPA, which evaluates
the propriety of claims. Claims administration expenses are controlled to a
large degree by the TPA, which manages the speed and efficiency of claims
settlement and charges the insured a fee for its services.
ESI's Risk Management/Workers' Compensation Model. The Company believes
that it has developed a risk management/workers' compensation program and
philosophy which allows the Company to achieve favorable results from its
workers' compensation operations. Specifically, the Company maintains the
following standards:
- maximum loss per occurrence of $250,000 ($350,000 for certain
transportation programs and $500,000 in two states with "monopolistic"
workers' compensation insurance structures)
- selective client acceptance
- relatively few claims assignments per claims manager
- effective closure of claims
- 30-day cancellation provisions in most PEO contracts
- retain no risk for accidental death and dismemberment
As the employer of record for its worksite employees, the Company is
required to provide workers' compensation insurance to its leased employees
unless other arrangements are made by the client. Prior to June 1, 1994, the
Company covered all its workers' compensation obligations by purchasing policies
from third-party insurers which provided coverage for the Company's workers'
compensation claims, although the Company partially self-insured for a portion
of its workers' compensation coverage from 1994 to 1995. These traditional
arrangements provided the Company with little or no risk for workers'
compensation losses, but the Company's prior arrangement did not permit it to
actively manage its workers' compensation premium costs.
Under the traditional arrangement, the Company had little control over its
workers' compensation costs and generally passed these costs through to its
customers. The Company believed, however, that if it could lower its workers'
compensation costs, and share the cost savings with its clients, it would be
able to market its PEO services more effectively. For this reason, in June 1995
the Company began providing workers' compensation insurance through Camelback,
its wholly-owned insurance company chartered in Bermuda, in coordination with
its servicing insurers which are rated "A-" (excellent) or better by A.M. Best
Company. Under its current arrangement with Reliance, Reliance provides full
first dollar insurance coverage for workers' compensation losses and Camelback
reinsures Reliance's obligation for losses equal to or less than $250,000
($350,000 for certain transportation programs and $500,000 in two states with
"monopolistic" workers' compensation insurance structures) for each occurrence.
The Reliance arrangements are subject to certain standard exceptions and exclude
coverage of certain high risk employees; the Company typically does not accept
clients with those types of employees although exceptions may exist. To further
reduce its potential liability, the Company has secured Accidental Death and
Dismemberment insurance from an insurance affiliate of Chubb that covers losses
of up to $500,000 (increased from $250,000 in July 1996 to obtain a net
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reduction in excess reinsurance costs) for certain types of serious claims and
maintains umbrella coverage for certain liabilities (other than losses resulting
from workers' compensation claims) the Company may incur in connection with its
administration of its risk management/workers' compensation program.
The Company believes that its current risk management/workers' compensation
arrangement helps lower its workers' compensation costs in the following ways:
Underwriting. The Company's Risk Services Department, established in June
1994, works to control the Company's exposure to losses by ensuring that
prospective clients present acceptable risks. The Company reviews every client's
prior loss experience and safety record, the extent to which such losses can be
prevented, job and industry classifications and current workers' compensation
premium rates. The Company's nationwide presence permits it to select those
industries and clients that present risk profiles that it believes it can manage
effectively. The Company carefully scrutinizes each potential client's risk
profile. Many cases submitted to the Company are rejected and do not become
clients of the Company. Once a client is accepted, the Company periodically
reviews the client's claims experience and costs to determine whether fee
adjustments or other changes are needed. The Company may terminate its
relationship with any PEO client on 30 days' notice, and thereby quickly reduce
any unacceptable exposure to workers' compensation claims.
Safety Control. The Company provides continuing assistance to its clients
in developing and maintaining safety programs and procedures. ESI reviews
periodic loss reports, attempts to identify weaknesses in the client company's
loss control procedures and assists the client in correcting those weaknesses.
The Company can mandate that its PEO clients implement recommended safety
procedures as a condition to receiving PEO services or workers' compensation
coverage.
Claims Management. The Company seeks through active claims management to
resolve claims quickly and at the lowest possible cost. To achieve this, the
Company maintains a low ratio of ESI claims managers to claims so that each case
may be properly evaluated. The Company emphasizes prompt attention to injuries
and claims, striving to achieve immediate reporting of injuries and with a goal
of contacting the employee, the client employer and the treating physician
within 24 hours of the time an injury is reported. The Company follows up with
an injured employee on a weekly basis, and emphasizes return to work programs to
minimize lost productivity. The Company makes available managed care programs to
treat employees and audits medical bills.
Where permitted by state law, the Company itself administers or pays most
claims with an expected loss of $5,000 or less, thereby saving proportionally
high TPA claims administration fees for such small claims. With at least 75% of
all claims falling below this $5,000 threshold, the Company believes this policy
results in significant cost savings. For claims exceeding $5,000, the Company
and the TPA work together to administer each claim, maintaining contacts with
the claimant employees, medical providers and client companies, investigating
claims reports and controlling medical, rehabilitation and other claims
settlement costs. In addition, the TPA cannot settle any claim without the
Company's prior approval. The Company believes its proactive claims management
approach permits it to settle its claims, on average, more quickly than ordinary
workers' compensation insurers.
Advantages of a Wholly-Owned Insurance Subsidiary. The Company believes
that operating its risk management/workers' compensation program using Camelback
provides it with operational and financial advantages. Use of Camelback provides
the Company flexibility in administering its program and coordinating coverage
with its insurers. The Company receives certain tax advantages, because
insurance companies may generally deduct reserves when booked versus when paid.
As an insurance company, Camelback pays state "premium tax" and accordingly its
profits are not subject to state income tax. Also, ESI's use of the insurance
subsidiary and its maintenance of a trust fund (or replacement letter of credit
arrangements) reduces credit risks for Reliance, thereby lowering administrative
costs of the Reliance program to ESI.
Reserves. To recognize liabilities for future unpaid losses, reserves are
established which represent estimates of future amounts needed to pay claims
with respect to insured events that have occurred. Reserves are also established
for loss adjustment expenses, which represent the estimated expenses of settling
claims, including legal and other fees, and general expenses of administering
the claims adjustment process. The Company also provides for claims incurred,
but not reported, based on industry-wide data and the Company's past claims
experience through consultation with an actuary. Reserves are estimates based
both on historical experience and on judgment of the effects future economic and
social forces are likely to have on Camelback's
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experience with the type of risk involved, circumstances surrounding individual
claims, and trends that may affect the probable number and nature of claims
arising from losses not yet reported. Consequently, loss reserves are inherently
subject to uncertainty and a number of highly variable circumstances.
The Company is required through its fronting arrangements with Reliance to
secure the future payment of workers' compensation losses. The Company currently
complies with this requirement by maintaining restricted cash and investments in
a trust fund, but may in the future comply by substituting letters of credit.
The amount required to be maintained as security is calculated by the Company's
fronting carrier (Reliance) based on estimates of the future growth in the
Company's business and ultimate losses on such business. For this purpose,
ultimate losses are actuarially determined by the fronting carriers utilizing
industry-wide data and regulatory requirements which may not reflect the
Company's historical or expected ultimate losses. Restricted cash and
investments is classified as a current asset as the Company settles and pays
most workers' compensation claims within one year from occurrence.
The Company has utilized its selective evaluation process, safety programs
and active claims management to manage its loss experience. However, the Company
may not be able to maintain its current loss experience over time. Future loss
experience could increase due to weakened underwriting standards as a result of
internal growth, the loss experience of acquired operations, increased
competition in the Company's risk management/workers' compensation business or
other factors which may affect the Company's standards, procedures or claims
experience. An increase in the Company's loss experience could materially
adversely affect the Company's results of operations, business and financial
performance.
Stand-alone Programs. Starting in 1996, the Company began formally
offering its risk management/ workers' compensation program on a stand-alone
basis to companies that are not full-service PEO clients or in connection with
possible acquisitions of other PEOs. See "Services and Products -- Stand-Alone
Risk Management/Workers' Compensation" above.
MEDICAL PROGRAMS
In addition to its medical insurance plans which are fully insured by third
party providers, the Company offers partially self-insured programs through
arrangements with Nationwide Life Insurance Company ("Nationwide") and John
Alden Life Insurance Company ("Alden"), and a self-insured program through an
arrangement with Provident Life & Accident Insurance company ("Provident"). As
of December 31, 1996, approximately 6% of employees were insured under the
Nationwide, Alden and Provident plans. Pursuant to the arrangements with
Nationwide and Alden, the Company is responsible for deductibles of $75,000
($100,000 prior to January 1, 1997) and $75,000 per covered individual per year,
respectively. Under the Provident program, the maximum policy coverage is
$100,000 per covered individual per year, for which the Company is responsible.
The Company's aggregate liability limit under the Nationwide program is based
upon covered lives as of the beginning of each month during the calendar year,
and is calculated at 125% of the expected claims amount. The Alden plan has no
stop-loss claim limit. Working with Nationwide and Pacific Atlantic
Administrators, which act as TPAs for the Alden program, and Provident,
respectively, the Company seeks to limit its risk by performing an in-depth
review of loss factors before agreeing to provide coverage, carefully monitoring
claims experience and identifying and adding preferred provider organizations
with competitive discounts as appropriate. The Company establishes reserves for
anticipated liabilities; however, there can be no assurance that the reserves
will be adequate due to such factors as unanticipated loss development on known
claims, increases in the number and severity of new claims, and a lack of
historical claims experience with new clients.
In June 1997, the Company entered into a strategic relationship with Aetna,
a national managed-care company, to offer Aetna's high-quality, competitively
priced medical and dental plans to the Company's worksite employees nationally.
The Company believes that the value and comprehensiveness of Aetna's health
benefit plans will allow the Company to consolidate and simplify its benefit
plan offerings, improve service and reduce costs. The Company is in the process
of beginning to offer Aetna products to its worksite employees.
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INDUSTRY REGULATION
FEDERAL REGULATION
Employers in general are 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 PEO 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 forms of agreement provide that the client is responsible for
compliance with certain employment-related laws and regulations, and that the
client is obligated to indemnify the Company 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.
TAXES
As employer of record for its clients' employees, the Company assumes
responsibility for the payment of federal and state employment taxes with
respect to wages and salaries paid to its worksite employees. There are
essentially three types of federal employment tax obligations: income tax
withholding requirements, social security obligations under FICA and
unemployment obligations under the Federal Unemployment Tax Act ("FUTA"). Under
the Code, the employer has the obligation to remit the employer portion and,
where applicable, withhold and remit the employee portion of these taxes. In
addition, the Company is obligated to pay state unemployment taxes and withhold
state income taxes.
The IRS has formed a Market Segment Study Group to examine whether PEOs
such as the Company are for certain tax purposes the "employers" of worksite
employees under the Code. If the IRS were to determine that the Company is not
an "employer" under certain provisions of the Code, it could materially
adversely affect the Company in several ways. First, with respect to benefit
plans, the tax qualified status of the Company's 401(k) plans could be revoked,
and the Company's cafeteria and medical reimbursement plans may lose their
favorable tax status. The Company cannot predict either the timing or the nature
of any final decision that may be reached by the IRS with respect to the Market
Segment Study Group or the ultimate outcome of any such decision, nor can the
Company predict whether the Treasury Department will issue a policy statement
with respect to its position on these issues or, if issued, whether such
statement would be favorable or unfavorable to the Company. Effective as of
January 1, 1997, the Company has implemented a new 401(k) retirement plan which
involves both the client and the Company as co-sponsors of the plan and is
intended to be a "multiple employer" plan under Code Section 413(c). The Company
believes that this multiple employer plan is less likely to be adversely
affected by any IRS determination that no employer relationship exists between
the Company and worksite employees. While the Company does sponsor some sole
employer plans covering worksite employees which the Company assumed in
connection with other acquired PEO operations and which could be adversely
affected by any unfavorable IRS determination, the Company intends to convert
the majority of the sole employer plans into one or more multiple employer
plans, and the Company believes that any unfavorable IRS determination, if
applied prospectively (that is, applicable only to periods after such a
determination is reached), probably would not have a material adverse effect on
the Company's financial position or results of operations. However, if an
adverse IRS determination were applied retroactively to disqualify benefit
plans, employees' vested account balances under 401(k) plans would become
taxable, an administrative employer such as the Company would lose its tax
deductions to the extent its matching contributions were not vested, a 401(k)
plan's trust could become a taxable trust and the administrative employer could
be subject to liability with respect to its failure to withhold applicable taxes
and with respect to certain contributions and trust earnings. In such event, the
Company also would face the risk of client dissatisfaction and potential claims
by clients or worksite employees.
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A determination by the IRS that the Company is not an "employer" under
certain provisions of the Code also could lead the IRS to conclude that federal
taxes were not paid by the proper party, because such taxes must be paid by the
employer. This conclusion could lead to actions by the IRS against clients of
the Company seeking direct payment of taxes, plus penalties and interest, even
though the taxes were previously paid by the Company. Further, if the Company
were required to report and pay such taxes on account of its clients, rather
than on its own account as the employer, the Company could incur increased
administrative burdens and costs.
In light of the IRS Market Segment Study Group and the general uncertainty
in this area, certain legislation has been drafted to clarify the employer
status of PEOs in the context of the Code and benefit plans. However, there can
be no assurance that such legislation will be proposed and adopted and even if
it were adopted, the Company may need to change aspects of its operations or
programs to comply with any requirements which may ultimately be adopted. In
particular, the Company may need to retain increased sole or shared control over
worksite employees if the legislation is passed in its current form.
In addition to the employer/employee relationship requirement described
above, pension and profit sharing plans including the Company's 401(k) plans
must satisfy certain other requirements under the Code. These other requirements
are generally designed to prevent discrimination in favor of highly compensated
employees to the detriment of non-highly compensated employees with respect to
both the availability of and the benefits, rights and features offered in
qualified employee benefit plans. The Company has made a good faith attempt to
apply the non-discrimination requirements of the Code in an effort to maintain
its 401(k) plans in compliance with the requirements of the Code.
Employee pension welfare benefit plans are also governed by ERISA. ERISA
defines an employer as "any person acting directly as an employer, or indirectly
in the interest of an employer, in relation to an employee benefit plan." ERISA
defines the term employee as "any individual employed by an employer." The
United States Supreme Court has held that the common law test of employment must
be applied to determine whether an individual is an employee or an independent
contractor under ERISA.
A definitive judicial interpretation of an employer in the context of a
full-service PEO arrangement has not been established. If the Company were found
not to be an employer for ERISA purposes, its plans would not comply with ERISA
and the level of services the Company could offer may be materially adversely
affected. Further, as a result of such finding, the Company and its plans would
not enjoy the pre-emption of state laws provided by ERISA and could be subject
to varying state laws and regulations as well as to claims based upon state
common law.
While the United States Department of Labor has issued advisory opinions to
one or more staff leasing companies indicating that their welfare plans, which
cover worksite employees, are multiple employer welfare arrangements rather than
single employer plans, the Company has not been the subject of any such advisory
opinion. If, however, the Company's welfare benefit plans were found to be
multiple employer welfare arrangements, ERISA would not pre-empt the application
of certain state insurance laws to the plans.
Certain Company clients maintain their own retirement and/or welfare
benefit plans covering worksite employees. The Company's involvement in these
plans is limited to forwarding payroll amounts to the client as directed by the
client to fund such plans and the Company has assumed no obligation in
connection with the sponsorship or administration of such plans. While the
Company believes that it has no liability in connection with any of these client
plans, due to the legal uncertainty that exists in this area, the Company cannot
guarantee that such is the case.
WORKERS' COMPENSATION
Camelback is subject to the insurance laws and regulations of Bermuda. Such
laws and regulations generally are designed to protect the interests of
policyholders, as opposed to the interests of shareholders such as the Company.
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 have broad administrative
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authority over insurers domiciled in their jurisdictions. 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 Camelback'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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The laws of Bermuda also place certain limitations upon the transfer
of statutory capital and surplus from an insurer to its parent company (whether
via dividend or otherwise), and regulate the circumstances under which an
insurer is permitted to loan funds to its parent company.
The Company's risk management/workers' compensation services program is
conducted via "fronting" arrangements with its insurer, under which another
insurer issues a policy on behalf of Camelback. A number of states currently
regulate fronting and other reinsurance relationships. Also, the National
Association of Insurance Commissioners ("NAIC") adopted a model act concerning
"fronting" arrangements which may be adopted in other states. Among other
things, these laws and the model act require reporting and prior approval of
reinsurance transactions relating to these arrangements, and limit the amount of
premiums that can be written under certain circumstances. No determination can
be made as to whether, or in what form, such act may ultimately be adopted by
any state and, the Company is therefore unable to predict whether these laws or
the model act might affect the Company's workers' compensation/risk management
program or its relationships with its insurers.
State regulation requires licensing of persons soliciting the sale of
workers' compensation insurance within that state. In certain states, licenses
are obtained by individual agents rather than a corporate entity. The Company,
or one of its employees, is licensed in 41 states, and has applied to be
licensed in others. Although the Company does not believe that its activities
require such licenses because it solicits through other licensed entities, it is
a risk that the Company may be deemed to be making sales without a license in
jurisdictions where it is not licensed, or that it would cease to maintain
necessary licenses upon the departure of the employee who holds certain of such
licenses.
HEALTH CARE REFORM
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. Any health care reform
proposal which mandated health insurance benefits based on the number of
employees employed by an entity could adversely affect PEOs such as the Company,
which for some purposes are deemed to employ all their clients' employees. In
addition, certain reform proposals have sought to include medical costs for
workers' compensation in the reform package. If such proposals increased the
cost of medical payments or limited the Company's ability to control its
workers' compensation costs, the Company's ability to offer competitively-priced
workers' compensation coverage to its clients could be adversely affected. While
the Company is unable to predict whether or in what form health care reform will
be enacted, aspects of such reform, if enacted, may have an adverse effect upon
the Company's medical and workers' compensation insurance programs.
The Health Insurance Portability and Accountability Act of 1996 may
increase the Company's risks relating to worksite employee health insurance
programs because it extends the periods for which, and circumstances under
which, an employer must allow a former employee to participate in the employer's
health plans. Such expanded availability may adversely affect the risk profile
and claims experience of groups insured through the Company, and thereby affect
the Company's premiums and the Company's retained risks under its self-insured
programs.
STATE AND LOCAL REGULATION
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 PEO industry and do not specifically address non-traditional employers.
While
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many states do not explicitly regulate PEOs, fifteen states have passed laws
that have licensing or registration requirements and at least three states are
considering such regulation. Twelve states, Arkansas, Florida, Maine, Montana,
New Hampshire, New Mexico, Oregon, South Carolina, Tennessee, Texas, Utah and
Vermont, have passed laws that license PEOs. Three states, Minnesota, Nevada and
Rhode Island require PEOs to be registered with these states. Further, a number
of other states have passed laws defining PEOs for purposes of addressing, in
particular contexts, whether PEOs constitute employers under certain state laws
applicable to employers generally. The Company believes it is licensed and
registered where required. Such laws vary from state to state but generally
provide for monitoring the fiscal responsibility of PEOs. Some states also
specify contractual arrangements between the PEO and the client company, and the
PEO and the worksite employee. For example, some states require an employment
relationship under which the Company must retain sole or shared control over
worksite employees, thereby requiring the Company to bear more responsibility
than under its standard co-employer model. Because existing regulations are
relatively new, there is limited interpretive or enforcement advice available.
The development of additional regulations and interpretation of existing
regulations can be expected to evolve over time.
The Company has formed Camelback in part to avail itself of the favorable
tax treatment of insurance companies, which pay state premium taxes rather than
income taxes and which may tax deduct reserves when booked. Although the Company
believes that it has structured its Camelback arrangements to qualify for such
tax treatment, any disallowance of this tax treatment could materially affect
the Company's results of operations for the current fiscal year and future
fiscal years.
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DESCRIPTION OF NOTES
The Original Notes were issued, and the Exchange Notes will be issued,
under an Indenture dated as of October 15, 1997 (the "Indenture") among ESI, the
Guarantors and the Trustee. The terms of the Exchange Notes and of the Original
Notes (which are sometimes referred to collectively as the "Notes") will be
substantially identical to each other, except for transferability. Under the
terms of the Indenture, the covenants and events of default will apply equally
to the Original Notes and the Exchange Notes, and the Original Notes and
Exchange Notes will be treated as one class for all actions to be taken by the
holders thereof and for determining their respective rights under the Indenture.
The terms of the Notes (including both the Original Notes and the Exchange
Notes) include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), as in effect from time to time. The Notes are subject to
all such terms, and Holders of the Notes are referred to the Indenture and the
Trust Indenture Act for a statement of them.
The following summaries of certain provisions of the Indenture are
summaries only, do not purport to be complete and are qualified in their
entirety by reference to all of the provisions of the Indenture. Capitalized
terms used herein and not otherwise defined shall have the meanings assigned to
them in the Indenture. Wherever particular provisions of the Indenture are
referred to in this summary, such provisions are incorporated by reference as a
part of the statements made and such statements are qualified in their entirety
by such reference. A copy of the form of Indenture is an exhibit to the
Registration Statement of which this Prospectus forms a part, and is available
upon request. For purposes of this summary, the term "Company" refers only to
Employee Solutions, Inc. and not to any of its subsidiaries.
GENERAL
The Notes are senior, unsecured, general obligations of the Company,
ranking pari passu in right of payment with all other senior, unsecured
obligations of the Company. The Notes are limited in aggregate principal amount
to $85 million. The Notes are jointly and severally irrevocably and
unconditionally guaranteed on a senior basis by each of the Guarantors. The
"Guarantors" include certain of the Company's present and future Subsidiaries.
See "Future Subsidiary Guarantors" and "Certain Definitions -- Guarantors." The
Guarantees rank pari passu in right of payment with all other senior, unsecured
obligations of the Guarantors. See "Certain Bankruptcy Limitations." The Notes
are issued only in fully registered form, without coupons, in denominations of
$1,000 and integral multiples thereof.
The Notes will mature on October 15, 2004. The Notes bear interest at the
rate of 10% per annum from the date of issuance (October 21, 1998) or from the
most recent Interest Payment Date to which interest has been paid or provided
for, payable semi-annually on April 15 and October 15 of each year, commencing
April 15, 1998, to the persons in whose names such Notes are registered at the
close of business on April 1 or October 1 immediately preceding such Interest
Payment Date. Interest is calculated on the basis of a 360-day year consisting
of twelve 30-day months.
Principal of, premium, if any, and interest and Liquidated Damages, if any,
on the Notes is payable, and the Notes may be presented for registration of
transfer or exchange, at the office or agency of the Company maintained for such
purpose, which office or agency shall be maintained in the Borough of Manhattan,
The City of New York, except as set forth below. At the option of the Company,
payment of interest may be made by check mailed to the Holders of the Notes at
the addresses set forth upon the registry books of the Company; provided that
all payments with respect to Global Notes and Certificated Notes the Holders of
which have given wire transfer instructions to the Company and the Paying Agent,
will be required to be made by wire transfers of immediately available funds to
the accounts specified by the Holders thereof. No service charge will be made
for any registration of transfer or exchange of Notes, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. Until otherwise designated by the
Company, the Company's office or agency will be the corporate trust office of
the Trustee presently located at the office of the Trustee in the Borough of
Manhattan, The City of New York.
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CERTAIN BANKRUPTCY LIMITATIONS
The Company conducts a substantial part of its business through
Subsidiaries. Certain of the Company's present and future Subsidiaries have
guaranteed or will guarantee the Company's obligations with respect to the
Notes. See "Future Subsidiary Guarantors" and "Certain
Definitions -- Guarantors." Holders of the Notes will be direct creditors of
each Guarantor by virtue of its guarantee. Nonetheless, in the event of the
bankruptcy or financial difficulty of a Guarantor, such Guarantor's obligations
under its guarantee may be subject to review and avoidance under state and
federal fraudulent transfer laws. Among other things, such obligations may be
avoided if a court concludes that such obligations were incurred for less than
reasonably equivalent value or fair consideration at a time when the Guarantor
was insolvent, was rendered insolvent, or was left with inadequate capital to
conduct its business. A court would likely conclude that a Guarantor did not
receive reasonably equivalent value or fair consideration to the extent that the
aggregate amount of its liability on its guarantee exceeds the economic benefits
it receives in the Offering. The obligations of each Guarantor under its
guarantee will be limited in a manner intended to cause it not to be a
fraudulent conveyance under applicable law, although no assurance can be given
that a court would give the Holder the benefit of such provision. See "Risk
Factors -- Fraudulent Transfer Considerations."
If the obligations of a Guarantor under its guarantee were avoided, Holders
of Notes would have to look to the assets of any remaining Guarantors for
payment. There can be no assurance in that event that such assets would be
sufficient to pay the outstanding principal and interest on the Notes.
OPTIONAL REDEMPTION
The Company does not have the right to redeem any Notes prior to October
15, 2001. The Notes are redeemable for cash at the option of the Company, in
whole or in part, at any time on or after October 15, 2001, upon not less than
30 days nor more than 60 days notice to each Holder of Notes, at the following
redemption prices (expressed as percentages of the principal amount) if redeemed
during the 12-month period commencing October 15 of the years indicated below,
in each case (subject to the right of Holders of record on a Record Date to
receive interest due on an Interest Payment Date that is on or prior to such
Redemption Date) together with accrued and unpaid interest and Liquidated
Damages, if any, thereon to the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
-------------------------------------------------- ----------
<S> <C>
2001.............................................. 105.0%
2002.............................................. 102.5%
2003 and thereafter............................... 100.0%
</TABLE>
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
Holder of each Note to be redeemed to such Holder's last address as then shown
upon the registry books of the Registrar. Any notice which relates to a Note to
be redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after the
date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption, unless the Company defaults in the payment
thereof.
CERTAIN COVENANTS
Repurchase of Notes at the Option of the Holder Upon a Change of
Control. The Indenture provides that in the event that a Change of Control has
occurred, each Holder of Notes will have the right, at such
55
<PAGE> 62
Holder's option, pursuant to an irrevocable and unconditional offer by the
Company (the "Change of Control Offer"), to require the Company to repurchase
all or any part of such Holder's Notes (provided, that the principal amount of
such Notes must be $1,000 or an integral multiple thereof) on a date (the
"Change of Control Purchase Date") that is no later than 35 Business Days after
the occurrence of such Change of Control, at a cash price equal to 101% of the
principal amount thereof (the "Change of Control Purchase Price"), together with
accrued and unpaid interest and Liquidated Damages, if any, to the Change of
Control Purchase Date. The Change of Control Offer shall be made within 10
Business Days following a Change of Control and shall remain open for 20
Business Days following its commencement (the "Change of Control Offer Period").
Upon expiration of the Change of Control Offer Period, the Company promptly
shall purchase all Notes properly tendered in response to the Change of Control
Offer.
As used herein, a "Change of Control" means (i) any merger or consolidation
of the Company with or into any person or any sale, transfer or other
conveyance, whether direct or indirect, of all or substantially all of the
assets of the Company and its Subsidiaries, on a consolidated basis, in one
transaction or a series of related transactions, if, immediately after giving
effect to such transaction(s), any "person" or "group" (as such terms are used
for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable) is or becomes the "beneficial owner," directly or indirectly, of
more than 50% of the total voting power in the aggregate normally entitled to
vote in the election of directors, managers, or trustees, as applicable, of the
transferee(s) or surviving entity or entities, (ii) any "person" or "group" (as
such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act, whether or not applicable) is or becomes the "beneficial owner," directly
or indirectly, of more than 50% of the total voting power in the aggregate of
all classes of Capital Stock of the Company then outstanding normally entitled
to vote in elections of directors, or (iii) during any period of 12 consecutive
months after the Issue Date, individuals who at the beginning of any such
12-month period constituted the Board of Directors of the Company (together with
any new directors whose election by such Board or whose nomination for election
by the shareholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office.
On or before the Change of Control Purchase Date, the Company will (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to
pay the Change of Control Purchase Price (together with accrued and unpaid
interest and Liquidated Damages, if any) of all Notes so tendered and (iii)
deliver to the Trustee Notes so accepted together with an Officers' Certificate
listing the Notes or portions thereof being purchased by the Company. The Paying
Agent promptly will pay the Holders of Notes so accepted an amount equal to the
Change of Control Purchase Price (together with accrued and unpaid interest and
Liquidated Damages, if any), and the Trustee promptly will authenticate and
deliver to such Holders a new Note equal in principal amount to any unpurchased
portion of the Note surrendered. Any Notes not so accepted will be delivered
promptly by the Company to the Holder thereof. The Company publicly will
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Purchase Date.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred.
No assurances can be given that the Company will have available sufficient
funds to acquire Notes tendered upon the occurrence of a Change of Control. In
the event that the Company is required to purchase outstanding Notes upon the
occurrence of a Change of Control, the Company expects that it would seek third
party financing to the extent that it does not have available funds to meet its
purchase obligations. There can be no assurance that the Company would be able
to obtain such financing.
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<PAGE> 63
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws. To the extent that the provisions of any securities laws or
regulations conflict with the terms hereof, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the Indenture or the Notes by virtue thereof.
Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock. The Indenture provides that, except as set forth in this
covenant, the Company and its Subsidiaries will not, and will not permit any of
their Subsidiaries to, directly or indirectly, issue, assume, guaranty, incur,
become directly or indirectly liable with respect to (including as a result of
an Acquisition), or otherwise become responsible for, contingently or otherwise
(individually and collectively, to "incur" or, as appropriate, an "incurrence"),
any Indebtedness or any Disqualified Capital Stock (including Acquired
Indebtedness) other than Permitted Indebtedness. Notwithstanding the foregoing,
if (i) no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect on a pro forma basis to, such
incurrence of Indebtedness or Disqualified Capital Stock and (ii) on the date of
such incurrence (the "Incurrence Date"), the Consolidated Coverage Ratio of the
Company for the Reference Period immediately preceding the Incurrence Date,
after giving effect on a pro forma basis to such incurrence of such Indebtedness
or Disqualified Capital Stock and, to the extent set forth in the definition of
Consolidated Coverage Ratio, the use of proceeds thereof, would be at least 2.25
to l (the "Debt Incurrence Ratio"), then the Company may incur such Indebtedness
or Disqualified Capital Stock and its Subsidiaries may incur such Indebtedness.
Indebtedness or Disqualified Capital Stock of any person which is
outstanding at the time such person becomes a Subsidiary of the Company
(including upon designation of any subsidiary or other person as a Subsidiary)
or is merged with or into or consolidated with the Company or a Subsidiary of
the Company shall be deemed to have been incurred at the time such person
becomes such a Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company, as applicable.
Limitation on Restricted Payments. The Indenture provides that the Company
and its Subsidiaries will not, and will not permit any of their Subsidiaries to,
directly or indirectly, make any Restricted Payment if, after giving effect to
such Restricted Payment on a pro forma basis, (1) a Default or an Event of
Default shall have occurred and be continuing, (2) the Company is not permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Debt
Incurrence Ratio in the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," or (3) the aggregate amount of all
Restricted Payments made by the Company and its Subsidiaries, including after
giving effect to such proposed Restricted Payment, from and after the Issue
Date, would exceed the sum of (a) $5.0 million, plus (b) 50% of the aggregate
Consolidated Net Income of the Company and its Consolidated Subsidiaries for the
period (taken as one accounting period), commencing on the first day of the
first full fiscal quarter commencing after the Issue Date, to and including the
last day of the fiscal quarter ended immediately prior to the date of each such
calculation (or, in the event Consolidated Net Income for such period is a
deficit, then minus 100% of such deficit), plus (c) the aggregate Net Cash
Proceeds received by the Company from the sale of its Qualified Capital Stock
(other than (i) to a Subsidiary of the Company and (ii) to the extent applied in
connection with a Qualified Exchange) after the Issue Date.
The immediately preceding paragraph, however, will not prohibit (y) a
Qualified Exchange or (z) the payment of any dividend on Qualified Capital Stock
within 60 days after the date of its declaration if such dividend could have
been made on the date of such declaration in compliance with the foregoing
provisions. The full amount of any Restricted Payment made pursuant to clause
(z) (but not pursuant to clause (y)) of the immediately preceding sentence,
however, will be deducted in the calculation of the aggregate amount of
Restricted Payments available to be made referred to in clause (3) of the
immediately preceding paragraph.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Indenture provides that the Company and its Subsidiaries will
not, and will not permit any of their Subsidiaries to, directly or indirectly,
create, assume or suffer to exist any consensual restriction on the ability of
any Subsidiary of the Company to pay dividends or make other distributions to or
on behalf of, or to pay any obligation to or on
57
<PAGE> 64
behalf of, or otherwise to transfer assets or property to or on behalf of, or
make or pay loans or advances to or on behalf of, the Company or any Subsidiary
of the Company, except (a) restrictions imposed by the Notes or the Indenture,
(b) restrictions imposed by applicable laws and regulations, including laws and
regulations establishing capital and liquidity requirements for Insurance
Subsidiaries, (c) existing restrictions under specified Indebtedness outstanding
on the Issue Date, (d) restrictions under any Acquired Indebtedness not incurred
in violation of the Indenture or any agreement relating to any property, asset,
or business acquired by the Company or any of its Subsidiaries, which
restrictions in each case existed at the time of acquisition, were not put in
place in connection with or in anticipation of such acquisition and are not
applicable to any person, other than the person acquired, or to any property,
asset or business, other than the property, assets and business so acquired, (e)
any such restriction or requirement imposed by Indebtedness incurred under
paragraph (b) of the definition of "Permitted Indebtedness" provided such
restriction or requirement is no more restrictive than that imposed by the
Amended Credit Facility as of the Issue Date, (f) restrictions with respect
solely to a Subsidiary of the Company imposed pursuant to a binding agreement
which has been entered into for the sale or disposition of all or substantially
all of the Equity Interests or assets of such Subsidiary, provided such
restrictions apply solely to the Equity Interests or assets of such Subsidiary
which are being sold, (g) restrictions arising out of "fronting" arrangements or
reinsurance agreements with third party insurers in existence on the Issue Date
pursuant to which the Insurance Subsidiary is required to meet certain cash
collateral requirements, (h) in connection with and pursuant to permitted
Refinancings, replacements of restrictions imposed pursuant to clauses (a), (c)
or (d) of this paragraph that are not more restrictive than those being replaced
and do not apply to any other person or assets than those that would have been
covered by the restrictions in the Indebtedness so refinanced; and (i) any
agreement that extends, renews or replaces any agreement described in clause (g)
or any similar agreement, provided that the terms and conditions of any such
restrictions are not materially less favorable to the Holders than those under
or pursuant to such agreements as in effect on the Issue Date. Notwithstanding
the foregoing, neither (a) customary provisions restricting subletting or
assignment of any lease entered into in the ordinary course of business,
consistent with industry practice, nor (b) Liens on assets securing the
Indebtedness under the Amended Credit Facility incurred in accordance with the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock" shall in and of themselves be considered a restriction on the
ability of the applicable Subsidiary to transfer such agreement or assets, as
the case may be.
Limitation on Liens Securing Indebtedness. The Company and its
Subsidiaries will not, and will not permit any of their Subsidiaries to, create,
incur, assume or suffer to exist any Lien of any kind, other than Permitted
Liens, upon any of their respective assets now owned or acquired on or after the
date of the Indenture or upon any income or profits therefrom, unless the
Company provides, and causes its Subsidiaries to provide, concurrently
therewith, that the Notes are equally and ratably so secured, provided that, if
such Indebtedness is Subordinated Indebtedness, the Lien securing such
Subordinated Indebtedness shall be subordinate and junior to the Lien securing
the Notes with the same relative priority as such Subordinated Indebtedness
shall have with respect to the Notes.
Limitation on Sale of Assets and Subsidiary Stock. The Indenture provides
that the Company and its Subsidiaries will not, and will not permit any of their
Subsidiaries to, in one or a series of related transactions, convey, sell,
transfer, assign or otherwise dispose of, directly or indirectly, any of its
property, business or assets, including by merger or consolidation (in the case
of a Subsidiary of the Company), and including any sale or other transfer or
issuance of any Equity Interests of any Subsidiary of the Company, whether by
the Company or a Subsidiary or through the issuance, sale or transfer of Equity
Interests by a Subsidiary of the Company, and including any sale and leaseback
transaction (any of the foregoing, an "Asset Sale"), unless (l)(a) within 210
days after the date of such Asset Sale, the Net Cash Proceeds therefrom (the
"Asset Sale Offer Amount") are applied to the optional redemption of the Notes
in accordance with the terms of the Indenture or to the repurchase of the Notes
pursuant to an irrevocable, unconditional cash offer (the "Asset Sale Offer") to
repurchase Notes at a purchase price of 100% of principal amount (the "Asset
Sale Offer Price") together with accrued and unpaid interest and Liquidated
Damages, if any, to the date of payment, made within 180 days of such Asset Sale
or (b) within 180 days following such Asset Sale, the Asset Sale Offer Amount is
(i) invested (or committed, pursuant to a binding commitment subject only to
reasonable, customary closing conditions, to be invested, and in fact is so
invested, within an additional 90 days) in assets
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<PAGE> 65
and property (other than notes, bonds, obligation and securities, except in
connection with the acquisition of a wholly owned Subsidiary) which in the good
faith reasonable judgment of the Board will immediately constitute or be a part
of a Related Business of the Company or such Subsidiary (if it continues to be a
Subsidiary) immediately following such transaction or (ii) used to permanently
reduce Indebtedness permitted pursuant to paragraph (b) of the definition
"Permitted Indebtedness" (provided that in the case of a revolver or similar
arrangement that makes credit available, such commitment is also permanently
reduced by such amount), (2) at least 85% of the total consideration received
for such Asset Sale or series of related Asset Sales consists of Cash or Cash
Equivalents, (3) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect, on a pro forma
basis, to, such Asset Sale, and (4) the Board of Directors of the Company
determines in good faith that the Company or such Subsidiary, as applicable,
receives fair market value for such Asset Sale.
The Indenture provides that an acquisition of Notes pursuant to an Asset
Sale Offer may be deferred until the accumulated Net Cash Proceeds from Asset
Sales not applied to the uses set forth in (l) above (the "Excess Proceeds")
exceeds $2.0 million and that each Asset Sale Offer shall remain open for 20
Business Days following its commencement (the "Asset Sale Offer Period"). Upon
expiration of the Asset Sale Offer Period, the Company shall apply the Asset
Sale Offer Amount plus an amount equal to accrued and unpaid interest and
Liquidated Damages, if any, to the purchase of all Notes properly tendered (on a
pro rata basis if the Asset Sale Offer Amount is insufficient to purchase all
Notes so tendered) at the Asset Sale Offer Price (together with accrued
interest). To the extent that the aggregate amount of Notes tendered pursuant to
an Asset Sale Offer is less than the Asset Sale Offer Amount, the Company may
use any remaining Net Cash Proceeds for general corporate purposes as otherwise
permitted by the Indenture and following each Asset Sale Offer the Excess
Proceeds amount shall be reset to zero. For purposes of (2) above, total
consideration received means the total consideration received for such Asset
Sales minus the amount of (a) Indebtedness which is not Subordinated
Indebtedness assumed by a transferee which assumption permanently reduces the
amount of Indebtedness outstanding on the Issue Date or permitted pursuant to
paragraph (b) or (d) of the definition "Permitted Indebtedness" (including that
in the case of a revolver or similar arrangement that makes credit available,
such commitment is so reduced by such amount) and (b) property that within 30
days of such Asset Sale is converted into Cash or Cash Equivalents.
Notwithstanding the foregoing provisions of the prior paragraph:
(i) the Company and its Subsidiaries may, in the ordinary course of
business, convey, sell, transfer, assign or otherwise dispose of property
or assets in the ordinary course of business;
(ii) the Company and its Subsidiaries may convey, sell, transfer,
assign or otherwise dispose of assets pursuant to and in accordance with
the covenant "Limitation on Merger, Sale or Consolidation;"
(iii) the Company and its Subsidiaries may sell or dispose of damaged,
worn out or other obsolete property in the ordinary course of business so
long as such property is no longer necessary for the proper conduct of the
business of the Company or such Subsidiary, as applicable; and
(iv) the Company and its Subsidiaries may convey, sell, transfer,
assign or otherwise dispose of assets to the Company or any of its wholly
owned Subsidiaries.
All Net Cash Proceeds from an Event of Loss shall be invested, used for
prepayment of Indebtedness, or used to repurchase Notes, all within the period
and as otherwise provided above in clause 1(a) or 1(b) of the first paragraph of
this section.
In addition to the foregoing, the Company will not, and will not permit any
Subsidiary to, directly or indirectly make any Asset Sale of any of the Equity
Interests of any Subsidiary except pursuant to an Asset Sale of all the Equity
Interests of such Subsidiary.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations thereunder and all other applicable Federal
and state securities laws. To the extent that the provisions of any securities
laws or
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<PAGE> 66
regulations conflict with the terms hereof, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations hereunder by virtue thereof.
Limitation on Transactions with Affiliates. The Indenture provides that
neither the Company nor any of its Subsidiaries will be permitted on or after
the Issue Date to enter into or suffer to exist any contract, agreement,
arrangement or transaction with any Affiliate (an "Affiliate Transaction"), or
any series of related Affiliate Transactions, (other than Exempted Affiliate
Transactions) (i) unless it is determined that the terms of such Affiliate
Transaction are fair and reasonable to the Company, and no less favorable to the
Company than could have been obtained in an arm's length transaction with a
non-Affiliate and, (ii) if involving consideration to either party in excess of
$1.0 million, unless such Affiliate Transaction(s) is evidenced by an Officers'
Certificate addressed and delivered to the Trustee certifying that such
Affiliate Transaction (or Transactions) has been approved by a majority of the
members of the Board of Directors that are disinterested in such transaction and
(iii) if involving consideration to either party in excess of $3.0 million,
unless in addition the Company, prior to the consummation thereof, obtains a
written favorable opinion as to the fairness of such transaction to the Company
from a financial point of view from an independent investment banking firm of
national reputation.
Limitation on Merger, Sale or Consolidation. The Indenture provides that
the Company will not, directly or indirectly, consolidate with or merge with or
into another person or sell, lease, convey or transfer all or substantially all
of its assets (computed, together with its Subsidiaries, on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another person or group of affiliated persons or adopt a Plan of Liquidation,
unless (i) either (a) the Company is the continuing entity or (b) the resulting,
surviving or transferee entity or, in the case of a Plan of Liquidation, the
entity which receives the greatest value from such Plan of Liquidation is a
corporation organized under the laws of the United States, any state thereof or
the District of Columbia and expressly assumes by supplemental indenture all of
the obligations of the Company in connection with the Notes and the Indenture;
(ii) no Default or Event of Default shall exist or shall occur immediately after
giving effect on a pro forma basis to such transaction; (iii) immediately after
giving effect to such transaction on a pro forma basis, the Consolidated Net
Worth of the consolidated surviving or transferee entity or, in the case of a
Plan of Liquidation, the entity which receives the greatest value from such Plan
of Liquidation is at least equal to the Consolidated Net Worth of the Company
immediately prior to such transaction; and (iv) immediately after giving effect
to such transaction on a pro forma basis, the consolidated resulting, surviving
or transferee entity or, in the case of a Plan of Liquidation, the entity which
receives the greatest value from such Plan of Liquidation would immediately
thereafter be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Debt Incurrence Ratio set forth in the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company or consummation of a Plan of Liquidation in
accordance with the foregoing, the successor corporation formed by such
consolidation or into which the Company is merged or to which such transfer is
made or, in the case of a Plan of Liquidation, the entity which receives the
greatest value from such Plan of Liquidation shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such successor corporation had been
named therein as the Company, and the Company shall be released from the
obligations under the Notes and the Indenture except with respect to any
obligations that arise from, or are related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company shall be deemed to
be the transfer of all or substantially all of the properties and assets of the
Company.
Limitation on Lines of Business. The Indenture provides that neither the
Company nor any of its Subsidiaries shall directly or indirectly engage to any
substantial extent in any line or lines of business activity other than that
which, in the reasonable good faith judgment of the Board of Directors of the
Company, is a Related Business.
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<PAGE> 67
Limitations with respect to Subsidiaries that are not Guarantors. The
Indenture provides that the aggregate total revenues and the aggregate
Consolidated Net Worth of the Subsidiaries which are not Guarantors (other than
the Insurance Subsidiaries) will not exceed 7.5% of total revenues or
Consolidated Net Worth, respectively, of the Company and its Subsidiaries on a
consolidated basis. The Indenture will also provide that the Company will not
retain any funds or assets in any Insurance Subsidiary except funds that are
held in trust accounts for claim reserves or otherwise held to pay claims and
funds for current operations or as required by insurance laws and regulations
applicable to such Insurance Subsidiaries, including capital and liquidity
requirements.
Future Subsidiary Guarantors. The Indenture provides that all future
Subsidiaries of the Company will jointly and severally guaranty irrevocably and
unconditionally all principal, premium, if any, and interest and Liquidated
Damages, if any, on the Notes on a senior basis, other than (i) future Insurance
Subsidiaries and (ii) certain other future Subsidiaries designated by the
Company, provided that the Company complies with the restrictions with respect
to the aggregate total revenues and aggregate Consolidated Net Worth of
Subsidiaries which are not Guarantors as set forth in the covenant "Limitations
with respect to Subsidiaries that are not Guarantors."
Release of Guarantors. The Indenture provides that no Guarantor shall
consolidate or merge with or into (whether or not such Guarantor is the
surviving person) another person unless (i) subject to the provisions of the
following paragraph, the person formed by or surviving any such consolidation or
merger (if other than such Guarantor, another Guarantor or the Company) assumes
all the obligations of such Guarantor pursuant to a supplemental indenture in
form reasonably satisfactory to the Trustee, pursuant to which such person shall
unconditionally guaranty, on a senior basis, all of such Guarantor's obligations
under such Guarantor's guaranty and the Indenture on the terms set forth in the
Indenture; and (ii) immediately before and immediately after giving effect to
such transaction on a pro forma basis, no Default or Event of Default shall have
occurred or be continuing.
Upon the sale or disposition (whether by merger, stock purchase, asset sale
or otherwise) by a Guarantor of all or substantially all of its assets to an
entity which is not a Guarantor, which transaction is otherwise in compliance
with the Indenture (including, without limitation, the provisions of the
covenant "Limitations on Sale of Assets and Subsidiary Stock"), such Guarantor
will be deemed released from its obligations under its Guarantee of the Notes;
provided, however, that any such termination shall occur only to the extent that
all obligations of such Guarantor under all of its guarantees of, and under all
of its pledges of assets or other security interests which secure, any
Indebtedness of the Company or any other Subsidiary shall also terminate upon
such release, sale or transfer.
Limitation on Status as Investment Company. The Indenture prohibits the
Company and its Subsidiaries from being required to register as an "investment
company" (as that term is defined in the Investment Company Act of 1940, as
amended), or from otherwise becoming subject to regulation under the Investment
Company Act.
Limitation on Sale and Leaseback Transactions. The Indenture provides that
the Company will not, and will not permit any Subsidiary to, directly or
indirectly, enter into any sale and leaseback transaction unless (a) immediately
after giving pro forma effect to such sale and leaseback transaction (the
Attributable Value of such sale and leaseback transaction being deemed to be
Indebtedness of the Company, if not otherwise treated so pursuant to the
definition of Indebtedness), the Company could incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio set forth in the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock" and (b) such sale and leaseback transaction complies with the
covenant "Limitation on Sale of Assets and Subsidiary Stock."
Payments for Consent. Neither the Company nor any of its Subsidiaries
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any holder of any Notes for or
as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture, the Notes or the Guarantees unless such
consideration is offered to be paid or agreed to be paid to all holders of the
Notes who so consent, waive or agree to amend in the time frame set forth in
solicitation documents relating to such consent, waiver or agreement.
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REPORTS
The Indenture provides that, whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and to each Holder annual and quarterly financial
statements substantially equivalent to financial statements that would have been
included in reports filed with the Commission, if the Company were subject to
the requirements of Section 13 or 15(d) of the Exchange Act, including, in each
case, a management's discussion and analysis of financial condition and results
of operations and, with respect to annual information only, a report thereon by
the Company's certified independent public accountants. In addition, the Company
has agreed that, from and after the time the Company files a registration
statement with the Commission with respect to the Notes, the Company will file
such reports with the Commission provided the Commission will accept such
filings.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as:
(i) the failure by the Company to pay any installment of interest on
the Notes as and when the same becomes due and payable and the continuance
of any such failure for 30 days;
(ii) the failure by the Company to pay all or any part of the
principal, or premium, if any, on the Notes when and as the same becomes
due and payable at maturity, redemption, by acceleration or otherwise,
including, without limitation, payment of the Change of Control Purchase
Price or the Asset Sale Offer Price, or otherwise;
(iii) the failure by the Company or any Subsidiary to observe or
perform any other covenant or agreement contained in the Notes or the
Indenture and, subject to certain exceptions, the continuance of such
failure for a period of 30 days after written notice is given to the
Company by the Trustee or to the Company and the Trustee by the Holders of
at least 25% in aggregate principal amount of the Notes outstanding;
(iv) certain events of bankruptcy, insolvency or reorganization in
respect of the Company or any of its Subsidiaries;
(v) a default in Indebtedness of the Company or any of its
Subsidiaries with an aggregate principal amount in excess of $5 million (a)
resulting from the failure to pay principal or interest or (b) as a result
of which the maturity of such Indebtedness has been accelerated prior to
its stated maturity;
(vi) final unsatisfied judgments not covered by insurance aggregating
in excess of $5 million, at any one time rendered against the Company or
any of its Subsidiaries and not stayed, bonded or discharged within 60
days; and
(vii) any Guarantee shall cease to be, or be asserted in writing by
any Significant Subsidiary or the Company not to be, in full force and
effect, except as contemplated by the Indenture.
The Indenture provides that if an Event of Default occurs and is continuing, the
Trustee must, within 90 days after the occurrence of such default, give to the
Holders notice of such default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv), above, relating to the Company or any of its
Significant Subsidiaries), then in every such case, unless the principal of all
of the Notes shall have already become due and payable, either the Trustee or
the Holders of 25% in aggregate principal amount of the Notes then outstanding,
by notice in writing to the Company (and to the Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal, determined as set forth
below, and accrued interest thereon to be due and payable immediately. If an
Event of Default specified in clause (iv) above, relating to the Company or any
Significant Subsidiary occurs, all principal and accrued interest thereon will
be immediately due and payable on all outstanding Notes without any declaration
or other act on the part of Trustee or the Holders. The Holders of a majority in
aggregate principal amount of Notes generally are authorized to rescind such
acceleration if all existing Events of Default, other than the non-payment of
the principal of, premium, if any, and interest on the Notes which have become
due solely by such
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acceleration, have been cured or waived, except on default with respect to any
provision requiring a supermajority approval to amend, which default may only be
waived by such a supermajority.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
October 15, 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to October 15, 2001, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except a default
with respect to any provision requiring a supermajority approval to amend, which
default may only be waived by such a supermajority, and except a default in the
payment of principal of or interest on any Note not yet cured or a default with
respect to any covenant or provision which cannot be modified or amended without
the consent of the Holder of each outstanding Note affected. Subject to the
provisions of the Indenture relating to the duties of the Trustee, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the Holders, unless such
Holders have offered to the Trustee reasonable security or indemnity. Subject to
all provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the Notes at the time outstanding will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option and at any time,
elect to have its obligations and the obligations of the Guarantors discharged
with respect to the outstanding Notes ("Legal Defeasance"). Such Legal
Defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented, and the Indenture shall cease to be of
further effect as to all outstanding Notes and Guarantees, except as to (i)
rights of Holders to receive payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due from the trust
funds; (ii) the Company's obligations with respect to such Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes, and the maintenance of an office or agency for payment and money
for security payments held in trust; (iii) the rights, powers, trust, duties,
and immunities of the Trustee, and the Company's obligations in connection
therewith; and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and the Guarantors released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including nonpayment, nonpayment of
guarantees, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, U.S. legal tender, U.S. Government Obligations or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on such Notes on the stated date for
payment thereof or on the redemption date of such principal or installment of
principal of, premium, if any, or interest on such Notes, and the Holders of
Notes must have a
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valid, perfected, exclusive security interest in such trust; (ii) in the case of
the Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to Trustee confirming that
(A) the Company has received from, or there has been published by the Internal
Revenue Service, a ruling or (B) since the date of the Indenture, there has been
a change in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the Holders
of such Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to such Trustee
confirming that the Holders of such Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance shall not result in a breach or violation of, or constitute a default
under, the Indenture or any other material agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee
an Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the holders of such Notes over any other creditors
of the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others; and (vii) the Company
shall have delivered to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that the conditions precedent provided for in, in the case
of the Officers' Certificate, (i) through (vi) and, in the case of the opinion
of counsel, clauses (i) (with respect to the validity and perfection of the
security interest), (ii), (iii) and (v) of this paragraph have been complied
with.
If the funds deposited with the Trustee to effect Legal Defeasance or
Covenant Defeasance cannot be applied to pay the principal of, premium, if any,
and interest on the Notes when due, then the obligations of the Company under
the Indenture will be revived and no such defeasance will be deemed to have
occurred.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company, the Guarantors
and the Trustee to enter into a supplemental indenture for certain limited
purposes without the consent of the Holders. With the consent of the Holders of
not less than a majority in aggregate principal amount of the Notes at the time
outstanding, the Company, the Guarantors and the Trustee are permitted to amend
or supplement the Indenture or any supplemental indenture or modify the rights
of the Holders; provided that no such modification may without the consent of
Holders of at least 66 2/3% in aggregate principal amount of Notes at the time
outstanding modify the provisions (including the defined terms used therein) of
the covenant "Repurchase of Notes at the Option of the Holder upon a Change of
Control" and "Limitation on Sale of Assets and Subsidiary Stock" in a manner
adverse to the Holders and provided that no such modification may, without the
consent of each Holder affected thereby: (i) change the Stated Maturity on any
Note, or reduce the principal amount thereof or the rate (or extend the time for
payment) of interest thereon or any premium payable upon the redemption thereof,
or change the place of payment where, or the coin or currency in which, any Note
or any premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof (or, in the case of redemption, on or after the Redemption
Date), or reduce the Change of Control Purchase Price or the Asset Sale Offer
Price or alter the provisions (including the defined terms used therein)
regarding the right of the Company to redeem the Notes in a manner adverse to
the Holders, or (ii) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose Holders is required for any such
amendment, supplemental indenture or waiver provided for in the Indenture, or
(iii) modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the Holder of each outstanding Note
affected thereby, or (iv) cause the Notes or any Guarantee to become subordinate
in right of payment to any other Indebtedness.
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NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company, the
Guarantors or any successor entity shall have any personal liability in respect
of the obligations of the Company or the Guarantors under the Indenture or the
Notes by reason of his or its status as such stockholder, employee, officer or
director, except to the extent such person is the Company or a Guarantor.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness or Disqualified Capital Stock of
any person existing at the time such person becomes a Subsidiary of the Company,
including by designation, or is merged or consolidated into or with the Company
or one of its Subsidiaries.
"Acquisition" means the purchase or other acquisition of any person or
substantially all the assets of any person by any other person, or the
acquisition of assets that constitute all or substantially all of an operating
unit or business, whether by purchase, merger, consolidation, or other transfer,
and whether or not for consideration.
"Affiliate" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise, provided, that, with respect to ownership interest in the Company
and its Subsidiaries a Beneficial Owner of 10% or more of the total voting power
normally entitled to vote in the election of directors, managers or trustees, as
applicable, shall for such purposes be deemed to constitute control.
"Amended Credit Facility" means the credit facility dated October 21, 1997
by and between the Company and Bank One, Arizona, N.A., providing for an
aggregate $20 million revolving credit facility, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, as such credit agreement and/or related documents may be
amended, restated, supplemented, renewed, replaced or otherwise modified from
time to time whether or not with the same agent, trustee, representative lenders
or holders, and, subject to the proviso to the next succeeding sentence,
irrespective of any changes in the terms and conditions thereof. Without
limiting the generality of the foregoing, the term "Amended Credit Facility"
shall include agreements in respect of Interest Swap and Hedging Obligations
with lenders party to the Amended Credit Facility and shall also include any
amendment, amendment and restatement, renewal, extension, restructuring,
supplement or modification to the Amended Credit Facility and all refundings,
refinancings and replacements of the Amended Credit Facility, including any
agreement (i) extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby, (ii) adding or deleting borrowers or guarantors
thereunder, so long as borrowers and issuers include one or more of the Company
and its Subsidiaries and their respective successors and assigns, (iii)
increasing the amount of Indebtedness incurred thereunder or available to be
borrowed thereunder, provided that on the date such Indebtedness is incurred it
would not be prohibited by paragraph (b) of the definition "Permitted
Indebtedness," or (iv) otherwise altering the terms and conditions thereof in a
manner not prohibited by the terms hereof.
"Attributable Value" means, as to any particular lease under which any
person is at the time liable other than a Capitalized Lease Obligation, and at
any date as of which the amount thereof is to be determined, the total net
amount of rent required to be paid by such person under such lease during the
remaining term thereof (whether or not such lease is terminable at the option of
the lessee prior to the end of such term), including any period for which such
lease has been, or may, at the option of the lessor, be extended, discounted
from the last date of such term to the date of determination at a rate per annum
equal to the discount rate which would be applicable to a Capitalized Lease
Obligation with a like term in accordance with GAAP. The net amount of rent
required to be paid under any lease for any such period shall be the aggregate
amount of rent payable by the lessee with respect to such period after excluding
amounts required to be paid on account of insurance, taxes, assessments,
utility, operating and labor costs and similar charges. "Attributable Value"
means, as to a Capitalized Lease Obligation under which any person is at the
time liable and at any date as of which the
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amount thereof is to be determined, the discounted present value of the rental
obligations of such person, as lessee, required to be capitalized on the balance
sheet of such person in conformity with GAAP.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective principal (or
redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"Beneficial Owner" or "beneficial owner" has the meaning attributed to it
in Rules 13d-3 and 13d-5 under the Exchange Act (as in effect on the Issue
Date), whether or not applicable, except that a "person" shall be deemed to have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests (however designated) in
stock issued by that corporation.
"Capitalized Lease Obligation" means, as applied to any person, any lease
of any property (whether real, personal or mixed) of which the discounted
present value of the rental obligations of such person, as lessee, in conformity
with GAAP, is required to be capitalized on the balance sheet of such person.
"Cash Equivalent" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) or (ii) time deposits and
certificates of deposit and commercial paper issued by the parent corporation of
any domestic commercial bank of recognized standing having capital and surplus
in excess of $500 million and (iii) commercial paper issued by others rated at
least A-1 or the equivalent thereof by Standard & Poor's Corporation or at least
P-1 or the equivalent thereof by Moody's Investors Service, Inc., and in the
case of each of (i), (ii), and (iii) maturing within one year after the date of
acquisition.
"Consolidated Coverage Ratio" of any person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of Consolidated EBITDA of such person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Fixed Charges of such person
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations giving
rise to such Consolidated Fixed Charges would no longer be obligations
contributing to such person's Consolidated Fixed Charges subsequent to the
Transaction Date) during the Reference Period; provided, that for purposes of
such calculation, (i) Acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the Transaction Date shall
be assumed to have occurred on the first day of the Reference Period, (ii)
transactions giving rise to the need to calculate the Consolidated Coverage
Ratio shall be assumed to have occurred on the first day of the Reference
Period, (iii) the incurrence of any Indebtedness or issuance of any Disqualified
Capital Stock during the Reference Period or subsequent to the Reference Period
and on or prior to the Transaction Date (and the application of the proceeds
therefrom to the extent used to refinance or retire other Indebtedness) shall be
assumed to have occurred on the first day of such Reference Period, and (iv) the
Consolidated Fixed Charges of such person attributable to interest on any
Indebtedness or dividends on any Disqualified Capital Stock bearing a floating
interest (or dividend) rate shall be computed on a pro forma basis as if the
average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless such
person or any of its Subsidiaries is a party to an Interest Swap or Hedging
Obligation (which shall remain in effect for the 12-month period immediately
following the Transaction Date) that has the effect of fixing the interest rate
on the date of computation, in which case such rate (whether higher or lower)
shall be used.
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"Consolidated EBITDA" means, with respect to any person, for any period,
the Consolidated Net Income of such person for such period adjusted to add
thereto (to the extent deducted from net revenues in determining Consolidated
Net Income), without duplication, the sum of (i) consolidated income tax
expense, (ii) consolidated depreciation and amortization expense, provided that
consolidated depreciation and amortization of a Subsidiary that is a less than
wholly owned Subsidiary shall only be added to the extent of the equity interest
of such person in such Subsidiary, (iii) other non-cash charges of the Company
and its Subsidiaries reducing Consolidated Net Income for such period and (iv)
Consolidated Fixed Charges.
"Consolidated Fixed Charges" of any person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such person and its
Consolidated Subsidiaries during such period, including (i) original issue
discount and non-cash interest payments or accruals on any Indebtedness, (ii)
the interest portion of all deferred payment obligations, and (iii) all
commissions, discounts and other fees and charges owed with respect to bankers'
acceptances and letters of credit financings and currency and Interest Swap and
Hedging Obligations, in each case to the extent attributable to such period, and
(b) the amount of dividends accrued or payable (or guaranteed) by such person or
any of its Consolidated Subsidiaries in respect of preferred stock (other than
by Subsidiaries of such person to such person or such person's wholly owned
Subsidiaries). For purposes of this definition, interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
in good faith by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP.
"Consolidated Net Income" means, with respect to any person for any period,
the net income (or loss) of such person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication): (a) all gains (but not losses) which are
either extraordinary (as determined in accordance with GAAP) or nonrecurring
(including any gain from the sale or other disposition of assets outside the
ordinary course of business or from the issuance or sale of any capital stock),
(b) the net income, if positive, of any person, other than a wholly owned
Consolidated Subsidiary, in which such person or any of its Consolidated
Subsidiaries has an interest, except to the extent of the amount of any
dividends or distributions actually paid in cash to such person or a wholly
owned Consolidated Subsidiary of such person during such period, but in any case
not in excess of such person's pro rata share of such person's net income for
such period, (c) the net income or loss of any person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition, (d)
the net income, if positive, of any of such person's Consolidated Subsidiaries
to the extent that the declaration or payment of dividends or similar
distributions is not at the time permitted by operation of the terms of its
charter or bylaws or any other agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation (other than any insurance statute, rule
or governmental regulation restricting dividends or similar distributions by an
Insurance Subsidiary, including capital and liquidity requirements) applicable
to such Consolidated Subsidiary.
"Consolidated Net Worth" of any person at any date means the aggregate
consolidated stockholders' equity of such person (plus amounts of equity
attributable to preferred stock) and its Consolidated Subsidiaries, as would be
shown on the consolidated balance sheet of such person prepared in accordance
with GAAP, adjusted to exclude, to the extent included in calculating such
equity, (a) the amount of any such stockholders' equity attributable to
Disqualified Capital Stock or treasury stock of such person and its Consolidated
Subsidiaries, (b) all upward revaluations and other write-ups in the book value
of any asset of such person or a Consolidated Subsidiary of such person
subsequent to the Issue Date, and (c) all investments in Subsidiaries that are
not Consolidated Subsidiaries and in persons that are not Subsidiaries.
"Consolidated Subsidiary" means, for any person, each Subsidiary of such
person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such person in accordance with GAAP.
"Default" means any event that is, or after notice or the passage of time
or both would be an Event of Default.
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"Disqualified Capital Stock" means (a) except as set forth in (b), with
respect to any person, any Equity Interest of such person that, by its terms or
by the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time would
be, required to be redeemed or repurchased (including at the option of the
holder thereof) by such person or any of its Subsidiaries, in whole or in part,
on or prior to the Stated Maturity of the Notes and (b) with respect to any
Subsidiary of such person (including with respect to any Subsidiary of the
Company), any Equity Interest other than any common equity with no preference,
privileges, or redemption or repayment provisions.
"Equity Interest" of any person means any shares, interests, participations
or other equivalents (however designated) in such person's equity, and shall in
any event include any Capital Stock issued by, or partnership or membership
interests in, such person.
"Event of Loss" means, with respect to any property or asset, (i) any loss,
destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
"Exempted Affiliate Transaction" means (a) customary employee compensation
arrangements approved by a majority of independent (as to such transactions)
members of the Board of Directors of the Company, (b) dividends permitted under
the terms of the covenant discussed above under "Limitation on Restricted
Payments" above and payable, in form and amount, on a pro rata basis to all
holders of Common Stock of the Company, and (c) transactions solely between the
Company and any of its Subsidiaries or solely among Subsidiaries of the Company.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"Guarantors" means (i) all of the Company's present Subsidiaries other than
Camelback Insurance, Ltd., Employee Solutions of Alabama, Inc. and Employee
Solutions of California, Inc. and (ii) certain future Subsidiaries as described
in the covenant "Future Subsidiary Guarantors".
"Indebtedness" of any person means, without duplication, (a) all
liabilities and obligations, contingent or otherwise (as set forth in subclauses
(i) through (vi)), of any such person, (i) in respect of borrowed money (whether
or not the recourse of the lender is to the whole of the assets of such person
or only to a portion thereof), (ii) evidenced by bonds, notes, debentures or
similar instruments, (iii) representing the balance deferred and unpaid of the
purchase price of any property or services, except those incurred in the
ordinary course of its business that would constitute ordinarily a trade payable
or other accrued current liability that is not more than 90 days past their
original due date and except those for which cash is held in escrow pending
payment of such deferred and unpaid purchase price, (iv) evidenced by bankers'
acceptances or similar instruments issued or accepted by banks, (v) relating to
any Capitalized Lease Obligation, or (vi) evidenced by a letter of credit or a
reimbursement obligation of such person with respect to any letter of credit;
(b) all net obligations of such person under Interest Swap and Hedging
Obligations; (c) all liabilities and obligations of others of the kind described
in the preceding clause (a) or (b) that such person has guaranteed or that is
otherwise its legal liability or which are secured by any assets or property of
such person; and (d) any and all deferrals, renewals, extensions, refinancing
and refundings (whether direct or indirect) of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (a), (b) or (c), or this clause (d), whether or not between or among the
same parties; and (e) all Disqualified Capital Stock of such person (measured at
the greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends). Indebtedness shall not include obligations under
insurance policies or reinsurance contracts entered into in the ordinary course
of business. For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital
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Stock, such fair market value to be determined in good faith by the board of
directors of the issuer (or managing general partner of the issuer) of such
Disqualified Capital Stock.
"Insurance Subsidiary" means a wholly owned Subsidiary of the Company
engaged principally in the ownership or issuance of insurance policies that have
not expired or the ownership or operation of any other similar assets of an
insurer or any interest therein.
"Interest Swap and Hedging Obligation" means any obligation of any person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"Investment" by any person in any other person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
person; (b) the making by such person of any deposit with, or advance, loan or
other extension of credit to, such other person (including the purchase of
property from another person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other person) or any
commitment to make any such advance, loan or extension (but excluding accounts
receivable or deposits arising in the ordinary course of business); (c) other
than guarantees of Indebtedness of the Company or any Guarantor to the extent
permitted by the covenant "Limitation on Incurrence of Additional Indebtedness
and Disqualified Capital Stock," the entering into by such person of any
guarantee of, or other credit support or contingent obligation with respect to,
Indebtedness or other liability of such other person; and (d) the making of any
capital contribution by such person to such other person. Investments shall
exclude insurance premiums and other receivables in the ordinary course of
collection.
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Net Cash Proceeds" means the aggregate amount of Cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock and by
the Company and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible or
exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities (including options, warrants, rights and convertible
or exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and expenses (including, without limitation, the fees and expenses
of legal counsel and investment banking fees and expenses) incurred in
connection with such Asset Sale or sale of Qualified Capital Stock, and, in the
case of an Asset Sale only, less the amount (estimated reasonably and in good
faith by the Company) of income, franchise, sales and other applicable taxes
required to be paid by the Company or any of its respective Subsidiaries in
connection with such Asset Sale.
"Permitted Indebtedness" means any of the following:
(a) the Company and the Guarantors may incur Indebtedness evidenced by
the Notes and represented by the Indenture up to the amounts specified
therein as of the date thereof;
(b) Indebtedness incurred pursuant to the Amended Credit Facility
(including any Indebtedness issued to refinance, refund or replace such
Indebtedness) provided that the aggregate principal amount of Indebtedness
outstanding at any time does not exceed $20.0 million, plus accrued
interest and such
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additional amounts as may be deemed to be outstanding in the form of
Interest Swap and Hedging Obligations with lenders party to the Amended
Credit Facility, minus the amount of any such Indebtedness retired with Net
Cash Proceeds from any Asset Sale or assumed by a transferee in an Asset
Sale;
(c) the Company and its Subsidiaries, as applicable, may incur
Refinancing Indebtedness with respect to any Indebtedness or Disqualified
Capital Stock, as applicable, described in clause (b) of this definition,
incurred under the Debt Incurrence Ratio test of the covenant "Limitation
on Incurrence of Additional Indebtedness and Disqualified Capital Stock,"
or which is outstanding on the Issue Date so long as such Refinancing
Indebtedness is secured only by the assets that secured the Indebtedness so
refinanced;
(d) the Company and its Subsidiaries may incur Indebtedness in an
aggregate amount outstanding at any time (including any Indebtedness issued
to refinance, replace, or refund such Indebtedness) of up to $2.0 million,
minus the amount of any such Indebtedness retired with Net Cash Proceeds
from any Asset Sale or assumed by a transferee in an Asset Sale;
(e) the Company may incur Indebtedness to any wholly owned Subsidiary,
and any wholly owned Subsidiary may incur Indebtedness to any other wholly
owned Subsidiary or to the Company; provided that, in the case of
Indebtedness of the Company (except Indebtedness to an Insurance
Subsidiary), such obligations shall be unsecured and subordinated in all
respects to the Company's obligations pursuant to the Notes and the date of
any event that causes a Subsidiary to no longer be a wholly owned
Subsidiary shall be an Incurrence Date;
(f) Indebtedness incurred in respect of reimbursement-type obligation
regarding workers' compensation claims;
(g) Indebtedness of the Company or its Subsidiaries in connection with
performance bonds, surety bonds, insurance obligations or bonds and other
similar bonds or obligations incurred in the ordinary course of business;
and
(h) Earn-out agreements in connection with acquisitions of businesses
by the Company or its Subsidiaries, provided that at the time such
agreement is entered into the Company may incur $1.00 of additional
Indebtedness under the Debt Incurrence Ratio in the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Stock" and any
Indebtedness incurred to fund payments made pursuant to any such earn-out
agreements shall not be Permitted Indebtedness.
"Permitted Investment" means (a) Investments in any of the Notes; (b)
Investments in Cash Equivalents; (c) Investments in intercompany obligations to
the extent permitted under clause (e) of the definition of "Permitted
Indebtedness"; (d) any Investment in a person in a Related Business, which,
after such Investment, becomes a wholly owned Subsidiary of the Company and a
Guarantor of the Notes; and (e) other Investments not to exceed $2.0 million.
"Permitted Lien" means (a) Liens incurred in connection with the Amended
Credit Facility if such Indebtedness is permitted by clause (b) under the
definition of Permitted Indebtedness and additional Liens in an amount not to
exceed $20.0 million in the aggregate incurred in connection with the Amended
Credit Facility, as such facility may be increased or amended from time to time,
provided that at the time such Lien is incurred, the Company is able to incur at
least $1.00 of additional Indebtedness pursuant to the Debt Incurrence Ratio in
the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock;" (b) Liens existing on the Issue Date; (c) Liens
imposed by governmental authorities for taxes, assessments or other charges not
yet subject to penalty or which are being contested in good faith and by
appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (d) statutory
liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen or
other like Liens arising by operation of law in the ordinary course of business
provided that (i) the underlying obligations are not overdue for a period of
more than 30 days, or (ii) such Liens are being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (e) Liens
securing the performance of bids, trade contracts (other than borrowed money),
leases, statutory obligations, surety and appeal bonds,
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performance bonds and other obligations of a like nature incurred in the
ordinary course of business; (f) easements, rights-of-way, zoning, similar
restrictions and other similar encumbrances or title defects which, singly or in
the aggregate, do not in any case materially detract from the value of the
property subject thereto (as such property is used by the Company or any of its
Subsidiaries) or interfere with the ordinary conduct of the business of the
Company or any of its Subsidiaries; (g) Liens arising by operation of law in
connection with judgments, only to the extent, for an amount and for a period
not resulting in an Event of Default with respect thereto; (h) pledges or
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security
legislation; (i) Liens securing the Notes; (j) Liens securing Indebtedness of a
person existing at the time such person becomes a Subsidiary or is merged with
or into the Company or a Subsidiary or Liens securing Indebtedness incurred in
connection with an Acquisition, provided that such Liens were in existence prior
to the date of such acquisition, merger or consolidation, were not incurred in
anticipation thereof, and do not extend to any assets other than those acquired;
(k) leases or subleases granted to other persons in the ordinary course of
business not materially interfering with the conduct of the business of the
Company or any of its Subsidiaries or materially detracting from the value of
the relative assets of the Company or any Subsidiary; (l) Liens arising from
precautionary Uniform Commercial Code financing statement filings regarding
operating leases entered into by the Company or any of its Subsidiaries in the
ordinary course of business; (m) Liens securing Refinancing Indebtedness
incurred to refinance any Indebtedness that was previously so secured in a
manner no more adverse to the Holders of the Notes than the terms of the Liens
securing such refinanced Indebtedness provided that the Indebtedness secured is
not increased and the Lien is not extended to any additional assets or property;
and (n) restrictions on funds held by or on behalf of the Insurance Subsidiaries
for the payment of claims.
"Qualified Capital Stock" means any Capital Stock of the Company that is
not Disqualified Capital Stock.
"Qualified Exchange" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or Indebtedness of the Company
issued on or after the Issue Date with the Net Cash Proceeds received by the
Company from the substantially concurrent sale of Qualified Capital Stock or any
exchange of Qualified Capital Stock for any Capital Stock or Indebtedness of the
Company issued on or after the Issue Date.
"Reference Period" with regard to any person means the four full fiscal
quarters ended immediately preceding any date upon which any determination is to
be made pursuant to the terms of the Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of Disqualified Capital Stock, liquidation preference, not to exceed (after
deduction of reasonable and customary fees and expenses incurred in connection
with the Refinancing) the lesser of (i) the principal amount or, in the case of
Disqualified Capital Stock, liquidation preference, of the Indebtedness or
Disqualified Capital Stock so Refinanced and (ii) if such Indebtedness being
Refinanced was issued with an original issue discount, the accreted value
thereof (as determined in accordance with GAAP) at the time of such Refinancing;
provided, that (A) such Refinancing Indebtedness of any Subsidiary of the
Company shall only be used to refinance outstanding Indebtedness or Disqualified
Capital Stock of such Subsidiary, (B) such Refinancing Indebtedness shall (x)
not have an Average Life shorter than the Indebtedness or Disqualified Capital
Stock to be so refinanced at the time of such Refinancing and (y) in all
respects, be no less subordinated or junior, if applicable, to the rights of
Holders of the Notes than was the Indebtedness or Disqualified Capital Stock to
be refinanced and (C) such Refinancing Indebtedness shall have a final stated
maturity or redemption date, as applicable, no earlier than the final stated
maturity or redemption date, as applicable, of the Indebtedness or Disqualified
Capital Stock to be so refinanced.
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"Related Business" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses.
"Restricted Payment" means, with respect to any person, (a) the declaration
or payment of any dividend or other distribution in respect of Equity Interests
of such person or any parent or Subsidiary of such person, (b) any payment on
account of the purchase, redemption or other acquisition or retirement for value
of Equity Interests of such person or any Subsidiary or parent of such person,
(c) other than with the proceeds from the substantially concurrent sale of, or
in exchange for, Refinancing Indebtedness any purchase, redemption, or other
acquisition or retirement for value of, any payment in respect of any amendment
of the terms of or any defeasance of, any Subordinated Indebtedness, directly or
indirectly, by such person or a parent or Subsidiary of such person prior to the
scheduled maturity, any scheduled repayment of principal, or scheduled sinking
fund payment, as the case may be, of such Indebtedness and (d) any Investment by
such person, other than a Permitted Investment; provided, however, that the term
"Restricted Payment" does not include (i) any dividend, distribution or other
payment on or with respect to Equity Interests of an issuer to the extent
payable solely in shares of Qualified Capital Stock of such issuer; or (ii) any
dividend, distribution or other payment to the Company, or to any of its wholly
owned Subsidiaries, by the Company or any of its Subsidiaries.
"Significant Subsidiary" shall have the meaning provided under Regulation
S-X under the Securities Act, as in effect on the issue date.
"Stated Maturity," when used with respect to any Note, means October 15,
2004.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor that is subordinated in right of payment to the Notes or such
Guarantee, as applicable, in any respect or has a stated maturity on or after
the Stated Maturity.
"Subsidiary," with respect to any person, means (i) a corporation a
majority of whose Equity Interests with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such person, by such person and one or more Subsidiaries of such person or by
one or more Subsidiaries of such person, (ii) any other person (other than a
corporation) in which such person, one or more Subsidiaries of such person, or
such person and one or more Subsidiaries of such person, directly or indirectly,
at the date of determination thereof has at least majority ownership interest,
or (iii) a partnership in which such person or a Subsidiary of such person is,
at the time, a general partner. Unless the context requires otherwise,
Subsidiary means each direct and indirect Subsidiary of the Company.
"wholly owned Subsidiary" means a Subsidiary all the Equity Interests of
which are owned by the Company or one or more wholly owned Subsidiaries of the
Company.
BOOK-ENTRY, DELIVERY AND FORM
The Notes are initially represented by one or more Global Notes issued in
the form of fully registered Global Notes, which are deposited with or on behalf
of the Depository and registered in the name of a nominee of the Depository.
Interests in Global Notes are available for purchase only by "qualified
institutional buyers" as defined in Rule 144A under the Securities Act.
Notes that were originally issued to or transferred to institutional
"accredited investors" as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act or to any other persons who are not qualified institutional
buyers were issued as a separate Certificated Note also held in the name of a
nominee of the Depository. Upon the transfer to a qualified institutional buyer
of Certificated Notes, such Certificated Notes will be exchanged for an interest
in the Global Notes representing the principal amount of the Notes being
transferred.
The Depository has advised the Company and the Initial Purchaser that the
Depository intends to follow the procedures described below:
The Depository will act as securities depository for the Global Notes.
The Global Notes will be issued as a fully registered security registered
in the name of Cede & Co. (the Depository's nominee).
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The Depository is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. The Depository holds securities that its
participants ("Participants") deposit with the Depository. The Depository
also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct Participants include securities brokers and dealers,
banks, trust companies, clearing corporations, and certain other
organizations ("Direct Participants"). The Depository is owned by a number
of its Direct Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depository's system is also available to others
such as securities brokers and dealers, banks, and trust companies that
clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants"). The
Rules applicable to the Depository and its Participants are on file with
the Commission.
Purchase of Notes must be made by or through Direct Participants,
which will receive a credit for the Notes on the Depository's records. The
ownership interest of each actual purchaser of each Note represented by the
Global Notes ("Beneficial Owner") is in turn recorded on the Direct and
Indirect Participants' records. Transfers of ownership interests in the
Notes are to be accomplished by entries made on the books of Participants
acting on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in the Notes, except in
the event that use of the book-entry system for the Notes is discontinued.
Conveyance of Notes and other communications by the Depository to
Direct Participants, by Direct Participants to Indirect Participants, and
by Direct Participants and Indirect Participants to Beneficial Owners are
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Notes are being redeemed, the Depository's practice is to determine by lot
the amount of the interest of each Direct Participant in such issue to be
redeemed.
Neither the Depository nor Cede & Co. will consent or vote with
respect to the Global Notes. Under its usual procedures, the Depository
mails an Omnibus Proxy to the issuer as soon as possible after the record
date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to
those Direct Participants to whose accounts the Notes are credited on the
record date (identified in a listing attached to the Omnibus Proxy).
Principal of, premium and Liquidated Damages, if any, and interest
payments on the Notes will be made to the Depository. The Depository's
practice is to credit Direct Participants' accounts on the payable date in
accordance with their respective holdings shown on the Depository's records
unless the Depository has reason to believe that it will not receive
payment on the payable date. Payments by Participants to Beneficial Owners
will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form
or registered in "street name", and will be the responsibility of such
Participant and not of the Depository, the Paying Agent or the Company,
subject to any statutory or regulatory requirements as may be in effect
from time to time. Payment to the Depository of principal of, premium and
Liquidated Damages, if any, and interest on the Notes are the
responsibility of the Company or the Paying Agent, disbursement of such
payments to Direct Participants shall be the responsibility of the
Depository, and disbursement of such payments to the Beneficial Owners
shall be the responsibility of Direct and Indirect Participants.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
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If the Depository is at any time unwilling, unable or ineligible to
continue as Depository and a successor Depository is not appointed by the
Company within 90 days, the Company will issue Certificated Notes in exchange
for the Global Notes. In addition, the Company may at any time and in its sole
discretion determine not to have any Notes in registered form represented by the
Global Notes and, in such event, will issue Certificated Notes in exchange for
the Global Notes. In any such instance, an owner of a beneficial interest in a
Global Note will be entitled to physical delivery of Certificated Notes
registered in its name. Upon the exchange of the Global Notes for Certificated
Notes, the Global Notes will be canceled by the Trustee.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchaser entered into the
Registration Rights Agreement pursuant to which the Company agreed to file with
the Commission promptly (but in any event on or prior to 45 days) after the
Issue Date, the Exchange Offer Registration Statement on the appropriate form,
relating to the Exchange Offer to exchange the Original Notes for the Company's
Series B 10% Senior Notes due 2004 (the "Exchange Notes"), which will have terms
substantially identical in all material respects to the Original Notes (except
that such Exchange Notes will not contain terms with respect to transfer
restrictions). The Registration Statement of which this Prospectus forms a part
is the Exchange Offer Registration Statement. The Company agreed to use its best
efforts to cause such Exchange Offer Registration Statement to become effective
within 120 days after the Issue Date. Upon the effectiveness of the Exchange
Offer Registration Statement, the Company agreed to offer the Holders of
Original Notes the opportunity to exchange their Original Notes for Exchange
Notes. In the event that applicable interpretations of the staff of the
Commission do not permit the Company to effect the Exchange Offer or permit a
Holder to participate in the Exchange Offer, or, in the case of any Holder of
Original Notes that participates in the Exchange Offer, such Holder does not
receive freely tradable Exchange Notes on the date of the exchange for tendered
Original Notes, or if for any reason the Exchange Offer is not consummated
within 150 days after the Issue Date, or, subject to certain conditions, upon
the request of the Initial Purchaser or the Holders of a majority in aggregate
principal amount of the Original Notes, the Company agreed, at its cost, to file
with the Commission the Shelf Registration Statement to cover resales of
Original Notes by the Holders thereof. The Company will use its best efforts to
cause the applicable registration statement to be declared effective by the
Commission as promptly as practicable after the date of filing.
Based on an interpretation of the staff of the Commission set forth in
several no-action letters to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by Holders thereof without compliance with the
registration and prospectus delivery provisions of the Securities Act. However,
any purchaser of Original Notes who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (i) will not be able to rely on the interpretation of the staff
of the Commission set forth in the above referenced no-action letters, (ii) will
not be able to tender its Original Notes in the Exchange Offer and (iii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of the Original Notes
unless such sale or transfer is made pursuant to an exemption from such
requirements.
The Registration Rights Agreement provides that unless the Exchange Offer
would not be permitted by a policy of the Commission, the Company will have
commenced the Exchange Offer and will use its best efforts to issue on or prior
to 30 business days after the date on which the Exchange Offer Registration
Statement was declared effective by the Commission Exchange Notes in exchange
for all Original Notes tendered prior thereto in the Exchange Offer. If (a)
neither of the registration statements described above is filed on or before the
45th day following the Issue Date, (b) neither of such registration statements
is declared effective by the Commission on or prior to the 120th day after the
Issue Date (the "Effectiveness Date"), (c) an Exchange Offer Registration
Statement becomes effective, and the Company fails to consummate the Exchange
Offer within 30 business days of the effectiveness of such registration
statement, or (d) the Shelf Registration Statement is filed and declared
effective but thereafter ceases to be effective without being succeeded within
30 days by another effective registration statement (each such event, a
"Registration Default"), the Company will pay liquidated damages ("Liquidated
Damages") to each Holder of Registrable
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Securities (as defined) during the first 90-day period immediately following the
occurrence of such Registration Default in an amount equal to one-half of one
percent (0.5%) per annum of the principal amount of the Original Notes held by
such Holder during the first 90-day period immediately following the occurrence
of such Registration Default, increasing by an additional one-half of one
percent (0.5%) per annum of the principal amount of such Original Notes during
each subsequent 90-day period, up to a maximum amount of Liquidated Damages
equal to two percent (2.0%) per annum of the principal amount of such Original
Notes, which provision for Liquidated Damages will continue until such
Registration Default has been cured. All accrued Liquidated Damages will be paid
in the same manner as interest payments on the Original Notes on semiannual
damages payment dates that correspond to interest payment dates for the Original
Notes and upon redemption dates, Change of Control Purchase Dates and Asset Sale
Offers. Following the cure of a Registration Default, the accrual of Liquidated
Damages will cease.
Holders of Original Notes is required to make certain representations to
the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement in order to have
their Notes included in the Shelf Registration Statement. A Holder of Original
Notes that sells such Original Notes pursuant to the Shelf Registration
Statement generally would be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such a Holder (including
certain indemnification obligations). The Company will provide a copy of the
Registration Rights Agreement to Holder upon request.
PLAN OF DISTRIBUTION
Based on interpretations by Commission staff set forth in no-action letters
issued to third parties, including the Exxon Capital and Morgan Stanley letters
and similar letters, the Company believes that the Exchange Notes to be issued
pursuant to the Exchange Offer in exchange for Original Notes may be offered for
resale, resold, and otherwise transferred by any Holder thereof (other than any
such Holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such Holder's business and
such Holder has no arrangement with any person to participate in the
distribution of such Exchange Notes. Accordingly, any Holder using the Exchange
Offer to participate in a distribution of the Exchange Notes will not be able to
rely on such no-action letters. Notwithstanding the foregoing, each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Original Notes where
such Original Notes were acquired as a result of market-making activities or
other trading activities. The Company has agreed that, for a period of up to 180
days after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale.
ESI will not receive any proceeds from any sales of the Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells the Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of the Exchange Notes and any
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commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a prospectus
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
For a period of up to 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. ESI has agreed to pay certain expenses incident to
the Exchange Offer, other than commissions or concession of any brokers or
dealers, and will indemnify the holders of the Exchange Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in this Prospectus untrue in any material respect or which
requires the making of any changes in this Prospectus in order to make the
statements herein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of this
Prospectus until the Company has amended or supplemented this Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such broker-dealer. If the Company shall give any
such notice to suspend the use of the Prospectus, it shall extend the period
referred to above by the number of days during the period from and including the
date of the giving of such notice to and including the date when broker-dealers
shall have received copies of the supplemented or amended Prospectus necessary
to permit resales of the Exchange Notes.
This Prospectus has been prepared to permit its use by the Initial
Purchaser in connection with offers and sales of the Notes, in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale. The Initial Purchaser may act as principal or agent in such
transactions. The Initial Purchaser has advised the Company that it currently
intends to make a market in the Notes, but it is not obligated to do so and may
discontinue any such market-making at any time without notice. Accordingly, no
assurance can be given that an active trading market will develop for, or as to
the liquidity of, the Notes.
LEGAL MATTERS
The validity of the Exchange Notes and the Guarantees offered hereby is
being passed upon for the Company by Quarles & Brady, Milwaukee, Wisconsin and
Phoenix, Arizona.
EXPERTS
The consolidated financial statements of the Company for each of the three
years in the period ended December 31, 1996 included in this Prospectus have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, which is included herein in
reliance upon the authority of said firm as experts in giving said report.
The combined financial statements of Leaseway for each of the three years
in the period ended December 31, 1995, incorporated by reference in this
Registration Statement, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated by reference herein
and have been so incorporated by reference in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
76
<PAGE> 83
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.............................................. F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets -- December 31, 1995 and 1996............................. F-3
Consolidated Statements of Operations -- For the Years Ended December 31, 1994,
1995 and 1996....................................................................... F-4
Consolidated Statements of Stockholders' Equity -- For the Years Ended December 31,
1994, 1995 and 1996................................................................. F-5
Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1994, 1995
and 1996............................................................................ F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................ F-7
Unaudited Consolidated Balance Sheets -- December 31, 1996 and June 30, 1997.......... F-33
Unaudited Consolidated Statements of Operations -- For the Six Months Ended June 30,
1996 and 1997....................................................................... F-34
Unaudited Consolidated Statements of Stockholders' Equity -- For the Six Months Ended
June 30, 1997....................................................................... F-35
Unaudited Consolidated Statements of Cash Flows -- For the Six Months Ended June 30,
1996 and 1997....................................................................... F-36
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.................................. F-37
</TABLE>
F-1
<PAGE> 84
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Employee Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of EMPLOYEE
SOLUTIONS, INC. (an Arizona corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Employee
Solutions, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Phoenix, Arizona,
March 25, 1997
(except with respect to the matter discussed in Note 14,
as to which the date is October 21, 1997).
F-2
<PAGE> 85
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
-------- --------
(DOLLARS IN
THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 14,029 $ 10,980
Restricted cash and investments...................................... 2,743 11,500
Accounts receivable, net............................................. 7,866 34,839
Receivables from insurance companies................................. 86 5,918
Prepaid expenses and deposits........................................ 379 1,258
Deferred income taxes................................................ 334 1,156
------- --------
Total current assets....................................... 25,437 65,651
Property and equipment, net.......................................... 440 1,084
Deferred income taxes................................................ -- 539
Goodwill and other assets, net....................................... 10,963 58,695
------- --------
Total assets............................................... $ 36,840 $125,969
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft....................................................... $ 3,752 $ 2,477
Accrued salaries, wages and payroll taxes............................ 6,681 17,586
Accounts payable..................................................... 1,114 4,078
Accrued workers' compensation and health insurance................... 2,463 6,927
Income taxes payable................................................. 2,207 720
Other accrued expenses............................................... 631 3,414
------- --------
Total current liabilities.................................. 16,848 35,202
------- --------
Deferred income taxes................................................ 49 111
------- --------
Long-term debt....................................................... -- 42,800
------- --------
Other long-term liabilities.......................................... -- 1,349
------- --------
Commitments and contingencies
Stockholders' equity:
Class A Convertible Preferred Stock, nonvoting, no par value,
10,000,000 shares authorized, no shares in 1995 and 1996 issued and
outstanding........................................................ -- --
Common Stock, no par value, 75,000,000 shares authorized, 26,747,196
shares issued and 26,652,272 shares outstanding in 1995, and
30,729,433 shares issued and outstanding in 1996................... 15,938 30,145
Retained earnings.................................................... 4,336 16,362
Treasury stock, 94,924 shares, in 1995 at cost and no shares in
1996............................................................... (331) --
------- --------
Total stockholders' equity................................. 19,943 46,507
------- --------
Total liabilities and stockholders' equity................. $ 36,840 $125,969
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 86
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
Revenues................................................... $ 74,334 $ 164,455 $ 439,016
---------- ---------- ----------
Cost of revenues:
Salaries and wages of worksite employees................. 62,827 132,379 341,988
Healthcare and workers' compensation..................... 3,095 7,591 30,234
Payroll and employment taxes............................. 5,146 10,705 28,640
---------- ---------- ----------
Cost of revenues................................. 71,068 150,675 400,862
---------- ---------- ----------
Gross profit............................................... 3,266 13,780 38,154
Selling, general and administrative expenses............... 2,297 7,183 17,310
Depreciation and amortization.............................. 269 426 2,073
---------- ---------- ----------
Income from operations........................... 700 6,171 18,771
Other income (expense):
Interest income.......................................... 52 296 833
Interest expense......................................... (3) (25) (1,196)
Minority interest and other.............................. 80 239 (1)
---------- ---------- ----------
Income before provision for income taxes................... 829 6,681 18,407
Income tax provision....................................... 450 2,846 6,381
---------- ---------- ----------
Net income....................................... $ 379 $ 3,835 $ 12,026
========== ========== ==========
Net income per common and common equivalent share:
Primary.................................................. $ .02 $ .16 $ .37
========== ========== ==========
Fully diluted............................................ $ .02 $ .14 $ .37
========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding:
Primary.................................................. 20,145,484 23,506,782 32,167,777
========== ========== ==========
Fully diluted............................................ 20,145,484 26,430,586 32,385,735
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 87
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON RETAINED TREASURY STOCKHOLDERS'
STOCK STOCK EARNINGS STOCK EQUITY
--------- ------- -------- -------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993.................... $ 6 $ 3,323 $ 122 $ -- $ 3,451
Purchase of 16,000 shares of treasury stock... -- -- -- (35) (35)
Issuance of 2,256,000 shares of common stock
in connection with a private placement...... -- 2,606 -- -- 2,606
Net income.................................... -- -- 379 -- 379
------- ------- ------- ------- -------
BALANCE, December 31, 1994.................... 6 5,929 501 (35) 6,401
Issuance of 5,060,000 shares of Common Stock
in connection with conversion of Preferred
Stock....................................... (6) 6 -- -- --
Issuance of 3,887,200 shares of Common Stock
in connection with exercise of underwriter
and
IPO warrants................................ -- 7,142 -- -- 7,142
Issuance of 1,305,308 shares of Common Stock
in connection with exercise of other
warrants and stock options.................. -- 981 -- -- 981
Acquisition of 78,924 shares of treasury stock
through collection of receivables from
officers/directors.......................... -- -- -- (296) (296)
Issuance of 799,448 shares of Common Stock in
connection with acquisitions................ -- 1,613 -- -- 1,613
Tax benefit related to the exercise of stock
options..................................... -- 267 -- -- 267
Net income.................................... -- -- 3,835 -- 3,835
------- ------- ------- ------- -------
BALANCE, December 31, 1995.................... -- 15,938 4,336 (331) 19,943
Cancellation of treasury stock................ -- (331) -- 331 --
Issuance of 701,000 shares of Common Stock in
connection with acquisitions................ -- 4,274 -- -- 4,274
Issuance of 1,968,161 shares of Common Stock
in connection with exercise of other
warrants and stock options.................. -- 7,786 -- -- 7,786
Acquisition of 7,850 shares of Common Stock
through collection of receivables from
officers/directors.......................... -- (157) -- -- (157)
Tax benefit related to the exercise of stock
options..................................... -- 2,635 -- -- 2,635
Net income.................................... -- -- 12,026 -- 12,026
------- ------- ------- ------- -------
BALANCE, December 31, 1996.................... $ -- $30,145 $ 16,362 $ -- $46,507
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 88
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers......................................... $ 74,473 $162,137 $408,424
Cash paid to suppliers and employees................................. (73,713) (155,066) (405,606)
Interest received.................................................... 42 279 833
Interest paid........................................................ (3) (25) (1,196)
Income taxes paid, net of refunds.................................... (87) (1,046) (5,772)
------ ------ ------
Net cash (used in) provided by operating activities......... 712 6,279 (3,317)
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................................... (189) (238) (702)
Business acquisitions................................................ (27) (961) (37,251)
Cash invested in restricted cash and investments..................... (1,361) (1,372) (8,757)
Issuance of notes receivable, net.................................... (360) 383 (189)
Other, net........................................................... (447) 3 --
------ ------ ------
Net cash used in investing activities....................... (2,384) (2,185) (46,899)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............................. -- -- 42,800
Proceeds from issuance of Common Stock............................... 2,606 8,123 7,786
Payment of deferred loan costs....................................... -- -- (515)
Decrease in bank overdraft and other................................. (35) (136) (2,904)
------ ------ ------
Net cash provided by financing activities................... 2,571 7,987 47,167
------ ------ ------
Net increase (decrease) in cash and cash equivalents................. 899 12,081 (3,049)
CASH AND CASH EQUIVALENTS, beginning of year......................... 1,049 1,948 14,029
------ ------ ------
CASH AND CASH EQUIVALENTS, end of year............................... $ 1,948 $ 14,029 $ 10,980
====== ====== ======
RECONCILIATION OF NET INCOME TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Net income........................................................... $ 379 $ 3,835 $ 12,026
------ ------ ------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization........................................ 269 426 2,073
Miscellaneous non-cash charges....................................... (77) (193) --
Tax benefit from stock options....................................... -- 267 2,635
Decrease (increase) in accounts receivable, net...................... 186 (2,249) (24,760)
Increase in insurance company receivables............................ -- (86) (5,832)
Increase in prepaid expenses and deposits............................ (17) (183) (736)
Increase in deferred income tax assets............................... (42) (275) (601)
Decrease (increase) in other assets.................................. 26 (17) (2,532)
(Decrease) increase in accrued salaries, wages and payroll taxes..... (160) 1,319 10,905
Increase in accrued workers' compensation and health insurance....... 287 676 4,464
(Decrease) increase in other long-term liabilities................... (261) (39) 1,349
Increase (decrease) in accounts payable.............................. 113 599 (2,038)
Increase (decrease) in income taxes payable.......................... 392 1,776 (1,487)
(Decrease) increase in other accrued expenses........................ (397) 404 1,155
Increase in deferred income tax liabilities.......................... 14 19 62
------ ------ ------
333 2,444 (15,343)
------ ------ ------
Net cash provided by (used in) operating activities......... $ 712 $ 6,279 $ (3,317)
====== ====== ======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the years ended December 31, 1995 and 1996, certain notes receivable
from officers/directors were repaid with the Company's Common Stock owned by
these individuals in the amount of $296,000 and $157,000, respectively.
In connection with business acquisitions during 1995 and 1996, the Company
assumed net liabilities of $5,385,000 and $5,478,000 and issued $1,613,000 and
$4,274,000 of Common Stock, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 89
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Corporation
Employee Solutions, Inc. (together with its subsidiaries, "ESI" or the
"Company") is a leading professional employer organization (PEO) providing
employers throughout the United States with comprehensive employee payroll,
human resources and benefits outsourcing services. The Company's integrated
outsourcing services include payroll processing and reporting, human resources
administration, employment regulatory compliance management, risk
management/workers' compensation services, retirement and health care programs,
and other products and services provided directly to worksite employees. At
December 31, 1996, ESI serviced approximately 1,200 client companies with
approximately 30,000 worksite employees in 46 states.
The Company began in 1995 to offer employers stand-alone risk
management/workers' compensation services. At December 31, 1996, this program
covers an additional approximately 13,500 workers employed by approximately 64
employers.
The Company conducts its business on a national scale across many
industries and is not concentrated to any material extent within a single local
market or industry, although the transportation industry, at approximately 33%,
represents the largest concentration of worksite employees.
Principles of Consolidation
The consolidated financial statements include the activities of Employee
Solutions, Inc. and its wholly owned subsidiaries from their respective
acquisition dates. All acquisitions were accounted for as purchases. All
significant intercompany accounts and transactions have been eliminated. Certain
amounts have been reclassified from prior years to conform with current year
presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. The nature of the Company's business requires significant
estimates to be made in the areas of workers' compensation reserves and revenue
recognized for retrospectively rated policies. The actual results of these
estimates may be unknown for a period of years. Actual results could differ from
those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with original maturities of three months or less. All cash equivalents are
invested in high quality investment grade instruments, such as U.S. Treasury
securities, at December 31, 1995 and 1996, and are stated at cost which
approximates fair market value. For purposes of the statements of cash flows,
investments with an original maturity of less than 90 days are considered cash
equivalents. Substantially all cash and cash equivalents, including restricted
cash and investments, are not insured at December 31, 1996.
Restricted Cash and Investments
The Company's risk management/workers' compensation programs with its
"fronting" carriers required $2,743,000 and $11,500,000 at December 31, 1995 and
1996, respectively, to be held in a restricted account for payment of future
claims, and future capitalization of Camelback Insurance, Ltd. ("Camelback"),
the
F-7
<PAGE> 90
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
Company's wholly owned off-shore captive insurance company. Such restricted cash
and investments have been calculated by the Company's carriers based on
estimates of the future growth in the Company's business and ultimate losses on
such business. For this purpose, ultimate losses are actuarially determined by
the carriers utilizing industry-wide data which may not reflect the Company's
historical or expected ultimate losses. Restricted investments consist of U.S.
Treasury and other short term corporate debt securities, purchased in accordance
with the Company's investment policy guidelines, with varying maturities to
coincide with expected liquidity requirements to meet future anticipated claims,
and are accounted for in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Investments in Certain Debt and Equity
Securities". At December 31, 1996, the Company maintained approximately
$8,666,000 of investments with maturities between 90 days and one year,
respectively. These securities are considered available for sale and,
accordingly, are recorded at market value. The difference between historical
cost and market value was not material.
Insurance Company Receivables
The Company's risk management/workers' compensation services program is
conducted via fronting arrangements with insurers. At December 31, 1995 and
1996, the Company had receivables from its fronting companies of $86,000 and
$5,918,000, respectively. Such amounts consist of the difference between cash
advanced to the insurance companies based on estimates of administrative fees,
excess reinsurance and premium taxes and the actual expenses incurred and paid
by the insurer on behalf of the Company.
Accounts Receivable/Revenue Recognition
Revenue is recognized as services are performed. The following table
presents a summary of the Company's accounts receivable.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts receivable.............................. $ 3,091 $17,306
Unbilled salary and wage accruals...................... 4,187 14,544
Unbilled stand alone premium revenue................... 183 618
Other.................................................. 620 3,001
Allowance for estimated uncollectible receivables...... (215) (630)
------- -------
Total accounts receivable, net......................... $ 7,866 $34,839
======= =======
</TABLE>
Contractual payment terms extended to customers on stand alone workers'
compensation policies are generally less than the expected annual policy
premium, resulting in unbilled revenues. Unbilled revenues become billed upon
completion of final policy audits.
At December 31, 1995 and 1996, receivables from related parties included in
the above totals were $1,227,000 and $3,287,000, respectively.
Credit Risk
The Company conducts only a limited credit investigation prior to accepting
most new clients and thus may encounter collection problems which could
adversely affect its cash flow. The nature of the Company's business is such
that a small number of client credit failures could have an adverse effect on
its business and financial condition.
F-8
<PAGE> 91
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
Property and Equipment
Property and equipment primarily consists of office furniture and equipment
and is recorded at cost. Depreciation is recorded on the straight-line method
over the estimated useful lives of the assets which range from three to five
years. Maintenance and repairs that neither materially add to the value of the
property, nor appreciably prolong its life, are charged to expense as incurred.
Betterments or renewals are capitalized when incurred. Property and equipment is
net of accumulated depreciation of $180,000 and $440,000 at December 31, 1995
and 1996, respectively.
Goodwill and Other Assets
Included in goodwill and other assets is $10,230,000 and $55,756,000 at
December 31, 1995 and 1996, respectively, representing the unamortized cost of
goodwill. Goodwill represents the excess of the purchase price paid over the
fair market value of the net assets acquired. As of December 31, 1996, goodwill
of $27,198,000 is being amortized over 30 years, $26,365,000 over 15 years and
$2,193,000 over shorter periods. The Company periodically assesses goodwill for
impairment using the criteria of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Goodwill and other assets are net of accumulated amortization of $656,000
and $2,457,000 at December 31, 1995 and 1996, respectively.
Also included in goodwill and other assets at December 31, 1996 is $2.9
million representing estimated unbilled stand alone workers' compensation
premium due from one customer for the first year of a two-year policy.
Approximately $2.6 million was billed and collected from this customer in 1996.
Bank Overdraft
Bank overdraft represents outstanding checks in excess of cash on hand at
the applicable bank. Historically, these checks are covered when presented for
payment through collection of accounts receivable.
Accrued Workers' Compensation and Health Insurance
The Company offers partially self-insured health programs through
arrangements with Nationwide Life Insurance Company ("Nationwide") and John
Alden Life Insurance Company ("Alden"), and a self-insured program through an
arrangement with Provident Life & Accident Insurance Company ("Provident"), in
addition to its fully insured medical plans. Pursuant to the arrangements with
Nationwide and Alden, the Company is responsible for deductibles of $100,000 and
$75,000 per covered individual per year, respectively. Under the Provident
program the maximum policy coverage is $100,000 per covered individual per year,
for which the Company is responsible. Effective January 1, 1997, the deductible
for the Nationwide program was decreased to $75,000. The Company's aggregate
liability limit under the Nationwide program is based upon covered lives as of
the beginning of each month during the calendar year, and is calculated at 125%
of the expected claims amount. The Alden plan has no stop-loss claim limit.
Prior to June 1, 1994 the Company covered its risk management/workers'
compensation obligations with fully insured policies issued by multiple
carriers. From June 1, 1994, to May 31, 1995, coverage was provided through
policies issued by the American International Group ("AIG") and Reliance
National Indemnity Company ("Reliance"). The Company received approval in 1994
to form Camelback. Camelback was activated in May 1995. Effective June 1, 1995,
the Company began conducting substantially all of its risk management/workers'
compensation program through Camelback in coordination with Reliance. Under
these policies, which provide first dollar coverage to the employees of the
Company, its subsidiaries and the
F-9
<PAGE> 92
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
Company's clients, the Company is responsible for the first $250,000 per
occurrence, with no aggregate to limit the Company's liability.
Individual risk management/workers' compensation claims in excess of
$250,000 and up to the statutory limits of the states where the Company operates
are the responsibility of Reliance. The Company's prior arrangements with AIG
were structured in a manner similar to its current arrangements with Reliance.
While the retention of the first $250,000 of individual workers' compensation
claims and the capital requirements resulting from the establishment of
Camelback are intended to enhance profitability, these actions increase the
Company's exposure to risk from workers' compensation claims.
To meet growing needs of the Company's business and to lessen its
dependence on Reliance, on August 1, 1996 the Company entered into an
arrangement with Legion Insurance Company ("Legion"), on substantially the same
terms as the Reliance program except that the Company is responsible for the
first $350,000 per occurrence with no aggregate to limit the Company's
liability. The Company is in the process of establishing a second captive
insurance company for the Legion program. Until such captive is formed and
activated, loss funds, recorded as restricted cash and investments under the
Reliance program, are held by Legion for the Company's benefit and are included
in receivables from insurance companies in the amount of $3,157,000 at December
31, 1996.
To further reduce its potential liability, the Company has secured
Accidental Death and Dismemberment insurance from an insurance affiliate of the
Chubb Group of Insurance Companies that covers losses up to $500,000 (increased
from $250,000 in July 1996, to obtain a net reduction in excess reinsurance
costs) for certain types of serious claims and maintains umbrella coverage for
certain liabilities (other than losses resulting from workers' compensation
claims) which the Company may incur in connection with its administration of its
risk management/workers' compensation program.
The Company recognizes a liability for partially self insured and self
insured health insurance and workers' compensation insurance claims at the time
a claim is reported to the Company by the third party administrator. The third
party administrator establishes the initial claim reserve based on information
relating to the nature and severity and the cost of similar claims. The Company
provides for claims incurred, but not reported, based on industry-wide data and
the Company's past claims experience through consultation with third party
actuaries. The liability recorded may be more or less than the actual amount of
the claims when they are submitted and paid. Changes in the liability are
charged or credited to operations as the estimates are revised.
Income Taxes
The Company files a consolidated federal income tax return. Consolidated or
combined state tax returns are filed in certain states.
Deferred income taxes arise from temporary differences resulting from
certain revenue and expense items reported for financial accounting and tax
reporting purposes in different periods. Reductions in current income taxes
payable related to disqualifying dispositions of qualified stock options and the
exercise of non-qualified stock options are credited to common stock.
Net Income Per Common and Common Equivalent Share
The Company used the modified treasury stock method prescribed by
Accounting Principles Board Opinion No. 15 to compute net income per share in
1994 and 1995 since the number of warrants and options outstanding were in
excess of 20% of common shares issued and outstanding. The Company used the
treasury stock method to compute net income per share in 1996. The computation
of adjusted net income and weighted
F-10
<PAGE> 93
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
average common and common equivalent shares used in the calculation of income
per common share is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------------------- ----------------------- -----------------------
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Weighted average of
common shares
outstanding.......... 15,085,484 15,085,484 22,391,616 22,391,616 30,224,357 30,224,357
Weighted average Class
A Preferred Stock
assumed converted.... 5,060,000 5,060,000 N/A N/A N/A N/A
Dilutive effect of
options and warrants
outstanding.......... -- -- 1,115,166 4,038,970 1,943,420 2,161,378
---------- ---------- ---------- ---------- ---------- ----------
Weighted average of
common and common
equivalent shares.... 20,145,484 20,145,484 23,506,782 26,430,586 32,167,777 32,385,735
========== ========== ========== ========== ========== ==========
Net income............. $ 379 $ 379 $ 3,835 $ 3,835 $ 12,026 $ 12,026
Adjustments to net
income............... -- -- (135) (135) -- --
---------- ---------- ---------- ---------- ---------- ----------
Adjusted net income for
purposes of the
income per common
share calculation.... $ 379 $ 379 $ 3,700 $ 3,700 $ 12,026 $ 12,026
========== ========== ========== ========== ========== ==========
Net income per common
and common equivalent
share................ $ .02 $ .02 $ .16 $ .14 $ .37 $ .37
========== ========== ========== ========== ========== ==========
</TABLE>
Adjustments to 1995 net income reflect the amortization of contingent
goodwill relating to the Employment Services of Michigan, Inc. and Hazar, Inc.
acquisitions (see Note 9).
The effect of the modified treasury stock method on 1994 was antidilutive
and therefore had no impact on the computation.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS 107),
"Disclosures about Fair Value of Financial Instruments," requires that the
Company disclose estimated fair values for its financial instruments. Fair value
estimates, methods and assumptions set forth below for the Company's financial
instruments are made solely to comply with the requirements of SFAS 107 and
should be read in conjunction with the financial statements and notes.
These calculations are subjective in nature, involve uncertainties and
matters of significant judgment and do not include tax ramifications; therefore,
the results cannot be determined with precision, substantiated by comparison to
independent markets and may not be realized in an actual sale or immediate
settlement of the instruments. There may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions used could
significantly affect the results. For all of these reasons, the aggregation of
the fair
F-11
<PAGE> 94
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
value calculations presented herein does not represent, and should not be
construed to represent, the underlying value of the Company.
The following table presents a summary of the Company's financial
instruments, as defined by SFAS 107:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1995 1996
-------------------- --------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents................................ $ 14,209 $14,209 $ 10,980 $10,980
Restricted cash and investments.......................... 2,743 2,743 11,500 11,500
Other financial assets, primarily accounts receivable.... 8,685 8,685 43,696 43,657
Financial Liabilities
Bank overdraft........................................... 3,752 3,752 2,477 2,477
Long-term debt........................................... -- -- 42,800 42,800
Other financial liabilities, primarily accounts
payable................................................ 10,889 10,889 33,354 33,354
</TABLE>
Financial instruments other than long-term debt approximate fair value
because of their short-term duration. Long-term debt approximates fair value
because of the variable interest rate.
2. COMMON STOCK SPLITS
On December 18, 1995, and June 26, 1996 the Board of Directors authorized
two-for-one common stock splits, effected in the form of 100% stock dividends,
effective on January 16, 1996 and July 26, 1996 respectively, to shareholders of
record at the close of business on January 2, 1996 and July 12, 1996. In this
report, all per share amounts and numbers of shares, including options and
warrants, have been restated to reflect these stock splits.
3. EMPLOYEE BENEFITS
The Company maintains two money purchase pension plans which are available
to those clients who wish to participate. Contributions to the plans are either
seven and one-half percent or ten percent of each eligible employee's
compensation, depending upon which plan the employee is covered by. The Company
funds both plans on a monthly basis.
One of the Company's subsidiaries is party to several union contracts
whereby benefits are provided to employees through Multiple Employer Pension
Plans. In connection with the acquisition of this subsidiary in 1996, the
Company assumed certain contingent liabilities for the funding of various
pension plans that could materialize if a significant decrease in contribution
units as defined in the various contracts were to occur. The Company has
recorded a liability of approximately $1.8 million based on information provided
to the Company from the various plans.
F-12
<PAGE> 95
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
4. LEASE COMMITMENTS
The Company leases office space under non-cancelable operating lease
agreements. Future minimum lease payments due under such agreements are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
--------------------------------------------------------------
(IN THOUSANDS)
<S> <C>
1997.......................................................... $1,117
1998.......................................................... 1,316
1999.......................................................... 1,160
2000.......................................................... 1,099
2001.......................................................... 1,052
Later years................................................... 2,360
----------
Total............................................... $8,104
==========
</TABLE>
Rental expense under all leases was $150,000, $162,000, and $734,000 in
1994, 1995 and 1996, respectively.
5. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 1994, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current................................................................ $478 $3,102 $6,935
Deferred............................................................... (28) (256) (554)
---- ----- -----
Income tax provision................................................... $450 $2,846 $6,381
==== ===== =====
</TABLE>
Income tax expense differs from the amount computed using the statutory
federal income tax rate due to the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense at statutory rate................................... $282 $2,272 $6,442
Non-deductible goodwill amortization................................... 60 73 197
Non-deductible per diem and other expenses............................. 38 85 41
State taxes, net of federal benefit.................................... 70 429 179
Change in estimate related to 1995 state taxes......................... -- -- (430)
Other.................................................................. -- (13) (48)
---- ----- -----
Income tax provision................................................... $450 $2,846 $6,381
==== ===== =====
</TABLE>
F-13
<PAGE> 96
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
Deferred tax assets and liabilities are comprised of the following
temporary differences at December 31:
<TABLE>
<CAPTION>
1996
1995 -----------------------
----------------------- LONG-TERM
CURRENT LONG-TERM CURRENT ASSETS
ASSETS (LIABILITIES) ASSETS (LIABILITIES)
------- ------------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Depreciation and amortization........................... $ -- $ (22) $ -- $(111)
Reserves not deductible for tax purposes................ 334 -- 1,130 539
Other, net.............................................. -- (27) 26 --
---- ---- ------ -----
$ 334 $ (49) $ 1,156 $ 428
==== ==== ====== =====
</TABLE>
6. LONG-TERM DEBT
On August 1, 1996, the Company entered into a three year $35 million
revolving credit facility for the purposes of acquisition financing, working
capital and general corporate purposes. The revolving credit facility provides
for various borrowing rate options including borrowing rates based on a fixed
spread of 25 basis points over prime or 250 basis points over the London
Interbank Offered Rate ("LIBOR"). The Company pays a commitment fee of 37.5
basis points on the unused portion of the line. Total costs incurred in
obtaining this facility were approximately $400,000 and are being amortized over
the life of the facility. The line matures on August 1, 1999. The principal loan
covenants are as follows as defined in the agreement: current ratio of at least
1.4 to 1; total liabilities to net worth of not more than 2 to 1; total funded
debt to earnings before taxes, depreciation and amortization of not more than 2
to 1. Certain acquisitions are limited without the lender's approval. The
facility is secured by substantially all of the Company's assets.
In October, 1996 the Company increased the line of credit by $10.0 million
to $45.0 million in anticipation of additional acquisition financing. Costs
related to such increase were approximately $100,000 and are being amortized
over the remaining life of the facility. Subsequent to year end, the line was
increased to $60 million. Additional costs of $150,000 will be amortized over
the remaining life of the loan. Commencing February 1, 1998, the commitment will
be reduced by $3 million every three months until the scheduled maturity date.
As a subfeature of the revolving credit facility, on December 31, 1996, an
irrevocable and unconditional Letter of Credit was established in the amount of
$1 million, with scheduled increases to a total amount of $2 million on May 1,
1997, expiring on September 5, 1997. The letter of credit will be automatically
extended unless the beneficiary is notified 30 days prior to the expiration
date, provided that the expiration date cannot be subsequent to the maturity
date of the revolving credit facility. The undrawn amount of the letter of
credit is reserved under the revolving credit facility and not available for
borrowing.
Since the loan was funded on August 1, 1996, through December 31, 1996, the
average principal amount outstanding has been $34.0 million and the
weighted-average interest rate has been 8.24%. As of December 31, 1996, the
outstanding balance was $42.8 million and the weighted-average interest rate was
8.50%.
7. STOCKHOLDERS' EQUITY
Preferred Stock
On April 12, 1995, each of the 1,265,000 outstanding shares of Class A
Convertible Preferred Stock were converted into four shares of Common Stock.
These preferred shares were considered converted in the 1994 earnings per share
calculations because the Company achieved the earnings target in 1994 which
allowed the shares to be converted.
F-14
<PAGE> 97
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
Warrants
Warrant activity in 1994, 1995 and 1996 was as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE
OF EXERCISE
WARRANTS PRICE
--------- ---------
<S> <C> <C>
Outstanding at December 31, 1993...................................... 5,179,240 $1.64
Granted.......................................................... 2,816,000 2.30
----------- -----
Outstanding at December 31, 1994...................................... 7,995,240 1.87
Granted.......................................................... 320,000 2.23
Exercised........................................................ (4,979,200) 1.62
Canceled......................................................... (40) 1.88
Canceled and replaced with options............................... (400,000) 2.13
----------- -----
Outstanding at December 31, 1995...................................... 2,936,000 2.32
Exercised........................................................ (2,816,000) 2.33
----------- -----
Outstanding at December 31, 1996...................................... 120,000 $1.88
=========== =====
</TABLE>
The number of warrants exercisable were 7,595,240, 2,936,000 and 120,000 at
December 31, 1994, 1995 and 1996, respectively. The remaining outstanding
warrants expire on January 2, 1999.
Stock Option Plans
The Company has a 1993 Stock Option Plan and a 1995 Stock Option Plan. The
plans are administered by the Compensation Committee of the Company's Board of
Directors, and certain employees are eligible to participate in the plans and
receive incentive stock options and/or non-statutory options. In addition, all
consultants are eligible to participate in the plans and receive non-statutory
options. Options granted may be either "incentive stock options," within the
meaning of Section 422 of the Internal Revenue Code, or nonqualified stock
options.
The total number of options made available and reserved for issuance under
the 1993 and 1995 Plans are 1,200,000 and 3,500,000, respectively. The Company
has granted options on 1,116,660 shares and 2,770,579 shares, respectively,
through December 31, 1996. Under both plans the option exercise price equals the
stock's market price on the date of grant. No compensation expense was recorded
for the stock options under the 1993 or 1995 Plans in the accompanying financial
statements as the Company has elected to retain the accounting prescribed under
Accounting Principles Board Opinion No. 25 (APB 25). Employee stock options
generally become fully exercisable over three years from the grant date and
generally have terms for up to five years. Upon termination of employment, the
option period is reduced or the options are canceled.
F-15
<PAGE> 98
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
The following table is a summary of the Company's 1993 and 1995 Stock
Option Plan activity and related information for the three years ended December
31, 1996:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER EXERCISE
OF OPTIONS PRICE
---------- ---------
<S> <C> <C>
Outstanding at December 31, 1993....................................... 550,000 $ 1.08
Granted........................................................... 400,000 2.32
Canceled.......................................................... (20,000) 1.24
-------- ------
Outstanding at December 31, 1994....................................... 930,000 1.61
Granted........................................................... 2,405,000 2.74
Exercised......................................................... (213,308) .84
Canceled.......................................................... (400,004) 2.35
-------- ------
Outstanding at December 31, 1995....................................... 2,721,688 2.56
Granted........................................................... 982,579 15.38
Exercised......................................................... (560,161) 2.22
Canceled.......................................................... (30,336) 10.07
-------- ------
Outstanding at December 31, 1996....................................... 3,113,770 $ 6.59
======== ======
Outstanding options exercisable as of:
December 31, 1994................................................. 626,668
December 31, 1995................................................. 859,160
December 31, 1996................................................. 791,843
Available for future grants at December 31, 1996....................... 812,761
</TABLE>
The following table is a summary of selected information for the Company's
compensatory stock option plans for December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
CONTRACTUAL EXERCISE
LIFE (IN YRS.) NUMBER PRICE
-------------- -------- ---------
<S> <C> <C> <C>
RANGE OF EXERCISE PRICES
1993 Stock Option Plan
$1.24 -- $3.31
Options outstanding.................................... 3.0 557,852 $2.66
Options exercisable.................................... 270,511 2.25
1995 Stock Option Plan
$2.13 -- $4.3125
Options outstanding.................................... 4.7 1,593,339 2.67
Options exercisable.................................... 516,332 2.62
$10.50 -- $21.88
Options outstanding.................................... 4.7 962,579 15.37
Options exercisable.................................... 5,000 14.50
</TABLE>
F-16
<PAGE> 99
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
The weighted-average fair value of options granted under the 1993 and 1995
Stock Option Plans was $1.07 and $6.10 for 1995 and 1996, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation." This Statement establishes a new fair value based
accounting method for stock-based compensation plans and encourages (but does
not require) employers to adopt the new method in place of the provisions of APB
25. Companies may continue to apply the accounting provisions of APB 25 in
determining net income; however, they must apply the disclosure requirements of
SFAS 123 for all grants issued after 1994. The Company elected to continue to
apply the provisions of APB 25 in accounting for the employee stock option plans
described. Accordingly, no compensation cost has been recognized for stock
options granted under the 1993 or 1995 Stock Option Plans.
Had compensation cost for these employee stock plans been determined based
on the new fair value method under SFAS 123, the Company's net income and
earnings per share would have been changed to the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
------ -------
(DOLLARS IN
THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net Income:
As Reported...................................... $3,835 $12,026
Pro Forma........................................ 3,256 13,233
Primary EPS:
As Reported...................................... .16 .37
Pro Forma........................................ .13 .41
Fully Diluted EPS:
As Reported...................................... .14 .37
Pro Forma........................................ .12 .41
</TABLE>
The pro forma amounts noted above only reflect the effects of stock-based
compensation grants made after 1994. Because stock options are granted each year
and generally vest over three years, these pro forma amounts may not reflect the
full effect of applying the (optional) fair value method established by SFAS 123
that would be expected if all outstanding stock option grants were accounted for
under this method and may not be representative of amounts in future years.
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes options pricing model. The following weighted-average
assumptions were used for grants in 1995 and 1996: risk-free interest rate of
5.98%; expected dividend yield of 0%; expected lives of 2 years; expected
volatility of 67%.
F-17
<PAGE> 100
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
8. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents summary unaudited quarterly financial data
from the Company's consolidated statements of operations:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------- ---------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
1995
Revenues.............................. $ 28,800 $ 29,159 $ 33,436 $ 73,060
Gross profit.......................... 1,826 2,633 3,627 5,694
Net income............................ 310 691 1,205 1,629
Net income per share
Primary.......................... .01 .03 .05 .06
Fully diluted.................... .01 .03 .05 .05
Weighted-average shares
Primary.......................... 21,101,948 21,101,948 26,226,280 27,799,146
Fully diluted.................... 21,101,948 21,101,948 26,226,280 28,882,526
1996
Revenues.............................. $ 73,934 $ 91,008 $ 125,238 $ 148,836
Gross profit.......................... 7,669 8,826 12,374 9,285
Net income............................ 2,352 3,116 4,246 2,312
Net income per share
Primary.......................... .07 .10 .13 .07
Fully diluted.................... .07 .10 .13 .07
Weighted-average shares
Primary.......................... 32,048,552 32,564,993 33,020,742 32,770,684
Fully diluted.................... 32,262,830 32,564,993 33,043,173 32,784,871
</TABLE>
9. ACQUISITIONS
Acquisition of Employment Services of Michigan, Inc.
The Company purchased all of the outstanding capital stock of Employment
Services of Michigan, Inc., a transportation PEO, effective January 1, 1995.
Once acquired by the Company, Employment Services of Michigan, Inc. was renamed
Employee Solutions -- Midwest, Inc. ("ESM"). The purchase price has been paid in
the form of the Company's unregistered common stock, valued at the average of
the Nasdaq daily closing prices during the 1995 calendar year less a discount of
35% for lack of marketability of the unregistered shares. Pursuant to the
purchase agreement, as amended, the consideration for the stock of ESM included
799,448 shares of the Company's common stock valued at an average price of $2.01
per share ($3.10 per share less the 35% discount) for a total purchase price of
approximately $1,612,000, plus acquisition costs of $22,000. The excess of
purchase price over net assets acquired was $1,634,000 of which $1,584,000 has
been recorded as goodwill.
Acquisition of Hazar, Inc.
On October 2, 1995, the Company completed the acquisition of the principal
assets of Hazar, Inc. and certain of its subsidiaries (collectively Hazar) for
$7.0 million plus $50,000 for fixed assets. The purchase
F-18
<PAGE> 101
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
price was paid in cash and by the assumption of certain liabilities. The Company
acquired Hazar through ESI America, Inc. (ESI America) a newly formed wholly
owned subsidiary. For several months prior to the purchase, the Company provided
workers' compensation coverage to Hazar.
In conjunction with the Hazar acquisition, the Company received an option
to purchase a related entity for $400,000 which was exercised on May 20, 1996.
This acquisition was for the principal assets of Employer Sources, Inc.
(formerly known as LMS), a California based PEO. The Company acquired Employer
Sources through Employee Solutions of California, Inc. Prior to the purchase,
the Company provided management and risk management/workers' compensation
services to Employer Sources.
In 1996, the Company completed its purchase accounting and quantified
certain assumed liabilities previously thought to be the responsibility of the
seller. The total purchase price for all Hazar related entities including
acquisitions costs is $9.6 million.
Hazar and LMS were PEO's which, together with some of their subsidiaries,
have been operating under the protection of the federal bankruptcy laws. The
acquisition increased the number of the Company's worksite employees and
expanded the Company's geographic reach to key markets in California, New York,
New Jersey, Massachusetts, New Hampshire, Rhode Island and Illinois.
Acquisition of Employee Solutions-East, Inc. (ESEI)
Effective January 1, 1996, the Company completed its acquisition of ESEI.
The base purchase price consists of 648,000 shares of the Company's unregistered
common stock, including certain registration rights as to these shares, valued
as of the effective date of the transaction at $5.53 per share ($8.50 less a 35%
discount for the lack of marketability of the unregistered shares) for a total
purchase price of $3.6 million plus acquisition costs of $94,000. The excess
purchase price over net assets acquired, was $3,674,000 which has been recorded
as goodwill. The former owner 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 ESEI after the effective date
of acquisition. ESEI's president had previously received options to acquire
400,000 shares of the Company's common stock at an exercise price of $2.13 per
share (the fair market value 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. ESEI's president was elected to
the Company's board of directors in 1995 and has served as its vice president of
sales since April 1995.
Ashlin Transportation Services, Inc.
On June 1, 1996, the Company completed the acquisition of the principal
assets of Ashlin Transportation Services, Inc. ("Ashlin"), an Indiana based
employee leasing company specializing in the transportation industry. The
Company acquired the assets of Ashlin through ESI-Midwest, Inc. For
approximately five months prior to the purchase, the Company provided risk
management/workers' compensation coverage to Ashlin. The purchase price was paid
in cash and assumed liabilities for a total purchase price of approximately $1.4
million.
Acquisition of TEAM Services
On June 22, 1996, the Company completed the purchase of all of the
outstanding capital stock of GCK Entertainment Services I, Inc. and Talent,
Entertainment and Media Services, Inc. (collectively, "TEAM Services"). TEAM
Services is a Burbank, California based company specializing in leasing
commercial talent, musicians and recording engineers to the music and
advertising segments of the entertainment industry. In connection with the
acquisition, the Company assumed net liabilities of
F-19
<PAGE> 102
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
approximately $825,000 which were recorded as goodwill and are being amortized
over a 15 year life. The purchase price will be the sum of the net liabilities
assumed at closing plus four times (4X) total TEAM Services' pre-tax income for
the twelve month period ending June 30, 1999. Additional purchase price, if any,
will be paid in the form of the Company's unregistered common stock. The
unregistered shares are entitled to certain piggyback and demand registration
rights. Based on current earnings of TEAM Services, no additional purchase price
will be required and, accordingly, any contingent purchase price has not been
considered in the earnings per share calculation for 1996.
Acquisition of Leaseway Personnel Corporation
On August 1, 1996, the Company completed the acquisition of the principal
assets of Leaseway Personnel Corporation and Leaseway Administrative Personnel,
Inc. (collectively, "Leaseway") for approximately $24 million in cash, plus
deferred acquisition costs of approximately $250,000. The Company acquired the
assets of Leaseway through Logistics Personnel Corp. ("LPC", formerly, Employee
Solutions of Florida, Inc.), a wholly owned subsidiary. Logistics Personnel
Corp. is an employee leasing company providing permanent and temporary private
carriage truck drivers, as well as non-driver employees, including warehouse
workers, mechanics, dispatchers, and administrative personnel to approximately
180 clients in 41 states.
Acquisition of The McClary-Trapp Companies
On November 1, 1996, the Company completed the acquisition of the principal
assets of the
McClary-Trapp Companies for approximately $10.6 million. The purchase price has
been paid in the form of cash, assumed liabilities, and the Company's
unregistered common stock, valued at the average closing price on Nasdaq for the
month ended October 31, 1996, less a discount of 35% for lack of marketability
of the unregistered shares. Pursuant to the purchase agreement, the
consideration for the assets of McClary-Trapp included 53,000 shares of the
Company's unregistered common stock (which carries certain registration rights)
valued at an average price of $13.09 per share ($20.14 per share less the 35%
discount) plus cash in the amount of $9.4 million and assumed liabilities. The
excess of purchase price over net assets acquired was $10,871,000 of which
$10,498,000 has been recorded as goodwill. McClary-Trapp Companies lease
approximately 2,000 worksite employees with a client base consisting primarily
of light industrial, transportation and service companies.
Unaudited Pro Forma Financial Information
The following unaudited pro forma combined financial data gives effect to
the combined historical results of operations of the Company, ESI America, TEAM
Services and LPC for the years ended December 31, 1995 and 1996, and assumed
that the acquisitions had been effective as of the beginning of each period.
The pro forma information is not indicative of the actual results which
would have occurred had the acquisitions been consummated at the beginning of
such periods or of future consolidated operations of the Company and
accordingly, does not reflect results that would occur from a change in
management and planned restructuring of the operations of ESI America. The pro
forma financial information is based on the purchase method of accounting and
reflects adjustments to eliminate nonrecurring general, administrative and other
expenses, to amortize the excess purchase price over the underlying value of net
assets acquired and to adjust income taxes for the pro forma adjustments.
F-20
<PAGE> 103
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Total revenues.................................................... $ 411,349 $ 522,286
Net income........................................................ 3,243 12,758
Net income per common and common equivalent share
Primary......................................................... .14 .40
Fully diluted................................................... .12 .39
Weighted average number of common and common
equivalent shares outstanding
Primary......................................................... 23,506,782 32,167,777
Fully diluted................................................... 26,430,586 32,385,735
</TABLE>
10. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
The Financial Accounting Standards Board (FASB) has issued SFAS 128,
"Earnings per Share." SFAS 128 requires companies to change the method for
calculating earnings per share. SFAS 128 is effective for financial statements
for periods ending after December 15, 1997. The Company has not yet determined
the effect of adopting SFAS 128.
11. CONTINGENCIES
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 calendar year 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. If it was
ultimately determined that the higher rate applies, the Company would owe
$500,000 (before interest and the income tax effect) more than is reflected in
the Company's financial statements. As of December 31, 1996, the compounded
interest totaled approximately $140,000.
The Company received payroll tax penalty notices from the Internal Revenue
Service and various states, relating to the acquired operations of Hazar
alleging certain late payment of payroll taxes. The penalties proposed to be
assessed against the Company total approximately $470,000 and the penalties to
be assessed against Hazar total approximately $390,000 for the period during
which the Company performed designated management services on behalf of the
predecessor. The Company has been informed that the IRS is considering abatement
of the penalties.
The Company, and certain of its executive officers, have been named as
defendants in several actions filed in March 1997. While the exact claims and
allegations vary, they all allege violations by the Company of Section 10(b) of
the Securities Exchange Act, and Rule 10b-5 promulgated thereunder, with respect
to the accuracy of statements regarding Company reserves and other disclosures
made by the Company and certain directors and officers. These suits were filed
shortly after a significant drop in the trading price of the Company's common
stock in March 1997. Each of the actions seek certification of a class
consisting of purchasers of securities of the Registrant over specified periods
of time. Each of the complaints seeks the award of compensatory damages in
amounts to be determined at trial, including interest thereon, and costs of the
action, including attorneys fees. The Company believes the actions are without
merit and intends to defend the cases vigorously.
F-21
<PAGE> 104
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
From time to time, the Company is named as a defendant in lawsuits filed by
a client or clients relating to the contractual arrangement between the Company
and the client. Such actions allege various contractual violations.
The Company believes that it has meritorious defenses to the lawsuits
facing it, including those mentioned above, and intends to assert such defenses
vigorously. However, it is not possible to predict whether such defenses will be
successfully asserted in all cases, and the Company would be required to record
an expense and liability as to any matter if, at any time in the future, it
became probable that the Company would not prevail in such matter.
12. RELATED PARTY TRANSACTIONS
Related party transactions not mentioned elsewhere in the financial
statements are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Legal services provided by officer/director......................... $154 $ 60 $ --
Processing fees paid to company owned by shareholder................ -- 820 805
Risk management/workers' compensation services to a
company owned by a shareholder.................................... -- 205 --
Non-compete agreement settlements with two shareholders............. -- -- 543
</TABLE>
Additionally, the Company provides services to companies affiliated with
certain directors and officers. Revenues were insignificant. The Company also
pays commissions to related parties in the ordinary course of business.
13. SUBSEQUENT EVENTS
To date in 1997, the Company has acquired two PEOs in transactions
described below:
Acquisition of ETIC Corporation
On February 1, 1997, the Company completed the acquisition of the principal
assets of ETIC Corporation, dba Employers Trust ("ETIC"). The purchase price is
$30,000 plus five times ETIC's total pre-tax income for the 12-month period
ending January 31, 1998. $855,000 of the purchase price was paid in cash at
closing. An interim payment toward the purchase price may be due on or before
April 30, 1997 if ETIC meets certain earnings thresholds. The final payment of
purchase price is due on or before April 30, 1998. The purchase price will be
paid in cash. ETIC is a Cincinnati, Ohio based company specializing in leasing
to a client base consisting primarily of light industrial, transportation and
construction companies, with approximately 150 clients and 2,000 worksite
employees.
Acquisition of CMGR Companies
On February 17, 1997, the Company completed the acquisition of the
principal assets of CMGR, Inc., and Humasys for $3.0 million in cash and
$850,000 in the assumption of certain liabilities. $1.5 million of the purchase
price was paid in cash at the closing. An interim payment of $500,000 toward the
purchase price is due 6 months after the closing. The final payment toward the
purchase price is due on or before April 18, 1998. CMGR is a New Jersey based
company, specializing in leasing to a client base consisting primarily of
professional, service and light industrial companies, with approximately 75
clients and 1,700 worksite employees.
F-22
<PAGE> 105
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
14. SUBSEQUENT EVENT -- ISSUANCE OF NOTES PAYABLE
On October 21, 1997, the Company issued $85 million of 10% Senior Notes due
2004 (the Notes) effected under Rule 144A under the Securities Act of 1933 as
amended (Securities Act). A portion of the net proceeds of the offering, sold
through private placement transactions, was used to repay certain indebtedness,
and the remaining balance will be used for general corporate purposes. Interest
under the Notes is payable semi-annually commencing April 15, 1998, and the
Notes are not callable until October 2001 subject to the terms of the Note
Agreement. The Company incurred expenses related to the offering of
approximately $3 million and will amortize such costs over the life of the
Notes. The Company has agreed to file under the Securities Act, a registration
statement relating to an exchange offer for these Notes. If this registration is
not declared effective prior to the 120th day after the issue date of October
21, 1997 or certain other conditions are not met, the interest rate can increase
up to a maximum of 12% per annum of the principal amount of such Notes. In
connection with the issuance of the Notes, the Company modified its revolving
credit facility whereby the total commitment has been reduced to $20 million.
The Notes contain certain covenants which could limit the Company's ability to
incur any future indebtedness.
The Notes are general unsecured obligations of the Company and are
unconditionally guaranteed on a joint and several basis by certain of the
Company's wholly-owned current and future subsidiaries. The Company's wholly
owned insurance subsidiary, which is a non-guarantor subsidiary, is subject to
certain statutory and contractual restrictions which limit its ability to pay
dividends or make loans to the parent company or other subsidiaries. The
financial statements presented below include the separate or combined financial
position, results of operations and cash flows of Employee Solutions, Inc.
(Parent), the guarantor subsidiaries (Guarantors) and the subsidiaries which are
not guarantors (Non-guarantors), for each of the periods indicated. The
non-guarantor subsidiaries were not significant as of and for the year ended
December 31, 1994.
F-23
<PAGE> 106
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
UNAUDITED BALANCE SHEETS
JUNE 30, 1997
-------------------------------------------------------------------
PARENT GUARANTORS NON GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- -------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 4,307 $ 2,477 $ 3,825 $ -- $ 10,609
Restricted cash and investments........ -- -- 14,000 -- 14,000
Accounts receivable, net............... 18,797 29,804 1,806 -- 50,407
Receivable from insurance companies.... -- 5,304 1,661 -- 6,965
Prepaid expenses and deposits.......... 1,287 941 542 -- 2,770
Deferred income taxes.................. 2,236 1,521 -- -- 3,757
-------- ------- ------- -------- --------
Total current assets......... 26,627 40,047 21,834 -- 88,508
Property and equipment, net............ 1,720 354 31 -- 2,105
Goodwill and other assets, net......... 20,667 39,990 487 -- 61,144
Investment in subsidiaries............. 46,800 -- -- (46,800) --
Due from affiliates.................... 36,729 6,105 15,554 (58,388) --
-------- ------- ------- -------- --------
Total assets................. $132,543 $ 86,496 $ 37,906 $ (105,188) $151,757
======== ======= ======= ======== ========
LIABILITIES
CURRENT LIABILITIES:
Bank overdraft......................... $ -- $ 2,516 $ -- $ -- $ 2,516
Accrued salaries, wages and payroll
taxes................................ 16,058 13,713 1,649 -- 31,420
Accounts payable....................... 685 1,716 881 -- 3,282
Accrued workers' compensation and
benefits............................. 1,664 1,967 7,449 -- 11,080
Other accrued expenses................. 1,408 3,742 41 -- 5,191
Due to affiliates...................... 15,809 31,842 10,737 (58,388) --
-------- ------- ------- -------- --------
Total current liabilities.... 35,624 55,496 20,757 (58,388) 53,489
-------- ------- ------- -------- --------
Long-term debt......................... 47,300 -- -- -- 47,300
-------- ------- ------- -------- --------
Other long-term liabilities............ -- 1,349 -- -- 1,349
-------- ------- ------- -------- --------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A convertible preferred stock.... -- -- -- -- --
Common stock, no par value............. 31,747 22 771 (793) 31,747
Additional paid in capital............. -- 26,175 50 (26,225) --
Retained earnings...................... 17,872 3,454 16,328 (19,782) 17,872
-------- ------- ------- -------- --------
Total stockholders' equity... 49,619 29,651 17,149 (46,800) 49,619
-------- ------- ------- -------- --------
Total liabilities and
stockholders' equity....... $132,543 $ 86,496 $ 37,906 $ (105,188) $151,757
======== ======= ======= ======== ========
</TABLE>
F-24
<PAGE> 107
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1996
-------------------------------------------------------------------
PARENT GUARANTORS NON GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- -------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 2,435 $ 6,747 $ 1,798 $ -- $ 10,980
Restricted cash and investments......... -- -- 11,500 -- 11,500
Accounts receivable, net................ 10,912 23,585 342 -- 34,839
Receivable from insurance companies..... -- 3,157 2,761 -- 5,918
Prepaid expenses and deposits........... 743 394 121 -- 1,258
Deferred income taxes................... 1,156 -- -- -- 1,156
------- ------- ------- -------- --------
Total current assets.......... 15,246 33,883 16,522 -- 65,651
Property and equipment, net............. 731 317 36 -- 1,084
Deferred income taxes................... 539 -- -- -- 539
Goodwill and other assets, net.......... 17,546 40,870 279 -- 58,695
Investment in subsidiaries.............. 39,113 -- -- (39,113) --
Due from affiliates..................... 30,279 3,680 12,900 (46,859) --
------- ------- ------- -------- --------
Total assets.................. $103,454 $ 78,750 $ 29,737 $ (85,972) $125,969
======= ======= ======= ======== ========
LIABILITIES
CURRENT LIABILITIES:
Bank overdraft.......................... $ -- $ 2,477 $ -- $ -- $ 2,477
Accrued salaries, wages and payroll
taxes................................. 9,890 7,180 516 -- 17,586
Accounts payable........................ 189 3,285 604 -- 4,078
Accrued workers' compensation and
benefits.............................. 232 2,219 4,476 -- 6,927
Income taxes payable.................... 720 -- -- -- 720
Other accrued expenses.................. 1,313 2,069 32 -- 3,414
Due to affiliates....................... 1,692 31,909 13,258 (46,859) --
------- ------- ------- -------- --------
Total current liabilities..... 14,036 49,139 18,886 (46,859) 35,202
------- ------- ------- -------- --------
Deferred income taxes................... 111 -- -- -- 111
------- ------- ------- -------- --------
Long-term debt.......................... 42,800 -- -- -- 42,800
------- ------- ------- -------- --------
Other long-term liabilities............. -- 1,349 -- -- 1,349
------- ------- ------- -------- --------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A convertible preferred stock..... -- -- -- -- --
Common stock, no par value.............. 30,145 22 771 (793) 30,145
Additional paid in capital.............. -- 26,175 -- (26,175) --
Retained earnings....................... 16,362 2,065 10,080 (12,145) 16,362
------- ------- ------- -------- --------
Total stockholders' equity.... 46,507 28,262 10,851 (39,113) 46,507
------- ------- ------- -------- --------
Total liabilities and
stockholders' equity........ $103,454 $ 78,750 $ 29,737 $ (85,972) $125,969
======= ======= ======= ======== ========
</TABLE>
F-25
<PAGE> 108
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1995
-------------------------------------------------------------------
PARENT GUARANTORS NON GUARANTORS ELIMINATING CONSOLIDATED
------- ---------- -------------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $12,185 $ 79 $1,765 $ -- $14,029
Restricted cash and investments......... -- -- 2,743 -- 2,743
Accounts receivable, net................ 5,125 2,732 9 -- 7,866
Receivable from insurance companies..... 86 -- -- -- 86
Prepaid expenses and deposits........... 257 122 -- -- 379
Deferred income taxes................... 334 -- -- -- 334
------- ------- ------ ------- -------
Total current assets.......... 17,987 2,933 4,517 -- 25,437
Property and equipment, net............. 319 121 -- -- 440
Deferred income taxes................... -- -- -- -- --
Goodwill and other assets, net.......... 4,718 6,245 -- -- 10,963
Investment in subsidiaries.............. 2,157 -- -- (2,157) --
Due from affiliates..................... 1,678 3,142 108 (4,928) --
------- ------- ------ ------- -------
Total assets.................. $26,859 $ 12,441 $4,625 $(7,085) $36,840
======= ======= ====== ======= =======
LIABILITIES
CURRENT LIABILITIES:
Bank overdraft.......................... $ -- $ 3,752 $ -- $ -- $3,752
Accrued salaries, wages and payroll
taxes................................. 3,166 3,515 -- -- 6,681
Accounts payable........................ 345 292 477 -- 1,114
Accrued workers' compensation and
benefits.............................. 282 1,129 1,052 -- 2,463
Income taxes payable.................... 2,207 -- -- -- 2,207
Other accrued expenses.................. 257 374 -- -- 631
Due to affiliates....................... 610 2,280 2,038 (4,928) --
------- ------- ------ ------- -------
Total current liabilities..... 6,867 11,342 3,567 (4,928) 16,848
------- ------- ------ ------- -------
Deferred income taxes................... 49 -- -- -- 49
------- ------- ------ ------- -------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A convertible preferred stock..... -- -- -- -- --
Common stock, no par value.............. 15,607 711 121 (832) 15,607
Retained earnings....................... 4,336 388 937 (1,325) 4,336
------- ------- ------ ------- -------
Total stockholders' equity.... 19,943 1,099 1,058 (2,157) 19,943
------- ------- ------ ------- -------
Total liabilities and
stockholders' equity........ $26,859 $ 12,441 $4,625 $(7,085) $36,840
======= ======= ====== ======= =======
</TABLE>
F-26
<PAGE> 109
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------------
PARENT GUARANTORS NON GUARANTORS ELIMINATING CONSOLIDATED
-------- -------- -------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................... $225,670 $180,076 $ 41,303 $ (25,025) $422,024
-------- -------- ------- ------- --------
Cost of Revenues:
Salaries and wages of worksite
employees......................... 181,390 138,980 17,978 -- 338,348
Healthcare and workers'
compensation...................... 23,690 18,429 11,454 (22,464) 31,109
Payroll and employment taxes......... 16,134 12,709 1,571 -- 30,414
-------- -------- ------- ------- --------
Cost of Revenues............. 221,214 170,118 31,003 (22,464) 399,871
-------- -------- ------- ------- --------
Gross profit........................... 4,456 9,958 10,300 (2,561) 22,153
Selling, general and administrative
expenses............................. 10,809 4,902 201 -- 15,912
Intercompany selling, general and
administrative expenses.............. 634 1,837 90 (2,561) --
Depreciation and amortization.......... 1,066 966 16 -- 2,048
-------- -------- ------- ------- --------
Income (loss) from
operations................. (8,053) 2,253 9,993 -- 4,193
Other income (expense):
Interest income...................... 17 9 421 -- 447
Interest expense and other........... (2,176) 53 -- -- (2,123)
-------- -------- ------- ------- --------
Income (loss) before provision for
income taxes......................... (10,212) 2,315 10,414 -- 2,517
Income tax (benefit) provision......... (4,085) 926 4,166 -- 1,007
-------- -------- ------- ------- --------
(6,127) 1,389 6,248 -- 1,510
Income from wholly-owned
subsidiaries......................... 7,637 -- -- (7,637) --
-------- -------- ------- ------- --------
Net Income................... $ 1,510 $ 1,389 $ 6,248 $ (7,637) $ 1,510
======== ======== ======= ======= ========
</TABLE>
F-27
<PAGE> 110
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------
PARENT GUARANTORS NON GUARANTORS ELIMINATING CONSOLIDATED
-------- -------- -------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................... $128,185 $293,874 $ 36,313 $ (19,356) $439,016
-------- -------- ------- ------- --------
Cost of Revenues:
Salaries and wages of worksite
employees......................... 103,873 230,469 7,646 -- 341,988
Healthcare and workers'
compensation...................... 4,751 29,585 12,768 (16,870) 30,234
Payroll and employment taxes......... 8,146 19,721 773 -- 28,640
-------- -------- ------- ------- --------
Cost of Revenues............. 116,770 279,775 21,187 (16,870) 400,862
-------- -------- ------- ------- --------
Gross profit........................... 11,415 14,099 15,126 (2,486) 38,154
Selling, general and administrative
expenses............................. 7,963 8,876 471 -- 17,310
Intercompany selling, general and
administrative expenses.............. 811 1,486 189 (2,486) --
Depreciation and amortization.......... 983 1,074 16 -- 2,073
-------- -------- ------- ------- --------
Income from operations....... 1,658 2,663 14,450 -- 18,771
Other income (expense):
Interest income...................... 227 92 514 -- 833
Interest expense and other........... (1,185) (11) (1) -- (1,197)
-------- -------- ------- ------- --------
Income before provision for income
taxes................................ 700 2,744 14,963 -- 18,407
Income tax (benefit) provision......... (506) 1,067 5,820 -- 6,381
-------- -------- ------- ------- --------
1,206 1,677 9,143 -- 12,026
Income from wholly-owned
subsidiaries......................... 10,820 -- -- (10,820) --
-------- -------- ------- ------- --------
Net Income................... $ 12,026 $ 1,677 $ 9,143 $ (10,820) $ 12,026
======== ======== ======= ======= ========
</TABLE>
F-28
<PAGE> 111
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------
PARENT GUARANTORS NON GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- -------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................... $108,324 $ 57,099 $5,127 $(6,095) $164,455
Cost of Revenues....................... 99,109 53,439 3,464 (5,337) 150,675
-------- ------- ------ ------ --------
Gross profit........................... 9,215 3,660 1,663 (758) 13,780
Selling, general and administrative
expenses............................. 4,769 3,125 70 (781) 7,183
Depreciation and amortization.......... 338 88 -- -- 426
-------- ------- ------ ------ --------
Income from operations....... 4,108 447 1,593 23 6,171
Other income (expense):
Interest income...................... 205 19 95 (23) 296
Interest expense and other........... (19) 233 -- -- 214
-------- ------- ------ ------ --------
Income before provision for income
taxes................................ 4,294 699 1,688 -- 6,681
Income tax provision................... 1,784 311 751 -- 2,846
-------- ------- ------ ------ --------
2,510 388 937 -- 3,835
Income from wholly-owned
subsidiaries......................... 1,325 -- -- (1,325) --
-------- ------- ------ ------ --------
Net Income................... $ 3,835 $ 388 $ 937 $(1,325) $ 3,835
======== ======= ====== ====== ========
</TABLE>
F-29
<PAGE> 112
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------------------------------
PARENT GUARANTORS NON GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- -------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income................................... $ 1,510 $ 1,389 $ 6,248 $ (7,637) $ 1,510
-------- -------- -------- --------- --------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation and amortization................ 1,066 966 16 -- 2,048
Increase in accounts receivable, net......... (7,884) (6,220) (1,464) -- (15,568)
(Increase) decrease in insurance company
receivable................................. -- (2,147) 1,100 -- (1,047)
Increase in prepaid expenses and deposits.... (544) (545) (423) -- (1,512)
Increase in deferred income taxes............ (652) (1,521) -- -- (2,173)
Decrease in other assets..................... -- 1,245 -- -- 1,245
(Decrease) increase from intercompany
transactions............................... (22) (2,489) (5,126) 7,637 --
Increase in accrued salaries, wages and
payroll taxes.............................. 6,168 6,532 1,134 -- 13,834
Increase (decrease) in accrued workers'
compensation and health insurance.......... 1,432 (252) 2,973 -- 4,153
Increase (decrease) in accounts payable...... 496 (1,571) 279 -- (796)
Increase (decrease) in income taxes
payable.................................... 468 (1,188) -- -- (720)
Increase in other accrued expenses........... 95 1,673 9 -- 1,777
-------- -------- -------- --------- --------
623 (5,517) (1,502) 7,637 1,241
-------- -------- -------- --------- --------
Net cash provided by (used in)
operating activities.............. 2,133 (4,128) 4,746 -- 2,751
-------- -------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........... (1,143) -- -- -- (1,143)
Business acquisitions........................ (4,032) (56) (219) -- (4,307)
Cash invested in restricted cash and
investments................................ -- -- (2,500) -- (2,500)
-------- -------- -------- --------- --------
Net cash used in investing
activities........................ (5,175) (56) (2,719) -- (7,950)
-------- -------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt..... 4,500 -- -- -- 4,500
Proceeds from issuance of common stock....... 414 -- -- -- 414
Decrease in bank overdraft and other......... -- (86) -- -- (86)
-------- -------- -------- --------- --------
Net cash provided by (used in)
financing activities.............. 4,914 (86) -- -- 4,828
-------- -------- -------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................ 1,872 (4,270) 2,027 -- (371)
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 2,435 6,747 1,798 -- 10,980
-------- -------- -------- --------- --------
CASH AND CASH EQUIVALENTS, end of period..... $ 4,307 $ 2,477 $ 3,825 $ -- $ 10,609
======== ======== ======== ========= ========
</TABLE>
F-30
<PAGE> 113
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
PARENT GUARANTORS NON GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- -------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income................................... $ 12,026 $ 1,677 $ 9,143 $ (10,820) $ 12,026
-------- -------- ------- -------- --------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization................ 983 1,074 16 -- 2,073
Tax benefit from stock options............... 2,635 -- -- -- 2,635
Increase in accounts receivable, net......... (5,464) (18,963) (333) -- (24,760)
Increase (decrease) in insurance company
receivable................................. 86 (3,157) (2,761) -- (5,832)
Increase in prepaid expenses and deposits.... (486) (129) (121) -- (736)
(Increase) decrease in deferred income tax
assets..................................... (1,361) 760 -- -- (601)
Increase in other assets..................... -- (2,253) (279) -- (2,532)
(Decrease) increase from intercompany
transactions............................... (62,735) 52,846 (931) 10,820 --
Increase in accrued salaries, wages and
payroll taxes.............................. 6,724 3,665 516 -- 10,905
(Decrease) increase in accrued workers'
compensation and health insurance.......... (50) 1,090 3,424 -- 4,464
Increase in other long term liabilities...... -- 1,349 -- -- 1,349
Increase (decrease) in accounts payable...... (406) (1,753) 121 -- (2,038)
Decrease in income taxes payable............. (1,487) -- -- -- (1,487)
(Decrease) increase in other accrued
expenses................................... (65) 1,188 32 -- 1,155
Increase in deferred income tax
liabilities................................ 62 -- -- -- 62
-------- -------- ------- -------- --------
(61,564) 35,717 (316) 10,820 (15,343)
-------- -------- ------- -------- --------
Net cash (used in) provided by
operating activities.............. (49,538) 37,394 8,827 -- (3,317)
-------- -------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........... (573) (92) (37) -- (702)
Business acquisitions........................ (10,225) (27,026) -- -- (37,251)
Cash invested in restricted cash and
investments................................ -- -- (8,757) -- (8,757)
Issuance of notes receivable, and other
net........................................ -- (189) -- -- (189)
-------- -------- ------- -------- --------
Net cash used in investing
activities........................ (10,798) (27,307) (8,794) -- (46,899)
-------- -------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt..... 42,800 -- -- -- 42,800
Proceeds from issuance of common stock....... 7,786 -- -- -- 7,786
Decrease in bank overdraft and other......... -- (3,419) -- -- (3,419)
-------- -------- ------- -------- --------
Net cash provided by (used in)
financing activities.............. 50,586 (3,419) -- -- 47,167
-------- -------- ------- -------- --------
Net (decrease) increase in cash and cash
equivalents................................ (9,750) 6,668 33 -- (3,049)
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 12,185 79 1,765 -- 14,029
-------- -------- ------- -------- --------
CASH AND CASH EQUIVALENTS, end of period..... $ 2,435 $ 6,747 $ 1,798 $ -- $ 10,980
======== ======== ======= ======== ========
</TABLE>
F-31
<PAGE> 114
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------
PARENT GUARANTORS NON GUARANTORS ELIMINATING CONSOLIDATED
------- ---------- -------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income.................................... $ 3,835 $ 388 $ 937 $(1,325) $ 3,835
------- ------- ------- ------- -------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization................. 338 88 -- -- 426
Tax benefit from stock options................ 267 -- -- -- 267
(Increase) decrease in accounts receivable,
net......................................... (3,415) 1,089 (9) -- (2,335)
Increase in prepaid expenses and deposits..... (253) (123) -- -- (376)
Increase in deferred income tax assets........ (275) -- -- -- (275)
Decrease (increase) in other assets........... 366 (383) -- -- (17)
(Decrease) increase from intercompany
transactions................................ (2,657) (597) 1,929 1,325 --
Increase (decrease) in accrued salaries, wages
and payroll taxes........................... 1,405 (86) -- -- 1,319
(Decrease) increase in accrued workers'
compensation and health insurance........... (5) (371) 1,052 -- 676
Decrease in other long term liabilities....... -- (39) -- -- (39)
Increase in accounts payable.................. 18 104 477 -- 599
Increase (decrease) in income taxes payable... 1,789 (13) -- -- 1,776
Increase in other accrued expenses............ 169 235 -- -- 404
Increase in deferred income tax liabilities... 19 -- -- -- 19
------- ------- ------- ------- -------
(2,234) (96) 3,449 1,325 2,444
------- ------- ------- ------- -------
Net cash provided by operating
activities......................... 1,601 292 4,386 -- 6,279
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............ (152) (86) -- -- (238)
Business acquisitions......................... (961) -- -- -- (961)
Cash invested in restricted cash and
investments................................. 1,361 9 (2,742) -- (1,372)
Issuance of notes receivable, and other net... 386 -- -- -- 386
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities............... 634 (77) (2,742) -- (2,185)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........ 8,002 -- 121 -- 8,123
Decrease in bank overdraft and other.......... -- (136) -- -- (136)
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities............... 8,002 (136) 121 -- 7,987
------- ------- ------- ------- -------
Net increase in cash and cash equivalents..... 10,237 79 1,765 -- 12,081
CASH AND CASH EQUIVALENTS, beginning of
period...................................... 1,948 -- -- -- 1,948
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period...... $12,185 $ 79 $ 1,765 $ -- $ 14,029
======= ======= ======= ======= =======
</TABLE>
F-32
<PAGE> 115
EMPLOYEE SOLUTIONS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 10,980 $ 10,609
Restricted cash and investments...................................... 11,500 14,000
Accounts receivable, net............................................. 34,839 50,407
Receivable from insurance companies.................................. 5,918 6,965
Prepaid expenses and deposits........................................ 1,258 2,770
Deferred income taxes................................................ 1,156 3,757
------------ --------
Total current assets....................................... 65,651 88,508
Property and equipment, net.......................................... 1,084 2,105
Deferred income taxes................................................ 539 --
Goodwill and other assets, net....................................... 58,695 61,144
------------ --------
Total assets............................................... $125,969 $151,757
========== ========
LIABILITIES
CURRENT LIABILITIES:
Bank overdraft....................................................... $ 2,477 $ 2,516
Accrued salaries, wages and payroll taxes............................ 17,586 31,420
Accounts payable..................................................... 4,078 3,282
Accrued workers' compensation and benefits........................... 6,927 11,080
Income taxes payable................................................. 720 --
Other accrued expenses............................................... 3,414 5,191
------------ --------
Total current liabilities.................................. 35,202 53,489
------------ --------
Deferred income taxes................................................ 111 --
------------ --------
Long-term debt....................................................... 42,800 47,300
------------ --------
Other long-term liabilities.......................................... 1,349 1,349
------------ --------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A Convertible Preferred Stock, nonvoting, no par value,
10,000,000 shares authorized, no shares in 1996 and 1997
issued and outstanding............................................. -- --
Common Stock, no par value, 75,000,000 shares authorized,
30,729,433 shares issued and outstanding December 31, 1996,
30,895,534 shares issued and outstanding June 30, 1997............. 30,145 31,747
Retained earnings.................................................... 16,362 17,872
------------ --------
Total stockholders' equity................................. 46,507 49,619
------------ --------
Total liabilities and stockholders' equity................. $125,969 $151,757
========== ========
</TABLE>
The accompanying unaudited notes are an integral part
of these unaudited consolidated financial statements.
F-33
<PAGE> 116
EMPLOYEE SOLUTIONS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1996 1997
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Revenues.......................................................... $ 164,942 $ 422,024
---------- ----------
Cost of revenues:
Salaries and wages of worksite employees........................ 128,777 338,348
Healthcare and workers' compensation............................ 7,508 31,109
Payroll and employment taxes.................................... 12,161 30,414
---------- ----------
Cost of revenues............................................. 148,446 399,871
---------- ----------
Gross profit...................................................... 16,496 22,153
Selling, general and administrative expenses...................... 6,975 15,912
Depreciation and amortization..................................... 654 2,048
---------- ----------
Income from operations....................................... 8,867 4,193
Other income (expense):
Interest income................................................. 410 447
Interest expense and other...................................... (7) (2,123)
---------- ----------
Income before provision for income taxes.......................... 9,270 2,517
Income tax provision.............................................. 3,801 1,007
---------- ----------
Net income................................................... $ 5,469 $ 1,510
========== ==========
Net income per common and common equivalent share:
Primary......................................................... $ .17 $ .05
========== ==========
Fully diluted................................................... $ .17 $ .05
========== ==========
Weighted average number of common and common
equivalent shares outstanding:
Primary......................................................... 32,200,621 32,549,438
========== ==========
Fully diluted................................................... 32,276,888 32,549,438
========== ==========
</TABLE>
The accompanying unaudited notes are an integral part
of these unaudited consolidated financial statements.
F-34
<PAGE> 117
EMPLOYEE SOLUTIONS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------------
TOTAL
PREFERRED COMMON RETAINED STOCKHOLDERS'
STOCK STOCK EARNINGS EQUITY
--------- ------- -------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996..................... $ -- $30,145 $ 16,362 $ 46,507
Issuance of 166,101 shares of common stock in
connection with exercise of stock options.... -- 414 -- 414
Tax benefit related to the exercise of stock
options...................................... -- 1,188 -- 1,188
Net income..................................... -- -- 1,510 1,510
--
------- ------- -------
BALANCE, June 30, 1997......................... $ -- $31,747 $ 17,872 $ 49,619
== ======= ======= =======
</TABLE>
The accompanying unaudited notes are an integral part
of these unaudited consolidated financial statements.
F-35
<PAGE> 118
EMPLOYEE SOLUTIONS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers............................................ $ 150,938 $ 405,409
Cash paid to suppliers and employees.................................... (147,365) (397,140)
Interest received....................................................... 330 447
Interest paid........................................................... (6) (2,065)
Income taxes paid, net of refunds....................................... (6,066) (3,900)
--------- ---------
Net cash (used in) provided by operating activities................. (2,169) 2,751
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................................... (416) (1,143)
Business acquisitions................................................... (1,628) (4,307)
Cash invested in restricted cash and investments........................ (2,358) (2,500)
Issuance of notes receivable, and other, net............................ (439) --
--------- ---------
Net cash used in investing activities............................... (4,841) (7,950)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................................ -- 4,500
Proceeds from issuance of common stock.................................. 7,491 414
Decrease in bank overdraft and other.................................... (3,792) (86)
--------- ---------
Net cash provided by financing activities........................... 3,699 4,828
--------- ---------
Net decrease in cash and cash equivalents............................... (3,311) (371)
CASH AND CASH EQUIVALENTS, beginning of period.......................... 14,029 10,980
--------- ---------
CASH AND CASH EQUIVALENTS, end of period................................ $ 10,718 $ 10,609
========= =========
RECONCILIATION OF NET INCOME TO NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Net income.............................................................. $ 5,469 $ 1,510
--------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization........................................... 654 2,048
Loss on sale of fixed assets............................................ -- 58
Increase in accounts receivable, net.................................... (14,034) (15,568)
Increase in insurance company receivable................................ -- (1,047)
Increase in prepaid expenses and deposits............................... (982) (1,512)
Decrease (increase) in deferred income tax.............................. 138 (2,173)
(Increase) decrease in other assets..................................... (80) 1,187
Increase in accrued salaries, wages and payroll taxes................... 7,653 13,834
Increase in accrued workers' compensation and health insurance.......... 944 4,153
Decrease in other long term liabilities................................. (113) --
Decrease in accounts payable............................................ (688) (796)
Decrease in income taxes payable........................................ (2,376) (720)
Increase in other accrued expenses...................................... 1,246 1,777
--------- ---------
(7,638) 1,241
--------- ---------
Net cash (used in) provided by operating activities................. $ (2,169) $ 2,751
========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1997, $1.2 million was derived as a
tax benefit for the exercise of stock options during the period.
The accompanying unaudited notes are an integral part of these unaudited
consolidated financial statements.
F-36
<PAGE> 119
EMPLOYEE SOLUTIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Corporation
The Company is a leading PEO, providing employers throughout the United
States with comprehensive employee payroll, human resources and benefits
outsourcing services. The Company's integrated outsourcing services include
payroll processing and reporting, human resources administration, employment
regulatory compliance management, risk management/workers' compensation
services, retirement and health care programs, and other products and services
provided directly to worksite employees.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. In the opinion of management the unaudited consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary in order to make the unaudited consolidated
financial statements not misleading. Results of operations for the six month
period ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included
elsewhere in this Offering Memorandum.
Principles of Consolidation
The consolidated financial statements include the activities of Employee
Solutions, Inc. and its wholly owned subsidiaries from their respective
acquisition dates. All acquisitions were accounted for as purchases. All
significant intercompany accounts and transactions have been eliminated. Certain
amounts have been reclassified from prior years to conform with the current year
presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. The nature of the Company's business requires significant
estimates to be made in the areas of workers' compensation reserves and revenue
recognized for stand-alone risk management/workers' compensation services,
particularly for retrospectively rated policies. The actual results of these
estimates may be unknown for a period of years. Actual results could differ from
those estimates.
F-37
<PAGE> 120
EMPLOYEE SOLUTIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 -- (CONTINUED)
Net Income Per Common and Common Equivalent Share
The Company used the treasury stock method to compute net income per share.
The computation of adjusted net income and weighted average common and common
equivalent shares used in the calculation of income per common share is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------
1996 1997
----------------------- -----------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Weighted average of common shares
outstanding........................... 30,175,511 30,175,511 30,840,094 30,840,094
Dilutive effect of options and warrants
outstanding........................... 2,025,110 2,101,377 1,709,344 1,709,344
---------- ---------- ---------- ----------
Weighted average of common and common
equivalent shares..................... 32,200,621 32,276,888 32,549,438 32,549,438
========== ========== ========== ==========
Net income.............................. $ 5,469 $ 5,469 $ 1,510 $ 1,510
Adjustments to net income............... (12) (12) (32) (32)
---------- ---------- ---------- ----------
Adjusted net income for purposes of the
income per common share calculation... $ 5,457 $ 5,457 $ 1,478 $ 1,478
========== ========== ========== ==========
Net income per common and common
equivalent share...................... $ .17 $ .17 $ .05 $ .05
========== ========== ========== ==========
</TABLE>
2. COMMON STOCK SPLITS
On December 18, 1995, and June 26, 1996 the Board of Directors authorized
two-for-one common stock splits, effected in the form of 100% stock dividends,
effective on January 16, 1996 and July 26, 1996 respectively, to shareholders of
record at the close of business on January 2, 1996 and July 12, 1996. In this
report, all per share amounts and numbers of shares, including options and
warrants, have been restated to reflect these stock splits.
3. ACQUISITIONS
Acquisition of ETIC Corporation
On February 1, 1997, the Company completed the acquisition of the principal
assets of ETIC Corporation, d/b/a Employers Trust (ETIC). The purchase price was
$30,000 plus five times ETIC's total pre-tax income for the 12-month period
ending January 31, 1998. At closing $855,000 was paid in cash. The excess
purchase price over net assets acquired was approximately $994,000 which has
been recorded as goodwill. The final payment of purchase price is due on or
before April 30, 1998, and will be paid in cash. ETIC is a Cincinnati, Ohio
based PEO with a client base consisting primarily of light industrial,
transportation and construction companies, with approximately 150 clients and
2,000 worksite employees.
Acquisition of CMGR Companies
On February 17, 1997, the Company completed the acquisition of the
principal assets of CMGR, Inc., and Humasys (collectively, CMGR) for $3.85
million. At closing $2.35 million was paid in cash. The excess purchase price
over net assets acquired was approximately $2.6 million which has been recorded
as goodwill.
F-38
<PAGE> 121
EMPLOYEE SOLUTIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 -- (CONTINUED)
An interim payment of $500,000 toward the purchase price is due six months after
the closing. Final payment is due on or before April 18, 1998 and is subject to
certain client retention factors. CMGR is a New Jersey based PEO with a client
base consisting primarily of professional, service and light industrial
companies, with approximately 75 clients and 1,700 worksite employees.
4. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined financial data gives effect to
the combined historical results of operations of the Company and TEAM Services
and Leaseway, which were acquired in 1996, for the six months ended June 30,
1996, and assumes that the acquisitions had been effective as of the beginning
of such period and compares the pro forma results in 1996 to actual results in
1997.
The pro forma information is not indicative of the actual results which
would have occurred had the acquisitions been consummated at the beginning of
such periods or of future consolidated operations of the Company. The pro forma
financial information is based on the purchase method of accounting and reflects
adjustments to eliminate nonrecurring general, administrative and other
expenses, to amortize the excess purchase price over the underlying value of net
assets acquired and to adjust income taxes for the pro forma adjustments.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE
30,
------------------------------
1996 PRO FORMA 1997 ACTUAL
-------------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Total revenues................................................. $ 245,592 $ 422,024
Net income..................................................... 6,106 1,510
Net income per common and common equivalent share
Primary................................................... .19 .05
Fully diluted............................................. .19 .05
Weighted average number of common and common equivalent shares
outstanding
Primary................................................... 32,200,621 32,549,438
Fully diluted............................................. 32,276,888 32,549,438
</TABLE>
F-39
<PAGE> 122
EMPLOYEE SOLUTIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 -- (CONTINUED)
5. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." The
statement establishes standards for computing and presenting earnings per share
and requires dual presentation of basic and diluted earnings per share on the
face of the income statement. SFAS 128 is effective for financial statement
periods ending after December 15, 1997. Adoption of SFAS 128 would have the
following effect on the June 30, 1996 and 1997 financial statements:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------
1996 1997
------------------------------ ------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
------ --------- --------- ------ --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Earnings per common share........... $ .17 $ .05
==== ====
Earnings per common share --
assuming dilution................. $ .17 $ .05
==== ====
Basic earnings per share Income
available to common
stockholders...................... $5,457 30,175,511 $ .18 $1,478 30,840,094 $ .05
Effect of dilutive securities common
stock options..................... -- 2,025,110 -- 1,709,344
------ ---------- ------ ----------
Diluted earnings per share.......... $5,457 32,200,621 $ .17 $1,478 32,549,438 $ .05
====== ========== ==== ====== ========== ====
</TABLE>
6. CONTINGENCIES
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 calendar year 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. If it was
ultimately determined that the higher rate applies, the Company would owe
$500,000 (before interest and the income tax effect) more than is reflected in
the Company's financial statements. As of June 30, 1997, the compounded interest
totaled approximately $170,000.
The Company received payroll tax penalty notices from the IRS and various
states, relating to the acquired operations of Hazar alleging certain late
payment of payroll taxes. The penalties proposed to be assessed against the
Company totaled approximately $470,000 and have been abated in totality by the
IRS during the quarter ended June 30, 1997. The penalties to be assessed against
Hazar have been revised down by the IRS to a maximum of approximately $130,000
from approximately $390,000 for the period during which the Company performed
designated management services on behalf of the predecessor. The Company has
been informed that the IRS is also considering abatement of these penalties.
The Company, and certain of its present and former executive officers and
directors, have been named as defendants in several actions filed in 1997. While
the exact claims and allegations vary, they all allege violations by the Company
of Section 10(b) of the Securities Exchange Act, and Rule 10b-5 promulgated
thereunder, with respect to the accuracy of statements regarding Company
reserves and other disclosures made by the Company and certain directors and
officers. These suits were filed shortly after a significant drop in the trading
price of the Company's common stock in March 1997. Each of the actions seeks
certification of a class consisting of purchasers of securities of the
Registrant over specified periods of time. Each of the
F-40
<PAGE> 123
EMPLOYEE SOLUTIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 -- (CONTINUED)
complaints seeks the award of compensatory damages in amounts to be determined
at trial, including interest thereon, and costs of the action, including
attorney's fees. The suits have been consolidated before a single judge of the
U.S. District Court in Phoenix, Arizona. The Court has before it motions by the
plaintiffs for the appointment of representative plaintiffs and approval of
selection of lead counsel. Once these motions are ruled upon, it is anticipated
that a consolidated, amended complaint will be filed. The Company believes the
actions are without merit and intends to defend the cases vigorously.
From time to time, the Company is named as a defendant in lawsuits in the
ordinary course of business. These lawsuits are not considered to have a
material impact on the Company.
The Company believes that it has meritorious defenses to the lawsuits
facing it, including those mentioned above, and intends to assert such defenses
vigorously. However, it is not possible to predict whether such defenses will be
successfully asserted in all cases. The Company would be required to record an
expense and liability as to any matter if, at any time in the future, it became
probable that the Company would not prevail in such matter.
F-41
<PAGE> 124
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Arizona Revised Statutes sec. 10-851 contains an extensive indemnification
provision which permits an Arizona corporation to indemnify any person who was,
is or is threatened to be named defendant or respondent ("party") in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative ("proceeding") (other than (i) a
proceeding by or in the right of the corporation in which the director was held
liable to the corporation or (ii) in connection with a proceeding charging
improper personal benefit in which the director was held liable on the basis
that personal benefit was improperly received by the director) by reason of the
fact that such person is or was a director, or while serving as a director, is
or was serving at the corporation's request as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise ("director") against the
obligation to pay a judgment, settlement, penalty or fine, or reasonable
expenses with respect to a proceeding (including obligations and expenses that
have not yet been paid by such person but that have been or may be incurred)
("liability") if such person's conduct was in good faith and such person
reasonably believed that such conduct in an official capacity with the
corporation was in the corporation's best interest or, in all other cases, that
such conduct was at least not opposed to the corporation's best interest, and,
in the case of criminal proceedings, such person had no reasonable cause to
believe that the conduct was unlawful.
Arizona Revised Statutes sec. 10-852 requires an Arizona corporation
(unless limited by its articles of incorporation) to (i) indemnify a director
who was the prevailing party in the defense of a proceeding to which the
director was a party because the director is or was a director of the
corporation against reasonable expenses incurred by the director in connection
with the proceeding and (ii) indemnify a director who is not an officer,
employee or holder of more than 5% of the outstanding shares of any class of the
corporation's stock (an "outside director") against liability and to pay an
outside director's expenses in advance of a final disposition of a proceeding,
if the director furnishes the corporation with a written affirmation of the
director's good faith belief that the director met the standard of conduct
described in sec. 10-851 and an undertaking executed personally, or on the
director's behalf, to repay the advance if it is determined that the director
did not meet the standard of conduct. Arizona Revised Statutes sec. 10-853
permits an Arizona corporation to pay expenses incurred by any other director
who is a party to a proceeding in advance of final disposition of a proceeding
if the director furnishes the corporation the written affirmation and
undertaking described above and a determination is made by the company's board
who are not parties to the proceeding, special legal counsel or shareholders
that the facts then known would not preclude indemnification.
Arizona Revised Statutes sec. 10-854 permits a court to order
indemnification of a director who is a party to a proceeding upon the director's
application for indemnification to the court even if the director has not met
the statutory requirements if the director is fairly and reasonably entitled to
indemnification in view of all of the relevant circumstances.
Arizona Revised Statutes sec. 10-856 entitles an officer who is not a
director to the mandatory and court-ordered indemnification provided by Arizona
law to directors. In addition, an officer who is not a director and employees
and agents of an Arizona corporation may be indemnified to the same extent as
directors and may be further indemnified to the extent consistent with public
policy.
Arizona Revised Statutes sec. 10-202 provides that a corporation in its
articles of incorporation may eliminate or limit personal liability of members
of its board of directors to the corporation or its shareholders for money
damages for any action taken or any failure to take any action as a director.
However, no such provision may eliminate or limit the liability of a director
for the amount of a financial benefit received by a director to which the
director is not entitled, an intentional infliction of harm on the corporation
or its shareholders, authorizing the unlawful distribution to shareholders, or
an intentional violation of criminal law. A provision of this type has no effect
on the availability of equitable remedies, such as injunction or rescission, for
an action or failure to take any action as a director. The Registrant's Articles
of Incorporation contain such a provision.
II-1
<PAGE> 125
The Registrant's Bylaws provide that the Registrant shall indemnify
officers and directors to the full extent permitted by and in the manner
permissible under the laws of the State of Arizona.
The Registrant maintains directors' and officers' liability insurance
coverage for, among other things, certain liability for violations of certain
federal and state securities laws. The Registrant also has entered into
indemnification agreements with substantially all of the Registrant's directors
and executive officers.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised 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.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
Incorporated by reference to the Exhibit Index immediately following the
signature page hereof.
(b) Financial Statement Schedules:
None. All schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements or notes
thereto.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised 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. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
II-2
<PAGE> 126
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein and this offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired therein, that was not the subject of and included in the
registration statement when it became effective.
II-3
<PAGE> 127
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Phoenix,
State of Arizona on October 29, 1997.
EMPLOYEE SOLUTIONS, INC.
By: /s/ MARVIN D. BRODY
------------------------------------
MARVIN D. BRODY
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Marvin D. Brody, Morris C. Aaron and Paul
M. Gales, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and any state securities
commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------- -----------------
<C> <S> <C>
/s/ MARVIN D. BRODY Chairman of the Board, Chief October 29, 1997
- ------------------------------------------ Executive Officer,
Marvin D. Brody President and Director
/s/ HARVEY A. BELFER Director October 29, 1997
- ------------------------------------------
Harvey A. Belfer
/s/ JEFFERY A. COLBY Director October 29, 1997
- ------------------------------------------
Jeffery A. Colby
/s/ EDWARD L. CAIN, JR. Director October 29, 1997
- ------------------------------------------
Edward L. Cain, Jr.
/s/ ROBERT L. MUELLER Director October 29, 1997
- ------------------------------------------
Robert L. Mueller
/s/ MORRIS C. AARON Chief Financial Officer October 29, 1997
- ------------------------------------------
Morris C. Aaron
/s/ JOHN V. PRINCE Chief Accounting Officer October 29, 1997
- ------------------------------------------
John V. Prince
</TABLE>
II-4
<PAGE> 128
* * *
Pursuant to the requirements of the Securities Act of 1933, as amended,
each of the Guarantor Subsidiaries, as a Registrant, has duly caused this
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Phoenix, State of Arizona on October 29, 1997.
ERC OF INDIANA, INC.
ERC OF MINN, INC.
ERC OF OHIO, INC.
ESI AMERICA, INC.
ESI-MIDWEST, INC.
ESI RISK MANAGEMENT AGENCY, INC.
EMPLOYEE RESOURCES CORPORATION
EMPLOYEE SOLUTIONS-EAST, INC.
EMPLOYEE SOLUTIONS-MIDWEST, INC.
EMPLOYEE SOLUTIONS OF OHIO, INC.
EMPLOYEE SOLUTIONS OF TEXAS, INC.
GCK ENTERTAINMENT SERVICES I, INC.
LOGISTICS PERSONNEL CORPORATION
PHOENIX CAPITAL MANAGEMENT, INC.
TALENT, ENTERTAINMENT AND MEDIA
SERVICES, INC.
By: /s/ MARVIN D. BRODY
------------------------------------
Marvin D. Brody, Chief Executive
Officer of each of the foregoing
Guarantor Subsidiaries
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------- -----------------
<C> <S> <C>
/s/ MARVIN D. BRODY Director and Chief Executive October 29, 1997
- ------------------------------------------ Officer of each of the
Marvin D. Brody foregoing Guarantor
Subsidiaries
/s/ HARVEY A. BELFER Director of each of the October 29, 1997
- ------------------------------------------ Guarantor Subsidiaries
Harvey A. Belfer
/s/ MORRIS C. AARON Chief financial officer of each October 29, 1997
- ------------------------------------------ of the foregoing Guarantor
Morris C. Aaron Subsidiaries
/s/ JOHN V. PRINCE Chief accounting officer of each October 29, 1997
- ------------------------------------------ of the foregoing Guarantor
John V. Prince Subsidiaries
</TABLE>
II-5
<PAGE> 129
* * *
Pursuant to the requirements of the Securities Act of 1933, as amended,
each of the Guarantor Subsidiaries, as a Registrant, has duly caused this
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Phoenix, State of Arizona on October 29, 1997.
EMPLOYEE SOLUTIONS-SOUTHEAST, INC.
By: /s/ ROY A. FLEGENHEIMER
------------------------------------
Roy A. Flegenheimer, President
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------- -----------------
<C> <S> <C>
/s/ ROY A. FLEGENHEIMER President (chief executive October 29, 1997
- ------------------------------------------ officer)
Roy A. Flegenheimer
/s/ HARVEY A. BELFER Director October 29, 1997
- ------------------------------------------
Harvey A. Belfer
/s/ EDWARD L. CAIN, JR. Director October 29, 1997
- ------------------------------------------
Edward L. Cain, Jr.
/s/ MORRIS C. AARON Chief financial officer October 29, 1997
- ------------------------------------------
Morris C. Aaron
/s/ JOHN V. PRINCE Chief accounting officer October 29, 1997
- ------------------------------------------
John V. Prince
</TABLE>
II-6
<PAGE> 130
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY FILED
NO. DESCRIPTION REFERENCE TO HEREWITH
------- ------------------------------------------------- ------------------------- ----------
<S> <C> <C> <C> <C>
4.1 -- Registrant's Composite Articles of Incorporation, Exhibit 3(i) to the
as amended Registrant's Annual
Report on Form 10-K for
the year ended December
31, 1996 ("1996 10-K")
4.2 -- Registrant's Bylaws, as amended Exhibit 3(ii) to 1996
10-K
4.3 -- Indenture dated October 15, 1997 among the Exhibit 4.1 to the
Registrant, the Guarantor Subsidiaries and The Registrant's Current
Huntington National Bank Report on Form 8-K dated
October 21, 1997
("10/21/97 8-K")
4.4 -- Purchase Agreement dated October 16, 1997 among Exhibit 4.2 to 10/21/97
the Registrant, the Guarantor Subsidiaries and 8-K
First Chicago Capital Markets, Inc. ("FCCM")
4.5 -- Registration Rights Agreement dated October 21, Exhibit 4.3 to 10/21/97
1997 among the Registrant, the Guarantor 8-K
Subsidiaries and FCCM
4.6 -- Amended and Restated Loan Agreement dated October Exhibit 4.4 to 10/21/97
21, 1997 between the Registrant and Bank One 8-K
Arizona, NA
5.1 -- Opinion of Quarles & Brady
X
12.1 -- Statements re computation of ratios
X
23.1 -- Consent of Quarles & Brady (Included in Exhibit
5.1 above)
23.2 -- Consent of Arthur Andersen LLP
X
23.3 -- Consent of Deloitte & Touche LLP
X
24.1 -- Powers of Attorney
Signature
Page
25.1 -- Statement of eligibility of Trustee, on Form T-1
X
99.1 -- Form of Letter of Transmittal
X
</TABLE>
II-7
<PAGE> 1
Exhibit 5.1
[Quarles & Brady letterhead]
October 29, 1997
Employee Solutions, Inc.
6225 N. 24th Street
Phoenix AZ 85016
Gentlemen and Ladies:
We have represented Employee Solutions, Inc., an Arizona corporation (the
"Company") and the Company's subsidiaries named on Annex A attached hereto (the
"Guarantors") in connection with the filing of a Registration Statement of the
Company on Form S-4 (the "Registration Statement") to be filed under the
Securities Act of 1933, as amended. The Registration Statement relates to the
proposed exchange offer by the Company of up to $85 million of Series B 10%
Senior Notes (the "Exchange Notes") for the Company's outstanding 10% Senior
Notes (the "Original Notes") in the same principal amount, all in the manner set
forth in the Registration Statement and in the Prospectus constituting a part
thereof (the "Prospectus"). Capitalized terms not otherwise defined herein have
the same meaning assigned to them in the Prospectus.
In such capacity, we have examined copies of the Registration Statement,
including the Prospectus, and originals, or copies identified to our
satisfaction, of such corporate records of the Company and the Guarantors, such
other agreements and instruments, certificates of public officials, officers of
the Company and the Guarantors and other persons as we have deemed necessary as
a basis for the opinions expressed below. In all such examinations, we have
assumed the genuineness of all signatures, the authenticity of all documents,
certificates and instruments submitted to us as originals, the valid
authorization and due execution and delivery of documents by parties other than
the Company and the Guarantors, and the conformity with the originals of all
documents submitted to us as copies.
Based upon the foregoing, and subject to the qualifications set forth
below we are of the opinion that:
(1) The Company is a corporation validly existing in good standing
under the laws of Arizona.
<PAGE> 2
Employee Solutions, Inc.
October 29, 1997
Page 2
(2) Each of the Guarantors is a corporation validly existing in good
standing under the laws of its jurisdiction of incorporation.
(3) The Exchange Notes have been duly and validly authorized by the
Company and when executed by the Company in accordance with the Indenture
and when issued in exchange for Original Notes as contemplated by the
Registration Statement and the Prospectus, assuming due authentication of
the Exchange Notes by the Trustee, upon delivery pursuant to the Exchange
Offer, will have been validly issued and delivered, and will constitute
valid and binding obligations of the Company.
(4) The Guarantees have been duly and validly authorized by each of
the Guarantors and, when executed by the Guarantors in accordance with the
Indenture and issued in exchange for Guarantees on the Original Notes as
contemplated by the Registration Statement and the Prospectus, assuming
due authentication of the Exchange Notes by the Trustee upon delivery
pursuant to the Exchange Offer, will have been validly issued and
delivered, and will constitute valid and binding obligations of the
Guarantors.
The opinion as to the enforceability of any entity's obligations under any
instrument is limited by bankruptcy, fraudulent conveyance and transfer,
insolvency, reorganization, moratorium, and other similar laws affecting
creditors' rights generally and by general equitable principles.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "Legal Matters" in
the Prospectus.
Very truly yours,
/s/ QUARLES & BRADY
QUARLES & BRADY
<PAGE> 3
Employee Solutions, Inc.
October 29, 1997
Page 3
Annex A
ERC OF INDIANA, INC.
ERC OF MINN, INC.
ERC OF OHIO, INC.
ESI AMERICA, INC.
ESI-MIDWEST, INC.
ESI RISK MANAGEMENT AGENCY, INC.
EMPLOYEE RESOURCES CORPORATION
EMPLOYEE SOLUTIONS-EAST, INC.
EMPLOYEE SOLUTIONS-MIDWEST, INC.
EMPLOYEE SOLUTIONS OF OHIO, INC.
EMPLOYEE SOLUTIONS OF TEXAS, INC.
GCK ENTERTAINMENT SERVICES I, INC.
LOGISTICS PERSONNEL CORPORATION
PHOENIX CAPITAL MANAGEMENT, INC.
TALENT, ENTERTAINMENT AND MEDIA SERVICES, INC.
<PAGE> 1
EXHIBIT 12.1
EMPLOYEE SOLUTIONS, INC.
AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
--------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations before
provision for income taxes $62 $208 $829 $6,681 $18,407 $9,270 $2,517
Add
Portion of rents representative of the
interest factor 29 29 44 47 213 106 159
Interest on indebtedness 5 104 3 25 1,196 7 2,065
Amortization of debt expense and
premium -- 169 -- -- 53 -- 125
--- ---- ---- ------ ------- ------ ------
Income as adjusted $96 $510 $876 $6,753 $19,869 $9,383 $4,866
=== ==== ==== ====== ======= ====== ======
Fixed charges
Interest on indebtedness $ 5 $104 $ 3 $ 25 $ 1,196 $ 7 $2,065
Amortization of debt expense and
premium -- 169 -- -- 53 -- 125
Portion of rents representative of
the interest factor 29 29 44 47 213 106 159
--- ---- ---- ------ ------- ------ ------
Fixed charges $34 $302 $ 47 $ 72 $ 1,462 $ 113 $2,349
=== ==== ==== ====== ======= ====== ======
Ratio of earnings to fixed charges 2.8x 1.7x 18.6x 93.8x 13.6x 83.0x 2.1x
=== ==== ==== ====== ======= ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this Form S-4
registration statement for Employee Solutions, Inc. We also consent to the
application of our report to the additional note labeled Subsequent Event -
Issuance of Notes Payable to the Company's audited financial statements included
therein.
Arthur Andersen LLP
Phoenix, Arizona,
October 28, 1997.
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement on
Form S-4 of Employee Solutions, Inc., of our report dated September 24, 1996
relating to the combined balance sheets of Leaseway Personnel Corp. and
Leaseway Administrative Personnel, Inc. as of December 31, 1995 and 1994 and
the related combined statements of earnings and cash flows for each of the
three years in the period ended December 31, 1995 appearing in the Current
Report on Form 8-K of Employee Solutions, Inc. dated August 1, 1996 (as amended
by Amendment No. 1 on October 10, 1996).
We also consent to the reference to us under the heading "Experts" in such
prospectus.
/s/ Deloitte & Touche LLP
- ----------------------------------
Philadelphia, Pennsylvania
October 28, 1997
<PAGE> 1
Exhibit 25.1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2)
THE HUNTINGTON NATIONAL BANK
(Exact name of trustee as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
31-0966785
(Jurisdiction of incorporation or organization (IRS Employer Identification Number)
if not a U.S. national bank)
41 S. High Street
Columbus, Ohio 43215
(Address of principal executive offices) (Zip Code)
</TABLE>
Ralph K. Frazier, General Counsel
The Huntington National Bank
41 S. High Street - HC3412
Columbus, Ohio 43215
Tel: (614) 480-4647
(Name, address and telephone number of agent for service)
EMPLOYEE SOLUTIONS, INC.
(Exact name of obligor as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Arizona 86-0676898
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
4225 North 24th Street
Phoenix, AZ 85016
(Address of principal executive offices) (Zip Code)
</TABLE>
EMPLOYEE SOLUTIONS, INC. 10% SENIOR
NOTES DUE 2004, SERIES B
Debt Securities
(Title of the indenture securities)
1
<PAGE> 2
GENERAL
Pursuant to General Instruction B of the Form T-1, the applicant is providing
responses to only Items 1, 2, and 16 of the Form T-1 since the obligor is not in
default.
Item 1. General Information
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which it is
subject.
<TABLE>
<CAPTION>
<S> <C>
Office of the Comptroller of the Currency Federal Deposit Insurance Corporation
Central District Chicago Region
One Financial Plaza 30 South Wacker Drive
440 South LaSalle, Suite 2700 Chicago, Illinois 60505
Chicago, Illinois 60605
</TABLE>
Board of Governors of the Federal Reserve System
Washington, D.C. 20551
Federal Reserve Bank of Cleveland - District No. 4
1455 East Sixth Street
Cleveland, Ohio 44115
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
2
<PAGE> 3
16. List of Exhibits
List below all exhibits filed as a part of this Statement of Eligibility.
1. A copy of the Articles of Association of the Trustee as now in effect (see
Item 16, Exhibit 1 to Form T-1 filed in connection with Registration Statement
No. 33-80090 which is incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence Business
(see Item 16, Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-80090, which is incorporated by reference).
3. A copy of the authorization of the Trustee to exercise corporate trust powers
(see Item 16, Exhibit 3 to Form T-1 filed in connection with Registration
Statement No. 33-80090, which is incorporated by reference).
4. A copy of the existing By Laws of the Trustee (see Item 16, Exhibit 4 to Form
T-1 filed in connection with Registration Statement No. 33-80090, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321 (b) of the Act (see Item
16, Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-80090, which is incorporated by reference).
7. A copy of the latest report of condition of the Trustee, published pursuant
to law or the requirements of its supervising or examining authority (see Item
16, Exhibit 7 to Form T-1 filed in connection with Registration Statement No.
333-34475, which is incorporated by reference).
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Huntington National Bank, a national association organized and
existing under the laws of the United States, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Columbus and State of Ohio, on the 22nd day of
October, 1997.
THE HUNTINGTON NATIONAL BANK
(Trustee)
By: /s/ Donna L. Shutek
-----------------------------------------
Donna L. Shutek, Assistant Vice President
(Name and Title)
3
<PAGE> 1
EXHIBIT 99.1
EMPLOYEE SOLUTIONS, INC.
LETTER OF TRANSMITTAL
OFFER FOR ALL OUTSTANDING
10% SENIOR NOTES DUE 2004 ("ORIGINAL NOTES")
IN EXCHANGE FOR
SERIES B 10% SENIOR NOTES DUE 2004 ("EXCHANGE NOTES")
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
PURSUANT TO THE PROSPECTUS DATED , 1997
THE EXCHANGE OFFER AND WITHDRAWAL PERIOD WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 199 , UNLESS EXTENDED (THE "EXPIRATION DATE")
DELIVER TO THE HUNTINGTON NATIONAL BANK, the Exchange Agent:
<TABLE>
<S> <C>
By Hand: By Overnight Courier/Mail:
The Huntington National Bank The Huntington National Bank
c/o The Bank of New York Attn: Corporate Trust
101 Barclay Street 41 South High Street, 11th Floor
New York, NY 10286 Columbus, OH 43215
Attn: Drop Window
</TABLE>
Facsimile Transmission:
(614) 480-5223
(For Eligible Institutions Only)
Confirm by Telephone:
(614) 480-3888
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE, OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA A FACSIMILE NUMBER
OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated ,
1997 (the "Prospectus") of Employee Solutions, Inc. (the "Company") and this
Letter of Transmittal, which together constitute the Company's offer (the
"Exchange Offer") to exchange an aggregate principal amount of up to $85 million
of its newly issued Series B 10% Senior Notes due 2004 (the "Exchange Notes")
that have been registered under the Securities Act of 1933, as amended (the
"Securities Act") for a like amount of its issued and outstanding 10% Senior
Notes due 2004 (the "Original Notes") that were issued and sold in a transaction
exempt from registration under the Securities Act.
For each Original Note accepted for exchange, the holder of such Original
Note will receive an Exchange Note having a principal amount equal to that of
the surrendered Original Note. The Exchange Notes will bear interest from the
most recent date to which interest has been paid on the Original Notes, or if no
interest has yet been paid, from October 21, 1997. Accordingly, registered
holders of Exchange Notes on the relevant record date for the first interest
payment date following consummation of the Exchange Offer will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid,
<PAGE> 2
from October 21, 1997. Original Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer. Holders
whose Original Notes are accepted for exchange will not receive any payment in
respect of interest on such Original Notes otherwise payable on any interest
payment date the record date for which occurs on or after consummation of the
Exchange Offer.
This Letter of Transmittal is to be used (a) if certificates for Original
Notes are to be physically delivered to the Exchange Agent herewith or if a
tender of certificates for Original Notes, if available, is to be made by
book-entry transfer to the account maintained by the Exchange Agent at the
Depository Trust Company (the "Book-Entry Transfer Facility"), or (b) if tenders
are to be made according to the guaranteed delivery procedures set forth in the
Prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures." Holders
of Original Notes whose certificates are not immediately available, or who are
unable to deliver their certificates or confirmation of the book-entry tender of
their Original Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility (a "Book-Entry Confirmation") and all other documents required
hereby to the Exchange Agent before the Expiration Date, must tender their
Original Notes according to the guaranteed delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery Procedures" in the Prospectus. See
Instruction 1.
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 199 (the "Expiration Date") unless extended, in which case
the term "Expiration Date" shall mean the last time and date to which the
Exchange Offer is extended. Capitalized terms used herein and not otherwise
defined shall have the respective meanings assigned to them in the Prospectus.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
ANY BOX BELOW. THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE
FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE
PROSPECTUS AND LETTER OF TRANSMITTAL SHOULD BE DIRECTED TO THE EXCHANGE AGENT AT
OR OR AT ITS ADDRESS SET FORTH ABOVE.
Holders who wish to tender their Original Notes must complete the table in
Box 1 and complete and sign in Box 5.
List below the Original Notes to which this Letter of Transmittal relates.
If the space below is inadequate, the certificate numbers and amount of Original
Notes should be listed on a separate signed schedule attached hereto.
2
<PAGE> 3
PLEASE READ THE ENTIRE LETTER OR TRANSMITTAL, INCLUDING THE
ACCOMPANYING INSTRUCTIONS, CAREFULLY BEFORE CHECKING ANY BOX BELOW.
- --------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF ORIGINAL NOTES TENDERED
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)
(PLEASE USE PRE-ADDRESSED LABEL OR FILL IN EXACTLY
AS TENDERED CERTIFICATE(S)
NAME(S) APPEAR(S) ON CERTIFICATE(S)) (ATTACH SIGNED ADDITIONAL LIST IF NECESSARY)
------------------------------------------------------------------------------------------------------------------
AGGREGATE
PRINCIPAL
AMOUNT AGGREGATE
CERTIFICATE REPRESENTED BY AMOUNT
NUMBER(S)* CERTIFICATE(S)** TENDERED**
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
Total Principal
Amount*
------------------------------------------------------------------------------------------------------------------
</TABLE>
* DOES NOT need to be completed if Original Notes are tendered by book-entry
transfer.
** Unless otherwise indicated, the holder will be deemed to have tendered the
entire stated face amount of all Original Notes represented by tendered
certificates. See Instruction 3.
- --------------------------------------------------------------------------------
3
<PAGE> 4
------------------------------------------------------------
BOX 2
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5, 6 AND 7)
To be completed ONLY if Exchange Notes are to be issued in the name
of someone other than the person whose signature appears in Box 5 of this
Letter of Transmittal, or if Original Notes delivered by book-entry
transfer which are not accepted for exchange are to be returned by credit
to an account maintained at the Book-Entry Transfer Facility other than
the account indicated above.
Issue Exchange Notes to:
Name
----------------------------------------------------
(PLEASE PRINT)
Address
--------------------------------------------------
------------------------------------------------------------
(INCLUDE ZIP CODE)
------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
[ ] Credit undercharged Original Notes delivered by book-entry transfer to
the Book-Entry Transfer Facility account set forth below:
------------------------------------------------------------
BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER, IF APPLICABLE
(COMPLETE SUBSTITUTE FORM W-9)
============================================================
BOX 3
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5, 6 AND 7)
To be completed ONLY if certificates for Exchange Notes are to be
sent to someone other than the person whose signature appears in Box 2 of
this Letter of Transmittal or such person at an address other than that
shown in Box 1, entitled "Description of Original Notes Tendered."
Mail and Deliver Exchange Notes to:
Name
----------------------------------------------------
(PLEASE PRINT)
Address
--------------------------------------------------
------------------------------------------------------------
(INCLUDE ZIP CODE)
------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
NOTE: SIGNATURES MUST BE PROVIDED UNDER BOX TWO
PLEASE READ CAREFULLY
THE ACCOMPANYING INSTRUCTIONS
------------------------------------------------------------
Ladies and Gentlemen:
In accordance with the terms and subject to the conditions set forth in the
Exchange Offer, the undersigned hereby tenders to the Company the
above-described Original Notes. Subject to, and effective upon, acceptance for
exchange of the Original Notes tendered herewith, the undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to all the Original Notes that are being
tendered hereby and that are being accepted for exchange pursuant to the
Exchange Offer, and hereby irrevocably constitutes and appoints the Exchange
Agent the true and lawful agent and attorney-in-fact of the undersigned with
respect to such Original Notes (with full knowledge that the Exchange Agent also
acts as agent for the Company) with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest), to
(a)(1) deliver such Original Notes to the Company or (2) present such Original
Notes for transfer to the Registrar on the Company's register, together, in each
case, with all accompanying evidences of transfer and authenticity to, or upon
order of, the Company, upon receipt by the Exchange Agent, as the undersigned's
agent, of the certificates representing Exchange Notes to which the undersigned
is entitled upon the acceptance by the Company of such Original
4
<PAGE> 5
Notes pursuant to the Exchange Offer, and (b) receive all benefits and otherwise
exercise all rights of beneficial ownership of such Original Notes, all in
accordance with the terms and subject to the conditions of the Exchange Offer.
The name and address of the registered holder(s) should be printed above in
Box One under "Description of Original Notes Tendered," exactly as they appear
on the certificates representing Original Notes tendered hereby. The certificate
number(s) and Original Notes to which this Letter of Transmittal relates should
be indicated in the appropriate boxes above under "Description of Original Notes
Tendered."
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign and transfer the Original
Notes tendered hereby, and that when the same are accepted for exchange by the
Company, the Company will acquire good and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances, and such Original
Notes shall not be subject to any adverse claims. The undersigned will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the exchange,
assignment and transfer of the Original Notes tendered hereby.
Further, the undersigned hereby represents and warrants that the
undersigned is acquiring the Exchange Notes in the ordinary course of its
business; the undersigned is not engaged in, and does not intend to engage in, a
distribution of the Exchange Notes; the undersigned has no arrangement or
understanding with any person to participate in the distribution of the Exchange
Notes; neither the undersigned nor any other such person is an affiliate of the
Company; and, if the undersigned is not a broker-dealer, the undersigned is not
engaged in, and does not intend to engage in, a distribution of the Exchange
Notes. If the undersigned is a broker-dealer, it acknowledges that it will
deliver a copy of the Prospectus in connection with any resale of the Exchange
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on interpretations by the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties, that the Exchange Notes issued in exchange for the Original Notes
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such Exchange
Notes. However, the SEC has not considered the Exchange Offer in the context of
a no-action letter and there can be no assurance that the staff of the SEC would
make a similar determination with respect to the Exchange Offer as in other
circumstances. If any holder is an affiliate of the Company, or is engaged in or
intends to engage in or has any arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, such holder (i) could not rely on the applicable interpretations of the
staff of the SEC and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
All authority conferred, or agreed to be conferred, in this Letter of
Transmittal shall survive the death or incapacity of the undersigned, and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, legal representatives, successors and assigns of the
undersigned. This tender of Original Notes may be withdrawn at any time prior to
the Expiration Date. See "The Exchange Offer -- Withdrawal Rights" in the
Prospectus.
The undersigned understands that tenders of Original Notes pursuant to any
of the procedures described in the Prospectus and in this Letter of Transmittal
will constitute a binding agreement between the undersigned and the Company upon
the terms and subject to the conditions of the Exchange Offer.
Original Notes properly tendered and not withdrawn will be accepted as soon
as practicable after the satisfaction or waiver of all conditions to the
Exchange Offer. The undersigned understands that the Exchange Notes will be
delivered as promptly as practicable following acceptance of the tendered
Original Notes by the
5
<PAGE> 6
Company. The Exchange Offer is subject to a number of conditions, as more
particularly set forth in the Prospectus. See "The Exchange Offer -- Certain
Conditions to the Exchange Offer" in the Prospectus. The undersigned recognizes
that as a result of such conditions the Company may not be required to accept
any of the Original Notes tendered hereby. In such event, the Original Notes not
accepted for exchange will be returned to the undersigned at the address shown
below the undersigned's signature(s), unless otherwise indicated under "Special
Delivery Instructions."
Unless otherwise indicated herein under "Special Issuance Instructions,"
please issue the certificates for the Exchange Notes with respect to the
Original Notes accepted for exchange, or return the Original Notes not accepted
for exchange, in the name(s) of the undersigned at the address set forth above
under "Description of Original Notes Tendered" or in the case of a book-entry
delivery of Original Notes, please credit the account indicated above maintained
at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under
"Special Delivery Instructions," please deliver the certificates for the
Exchange Notes with respect to the Original Notes accepted for exchange, or the
Original Notes if not accepted for exchange (and accompanying documents, as
appropriate), to the undersigned at the address set forth above under
"Description of Original Notes Tendered." In the event that both the "Special
Issuance Instructions" and the "Special Delivery Instructions" are completed,
please issue the certificates for Exchange Notes accepted for exchange or in the
case of a book-entry delivery of Original Notes, please credit the account
indicated above maintained at the Book-Entry Transfer Facility, and/or return or
issue any certificates for Original Notes not tendered or not accepted for
exchange, in the name(s) of, and deliver such certificates for Exchange Notes
and/or such certificates for Original Notes not tendered or accepted for
exchange to the person or persons so indicated. The undersigned recognizes that
the Company has no obligation pursuant to the "Special Issuance Instructions" to
make arrangements for the transfer of any Original Notes from the name of the
registered holder(s) thereof if the Company does not accept for exchange the
Original Notes so tendered. Further, the undersigned recognizes that the
undersigned must comply with all terms and conditions of the Indenture, by and
between the Company and the Guarantors and the Trustee dated as of October 15,
1997, as amended or supplemented from time to time in accordance therewith (the
"Indenture"), to transfer Original Notes either not tendered for exchange or not
accepted for exchange from the name of the registered holder(s).
6
<PAGE> 7
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
BOX 4
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITIES AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
-------------------------------------------------------------------------------
Account Number
----------------------------------------------------------------------------
Transaction Code Number
----------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT PRIOR
TO THE DATE HEREOF AND COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s):
---------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
--------------------------------------------------------
Name of Eligible Institution which Guaranteed Delivery:
---------------------------------------------------
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number
---------------------------------------------------------------------------
Transaction Code Number
---------------------------------------------------------------------------
NOTE: Signature(s) must be guaranteed by an institution which is a participant
in the Securities Transfer Agent Medallion Program ("STAMP") or similar program.
7
<PAGE> 8
BOX 5
PLEASE SIGN HERE
TO BE COMPLETED BY ALL HOLDERS TENDERING ORIGINAL NOTES (WHETHER OR NOT
CERTIFICATES ARE BEING PHYSICALLY TENDERED HEREBY)
Must be signed by the registered holder(s) exactly as name(s) appear(s) on
the certificate(s) for Original Notes or by person(s) authorized to become
registered holder(s) as evidenced by endorsements and documents transmitted
herewith. See Instructions 4 and 5. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, agent, or
other person acting in a fiduciary or representative capacity, please provide
the following information. See Instruction 4.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(SIGNATURE(S) OF REGISTERED HOLDER(S) OR AUTHORIZED SIGNATORY)
Dated:
- --------------------------- , 199_
Name(s):
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Capacity (Full Title):
- --------------------------------------------------------------------------------
Address(es) (including zip code):
- --------------------------------------------------------------------------------
Area Code(s) and Telephone Number(s):
--------------------------------------------------------------------------
Tax Identification or Social Security Number(s):
------------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTION 4)
Name of Firm:
- --------------------------------------------------------------------------------
Authorized Signature:
- --------------------------------------------------------------------------------
Name:
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE)
Title:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number:
- --------------------------------------------------------------------------------
Dated:
- --------------------------- , 199_
8
<PAGE> 9
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------
PAYER'S NAME: [DEPOSITARY]
- -------------------------------------------------------------------------------------------------------------
SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX Social Security number
FORM W-9 AT RIGHT AND CERTIFY BY SIGNING AND DATING OR
DEPARTMENT OF THE TREASURY BELOW ------------------------------
INTERNAL REVENUE SERVICE Employer Identification Number
-------------------------------------------------------------------------------
PAYER'S REQUEST FOR Part 2 -- CERTIFICATION -- Under penalties of perjury, I certify that:
TAXPAYER IDENTIFICATION (1) the number shown on this form is my correct Taxpayer Identification
NUMBER (TIN) Number (or I am waiting for a number to be issued to me) and
(2) I am not subject to backup withholding either because: (a) I am
exempt from backup withholding, or (b) I have not been notified by the
Internal Revenue Service (the "IRS") that I am subject to backup
withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject
to backup withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you
have been notified by the IRS that you are currently subject to backup
withholding because of underreporting interest or dividends on your tax
return. However, if after being notified by the IRS that you are subject
to backup withholding, you received another notification from the IRS
that you are no longer subject to backup withholding, do not cross out
such item (2).
--------------------------------------------------------------------------------
SIGNATURE DATE Part 3 -- Awaiting TIN [ ]
- -------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
9
<PAGE> 10
(EXHIBIT 99)
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF
SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office, or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number within sixty (60) days, 31%
of all reportable payments made to me thereafter will be withheld until I
provide a number.
- ------------------------------------------------------------------------ ,199
Signature Date
10
<PAGE> 11
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Certificates; Guaranteed
Delivery Procedures. This Letter of Transmittal is to be used if (a)
certificates for Original Notes are to be physically delivered to the Exchange
Agent herewith or tenders are to be made according to the guaranteed delivery
procedures or (b) tenders are to be made pursuant to the procedures for delivery
by book-entry transfer, all as set forth in the Prospectus.
To validly tender Original Notes pursuant to the Exchange Offer, either (a)
a properly completed and duly executed copy of this Letter of Transmittal (or
facsimile thereof) with any required signature guarantees, together with either
a properly completed and duly executed Notice of Guaranteed Delivery or
certificates for the Original Notes, or Book-Entry Confirmation, as the case may
be, and any other documents required by this Letter of Transmittal, must be
received by the Exchange Agent at its address or number set forth on the first
page of this Letter of Transmittal, or (b) a holder of Original Notes must
comply with the guaranteed delivery procedures described in the next succeeding
paragraph. Original Notes tendered must be in denominations of principal amount
of $1,000 and any integral multiple thereof.
Holders of Original Notes who desire to tender such Original Notes pursuant
to the Exchange Offer and whose certificates representing such Original Notes
are not lost but are not immediately available, or time will not permit all
required documents to reach the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date, or who cannot complete the procedure for
book-entry transfer on a timely basis, may tender their Original Notes pursuant
to the guaranteed delivery procedures set forth in the Prospectus under "The
Exchange Offer -- Guaranteed Delivery Procedures." Pursuant to such procedures,
(a) tender must be made by a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or by a commercial bank or trust company having an office or correspondent in
the United States and, in each instance, which is a participant in the
Securities Transfer Agent Medallion Program ("STAMP") or similar program (an
"Eligible Institution"), (b) the Exchange Agent must have received from such
Eligible Institution, prior to 5:00 p.m., New York City time, on the Expiration
Date, a properly completed and duly executed Notice of Guaranteed Delivery (by
mail, hand delivery, telegram or facsimile transmission), and (c) the
certificates for all physically tendered Original Notes in proper form for
transfer or Book-Entry Confirmation as the case may be, together with a properly
completed and duly executed Letter of Transmittal (or facsimile thereof) and all
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent within five New York Stock Exchange trading days after the
Expiration Date, all as provided in the Prospectus under the caption "The
Exchange Offer -- Guaranteed Delivery Procedures."
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE CERTIFICATES FOR
ORIGINAL NOTES AND OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
TENDERING HOLDER. EXCEPT AS OTHERWISE PROVIDED HEREIN AND IN THE PROSPECTUS,
SUCH DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE PROPERLY
INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE
MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, withdrawal and revocation of Original Notes tendered for
exchange will be determined by the Company in its sole discretion, whose
determination will be final and binding. The Company reserves the absolute right
to waive any defects or irregularities in the tender or conditions of the
Exchange Offer as to particular Original Notes. The interpretation of the
Company of the terms and conditions of the Exchange Offer (including the
Instructions herein) will be final and binding. Unless waived, any defects or
irregularities in connection with tenders must be cured within such time as the
Company shall determine. No alternative, conditional or contingent tenders will
be accepted. Neither the Company, the Exchange Agent nor any other person will
be under any duty to give notification of any defects or irregularities in any
tender or will incur any liability for failure to give any
11
<PAGE> 12
such notification. Tenders of Original Notes will not be deemed to have been
made until irregularities have been cured or waived. Any certificates of
Original Notes received by the Exchange Agent that are not properly tendered and
as to which irregularities have not been cured or waived will be returned by the
Exchange Agent to the tendering holders of such Original Notes, unless otherwise
provided in this Letter of Transmittal, as soon as practicable following the
Expiration Date.
Any tendered Original Notes which are not accepted for exchange because of
an invalid tender, the occurrence or nonoccurrence of certain other events set
forth in the Prospectus or otherwise will be returned without expense to the
appropriate tendering holder thereof as promptly as practicable following the
expiration, withdrawal or termination of the Exchange Offer.
2. Withdrawal Rights. Original Notes tendered pursuant to the Exchange
Offer may be withdrawn, as hereinafter provided, at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
For the withdrawal of a tender to be effective, a written, telegraphic or
facsimile transmitted notice of withdrawal must be received by the Exchange
Agent at the address or number set forth on the front page of this Letter of
Transmittal prior to the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person who tendered the Original Notes, (ii) identify
the Original Notes to be withdrawn (including the certificate number or numbers
of any physically delivered Original Notes and the principal amount of the
Original Notes), and (iii) be signed in the same manner required by the Letter
of Transmittal by which such Original Notes were tendered (including any
required signature guarantees, endorsements and/or powers). All questions as to
the validity, form and eligibility (including time of receipt) of notices of
withdrawal will be determined by the Company, whose determination will be final
and binding on all parties. The Original Notes so withdrawn, if any, will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Original Notes which have been tendered for exchange but
which are withdrawn will be returned to the holder without cost to such holder
as soon as practicable after withdrawal. Properly withdrawn Original Notes may
be retendered on or prior to 5:00 p.m., New York City time, on the Expiration
Date by following any of the procedures described above under Instruction 1.
Neither the Company, the Exchange Agent nor any other person will be under
any duty to give notification of any defects or irregularities in any notice of
withdrawal or will incur any liability for failure to give such notification.
3. Acceptance of Original Notes for Exchange; No Partial Tenders. Tenders
will be accepted in denominations of $1,000 and any integral multiples thereof.
The entire aggregate principal amount of Original Notes will be deemed to have
been tendered unless otherwise indicated. If less than the entire aggregate
principal amount of any Original Notes evidenced by a submitted certificate is
to be tendered, the tendering holder should fill in the aggregate principal
amount of the Original Notes which is to be tendered in column (4) of the table
in Box One above.
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Original Notes validly tendered pursuant to the
Exchange Offer and not withdrawn, and delivery of the Exchange Notes, will be
made promptly after the Expiration Date.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange validly tendered Original Notes when, as and if the
Company has given oral or written notice thereof to the Exchange Agent. The
Exchange Agent will act as agent for the tendering holders of Original Notes for
the purpose of receiving the Exchange Notes and transmitting the Exchange Notes
to such holders. Tendered Original Notes not accepted for exchange by the
Company will be returned without expense to tendering holders as soon as
practicable following the Expiration Date.
4. Signatures on this Letter of Transmittal; Stock Powers and Endorsements;
Guarantee of Signatures. With respect to a tender of Original Notes, this Letter
of Transmittal must be signed by the registered holder(s) of the Original Notes
tendered, and such signatures must correspond with the name(s) of such holder(s)
as written on the face of the certificate without alteration, enlargement, or
any change whatsoever. If this Letter of Transmittal is signed by a person other
than the registered holder(s) of the Original Notes tendered hereby, such
Original Notes must be endorsed or accompanied by appropriate stock powers
signed
12
<PAGE> 13
exactly as the name(s) of the registered holder(s) appear(s) on such
certificates. Signatures of endorsement on any such certificate or stock powers
must be guaranteed by an Eligible Institution.
(a) If any of the Original Notes tendered hereby are held of record by two
or more persons, all such persons must sign this Letter of Transmittal.
(b) If any of the Original Notes tendered hereby are registered in
different names, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal and any necessary accompanying documents as
there are different registrations.
(c) If this Letter of Transmittal is signed by the registered holder(s) of
the Original Notes tendered hereby, no endorsements of certificates or separate
stock powers are required, unless the Original Notes are not accepted for
exchange, or the certificates for Exchange Notes are to be issued in the name
of, or delivered to, any person other than the registered holder(s). Signatures
on any such certificate or stock powers must be guaranteed by an Eligible
Institution (unless signed by an Eligible Institution).
(d) If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Original Notes tendered hereby, certificates
representing such Original Notes tendered hereby, certificates representing such
Original Notes must be endorsed or accompanied by appropriate bond powers and
signed exactly as the name(s) of the registered holder(s) appear(s) on such
certificates. Signatures on any such certificate or bond powers must be
guaranteed by an Eligible Institution (unless signed by an Eligible
Institution).
(e) If this Letter of Transmittal or any certificates or bond powers are
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation, or other person acting in a fiduciary or
representative capacity, such person should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of the
authority of such person to so act must be submitted with this Letter of
Transmittal.
5. Brokerage Fees and Transfer Taxes. Holders of Original Notes who tender
Original Notes will not be required to pay transfer taxes with respect to the
exchange of Original Notes pursuant to the Exchange Offer unless the box
entitled "Special Issuance Instructions" herein is marked as described in
Instruction 6. If, however, the box entitled "Special Issuance Instructions" is
marked and Exchange Notes are to be issued in the name of, or delivered to, any
person other than the registered holder(s), or if a transfer tax is imposed for
any reason other than the exchange of Original Notes for Exchange Notes pursuant
to the Exchange Offer, the amount of any transfer taxes (whether imposed on the
registered holder(s), such other person or otherwise) payable on account of the
transfer to such person will be the responsibility of the tendering holder(s).
Unless satisfactory evidence of the payment of such taxes, or exemption
therefrom, is submitted herewith, the amount of such transfer taxes will be
billed directly to the tendering holder(s). EXCEPT AS PROVIDED IN THIS
INSTRUCTION 5, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO
THE CERTIFICATES LISTED IN THIS LETTER OF TRANSMITTAL.
6. Special Issuance and Delivery Instructions. If (a) certificates for
Exchange Notes are to be issued in the name of a person other than the person(s)
signing this Letter of Transmittal or (b) Original Notes not accepted for
exchange are to be delivered to a person other than the person(s) signing this
Letter of Transmittal, the appropriate boxes on this Letter of Transmittal
should be completed. Further, if Original Notes not accepted for exchange are to
be delivered to a person other than the person(s) signing this Letter of
Transmittal, such Original Notes must be accompanied by such documents as are
required under the terms and conditions of the Indenture.
7. Substitute Form W-9. Federal income tax law requires each holder who
tenders Original Notes to provide the Exchange Agent with such holder's Taxpayer
Identification Number ("TIN") and to certify that such holder is not subject to
backup withholding for underreporting interest or dividend income. These
certifications must be made by entering the TIN in the space provided on the
Substitute Form W-9 herein and signing and dating the form in the appropriate
places.
13
<PAGE> 14
FAILURE TO PROVIDE THE INFORMATION REQUESTED ON THE SUBSTITUTE FORM W-9 MAY
SUBJECT A HOLDER TO A $50 PENALTY IMPOSED BY THE INTERNAL REVENUE SERVICE AND TO
BACKUP WITHHOLDING OF 31% OF ANY REPORTABLE PAYMENT TO BE MADE TO SUCH HOLDER.
If backup withholding applies to a holder, the Exchange Agent is required
to withhold 31% of any reportable payments made to such holder. Backup
withholding is not an additional tax. Rather, the tax liability of persons
subject to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained.
Certain holders (including, among others, all corporations and certain
foreign individuals that establish their entitlement to an exemption) are not
subject to these backup withholding and reporting requirements. In order for a
foreign individual to qualify as an exempt recipient, that holder must submit a
statement, signed under penalties of perjury, attesting to that individual's
exempt status. Such statements can be obtained from the Exchange Agent.
For additional information in this regard, please refer to the enclosed
Guidelines for Certification of TIN on Substitute Form W-9.
8. Waiver of Conditions. The Company reserves the absolute right to waive
the specified conditions to the Exchange Offer, as described in, and to the
extent provided in, the Prospectus under "The Exchange Offer -- Certain
Conditions to the Exchange Offer."
9. Mutilated, Lost, Stolen or Destroyed Certificates. Any holder whose
certificates for Original Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. Expiration Date. The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 199 , unless extended by the Company. The
Company expressly reserves the right, at any time and from time to time, to
extend the Exchange Offer for such period or periods as it may determine in its
sole discretion, in which event the Expiration Date shall be the time and dated
on which such Exchange Offer, as so extended, shall expire. The Company will
notify all holders of any extension by issuing a press release prior to 9:00
a.m., New York City time, on the next business day following the previously
scheduled Expiration Date. During any such extension, all Original Notes
previously tendered and not accepted for exchange will remain subject to the
Exchange Offer and may, subject to the terms and conditions hereof, be accepted
for exchange by the Company, subject to the withdrawal rights of tendering
holders.
11. Requests for Assistance or Additional Copies. Questions and requests
for assistance may be directed to the Exchange Agent at its address and
telephone number set forth above. Additional copies of the Prospectus and this
Letter of Transmittal may be obtained from the Exchange Agent at its address and
telephone number set forth above.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE COPY
HEREOF (TOGETHER WITH CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS) OR THE
NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
14
<PAGE> 15
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER.--Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer Identification numbers have nine digits separated by only
one hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<C> <S> <C>
- -----------------------------------------------------------
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF--
===========================================================
1. An individual's account The individual
2. Two or more individuals (joint The actual owner of
account) the account or, if
combined funds, any
one of the
individuals(1)
3. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
4. (a) The usual revocable savings The grantor-
trust (grantor is also trustee(1)
trustee)
(b) So-called trust account The actual owner(1)
that is not a legal or valid
trust under state law
5. Sole proprietorship The owner(3)
6. Sole proprietorship The owner(3)
- -----------------------------------------------------------
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF--
- -----------------------------------------------------------
7. A valid trust, estate or Legal entity(4)
pension trust
8. Corporate The corporation
9. Association, club, religious, The organization
charitable, educational or
other tax-exempt organization
10. Partnership The partnership
11. A broker or registered nominee The broker or
nominee
12. Account with the Department of The public entity
Agriculture in the name of a
public entity (such as a state
or local government, school
district, or prison) that
receives agriculture program
payments
- -----------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your Social Security number or
Employer Identification number.
(4) List first and circle the name of the legal trust, estate, or pension trust.
(Do not furnish the identifying number of the personal representative or
trustee unless the legal entity itself is not designated in the account
title.)
NOTE: If no name is circled when more than one name is listed, the number will
be considered to be that of the first name listed.
<PAGE> 16
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
Section references are to the Internal Revenue Code.
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service (the "IRS") and
apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
The following is a list of payees exempt from backup withholding and for which
no information reporting is required. For interest and dividends, all listed
payees are exempted except item (9). For broker transactions, payees listed in
items (1) through (13) and a person registered under the Investment Advisers Act
of 1940 who regularly acts as a broker are exempt. Payments subject to reporting
under Sections 6041 and 6041A are generally exempt from backup withholding only
if made to payees described in items (1) through (7), except that a corporation
that provides medical and health care services or bills and collects payments
for such services is not exempt from backup withholding or information
reporting. Only payees described in items (2) through (6) are exempt from backup
withholding for barter exchange transactions, patronage dividends, and payments
by certain fishing boat operators.
(1) A corporation.
(2) An organization exempt from tax under Section 501(a), or an individual
retirement plan ("IRA"), or a custodial account under Section 403(b)(7).
(3) The United States or any of its agencies or instrumentalities.
(4) A state, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities.
(5) A foreign government or any of its political subdivisions, agencies or
instrumentalities.
(6) An international organization or any of its agencies or
instrumentalities.
(7) A foreign central bank of issue.
(8) A dealer in securities or commodities required to register in the United
States or a possession of the United States.
(9) A futures commission merchant registered with the Commodity Futures
Trading Commission.
(10) A real estate investment trust.
(11) An entity registered at all times during the tax year under the
Investment Company Act of 1940.
(12) A common trust fund operated by a bank under Section 584(a).
(13) A financial institution.
(14) A middleman known in the investment community as a nominee or listed in
the most recent publication of the American Society of Corporate
Secretaries, Inc., Nominee List.
(15) A trust exempt from tax under Section 664 or described in Section 4947.
Payments of dividends and patronage dividends generally not subject to backup
withholding also include the following:
- Payments to nonresident aliens subject to withholding under Section 1441.
- Payments to partnerships not engaged in a trade or business in the United
States and that have at least one nonresident partner.
- Payments of patronage dividends not paid in money.
- Payments made by certain foreign organizations.
Payments of interest generally not subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals.
NOTE: You may be subject to backup withholding if this interest is $600 or
more and is paid in the course of the payer's trade or business and you have not
provided your correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt interest dividends under
Section 852).
- Payments described in Section 6049(b)(5) to nonresident aliens.
- Payments on tax-free covenant bonds under Section 1451.
- Payments made by certain foreign organizations.
- Mortgage interest paid by you.
Payments that are not subject to information reporting are also not subject to
backup withholding. For details see Sections 6041, 6041(a), 6042, 6044, 6045,
6049, 6050A and 6050N, and the regulations under such sections.
PRIVACY ACT NOTICE.--Section 6109 requires you to give your correct taxpayer
identification number to persons who must file information returns with the IRS
to report interest, dividends, and certain other income paid to you, mortgage
interest you paid, the acquisition or abandonment of secured property,
cancellation of debt, or contributions you made to an IRA. The IRS uses the
numbers for identification purposes and to help verify the accuracy of your tax
return. You must provide your taxpayer identification number whether or not you
are required to file a tax return. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
taxpayer identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail
to furnish your correct taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis that results in no backup
withholding, you are subject to a $500 penalty.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
(4) MISUSE OF TAXPAYER IDENTIFICATION NUMBERS.--If the requester discloses or
uses your taxpayer identification numbers in violation of federal law, the
requester may be subject to civil and criminal penalties.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE.
