U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number: 0-22600
EMPLOYEE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0676898
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2929 East Camelback Road, Phoenix, Arizona 85016
(Address of principal executive offices)
Issuer's telephone number: (602) 955-5556
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
None N/A
- ----------------------- -----------------------
Securities registered pursuant to Section 12(g)
of the Act:
No Par Value Common Stock
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based upon the $6.0625 closing price of the
Registrant's Common Stock as reported on the NASDAQ National Market on March 27,
1997, was approximately $155 million. Shares of Common Stock held by each
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily conclusive
for other purposes.
The number of outstanding shares of the Registrant's Common Stock as of
March 27, 1997, was 30,857,101.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Registrant's 1997
Annual Meeting of Shareholders are incorporated by reference in Part III hereof.
<PAGE>
EMPLOYEE SOLUTIONS, INC.
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
ITEM 1. - BUSINESS
ITEM 2. - PROPERTIES
ITEM 3. - LEGAL PROCEEDINGS
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 4A. - EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. - EXECUTIVE COMPENSATION
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. - EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I
Except for the historical information contained herein, the
discussion in this Form 10-K contains or may contain forward-looking statements
(including statements in the future tense and statements using the terms
"believe," "anticipate," expect," "intend" or similar terms) which are made
pursuant to safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements involve risks and uncertainties
that could cause the Company's actual results to differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Item 1 -- Business" and
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" (particularly "Outlook: Issues and Risks" therein), as
well as those factors discussed elsewhere herein or in any document incorporated
herein by reference.
Unless otherwise indicated, all share and per share information
herein has been restated to reflect the Company's two-for-one stock splits in
1996.
ITEM 1. BUSINESS
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Introduction
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 has
implemented an aggressive growth strategy since its initial public offering in
August 1993. Through internal growth and acquisitions, ESI revenues have
increased 167% to $439 million for the fiscal year 1996 from $164 million in
1995. ESI's net income for 1996 was $12.0 million, an increase of 214% from net
income of $3.8 million in 1995.
The Company seeks to strengthen its leadership position in the
PEO industry by providing client companies with comprehensive and flexible
outsourcing services to meet their human resources needs while helping manage
their overall costs. The Company believes its size, full range of employee
outsourcing solutions, nationwide presence and sophisticated risk
management/workers' compensation programs give it a competitive advantage. Under
ESI's primary contractual arrangement with its clients, ESI assumes designated
obligations for payroll preparation and reporting, payment of payroll taxes,
human resources management and the provision of employee benefit plans. Although
the Company is the "employer of record," the client generally retains management
control of the employees, including supervision, hiring and termination, and
determining the employees' job descriptions and salaries. Through its integrated
services, the Company provides significant benefits to its client companies,
including managing escalating costs associated with workers' compensation,
health insurance, workplace safety and employment policies and practices;
enhancing employee recruiting and retention by providing employees with access
to health care and other benefits that are more characteristic of larger
employers; and reducing the time and effort required by the employer to deal
with the increasingly complex legal and regulatory employment environment. The
Company intends to expand the services it provides directly to worksite
employees to include employee payroll deduction programs for life, disability
and special health insurance, automobile insurance, prepaid telephone cards and
other personal financial services and benefits which the employee may purchase
at competitive rates.
In part as a marketing strategy to introduce its services to
potential clients not currently seeking a full PEO solution, the Company began
in 1995 to offer employers stand-alone risk management/workers' compensation
services. At December 31, 1996, this program covered an additional approximately
13,500 workers employed by approximately 64 employers. ESI targets these
stand-alone risk management/workers' compensation clients for conversion into
full-service PEO clients over the long term, although there can be no assurance
that such conversions will occur.
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<PAGE>
In addition, to leverage the Company's transportation market
expertise, the Company entered the full-service driver leasing market in 1996.
Through this program, ESI hires and places drivers with companies wishing to
obtain transportation services on a contract basis.
The Company is an Arizona corporation incorporated in 1991.
Acquisitions
The Company believes that strategic acquisitions present a
practical, effective and economical means of growth. Because the Company intends
to focus in the short term on further integrating prior acquisitions into the
Company's operations, the Company currently does not expect 1997 acquisition
activity to be as extensive as in 1996.
The Company analyzes the economic advantages of potential
acquisition opportunities principally by focusing upon multiples of expected
overall profitability and also examining other opportunities which may be
presented to the Company such as the ability to enter into attractive new market
segments, extend its geographical reach, and/or achieve potential costs savings
and economies of scale. The Company does not believe that revenues per worksite
employee or other per-employee measurements are generally relevant criteria for
evaluating acquisitions.
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The Company believes that the following table illustrates both
the execution of its acquisition strategy and the diversity of its acquisitions,
which results from its case by case analysis of acquisition opportunities. The
Company's recent acquisitions of PEOs include:
<TABLE>
<CAPTION>
Estimated Approx.
Annualized Number of Approx. Primary
Acquired Company Date Revenues at Worksite Number of Industry(ies)
or Operations Acquired Closing(1) Employees Clients of Operations Region(s)
------------- -------- ---------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Pokagon Office 1/96 $17 million 800 58 Transportation Ohio
Services, Inc.
Renhill Group 4/96 $7 million 400 34 Transportation Midwest
and light
industrial
Employer Sources, 5/96 $8 million 1,100 55 Apparel Southern
Inc. manufacturing California
Ashlin Transportation 6/96 $35 million 1,100 82 Transportation Midwest
Services, Inc.
TEAM Services 6/96 $61 million 11,000 74 Entertainment Nationwide
Leaseway(2) 8/96 $97 million 1,900 77 Private carriage Nationwide
and driver
leasing
McClary-Trapp groups 11/96 $55 million 2,000 130 Manufacturing, Southeast
of companies light industrial
("McClary-Trapp and
Group") transportation
ETIC Corporation 2/97 $50 million 2,000 150 Light industrial, Ohio and
d/b/a Employer's Trust transportation surrounding
("ETIC") and construction states
CMGR, Inc. and 2/97 $55 million 1,700 75 Professional, Northeast
Humasys, Inc. service and light
("CMGR Companies") industrial
</TABLE>
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1 Estimated revenues are determined by annualizing the acquired
business revenues for the first month following the acquisition
(except in the case of ETIC and the CMGR Companies, in which
case the estimate is based upon historical information from the
acquired companies, and Employer Sources where amounts were
adjusted to reflect the seasonal nature of the business). The
data have not been adjusted to reflect the Company's
post-acquisition actions to terminate client relationships
which do not fit the Company's standard client or risk profiles
or other post-acquisition changes in payroll, numbers of
worksite employees or number of clients.
2 Excludes temporary drivers and clients.
Beginning in 1993, the Company determined that it would need to
increase its size to obtain operating efficiencies, strengthen its overall
presence and achieve other corporate goals, such as becoming sufficiently large
to permit its initial public offering. To further these goals, the Company
acquired The Prescott Group and Pro Pay, which expanded the Company's presence
in service businesses in the southwestern United States. After consolidating
these acquisitions, the Company continued its acquisition strategy in order to
expand further the geographical reach of its operations and the breadth of the
industry segments which it served. By expanding its presence nationally, the
Company believed it would be better positioned to provide outsourcing solutions
to multistate employers and assimilate additional strategic acquisitions with
multi-state operations. The Company also identified the transportation segment
as a market which would particularly benefit from the Company's services and
enhance the Company's operations and profitability.
5
<PAGE>
In furtherance of these strategies, in January 1995, the
Company acquired ESM, a transportation PEO. The Company then significantly
increased its nationwide presence in October 1995 through its acquisition of
Hazar which expanded the Company's geographic reach to many areas in the United
States, including California, New York, New Jersey, Massachusetts, and Illinois.
Other acquisitions with a significant transportation emphasis
include the 1996 acquisitions of Pokagon, Renhill, Ashlin, and six companies in
the McClary-Trapp Group.
In order to leverage its expertise gained in the transportation
market in August 1996 the Company entered the full-service driver leasing market
through its acquisition of Leaseway, a company which provided clients permanent
and temporary private carriage truck drivers, as well as non-driver employees,
including warehouse workers, mechanics, dispatchers, and administrative
personnel. In this market, the Company itself hires and places drivers and
provides them to companies requiring transportation services on a contract
basis.
The Company has also identified the entertainment industry as
an industry that lacks significant market penetration by PEO companies.
Accordingly, the Company acquired TEAM Services in June 1996. TEAM Services'
current business generally involves temporary and part-time employees in the
entertainment industry, although the Company believes the acquisition of TEAM
Services may assist the Company in entering other segments of the entertainment
industry, such as production.
Four of the acquisitions in 1996 were particularly substantial,
and are described in greater detail below:
Employee Solutions-East, Inc. Effective January 1, 1996, the
Company, which had held a 1% equity interest in Employee Solutions-East, Inc.
("ESEI") since its formation in June 1994, acquired the remaining 99% equity
interest in ESEI from Edward L. Cain, Jr., a director and executive officer.
ESEI was a joint venture based in Atlanta, Georgia through which the Company
conducted substantially all of its sales and marketing activities in relation to
its employee leasing business. The base purchase price consisted of 648,000
shares of the Company's unregistered Common Stock. In connection with his
employment agreement, Mr. Cain 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 of the Company's Common Stock on the date of grant)
which expire through November 10, 2004 and which, among other terms and
conditions, become exercisable in November 1999 subject to continued employment.
Mr. Cain was elected to the Company's Board of Directors in 1995 and has served
as its vice president of sales since April 1995. Mr. Cain has continued to serve
the Company in these capacities following completion of the acquisition.
The Company has provided certain support services and financial
support to ESEI since its formation. During the period in which the Company
owned a minority equity position in the venture, the venture's results were
consolidated with those of the Company for financial reporting purposes because
the Company held a controlling interest in ESEI's operations.
TEAM Services. On June 22, 1996, the Company purchased 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. At the time of the
acquisition, TEAM Services had approximately 3,800 active worksite employees and
approximately an additional 7,200 employees representing employees who are
expected to receive payments in future periods, most of whom work on a temporary
or part-time basis. In connection with the acquisition, the Company assumed net
liabilities of approximately $825,000 (representing the minimum purchase price)
which has been recorded as goodwill, and is being amortized over a 15 year life.
The final purchase price will be four times total TEAM Services' pre-tax income
for the year ending June 30, 1999, to be paid in the form of net assumed
liabilities and the Company's unregistered Common Stock. Although there is no
stated maximum purchase price, the Company believed this arrangement is
attractive because the purchase price is ultimately dependent on the future
success of the acquired business. The unregistered shares are entitled to
certain piggyback and demand registration rights.
Jeffery Colby, a member of the Company's Board of Directors and
a principal shareholder of TEAM Services, has served as Chief Executive Officer
of TEAM Services since 1993. Mr. Colby entered into an employment agreement with
the Company pursuant to which he will provide, among other services, certain
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<PAGE>
marketing services. The purchase price payable under the TEAM Services
acquisition agreement will be increased by an amount equal to four times the
gross profit on Company PEO sales generated by Mr. Colby during the year ending
June 30, 1999.
Leaseway Personnel Corporation and Leaseway Administrative
Personnel, Inc. 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. The Company acquired the assets of Leaseway through Logistics Personnel
Corp. ("LPC"), a wholly owned subsidiary. LPC provides approximately 2,000
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.
McClary-Trapp Group. On November 1, 1996, the Company acquired
the principal assets of the McClary-Trapp Companies for approximately $10.6
million paid in the form of cash, assumed liabilities, and 53,000 unregistered
shares of the Company's common stock. The Company's unregistered common shares
were valued at the average closing price on the NASDAQ National Market for
October 1996, less a 35% discount for lack of marketability, and have certain
registration rights. McClary-Trapp Group together leased approximately 2,000
employees to a client base consisting primarily of light industrial,
transportation and service companies.
To date in 1997, the Company has acquired two PEOs, in
transactions described below.
ETIC. On February 1, 1997, the Company acquired the principal
assets of ETIC Corporation, dba Employers Trust ("ETIC"), a Cincinnati, Ohio
based PEO. The purchase price will be $30,000 plus five times ETIC's pre-tax
income as defined for the 12-month period ending January 31, 1998. At closing,
$855,000 of the purchase price was paid in cash. 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 has current
annualized revenue of approximately $50 million and approximately 2,000 worksite
employees at approximately 150 clients.
CMGR Companies. On February 17, 1997, the Company acquired the
principal assets of CMGR, Inc., and Humasys, Inc. (the "CMGR Companies"), based
in the New York metropolitan area, for approximately $3.9 million, payable $3.0
million in cash and $850,000 through the assumption of certain liabilities. At
closing, $1.5 million of the purchase price was paid in cash. An interim payment
toward the remaining purchase price of $500,000 in cash is due six months after
the closing. The final payment toward the purchase price is due on or before
April 18, 1998. ETIC has current annualized revenue of approximately $55 million
and approximately 1,700 worksite employees at approximately 75 clients.
The Company reviews acquisition opportunities on an ongoing
basis. While growth through acquisition is a significant element of the
Company's overall long term growth plan, the Company expects 1997 acquisition
activity to be reduced from 1996 and there can be no assurance that any
additional acquisitions will be completed.
Current Operations
The Company is engaged in the business of employee leasing
wherein the Company and the Company's "client company" agree that the Company
will become the "employer of record" for the client company's employees. In most
cases, the Company acts as a "co-employer" although it assumes certain
additional obligations in certain situations, including where required by state
regulation. As the employer of record, the Company assumes designated payroll
and personnel obligations, such as payroll preparation, payment of payroll
taxes, preparation and filing of payroll tax reports and maintenance of employee
health insurance and related plans, including group term life insurance
programs, pension plans, 401(k) plans, accidental death and dismemberment
insurance and risk management/workers' compensation services, while allowing the
client in most cases to retain management control of the employees, including
supervision, hiring and firing, job description and salary determinations. The
Company also provides risk management/workers' compensation services to clients
which are not employee-leasing clients of the Company.
Employee leasing is a value-added service that provides small
to mid-sized companies real economic benefits. Since the Company has a large
number of employees on its payroll, exposure relating to workers'
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<PAGE>
compensation insurance, health insurance and unemployment insurance may be
spread over a large pool of employees, thereby potentially reducing the
Company's rates below rates which might otherwise be available to smaller
companies. In addition, employee leasing may relieve the client company of
liability for late payments of payroll and withholding taxes and resulting
penalties.
The Company has entered into PEO arrangements with a wide
variety of client companies. As a marketing strategy to introduce its services
to potential clients not currently seeking a full PEO solution, the Company
began in 1995 to offer employers with stand-alone risk management/workers'
compensation services. At December 31, 1996, this program covered an additional
approximately 13,500 workers employed by approximately 64 employers. ESI targets
these stand-alone risk management/workers' compensation clients for conversion
into full-service PEO clients. The Company competitively prices its services
taking into account the various needs of its clients.
The Company generally enters into subscriber agreements with
its clients. These agreements generally may be canceled upon 30 days written
notice of termination by either party and also may be canceled without notice by
the Company under certain circumstances such as nonpayment of fees.
Industry Overview
According to the U.S. Small Business Administration, in 1993
there were approximately 5.2 million businesses in the United States with fewer
than 500 employees; these businesses together employed over 50 million employees
and had annual payrolls exceeding $1.1 trillion. Due to trends in the U.S.
economy, these smaller businesses, with fewer internal resources to cope with
these administrative burdens and benefits challenges, are becoming more
numerous. The prime target market for PEO organizations generally is small or
medium sized employers who seek cost savings and assistance in dealing with the
increased complexity of the employment relationship. The Company believes larger
organizations also can benefit from PEO services.
The professional employer organization 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. Whi
le 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.
According to the National Association of Professional Employer
Organizations ("NAPEO"), the number of employees under PEO arrangements in the
United States has grown from approximately 10,000 in 1984 to approximately 2.0
million in 1995. Although industry data is somewhat incomplete, the PEO industry
market is highly fragmented; it is estimated that there are approximately 2,300
PEOs in operation in the United States, none of which has a dominant market
share nationwide. Industry revenues grew from $5.0 billion in 1991 to $13.8
billion in 1995, representing a compounded annual growth of approximately 29%,
according to data from Staffing Industry Analysts, Inc. The large size of the
potential client market leaves room for substantial continued growth of the PEO
industry. Estimates of current PEO market penetration are only approximately two
percent of the target small to medium-sized employer group.
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
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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 "Government Regulation"
Clients
As of December 31, 1996, the Company's full-service PEO client
base consisted of approximately 1,200 client companies, representing
approximately 30,000 employees in 46 states. At that date, the Company had
customers in more than 12 specific industries, based on Standard Industrial
Classification ("SIC") codes, and no more than 33% of the Company's customers
were classified in any one SIC code. The Company's approximate client company
distribution by major industry grouping as of December 31, 1996 is set forth
below:
Percent of
Industry Group Clients
-------------- -------
Transportation:
Private carriage/driver leasing 10%
For hire/standard PEO 23
-------- --
Total 33
Services:
Professional 14
Light Industrial 5
Entertainment 11
--------------- --
Total 30
Manufacturing 11
Construction 7
Retail Trade 6
Real Estate 5
Wholesale Trade 3
Agriculture and Fishing 2
Other 3
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
17 employees as of December 31, 1996 (excluding TEAM Services), 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, with
approximately 3,800 employees who became Company worksite employees. The
addition of the worksite employees of US Xpress, which has become the Company's
largest single client, will increase 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.
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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 continue 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 Company's standard forms of subscriber agreements for PEO
services establish the division of responsibilities between the Company and the
client as co-employers. Pursuant to the agreement, the Company generally is
responsible for personnel administration and is liable for payment of related
payroll taxes and compliance with payroll and benefit-related government
regulation. The client generally retains the employee's services and remains
liable for government regulations which require control of the worksite or daily
supervisory responsibility. 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 more control over those worksite employees
than under its standard arrangements.
The general division of responsibilities under the Company's
standard forms of subscriber agreements is as follows:
The Company:
------------
o Payroll preparation and reporting
o Tax reporting and payment (state and federal
withholding, FICA, FUTA, state unemployment)
o Workers' compensation compliance, procurement,
management, reporting
o Employee benefit procurement, administration and
payment
o Monitoring changes in certain governmental
regulations governing the employer/employee
relationship and updating the client when necessary
Client:
-------
o Supervision and direction of job specific activities
and designation of job description and duties
o Hiring, firing and disciplining of employees
o Determination of salaries and wages
o Selection of fringe benefits, including employee
leave policies
o Professional and business licensing and permits
o Compliance with immigration laws
o Compliance with health, safety and work laws and
regulations
Joint:
------
o Implementation of policies and practices relating to
the employer/employee relationship
o Employer liability under workers' compensation laws
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 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 the Leaseway 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
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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 13,500 employees as of
December 31, 1996. The Company's stand-alone risk management/workers'
compensation clients and employees are located in 38 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. In addition, the Company offers risk management/workers'
compensation services as a stand-alone product to clients to which the Company
does not provide PEO services, and makes certain additional services available
directly to worksite employees.
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 serviced by
TEAM Services and LPC) the Company extends to its clients payment terms ranging
from 15 to 30 days. See "Outlook: Issues and Risks" and "Liquidity and Capital
Resources" in Management's Discussion and Analysis.
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.
Risk Management/Workers' Compensation
The Company, through its relationships with the Reliance Group
of Insurance Companies ("Reliance") and Legion Insurance Company ("Legion"),
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
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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.
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.
Although profitable, the Company also views the stand-alone
program as 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. The Company believes that clients can
benefit from the Company's goal to provide low cost risk management/workers'
compensation products through careful client selection, active claims management
and safety programs.
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 also is evaluating
a payroll deduction program under which the Company intends to offer to worksite
employees at competitive prices discount goods and services such as homeowners,
automobile and other types of personal insurance, pre-paid telephone cards and
travel services.
Sales, Marketing and Strategic Alliances
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 what benefits they generally offer 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.
Sales and Marketing
The Company's national sales operation is headquartered in
Atlanta, Georgia. This operation generates new business leads through
telemarketing operations. 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.
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The Company's field sales operations, which are directed by the
Company's Vice President - Sales, 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 December 31, 1996, the Company's sales force included 45 full-time
RVPs, general agents and sales agents, and 4 part-time brokers.
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.
Strategic 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 both entities with profitable business opportunities
to either expand the Company's 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, 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 at least one is larger than the Company in
terms of the number of worksite employees and several others approach the
Company's 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 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 may
have greater resources, greater assets and larger marketing staffs than the
Company. The Company also competes less directly 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.
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The Company recently has experienced the effects of an increase
in competition, and a general softening of the market, in the workers'
compensation and benefits areas.
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, which 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 Company has recently established an investment policy with
respect to its short-term investment portfolio maintained to fund the Camelback
trust account maintained by its Camelback Insurance Ltd. ("Camelback")
subsidiary, the trust account required by Reliance (with which the Company
conducts the majority of its risk management workers' compensation programs) for
future claims payments and related requirements for its risk management/workers'
compensation program. See "Risk Management/Workers' Compensation Program" below.
The investment policy applies to the Company's personnel and to outside
investment managers that the Company may appoint from time to time.
The basic objectives of the investment policy are the safety
and preservation of the invested funds, the liquidity of investments to meet
cash flow requirements, the realization of a maximum rate of return on
investments, and the reduction of tax liability, where appropriate. 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. Prior
to the adoption of this investment policy, the Company invested its available
funds primarily in certificates of deposit and other short term liquid
investments.
Risk Management/Workers' Compensation Program
Overview
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 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
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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 workers' compensation operations. Specifically, the
Company maintains the following standards:
o maximum loss per occurrence of $250,000 or $350,000
o no Category IV risks (highest risk occupations)
o selective client acceptance
o relatively few claims assignments per claims manager
o effective closure of claims
o 30-day cancellation provisions in PEO contracts
o retain no risk for accidental death and dismemberment
or other catastrophic losses
The following section explains in greater detail the operation of the Company's
partially self-insured risk management/workers' compensation program.
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 did not permit ESI 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 newly formed wholly-owned offshore 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 for each occurrence. 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
(Chubb) that covers losses of 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) the Company may incur
in connection with its administration of its risk management/workers'
compensation program. The Company does not underwrite or accept Category IV
risks, which contain the highest risk occupations.
To create additional flexibility by having the internal
resources to operate similar programs with other insurers, the Company is in the
process of forming Camelhead Insurance Ltd. in Hawaii ("Camelhead"). The Company
anticipates that it will utilize Camelback for its programs in connection with
Reliance, and use Camelhead for other programs. See "Other Arrangements" below.
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 Management Department,
established in June 1994, works to control the Company's exposure to losses by
ensuring that prospective clients present acceptable risks. Before the Company
accepts any PEO or stand-alone clients, it reviews the 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 the Department believes it can
manage effectively. The Company carefully scrutinizes each potential client's
risk profile before undertaking any leasing arrangement. 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's Risk Management Department
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
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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 pro-active claims
management approach permits it to settle its claims, on average, more quickly
than ordinary workers' compensation insurers.
The Company retained Lindsay Morden as its primary TPA in
mid-1996, replacing its prior primary TPA. The Company also uses Mark VII as its
TPA for certain transportation-related programs as part of a strategic alliance
in which Mark VII affiliates also solicit prospects on behalf of the Company.
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 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 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. See "Adequacy of Loss Reserves" and
"Loss and Claims Experiences" in Item 7 -- "Management's Discussion and Analysis
- - Outlook: Issues and Risks."
The Company is required through its fronting arrangements with
Reliance and Legion to maintain restricted cash and investments to secure the
future payment of workers' compensation losses. Such restricted cash and
investments have been calculated by the Company's fronting carriers (Reliance
and Legion) 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. At December 31, 1996, Restricted Cash and
Investments related to the Legion program will be classified as Receivables from
Insurance Companies until Camelhead is formed and the funds are ceded to it.
During the limited period of time the Company has operated its
risk management/workers' compensation programs, it believes that it has achieved
below average loss experience rates due to its selective evaluation process,
safety programs and active claims management. However, the Company may not be
able to maintain such a loss experience over a longer period of time. Future
loss experience could increase due to weakened underwriting controls as a result
of 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 in the
future. An increase in the Company's loss
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experience would decrease the Company's net income and could materially
adversely affect the Company's business and financial performance.
Stand-alone Program
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.
Other Arrangements
In part to lessen its dependence upon Reliance, the Company
regularly explores the establishing of additional relationships. The Company has
established an additional relationship with Legion, which relationship is
similar to the Reliance program and provides workers' compensation services for
certain Company transportation operations. The Company retains an obligation for
losses up to $350,000 for each workers' compensation occurrence for LPC and
other Company driver leasing operations and certain other transportation
programs which are covered through Legion; the Company's Accidental and Death
and Dismemberment insurance from Chubb also applies to the Legion program. The
Company intends to proceed with continuing relationships with more than one
insurance company to provide alternative sources of service, although there can
be no assurance that Company will be able to successfully continue an
arrangement with any such insurer.
Medical Program
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 arrangement with Provident Life & Accident
Insurance company ("Provident"), in addition to its fully insured medical plans.
As of December 31, 1996, approximetely 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.
Government 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 form of agreement provides 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.
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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 Internal Revenue Code of 1986, as amended (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 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. 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.
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.
18
<PAGE>
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 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, and Camelhead would be subject to the insurance laws and regulations of
Hawaii. 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
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 --
Liquidity and Capital Resources." Hawaii laws would require Camelhead to
maintain statutory capital and surplus in an amount equal to at least 33-1/3% of
the net premiums written through Camelhead's fronting arrangements. The laws of
Bermuda and Hawaii 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 insurers, under which
another insurer issues a policy on behalf of Camelback. The National Association
of Insurance Commissioners ("NAIC") recently adopted a model act concerning
"fronting" arrangements. The model act requires reporting and prior approval of
reinsurance transactions relating to these arrangements, and limits the amount
of premiums that can be written under certain circumstances. 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 the model
act will affect 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.
19
<PAGE>
Health Care Reform
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.
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 many states do not explicitly regulate PEOs, 16
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, Nevada, New Hampshire, New Mexico, South Carolina,
Tennessee, Texas, Utah and Vermont, have passed laws that license PEOs. Three
states, Rhode Island, Oregon and Minnesota, require PEOs to be registered with
these states. One state (Idaho) establishes guidelines for PEOs. The Company
believes it is licensed 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.
Employees
At December 31, 1996, the Company employed 216 full-time
corporate employees in addition to the worksite employees. The Company considers
its employee relations to be very good.
ITEM 2. PROPERTIES
- -------------------
The Company leases all of its offices.
The Company's headquarters office space at 2929 East Camelback
Road, Phoenix, Arizona is leased for a term expiring on March 31, 1997. The
Company leases additional space nearby for its risk management
20
<PAGE>
operations. The Company has leased new space at 6225 North 24th Street, Phoenix,
Arizona for its home office, and to consolidate and increase space for its
expanding Phoenix operations. The new lease takes effect on April 1, 1997, and
increases the useable space for the Company's home office operations from
approximately 18,000 square feet to 58,000 square feet.
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.
Substantially all of the Company's assets are pledged to secure
the Company's revolving bank line of credit.
ITEM 3. - LEGAL PROCEEDINGS
- ---------------------------
Securities Class Actions
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. Actions known to the Company as having been filed are:
(a) Keith Blaich, on behalf of himself and all others similarly
situated, against Employee Solutions, Inc., Marvin Brody, Harvey A. Belfer, Roy
A. Flegenheimer, and Morris C. Aaron, United States District Court for the
District of Arizona, Case No. CIV 97-545 PHX RGS.
(b) Gail Lehmann, Lucian B. Cox, III and Frederick Schwartz, on
behalf of themselves and all others similarly situated, vs. Employee Solutions,
Inc., Harvey A. Belfer, Marvin D. Brody, Roy Alan Flegenheimer, Edward L. Cain,
Jr. and Morris C. Aaron, United Stated District Court for the District of
Arizona, Case No. CIV 97-547 PHX SMM.
(c) Harold M. Sucher, individually and on behalf of and all
others situated, vs. Employee Solutions, Inc., Marvin D. Brody, Harvey A.
Belfer, Morris Aaron and Bertram Danzig, United States District Court for the
District of Arizona , Case No. CIV 97-553 PHX EHC.
(d) Stephen A. Roplin and Atlas Biscuit Co., Inc., on behalf of
themselves and all others similarly situated, against Employee Solutions, Inc.,
Marvin D. Brody, Roy Flegenheimer, Morris C. Aaron and Harvey A. Belfer, United
States District Court for the District of Arizona, Case No. CIV 97-614 PHX SMM.
Tax Matters
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. In consultation with legal
counsel, the Company believes that based on Arizona Revised Statutes it is
entitled to the lower rate. If it is 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.
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 $330,000 for the
period during which the Company performed designated management services on
behalf of the predecessor. The Company has been informed that the Service is
considering abatement of the penalties assessed against it, at the Company's
request.
The Company believes that it has defenses to these actions, and
has objected vigorously to payment of such past taxes and penalties. However, it
is not possible to predict if the Company will be successful in abating
21
<PAGE>
these taxes and penalties. The Company would be required to record these amounts
as an additional expense and liability if, at any time in the future, it became
apparent that it was probable that the company would not prevail in these
matters.
Other
The Company was named as a defendant in a lawsuit filed by M &
M Building Services, Inc. in the Superior Court of the State of Arizona,
Maricopa County, No. CV 96-03682, in March 1996 challenging the manner in which
the Company billed plaintiff for payroll taxes. The complaint alleges improper
billing practices and other causes of action and seeks unspecified damages and
injunctive relief. The suit purports to be brought as a class action, although
the Company was subsequently informed that class certification will not be
sought. The Company intends to defend the matter vigorously, and has filed a
motion for dismissal.
The Company was named as a defendant in a lawsuit filed by B&B
Amusements, Inc. in the Superior Court of the State of Arizona, Maricopa County,
No. CV 96-21078 in December 1996 challenging the manner in which the Company
billed plaintiff for payroll taxes. The complaint alleges improper billing
practices and other causes of action and seeks unspecified damages and
injunctive relief. The suit purports to be brought as a class action, although
the Company was subsequently informed that class certification will not be
sought. The Company intends to defend the matter vigorously.
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 form of client service agreement establishes
the contractual division of responsibilities between the Company and its clients
for various personnel management matters, including compliance with and
liability under various governmental regulations. However, because the Company
acts as a co-employer, 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 employee's 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.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No matters were submitted to a vote of the Company's
shareholders during the fourth quarter of 1996.
ITEM 4A. - EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------
The names of the Company's executive officers, and certain
information about them, are set forth below.
<TABLE>
<CAPTION>
Name Age Position(s) with Company Officer/Director
---- --- ------------------------ ----------------
Since
<S> <C> <C> <C>
Marvin D. Brody 53 Chairman of the Board, President, Chief 1993
Executive Officer and Director
Roy A. Flegenheimer 49 Chief Operating Officer and Secretary 1993
Edward L. Cain, Jr. 37 Vice President of Sales and Director 1995
Morris C. Aaron 32 Chief Financial Officer and Treasurer 1996
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Paul M. Gales 41 Vice President and General Counsel 1996
Mark J. Gambill 37 Vice President Marketing 1997
</TABLE>
Marvin D. Brody co-founded the Company in 1991. He has been a
Director of the Company since 1993 and became the Company's Chief Executive
Officer in November 1994 and President in June 1996. Prior to becoming the
Company's Chief Executive Officer, Mr. Brody was engaged in the private practice
of law since 1973.
Roy A. Flegenheimer has been the Chief Operating Officer of the
Company since July 12, 1995. Mr. Flegenheimer was the Company's Treasurer from
June 1994 until November 1996. Mr. Flegenheimer joined the Company as its Vice
President of Finance in February 1993 and was Chief Financial Officer from June
1994 until January 1996 and the Company's Secretary since December 1995. From
1988 until 1993, he was Executive Vice President and Chief Financial Officer of
Avesis Incorporated, a publicly held marketer and administrator of dental,
vision and hearing benefit plans. From 1980 until 1988, Mr. Flegenheimer was an
audit partner in the accounting firm of Arthur Andersen LLP.
Edward L. Cain, Jr. has been a Director of the Company since
July 1995 and has been the Company's Vice President of Sales since April 1995.
Mr. Cain has been President of the Company's sales and marketing subsidiary
since June 1994. From 1991 until 1994, he was the Director of Sales and
Marketing for Personal Benefits Group, an Atlanta-based PEO. Prior thereto, he
was a sales agent in CIGNA's individual financial service division in
Springfield, Massachusetts and later in Grand Rapids, Michigan.
Morris C. Aaron joined the Company as its Chief Financial
Officer in January 1996, and became its Treasurer in November 1996. From
September 1986 to January 1996, Mr. Aaron served in various professional
positions, most recently as senior manager in the Financial Consulting Services
Group of Arthur Andersen LLP.
Paul M. Gales joined the Company as its Vice President and
General Counsel in October 1996. Mr. Gales was a partner at Quarles & Brady,
Phoenix, Arizona from 1992 to 1996. Prior to that time, he practiced as an
attorney since 1982.
Mark J. Gambill joined the Company as its Vice President
Marketing in March 1997. From 1994 to 1997, Mr. Gambill was Director of National
Accounts and Strategic Alliances for Paychex, Inc., a payroll processing
company. Prior to that time, Mr. Gambill was a senior manager in sales and
marketing for Ceridian Corporation, an international payroll processing and
human resources company.
PART II
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
- -----------------------------------------------------------------------
MATTERS
- -------
The Company's Common Stock began trading on the Nasdaq National
Market under the symbol "ESOL" in January 1996. Previously, the Company's Common
Stock traded on the Nasdaq Smallcap Market under the symbol "ESOL" from August
1993 to January 1996.
The following table sets forth for the quarters indicated the
range of high and low sales prices of the Company's Common Stock as reported by
the Nasdaq National Market since January 1996, and the Nasdaq Smallcap Market
prior thereto. As of March 17, 1997, the Company had 150 holders of record.
Quarter Ended
High Low
---- ---
December 31, 1996........................................ $24 5/8 $16 5/8
September 30, 1996....................................... $18 7/8 $12 7/8
June 30, 1996............................................ $21 5/8 $12 1/4
March 31, 1996........................................... $19 $ 7 1/4
December 31, 1995........................................ $ 9 1/8 $ 3
September 30, 1995....................................... $ 3 7/8 $ 2 3/8
23
<PAGE>
June 30, 1995............................................ $ 2 5/8 $ 1 3/4
March 31, 1995........................................... $ 2 3/8 $1 11/16
To the extent the above quotations were reported by the Nasdaq
Smallcap Market, they reflect interdealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Dividend Policy
The Company has never paid cash dividends on its Common Stock
and intends to retain earnings, if any, for use in the operation and expansion
of its business. The amount of future dividends, if any, will be determined by
the Board of Directors based upon the Company's earnings, financial condition,
capital requirements and other conditions.
Miscellaneous
The Company has issued securities in private placement
transactions pursuant to Section 4(2) of the Securities Act of 1933 (the "1933
Act") in the fourth quarter of 1996 as described in the following paragraph.
As part of the total consideration of $10.6 million in the
November 1996 acquisition of the McClary- Trapp Group, the Company issued 53,000
unregistered shares of the Company's common stock which are subject to
registration rights and valued at $700,000 to three individuals, who were
affiliates of the acquired companies.
ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
- ----------------------------------------------
The following selected consolidated financial data should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto, and "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein. The selected
consolidated financial data presented below as of December 31, 1996, 1995, and
1994 and for the years then ended are derived from the consolidated financial
statements of the Company, which consolidated financial statements have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report included elsewhere herein. The selected consolidated financial data
presented below as of December 31, 1993 and 1992 and for the years then ended
are derived from the consolidated financial statements of the Company, which
consolidated financial statements have been audited by Semple & Cooper, P.L.C.,
independent public accountants. The per share data and share amounts have been
restated to give effect to the two-for-one stock splits effected in the form of
100% stock dividends effective January 16, 1996 and July 26, 1996.
24
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of (In thousands)
Earnings Data:
Revenues......................................... $439,016 $164,455 $ 74,334 $ 48,571 $ 11,191
Cost of revenues................................. 400,862 150,675 71,068 46,501 10,800
Gross profit..................................... 38,154 13,780 3,266 2,070 391
Selling, general and administrative expenses..... 17,310 7,183 2,297 1,471 299
Depreciation & amortization...................... 2,073 426 269 128 24
Income from operations........................... 18,771 6,171 700 471 68
Non-operating income (expense), net.............. (364) 510 129 (263) (6)
Income before provision for taxes................ 18,407 6,681 829 208 62
Income tax provision............................. 6,381 2,846 450 98 14
Net income....................................... 12,026 3,835 379 110 48
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet (In thousands, except per share data)
Data:
Working capital (deficit)........................ $ 30,449 $ 8,589 $ 2,394 $ (36) $ (146)
Total assets..................................... 125,969 36,840 9,310 6,399 664
Long-term debt................................... 42,800 -- -- -- --
Stockholders' equity ............................ 46,507 19,943 6,401 3,451 14
Common Stock Data
Earnings per share
- -Primary......................................... .37 .16 .02 .01 --
- -Fully diluted................................... .37 .14 .02 .01 --
Weighted average common and
equivalent shares outstanding
- -Primary......................................... 32,168 23,507 20,145 11,414 10,120
- -Fully diluted................................... 32,386 26,431 20,145 15,716 10,120
Growth Percentages
Revenues......................................... 167% 121% 53% 334% 1,884%
Net income....................................... 214% 912% 246% 129% 237%
</TABLE>
25
<PAGE>
ITEM 7. - 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.
Except for the historical information contained herein, the
discussion in this Form 10-K contains or may contain forward-looking statements
(which include statements in the future tense and statements using the terms
"believe," "anticipate," "expect," "intend" or similar terms) that involve risks
and uncertainties. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein particularly in
"Outlook: Issues and Risks" below, and in "Item 1 -- Business," as well as those
factors discussed elsewhere herein or in any document incorporated herein by
reference.
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 client's 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 (which was
commenced in 1996 as a result of the Leaseway acquisition), although such fees
have not yet been material to the Company.
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 has recently begun extending credit terms
to clients in certain industries. See "Outlook: Issues and Risks -- Credit
Risks" herein.
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 its losses. In its arrangements with
Reliance through the Company's wholly-owned insurance subsidiary, and Legion,
the Company retains workers' compensation liabilities up to certain specified
amounts. Retained workers' compensation claims liability is recorded at the time
a claim is reported to the Company, in an amount
26
<PAGE>
equal to the retained portion of the expected total incurred claim. The Company
also provides for claims incurred, but not reported, based on industry-wide data
and 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. See "Outlook: Issues and Risks." Changes in the liability are charged
or credited to operations as the estimates are revised. 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. The Company also purchases accidental death and dismemberment
insurance which covers the Company and its excess reinsurance carriers against
catastrophic losses related to workers' compensation claims up to certain
limits. See "Item 1 -- Risk Management/Workers' Compensation Program."
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. See "Item 1 --
Medical Program." 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. See
"Outlook: Issues and Risks."
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. The Company's headquarters and Phoenix
operations are moving to new offices beginning in April 1997, to accommodate the
significant growth which the Company has experienced in administrative
employees. This is expected to significantly increase the Company's rent expense
in future periods.
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.
Because of the Company's recent and possible future acquisitions, amortization
costs are expected to increase substantially in future periods.
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. Because the Company intends to focus in the short term on further
integrating prior acquisitions, the Company does not currently expect 1997
acquisition activity to be as extensive as in 1996.
Quarterly Operating Results
Revenues are also affected by bonus payrolls in the fourth
quarter, which tend to increase due to the common practice of employers paying
year end bonuses. The effects of the flow-through of such bonus payrolls to
worksite employees are substantially higher in December than in any other month.
In addition to increasing revenues, these payments also affect margins because
of the offsetting nature of bonus payments to worksite employees as costs.
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Quarterly 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 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--Year Ended December 31, 1996 Compared to Year Ended
December 31, 1995.
(in thousands)
Percent
1996 Change 1995
---- ------ ----
Revenues $439,016 167% $164,455
Cost of revenues 400,862 166 150,675
Gross profit 38,154 177 13,780
Selling, general and administrative 17,310 141 7,183
Depreciation and amortization 2,073 387 426
Interest income 833 181 296
Interest expense 1,196 4,684 25
Net income 12,026 214 3,835
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 is 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.
The Company recently began 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. Policies in place at January 1, 1997 represent annualized premiums of
approximately $12 million. Each such policy is subject to renewal in 1997
subject to agreement of the parties.
Cost of Revenues
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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 is 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% to
$10.0 million in 1996 from $2.2 million in 1995, 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. 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 Chubb, no Category IV high risk
clients, 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 ESI'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, and intends to use similar methodologies going forward which may
have an impact on future periods. See "Adequacy of Loss Reserves" and "Loss and
Claims Experience" below in "Outlook: Issues and Risks" for a further
explanation of risks and uncertainties relating to the Company's establishment
of reserves.
The following table provides an analysis of the Company's
workers' compensation reserves from its partially self-insured programs for the
years ended December 31, 1996 and 1995 and the seven months ended December 31,
1994:
(In thousands)
1996 1995 1994
-------- -------- --------
Reserve - Beginning of period $ 1,052 $ 45 $ 0.0
Losses 10,034 2,230 172
Payments (5,932) (1,223) (127)
-------- -------- --------
Reserve - End of period $ 5,154 $ 1,052 $ 45
======== ======== ========
The following table summarizes certain indicators of
performance regarding the Company's risk management department's ability to
close out workers' compensation claims in each of the years ended December 31:
29
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Incurred Claims by Calendar Year
Approximate Approximate
Approximate Open Claims Open Claims
Year ended Total December 31, December 31,
December Number of 1996 1995
31, Claims
1996 3,266 1,156 N/A
1995 1,024 89 191
1994 100 4 4
----- ---- ---
4,390 1,249 195
===== ===== ===
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 Hazar employees 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. The 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 because the PEO
revenues 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.
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
has 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. See "Business--Risk Management/Workers' Compensation Program"
in Item 1 and "Adequacy of Loss Reserves" and "Loss and Claims Experience" in
"Outlook: Issues and Risks" below.
Selling, General and Administration
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 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 recent 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 have 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. Selling, general and administrative expenses are expected to continue to
increase to meet the needs of new business. The most extensive growth in
selling,
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general and administrative expenses has been in the risk management department.
This trend is expected to continue into the foreseeable future. The Company has
recently signed a seven year lease on new office space in Phoenix, Arizona
containing significantly more space at higher rates than its existing offices;
the approximate annual rental increase is expected to be $1 million. The Company
also expects that costs for professional services will increase in 1997 as a
result of litigation recently brought against the Company; see "Outlook: Issues
and Risks-Litigation."
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; therefore, amortization costs will be higher in
1997 and future years. Amortization relating to the acquisitions completed in
1995, 1996 and to date in 1997 is expected to be approximately $1.4 million more
in 1997 than in 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 Company's revolving line of credit. 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. The Company anticipates
its interest expense will significantly increase in future periods depending
upon amounts borrowed under its new revolving credit facility. 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. 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. While the
Company's effective tax rate will vary from time to time depending on the mix of
profits derived from Camelback and the Company's various other profit centers
and other factors, the Company believes it will continue to benefit from the
lower rate applicable to profits derived from Camelback. The Company's estimated
effective tax rate for financial reporting purposes for 1996 is also based on
estimates of the following items that are not deductible for tax purposes:(a)
amortization of certain goodwill, and (b) one-half of the per diem allowance
relating to meals paid to truck drivers. The tax rate used in each quarterly
reporting period is generally an estimate of the Company's effective tax rate
for the calendar year.
1997 Outlook
Many factors may affect the Company's 1997 operations and
results as compared to 1996. As discussed in more detail above, some of the more
significant factors include: a narrowing of profit margins in the Company's
business which began to be felt in late 1996 and continues into 1997; an
increase in competition and an overall weakening in pricing for the Company's
services in the workers' compensation and employee benefit markets; increased
reliance on industry-wide data relative to ESI's specific risk structure and
philosophy in estimating workers' compensation reserves; certain tax benefits
the Company received in 1996 relating to prior years; and increased interest
expense, lease payments, amortization and litigation expense.
Additional factors which may impact the Company's future operations and
results are discussed below under "Outlook: Issues and Risks."
Results of Operations -- Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994
31
<PAGE>
(in thousands)
Percent
1995 Change 1994
---- ------ ----
Revenues $164,455 121% $74,334
Cost of revenues 150,675 112 71,068
Gross profit 13,780 322 3,266
Selling, general and administrative 7,183 213 2,297
Depreciation and amortization 426 58 269
Interest income 296 469 52
Net income 3,835 912 379
Net income for 1995 was $3.8 million or $0.14 per fully diluted
share, reflecting significant growth from 1994 net income of $379,000 or $0.02
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
Employment Services of Michigan, Inc. (which has been renamed Employee
Solutions-Midwest, Inc. ("ESM")) and Hazar, Inc. and certain of its subsidiaries
("Hazar"), the success of direct sales and marketing efforts of Employee
Solutions-East, Inc. ("ESEI") 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 from $74.3 million in the year ended
December 31, 1994 to $164.5 million for the year ended December 31, 1995, a 121%
increase. The increase in revenues was partially due to sales from the Company's
expanded sales force through ESEI, which commenced operations 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 PEO worksite
employees increased from approximately 3,600 at December 31, 1994 to
approximately 11,000 at December 31, 1995.
In 1995, the Company commenced placing risk management/workers'
compensation services to clients which are not PEO clients of the Company and a
portion of the increase in revenues during the year ended December 31, 1995 is
attributable to this program. A significant portion of the 1995 risk
management/workers' compensation services results reflects the inclusion of
approximately 5,900 leased 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 leased employees of the Company. As of December 31, 1995, the
Company provided 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 is primarily due to the increase in the Company's business as
explained in the paragraph above. Workers' compensation costs decreased on a per
leased 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 was activated in
May 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
32
<PAGE>
management/workers' compensation services related to non-PEO employees. Gross
profit margin on revenues derived from risk management/workers' compensation
services provided to non-PEO employees tends to be significantly higher than
gross profit margin on revenues derived from the Company's PEO clients because
the gross profit margin calculation with respect to PEO clients includes
significant (and substantially offsetting) revenue and expense items relating to
payroll and payroll-related costs. The margin is affected in significant part by
the mix of revenues derived from employee leasing clients and clients for which
the Company provides only risk management/workers' compensation services.
Revenues during the year ended December 31, 1995 include risk
management/workers' compensation revenues derived from Hazar, whose leased
employees were not leased employees of the Company for a period of five months
prior to the October 2, 1995 acquisition. These employees became leased
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
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 are
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. Beginning February 13, 1996,
the Company increased such space by 1,650 square feet to accommodate the growth
of the risk management/workers' compensation services staff. The Company's
general liability insurance costs have increased due in part to the added
corporate staff, and costs for directors and officers liability insurance also
increased. Costs to operate ESEI, which began 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. Selling, general and administrative expenses are expected to
continue to increase to meet the needs of new business. The most extensive
growth in selling, general and administrative expenses is expected in the area
of risk management/workers' compensation services.
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 income
Interest income increased from $52,000 for the year ended
December 31, 1994 to $296,000 for the year ended December 31, 1995, primarily
due to interest earned on both the restricted cash 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.
Effective tax rate
The effective tax rate for 1995 was 42.6% compared with 54.3%
for 1994. The Company's estimated effective tax rate for financial reporting
purposes for the first three quarters in 1995 was 45.0%, which estimated rate
was based on estimates of the following items that are not deductible for tax
purposes:(a) amortization of certain goodwill, and (b) one-half of the per diem
allowance relating to meals paid to truck drivers. In the fourth quarter
33
<PAGE>
of 1995, the Company successfully completed the transition of a significant
portion of the per diem allowance programs back to client companies retroactive
to January 1, 1995. 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. Management believes the Company's effective tax rate will decline
in 1996 as non-deductible goodwill and non-deductible per diem allowances have
an even lesser impact on a growing profit base, though no assurance of such
decline or growth can be provided. The tax rate used in each quarter is an
estimate of the Company's effective tax rate for the calendar year.
Liquidity and Capital Resources
The Company defines liquidity as the ability to mobilize cash
to meet operating, capital and acquisition financing needs. The Company's
primary sources of cash traditionally have been from financing activities and
operations, though operations represented a use of cash in 1996 primarily to
finance receivables of acquired companies and stand alone risk
management/workers' compensation clients.
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 acquisitions of TEAM
Services, Leaseway and certain companies in the McClary-Trapp Group plus growth
in the stand alone program decreased the Company's operating cash flows in 1996
by approximately $15.1 million as these operations extend credit terms generally
from 15 to 45 days as is customary in their respective markets segments. Had it
not been for these accounts receivable requirements in 1996, the Company would
have generated cash flow from operations of approximately $11.8 million. 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. As 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.
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 (see below) 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.
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
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 its ability to
support ESI's increasing client and employee base. In 1997, the Company intends
to relocate its headquarters offices, and other Phoenix operations, to a new
facility. The Company anticipates that related leaseholds and improvements will
be financed by the landlord as a buildout allowance, and subsequently reflected
in rental payments. Moving costs and office furniture will represent cash
outlays in the first and second quarters of 1997 of approximately $1.0 million.
Also during 1997, the Company expects to continue to invest in additional
computer and technological equipment. Although the Company continuously reviews
its capital 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.
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 has developed 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 to maintain
restricted cash and investments to secure the future payment of workers'
compensation losses. Such restricted cash and investments have been calculated
by the Company's fronting 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 fronting carriers utilizing
industry-wide data and
34
<PAGE>
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 in the trust fund without the agreement of Reliance. See "Item 1 --
Risk Management/Workers' Compensation Program". At December 31, 1996 and 1995,
approximately $11.5 million and $2.7 million were on deposit at Camelback as
restricted cash and investments.
At December 31, 1996 and 1995, the Company had working capital
of $30.4 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 insurance
arrangements with its insurers to set aside increasing amounts of funds for
payment of claims and related administrative costs.
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
$6,000,000. Under Hawaii law, Camelhead will be required to maintain statutory
capital and surplus in an amount equal to at least 33-1/3% of the net premiums
written through the Company's fronting arrangements. Camelhead's initial capital
and surplus are expected to be $7.5 million. The laws of the jurisdictions of
incorporation also regulate the circumstances under which these insurers may
loan funds to their parent company. In 1996, the Company paid to Reliance
approximately $20.9 million of which $14.8 million was ceded to the trust
account at Camelback for payment of claims. The Company also paid to Legion in
1996 approximately $3.6 million of which $3.1 million in loss funds will be
ceded to Camelhead when such captive is authorized and activated. Between
Reliance and Legion, the Company used cash from operations of approximately
$24.5 million to fund its partially self-insured workers' compensation programs
in 1996. 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 and
Camelhead to transfer funds to its parent company (whether via dividend or
otherwise).
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 other general corporate purposes. The line was expanded to
$45 million on October 15, 1996 and to $60 million on February 19, 1997. The
revolving credit facility provides 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 pays a commitment
fee of 3/8% on the unused portion of the line. Total costs incurred in obtaining
this facility and the expansion were approximately $500,000 and will be
amortized over the life of the facility. The line matures on August 1, 1999, and
the maximum borrowing will decrease by $3.0 million in each quarter beginning
February 1, 1998. The principal loan covenants are as follows: 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. The facility includes certain other covenants and is secured by
substantially all of the Company's assets. Since the Company obtained its line
of credit in August 1996, the $42.8 million drawn under the line has been used
almost exclusively for acquisition financing including: $24.0 million for the
acquisition of Leaseway; $9.4 million for the acquisition of the McClary-Trapp
Group, and approximately $8.7 million to finance accounts receivable on such
acquisitions. At March 26, 1997, the Company had borrowed approximately $46.0
million under the credit facility; at that date, the Company's borrowing limit
was $54 million as a consequence of the combination of the overall line of
credit and borrowing covenants.
The Company has financed its acquisitions through combinations
of issuance of Common Stock, borrowing under its credit facility, working
capital and assumption of acquired company obligations. The Company's revolving
credit facility restricts its ability to consummate any acquisition for more
than $10 million or five times earnings before interest, taxes, depreciation and
amortization. The Company received a waiver under the revolving credit facility
to enter into its agreement to acquire the McClary-Trapp Group.
Management believes that existing cash and cash equivalents,
cash generated from ongoing operations, and cash available through its existing
line of credit will satisfy the anticipated cash requirements of the Company's
current operations for the foreseeable future; however, the Company's ability to
continue funding its acquisition strategy is dependent upon its ability to
obtain additional funds through equity or debt financing.
Outlook: Issues and Risks
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<PAGE>
The Company believes that future growth opportunities in
revenues and profits remain available. However, the following issues and risks,
among others (including those discussed elsewhere herein), should also be
considered in evaluating its outlook.
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 intends to expand 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.
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.
A substantial portion of the Company's recent and anticipated
growth is attributable to its risk management/workers' compensation services
program. The risks associated with rapid growth in this area include the
potential for poor 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 assurances that this
conversion will ultimately prove to be successful, or that other future changes
in systems or procedures will be successfully completed. To accommodate growth,
the Company is also relocating its Phoenix operations to new offices in April
1997, which move may result in certain disruptions. Any failure to successfully
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. Under its present workers'
compensation arrangements, the Company is responsible for the first $250,000
($350,000 for certain transportation programs) of each loss with no aggregate
limit to the number of losses for which the Company may be liable and under its
partially self-insured and self-insured health insurance arrangements, the
Company is responsible for the first $100,000 or $75,000 per covered individual
per year, depending upon the program. The Company's reserves for losses and loss
adjustment expenses under its workers' compensation and health insurance
programs 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 insurance 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, in the
Company's net income in the period in which the deficiency is identified.
Loss and Claims Experience. During the limited period of time
the Company has operated its risk management/workers' compensation programs, it
believes that it has achieved a below average loss experience ratio due to its
selective evaluation process, safety programs, active claims management,
maintenance of its accidental death and dismemberment policy, and exclusion of
Category IV risks. However, the Company may not be able to maintain such a loss
experience over a longer period of 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 in the future. An increase
in the Company's loss experience would decrease the Company's net income and
could materially adversely affect the Company's business and financial
performance.
The Company provides stand-alone risk management/workers'
compensation coverage on either a guaranteed cost basis or a "retrospective"
basis in which premiums are adjusted after the end of the policy term to reflect
loss experience. In a guaranteed cost arrangement, the Company bears the risk of
losses, which may be higher than anticipated. While premiums are adjusted to
reflect actual losses in a retrospective policy, which may reduce risk
36
<PAGE>
to the Company, lower than anticipated losses on these policies may negatively
affect the Company because the Company may have recorded a higher premium which
would have resulted from the expected loss level.
State unemployment taxes are, in part, determined by the
Company's claims experience. 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 Code Treatment. 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 would 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), would probably 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.
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.
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.
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 Code (for example, the opportunity of employees to pay for
certain benefits under a cafeteria plan using pre-tax dollars). Changes to the
Code, related IRS regulations or other laws and regulations could adversely
affect the Company's business and financial performance.
Credit Risks. As the employer of record for its worksite
employees, the Company is obligated to pay their wages, benefit costs and
payroll taxes. The Company typically bills a client company for these amounts in
advance of or at each payroll date, and reserves the right to terminate its
agreement with the client, and thereby the Company's liability for future
payrolls to the client's worksite employees, if payment is not received within
two days of the invoice date. However, the rapid turnaround necessary to process
and make payroll payments leaves the
37
<PAGE>
Company vulnerable to client credit risks, some of which may not be identified
prior to the time payroll payments are made. There can be no assurance that the
Company will be able to timely terminate any delinquent accounts or that its
contractual termination rights will be judicially enforced.
In addition, the Company has recently entered several market
segments through acquisitions in which PEOs typically advance wages, benefit
costs and payroll taxes to their clients. The Company intends to continue this
practice despite the potentially greater credit risk posed by such practices.
Also, in its stand-alone risk management/worker's compensation program, the
Company structures certain of its clients' premium payments so that less than
the full premium is billed periodically through the policy year, with the
difference to be paid by the client on a deferred basis after the end of the
policy year. In each case, the Company conducts a limited credit review before
accepting new clients. However, the nature of the Company's business and pricing
margins is such that a small number of client credit failures could have an
adverse effect on its business and financial performance.
Litigation. The Company has 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
shortly after significant drop in trading price of the shares of the Company's
common stock in March 1997. While the complaints do not specify damages, the
Company expects the requests to be substantial. The Company believes the claims
are without merit, and intends to vigorously defend these actions. However, the
cost of defending these actions could have a material adverse effect on the
Company's results of operations in future periods, and their ultimate resolution
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.
Client Relationships. The Company's subscriber agreements with
its clients generally may be canceled upon 30 days written notice of termination
by either party. While the Company believes that it has experienced favorable
client retention in the past, there can be no assurance that those relationships
will continue or that historical rates of retention will continue to be
achieved. The short-term nature of most customer agreements means that clients
could terminate a substantial portion of the Company's business upon short
notice.
Through recent acquisitions and internal growth, the percentage
of Company's clients in the transportation industry has increased. While the
Company has targeted this industry, which it believes could benefit from Company
services and expertise, increased concentration in a single industry could make
the Company more subject to risks and trends of that industry. Also, certain
aspects of the transportation industry may be subject to particular risks, such
as the risk of property damage, injury and death from accidents inherent in the
operation of a motor vehicle. In addition, the Company is providing driver
leasing services, in which the Company acts as sole employer, which may increase
risk to the Company as a result of the direct nature of the employment
relationship.
Dependence on One Insurer. The Company believes that its risk
management/workers' compensation services program has been and will continue to
be an important competitive factor in its growth and profitability. The
Company's risk management/workers' compensation services program is currently
being conducted principally in coordination with one insurer, Reliance. The
Company's contract with Reliance was last renewed June 1, 1996, and is subject
to annual renewals and may, if certain conditions are not met by the Company, be
canceled by Reliance on 30 days' notice. There can be no assurance that upon
expiration of the current term the Company can renew the Reliance program on
commercially reasonable terms. The Company would be materially adversely
affected by a termination of its arrangements with Reliance if the Company could
not quickly make similar arrangements with another insurer. In part to lessen
its dependence upon Reliance, the Company is seeking to establish relationships
with additional insurers, and has entered into an agreement with Legion for
certain Company programs. The Company's ability to make similar arrangements
with other insurers is limited, however, because other insurers generally
require large segregated books of business in order to lessen the risk of
adverse selection by the Company and to maximize the economic potential of the
arrangement for the insurer. There can therefore be no assurance that the
Company will be able to significantly lessen its dependence on Reliance in the
near future.
Uncertainty of Extent of PEO's Liability; Government Regulation of
PEOs. The Company's clients 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
38
<PAGE>
specifically address the obligations and responsibilities of non-traditional
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. Compliance with these laws and regulations is
time consuming and expensive.
The Company's standard form of client service agreement establishes the
contractual division of responsibilities between the Company and its clients for
various personnel management matters, including compliance with and liability
under various governmental regulations. However, because the Company acts as a
co-employer, 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, 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 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 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, 16 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.
Government Regulation Relating to Workers' Compensation Program. As
part of its risk management/workers' compensation programs, the Company utilizes
Camelback and proposes to form Camelhead as a wholly-owned insurance company
chartered in the state of Hawaii. Insurance companies such as Camelback and
Camelhead 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 Camelhead and Camelback could materially adversely affect the
Company's operations and results.
The Company's risk management/workers' compensation services program is
conducted via "fronting" arrangements with insurers. The National Association of
Insurance Commissioners ("NAIC") recently adopted a model act concerning
"fronting" arrangements. The model act requires reporting and prior approval of
reinsurance transactions relating to these arrangements, and limits the amount
of premiums that can be written under certain circumstances. 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 the model
act will affect 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.
39
<PAGE>
Acquisitions. The Company has grown substantially in recent years
through the acquisition of other PEO and similar companies. A key component of
the Company's growth strategy is to continue to pursue attractive acquisition
opportunities. However, 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. Also, there can be no assurance that the Company will have
or be able to obtain the resources necessary to successfully make future
acquisitions or to integrate acquired operations into the Company's. Because of
the need to integrate acquisitions into the Company's operations and the high
volume of acquisitions in 1996, the Company does not currently expect 1997
acquisition activity to be as extensive as in 1996. 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 thoroughly evaluate each acquisition candidate prior to an acquisition, there
can also be no assurance that, once acquired, the Company will be able to
integrate the acquired company with the Company's existing operations or achieve
acceptable levels of revenues, profitability or productivity from the acquired
company.
In addition, because the Company generally accounts for its
acquisitions using the "purchase" method of accounting, prior periods are not
restated to reflect those acquisitions. Therefore, the Company's
period-to-period results may vary significantly as a result of acquisitions.
Health Care Reform Proposals. Various proposals for national health
care reform have been under discussion in recent years, including proposals to
extend mandatory health insurance benefits to virtually all classes of
employees. 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 an 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.
Tax Liabilities. As the employer of record for approximately 1,200
client companies and their 30,000 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. The Company has received a letter from the Arizona
Department of Economic Security with respect to its unemployment tax rate for
the year ended December 31, 1994 which, if determined adversely to the Company,
would result in an amount due of approximately $500,000 (before interest and
income tax effect). In addition, the Company has notices from the IRS and
various states alleging late payment of payroll taxes relating to an acquired
company. The penalties proposed to be assessed against the Company total
approximately $470,000 for post-acquisition filings, and the penalties to be
assessed against the predecessor company total approximately $390,000 for the
period during which the Company performed designated management services on
behalf of the predecessor. The Company believes that it has defenses to these
actions, and has objected vigorously to payment of such past taxes and
penalties. However, it is not possible to predict if the Company will be
successful in abating these taxes and penalties, or other claims which could
arise in the future. The Company would be required to record these amounts as
additional expense and liability if, at any time in the future, it appeared
probable that the Company would not prevail in these matters.
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 at least one is larger than the
Company and several others approach the Company's size. The Company also
competes less directly with non-PEO companies whose offerings overlap with some
of the Company's PEO services, including payroll processing firms, insurance
companies, temporary personnel companies and human resource consulting firms. In
addition, the Company expects
40
<PAGE>
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. The Company recently has experienced the effects
of an increase in competition, and a general softening of the market, in the
workers' compensation and benefits areas, which affects the Company's growth and
margins.
Dependence Upon Certain Officers and Key Employees. The Company is
highly dependent upon the services of certain of its officers and key employees,
particularly Marvin D. Brody, its Chief Executive Officer. The loss of services
of any of these individuals would have a material adverse effect upon the
Company. The Company does not have employment or non-competition agreements with
Mr. Brody or employment agreements with certain other of these individuals.
Volatility of Securities Prices. The market price of the Company's
common stock has risen substantially since its initial public offering in August
1993, and in that time has been and may continue to be highly volatile. The
market experienced particularly severe volatility in March 1997. Factors such as
the Company's actual or anticipated operating results, acquisition activity, or
other announcements by or about the Company or its competitors have, and may
continue to have, a significant effect on the market price of the Company's
securities. In addition, the Company's Common Stock is quoted on the Nasdaq
National Market, which market has experienced, and is likely to experience in
the future, significant price and volume fluctuations which could adversely
affect the price of the Company's Common Stock without regard to the operating
performance of the Company.
Authorization of Preferred Stock. The Company's Articles of
Incorporation authorize the issuance of up to 10,000,000 shares of Preferred
Stock with such rights and preferences as may be determined from time to time by
the Board of Directors. No shares of Preferred Stock are currently outstanding.
Accordingly, under the Articles of Incorporation, the Board of Directors may,
without shareholder approval, issue Preferred Stock with dividend, liquidation,
conversion, voting, redemption or other rights which could adversely affect the
voting power or other rights of the holders of the Common Stock. The issuance of
any shares of Preferred Stock having rights superior to those of the Common
Stock may result in a decrease of the value or market price of the Common Stock
and could further be used by the Board as a device to prevent a change in
control of the Company.
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
Financial statements required by Form 10-K are set forth at pages F-1
through F-27 hereof. Supplementary data is set forth in Note 8 thereto.
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
PART III
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------
The biographical information relating to the Company's directors
included under the caption "Election of Directors" in the Company's definitive
Proxy Statement for its 1997 Annual Meeting of Shareholders (the "Proxy
Statement") is incorporated herein by reference. The Company anticipates filing
the Proxy Statement within 120 days after December 31, 1996.
ITEM 11. - EXECUTIVE COMPENSATION
- ---------------------------------
The information under the heading "Executive Compensation" and
"Compensation of Directors" in the Proxy Statement is incorporated herein by
reference.
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ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------
The information under the heading "Voting Securities and Principal
Holders - Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement is incorporated herein by reference.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
The information under the heading "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. - EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------
(a) Exhibits
See attached Exhibit Index, which is incorporated herein by reference.
(b) Reports on Form 8-K for last quarter
The Company filed a report on Form 8-K dated November 14, 1996 which
reported under Item 2 the acquisition by the Company of substantially all of the
assets of the McClary-Trapp Companies effective November 1, 1996. Financial
statements were not required or filed.
On October 29, 1996, the Company filed a report on Form 8-K dated June
22, 1996 which reported under Item 2 the acquisition by the Company of the
outstanding capital stock of GCK Entertainment Services I, Inc. and Talent,
Entertainment and Media Services, Inc. (together "Team"). The following
financial statements were filed as part of such Form 8-K:
a. Team Consolidated Balance Sheets as of June 22, 1996
(unaudited) and December 31, 1995.
b. Team Consolidated Statements of Operations for the year ended
December 31, 1995 and the interim periods ended June 30, 1995
(unaudited) and June 22, 1996 (unaudited).
c. Notes to Team Consolidated Financial Statements.
d. The Company's Combined Pro Forma Balance Sheet for June 30,
1996 (unaudited).
e. The Company's Combined Pro Forma Statements of Operations for
June 30, 1996 (unaudited) and year ended December 31, 1995.
f. Notes to the Company's Pro Forma Financial Statements.
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<PAGE>
Item 8. FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1996 and 1995 F-3
Consolidated Statements of Operations - For the Years
Ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity - For the
Years Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows - For the Years
Ended December 31, 1996, 1995 and 1994 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
</TABLE>
F-1
<PAGE>
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,
1996 and 1995, 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, 1996 and 1995, 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.
F-2
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
(In thousands of dollars, except share data) 1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,980 $ 14,029
Restricted cash and investments 11,500 2,743
Accounts receivable, net 34,839 7,866
Receivables from insurance companies 5,918 86
Prepaid expenses and deposits 1,258 379
Deferred income taxes 1,156 334
----------- -----------
Total current assets 65,651 25,437
Property and equipment, net 1,084 440
Deferred income taxes 539 --
Goodwill and other assets, net 58,695 10,963
----------- -----------
Total assets $ 125,969 $ 36,840
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 2,477 $ 3,752
Accrued salaries, wages and payroll taxes 17,586 6,681
Accounts payable 4,078 1,114
Accrued workers' compensation and health insurance 6,927 2,463
Income taxes payable 720 2,207
Other accrued expenses 3,414 631
----------- -----------
Total current liabilities 35,202 16,848
----------- -----------
Deferred income taxes 111 49
----------- -----------
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 1996 and 1995 issued and outstanding -- --
Common stock, no par value, 75,000,000 shares authorized, 30,729,433 shares
issued and outstanding in 1996, and 26,747,196 shares issued and 26,652,272
shares outstanding in 1995 30,145 15,938
Retained earnings 16,362 4,336
Treasury stock, no shares in 1996 and 94,924 shares in 1995, at cost -- (331)
----------- -----------
Total stockholders' equity 46,507 19,943
----------- -----------
Total liabilities and stockholders' equity $ 125,969 $ 36,840
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(In thousands of dollars, except share data) 1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 439,016 $ 164,455 $ 74,334
------------ ------------ ------------
Cost of revenues
Salaries and wages of worksite employees 341,988 132,379 62,827
Healthcare and workers' compensation 30,234 7,591 3,095
Payroll and employment taxes 28,640 10,705 5,146
------------ ------------ ------------
Cost of revenues 400,862 150,675 71,068
------------ ------------ ------------
Gross profit 38,154 13,780 3,266
Selling, general and administrative expenses 17,310 7,183 2,297
Depreciation and amortization 2,073 426 269
------------ ------------ ------------
Income from operations 18,771 6,171 700
Other income (expense):
Interest income 833 296 52
Interest expense (1,196) (25) (3)
Minority interest and other (1) 239 80
------------ ------------ ------------
Income before provision for income taxes 18,407 6,681 829
Income tax provision 6,381 2,846 450
------------ ------------ ------------
Net income $ 12,026 $ 3,835 $ 379
============ ============ ============
Net income per common and common equivalent share:
Primary $ .37 $ .16 $ .02
============ ============ ============
Fully diluted $ .37 $ .14 $ .02
============ ============ ============
Weighted average number of common and common equivalent shares outstanding:
Primary 32,167,777 23,506,782 20,145,484
============ ============ ============
Fully diluted 32,385,735 26,430,586 20,145,484
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Total
Preferred Common Retained Treasury Stockholders'
(In thousands of dollars, except share data) Stock Stock Earnings Stock Equity
-------- -------- -------- -------- --------
<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>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(In thousands of dollars) 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 408,424 $ 162,137 $ 74,473
Cash paid to suppliers and employees (405,606) (155,066) (73,713)
Interest received 833 279 42
Interest paid (1,196) (25) (3)
Income taxes paid, net of refunds (5,772) (1,046) (87)
--------- --------- ---------
Net cash (used in) provided by operating activities (3,317) 6,279 712
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (702) (238) (189)
Business acquisitions (37,251) (961) (27)
Cash invested in restricted cash and investments (8,757) (1,372) (1,361)
Issuance of notes receivable, net (189) 383 (360)
Other, net -- 3 (447)
--------- --------- ---------
Net cash used in investing activities (46,899) (2,185) (2,384)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 42,800 -- --
Proceeds from issuance of common stock 7,786 8,123 2,606
Payment of deferred loan costs (515) -- --
Decrease in bank overdraft and other (2,904) (136) (35)
--------- --------- ---------
Net cash provided by financing activities 47,167 7,987 2,571
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (3,049) 12,081 899
CASH AND CASH EQUIVALENTS, beginning of year 14,029 1,948 1,049
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 10,980 $ 14,029 $ 1,948
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH (USED IN)
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 12,026 $ 3,835 $ 379
-------- -------- --------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH (USED IN )
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 2,073 426 269
Miscellaneous non-cash charges -- (193) (77)
Tax benefit from stock options 2,635 267 --
(Increase) decrease in accounts receivable, net (24,760) (2,249) 186
Increase in insurance company receivables (5,832) (86) --
Increase in prepaid expenses and deposits (736) (183) (17)
Increase in deferred income tax assets (601) (275) (42)
Decrease (increase) in other assets (2,532) (17) 26
Increase (decrease) in accrued salaries,
wages and payroll taxes 10,905 1,319 (160)
Increase in accrued workers' compensation
and health insurance 4,464 676 287
Increase (decrease) in other long term liabilities 1,349 (39) (261)
(Decrease) increase in accounts payable (2,038) 599 113
(Decrease) increase in income taxes payable (1,487) 1,776 392
Increase (decrease) in other accrued expenses 1,155 404 (397)
Increase in deferred income tax liabilities 62 19 14
-------- -------- --------
(15,343) 2,444 333
-------- -------- --------
Net cash (used in) provided by operating activities $ (3,317) $ 6,279 $ 712
======== ======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the years ended December 31, 1996 and 1995, certain notes receivable from
officers/directors were repaid with the Company's common stock owned by these
individuals in the amount of $157,000 and $296,000, respectively.
In connection with business acquisitions during 1996 and 1995, the Company
assumed net liabilities of $5,478,000 and $5,385,000 and issued $4,274,000 and
$1,613,000 of common stock, respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(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
F-8
<PAGE>
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, 1996 and 1995, 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 $11,500,000 and $2,743,000 at December 31, 1996 and 1995,
respectively, to be held in a restricted account for payment of future claims,
and future capitalization of Camelback Insurance, Ltd. (Camelback), the
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, 1996 and
1995, the Company had receivables from its fronting companies of $5,918,000 and
$86,000, 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.
F-9
<PAGE>
Accounts Receivable/Revenue Recognition
Revenue is recognized as services are performed. The following table presents a
summary of the Company's accounts receivable.
- --------------------------------------------------------------------------------
December 31,
-------------------------
(In thousands of dollars) 1996 1995
-------- --------
Trade accounts receivable $ 17,306 $ 3,091
Unbilled salary and wage accruals 14,544 4,187
Unbilled stand alone premium revenue 618 183
Other 3,001 620
Allowance for estimated
uncollectible receivables (630) (215)
-------- --------
Total accounts receivable, net $ 34,839 $ 7,866
======== ========
- --------------------------------------------------------------------------------
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, 1996 and 1995, receivables from related parties included in the
above totals were $3,287,000 and $1,227,000, 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.
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 $440,000 and $180,000 at December 31, 1996
and 1995, respectively.
F-10
<PAGE>
Goodwill and Other Assets
Included in goodwill and other assets is $55,756,000 and $10,230,000 at December
31, 1996 and 1995, 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 $2,457,000 and
$656,000 at December 31, 1996 and 1995, 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'
F-11
<PAGE>
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 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.
F-12
<PAGE>
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 1995 and 1994
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 average common and common equivalent shares used in the calculation
of income per common share is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(In thousands of dollars, except share data)
1996 1995 1994
------------------------ ------------------------ -------------------------
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Weighted average of
common shares outstanding 30,224,357 30,224,357 22,391,616 22,391,616 15,085,484 15,085,484
Weighted average Class A
preferred stock assumed
converted N/A N/A N/A N/A 5,060,000 5,060,000
Dilutive effect of options
and warrants outstanding 1,943,420 2,161,378 1,115,166 4,038,970 -- --
----------- ----------- ----------- ----------- ----------- ----------
Weighted average of common
and common equivalent
shares 32,167,777 32,385,735 23,506,782 26,430,586 20,145,484 20,145,484
=========== =========== =========== =========== ========== ===========
Net income $ 12,026 $ 12,026 $ 3,835 $ 3,835 $ 379 $ 379
Adjustments to net income -- -- (135) (135) -- --
----------- ----------- ----------- ----------- ----------- ----------
Adjusted net income for
purposes of the income per
common share calculation $ 12,026 $ 12,026 $ 3,700 $ 3,700 $ 379 $ 379
=========== =========== =========== =========== =========== ===========
Net income per common and
common equivalent share $ 0.37 $ 0.37 $ 0.16 $ 0.14 $ 0.02 $ 0.02
=========== =========== =========== =========== =========== ===========
- -------------------------------------------------------------------------------------------------------------------
</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.
F-13
<PAGE>
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 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,
-------------------------------------------------------------------
(In thousands of dollars) 1996 1995
----------------------------- -------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
Financial Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 10,980 $ 10,980 $ 14,209 $ 14,209
Restricted cash and investments 11,500 11,500 2,743 2,743
Other financial assets, primarily
accounts receivable 43,696 43,657 8,685 8,685
Financial Liabilities
Bank overdraft 2,477 2,477 3,752 3,752
Long-term debt 42,800 42,800 -- --
Other financial liabilities, primarily
accounts payable 33,354 33,354 10,889 10,899
- ------------------------------------------------------------------------------------------------------------------
</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.
F-14
<PAGE>
(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.
(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:
- --------------------------------------------------------------------------------
(In thousands of dollars)
Years Ending
December 31, Amount
------------ ------
1997 $ 1,117
1998 1,316
1999 1,160
2000 1,099
2001 1,052
Later years 2,360
---------
Total $ 8,104
=========
- --------------------------------------------------------------------------------
Rental expense under all leases was $734,000, $162,000, and $150,000 in 1996,
1995 and 1994, respectively.
F-15
<PAGE>
(5) INCOME TAXES:
The components of the provision for income taxes for the years ended December
31, 1996, 1995 and 1994 were as follows:
- --------------------------------------------------------------------------------
(In thousands of dollars) 1996 1995 1994
------- ------- -------
Current $ 6,935 $ 3,102 $ 478
Deferred (554) (256) (28)
------- ------- -------
Income tax provision $ 6,381 $ 2,846 $ 450
======= ======= =======
- --------------------------------------------------------------------------------
Income tax expense differs from the amount computed using the statutory federal
income tax rate due to the following:
- --------------------------------------------------------------------------------
(In thousands of dollars) 1996 1995 1994
------- ------- -------
Income tax expense at
statutory rate $ 6,442 $ 2,272 $ 282
Non-deductible goodwill amortization 197 73 60
Non-deductible per diem
and other expenses 41 85 38
State taxes, net of federal benefit 179 429 70
Change in estimate related to 1995
state taxes (430) -- --
Other (48) (13) --
------- ------- -------
Income tax provision $ 6,381 $ 2,846 $ 450
======= ======= =======
- --------------------------------------------------------------------------------
Deferred tax assets and liabilities are comprised of the following temporary
differences at December 31:
- --------------------------------------------------------------------------------
1996 1995
------------------------- --------------------------
Long-term
Current Assets Current Long-term
(In thousands of dollars) Assets (Liabilities) Assets (Liabilities)
------ ------------ ------ -------------
Depreciation and
amortization $ -- $ (111) $ -- $ (22)
Reserves not deductible
for tax purposes 1,130 539 334 --
Other, net 26 -- -- (27)
------ ------------ ------ -------------
$1,156 $ 428 $ 334 $ (49)
====== ============ ====== =============
- --------------------------------------------------------------------------------
F-16
<PAGE>
(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 3/8% 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-17
<PAGE>
Warrants
Warrant activity in 1994, 1995 and 1996 was as follows:
- --------------------------------------------------------------------------------
Weighted-
Number average Exercise
of Warrants Price
----------- -----------
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
===========
- --------------------------------------------------------------------------------
The number of warrants exercisable were 120,000, 2,936,000 and 7,595,240 at
December 31, 1996, 1995 and 1994, 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 422A 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
F-18
<PAGE>
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.
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:
- --------------------------------------------------------------------------------
Weighted-
average
Number Exercise
of Options Price
---------- ----------
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
- --------------------------------------------------------------------------------
F-19
<PAGE>
The following table is a summary of selected information for the Company's
compensatory stock option plans:
- --------------------------------------------------------------------------------
December 31, 1996
-------------------------------------------------
Weighted-
average Weighted-
Remaining average
Contractual Exercise
Life (in yrs.) Number Price
-------------- ------ ---------
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
- --------------------------------------------------------------------------------
The weighted-average fair value of options granted under the 1993 and 1995 Stock
Option Plans was $6.10 and $1.07 for 1996 and 1995, 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.
F-20
<PAGE>
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 reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars, except per share data) Year ended December 31,
--------------------------------------------
1996 1995
<S> <C> <C>
Net Income:
As Reported $ 12,026 $ 3,835
Pro Forma 13,233 3,256
Primary EPS:
As Reported .37 .16
Pro Forma .41 .13
Fully Diluted EPS:
As Reported .37 .14
Pro Forma .41 .12
- ---------------------------------------------------------------------------------------------------------------------------
</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 1996 and 1995: risk-free interest rate of
5.98%; expected dividend yield of 0%; expected lives of 2 years; expected
volatility of 67%.
F-21
<PAGE>
(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
(In thousands of dollars, except share data) March 31, June 30, September 30, December 31,
<S> <C> <C> <C> <C>
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
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
- ---------------------------------------------------------------------------------------------------------------------------
</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
F-22
<PAGE>
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 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.
F-23
<PAGE>
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 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 the
NASDAQ National Market 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
F-24
<PAGE>
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, 1996 and 1995, 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.
- --------------------------------------------------------------------------------
(In thousands of dollars, except share data) 1996 1995
----------- -----------
Total revenues $ 522,286 $ 411,349
Net income 12,758 3,243
Net income per common and common
equivalent share
Primary .40 .14
Fully diluted .39 .12
Weighted average number of common and
common equivalent shares outstanding
Primary 32,167,777 23,506,782
Fully diluted 32,385,735 26,430,586
- --------------------------------------------------------------------------------
(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
F-25
<PAGE>
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.
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 sucessfully
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>
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Legal services provided by officer/director $ -- $ 60 $ 154
Processing fees paid to company owned by shareholder 805 820 --
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.
F-26
<PAGE>
(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-27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated this 31st day of March, 1997.
EMPLOYEE SOLUTIONS, INC.
By /s/ Marvin D. Brody
-------------------------------------
Marvin D. Brody
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Marvin D. Brody Chairman of the Board, Chief March 31, 1997
- ----------------------------------- Executive Officer, President
Marvin D. Brody and Director
/s/ Harvey A. Belfer Director March 31, 1997
- -----------------------------------
Harvey A. Belfer
/s/ Edward L. Cain, Jr. Director March 31, 1997
- -----------------------------------
Edward L. Cain, Jr.
/s/ Jeffery A. Colby Director March 31, 1997
- -----------------------------------
Jeffery A. Colby
/s/ Robert L. Mueller Director March 31, 1997
- -----------------------------------
Robert L. Mueller
/s/ Henry G. Walker Director March 31, 1997
- -----------------------------------
Henry G. Walker
/s/ Morris C. Aaron Chief Financial Officer (also, March 31, 1997
- ----------------------------------- principal accounting officer)
Morris C. Aaron
</TABLE>
<PAGE>
EMPLOYEE SOLUTIONS, INC.
(the "Registrant")
EXHIBIT INDEX
TO
REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description By Reference To Herewith
- ------ ----------- --------------- --------
<C> <C> <C> <C>
3(i) Registrant's composite Articles of X
Incorporation, as amended
3(ii) Registrant's Bylaws, as amended X
4.1 Loan Agreement dated August 1, 1996 Registrant's Current Report
between the Registrant and Bank One on Form 8-K dated August 1,
Arizona, NA 1996 ("8/1/96 8-K")
4.1.1 Amendment No. One thereto, dated Registrant's Form 10-Q for
October 15, 1996 the quarter ended
September 30, 1996
("September 1996 10-Q")
4.1.2 Second Modification Agreement dated
February 19, 1997
10.1* Registrant's 1993 Employee Incentive Registrant's Form 10-KSB for
Stock Option Plan, as amended the fiscal year ended
December 31, 1994
("1994 Form 10-KSB")
Registrant's Camelback Road Office Registrant's Registration
Lease Statement on Form SB-2
declared effective August 12,
1993 (No. 33-62548)("Form
SB-2")
10.2 Employment Agreement with Form SB-2
Harvey A. Belfer, as amended
10.3 Employment Agreement with Roy A. Form SB-2
Flegenheimer [superseded]
10.3.1 Amendment to Employment 1994 Form 10-KSB
Agreement with Roy Flegenheimer
[superseded]
10.3.2 Second Amendment to Employment Registrant's Form 10-K for
Agreement with Roy Flegenheimer the fiscal year ended
[superseded] December 31, 1995 ("1995
10-K")
10.3.3 Third Amendment to Employment 1995 10-K
Agreement with Roy Flegenheimer
[superseded]
</TABLE>
EI-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
- ------ ----------- --------------- --------
<C> <C> <C> <C>
10.4* Employment Agreement with Roy X
Flegenheimer dated March 18, 1997
[superseding prior agreements]
10.5 Employment Agreements dated
March 18, 1997 between the
Registrant and:
10.5.1* Morris C. Aaron X
10.5.2* Paul M. Gales X
10.6 Joint Venture Agreement among Registrant's Form 10-QSB for
Registrant, Edward L. Cain, Jr., and the quarter ended
Employee Solutions-East, Inc. September 30, 1994
("September 1994 10-QSB")
10.6.1 Extension of Joint Venture Agreement 1995 10-K
among Registrant, Edward L. Cain,
Jr. and Employee Solutions-East, Inc.
10.7* Employment Agreement between September 1994 10-QSB
Employee Solutions-East, Inc. and
Edward L. Cain, Jr.
10.7.1* Amended and Restated Employment 1995 10-K
Agreement among Registrant,
Edward L. Cain, Jr. and Employee
Solutions-East, Inc.
10.8 Guarantee of Payment and September 1994 10-QSB
Performance by Employee Solutions,
Inc. to and in favor of Edward L.
Cain, Jr.
10.9 Supplemental Agreement to Joint September 1994 10-QSB
Venture Agreement among Registrant,
Edward L. Cain, Jr. and Employee
Solutions, Inc.
10.10 Stock Purchase Agreement to acquire Registrant's Form 10-Q for
Employment Services of Michigan, the quarter ended March 31,
Inc. 1995
10.10.1 Amended Restated Stock Purchase 1995 10-K
Agreement to acquire Employment
Services of Michigan, Inc.
10.11* Employee Solutions, Inc. 1995 Stock X
Option Plan, as amended
</TABLE>
EI-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
- ------ ----------- --------------- --------
<C> <C> <C> <C>
10.12 Asset Purchase Agreement with Registrant's Form 8-K/A filed
Hazar, Inc. and its subsidiaries October 2, 1995 ("October 2,
1995 Form 8-K/A")
10.13 Management Services Agreement October 2, 1995 Form 8-K/A
dated October 2, 1995 between ESI
America, Inc. and Employer Sources,
Inc., a subsidiary of Hazar, Inc.
10.14 Warrant Agreement dated October 2, October 2, 1995 Form 8-K/A
1995 with Hazar, Inc.
10.15 Agreement and Plan of Reorganization 1995 10-K
among Registrant, Edward L. Cain,
Jr. and Employee Solutions-East, Inc.
10.16 Asset Purchase Agreement dated 8/1/96 8-K
July 5, 1996 by and among Leaseway
Transportation Corp., Leaseway
Personnel Corp., Leaseway
Administrative Personnel, Inc. and
Employee Solutions, Inc.
10.16.1 First Amendment to Asset Purchase 8/1/96 8-K
Agreement dated August 1, 1996 by
and among Leaseway Transportation
Corp., Leaseway Personnel Corp.,
Leaseway Administrative Personnel,
Inc., Employee Solutions, Inc. and
Logistics Personnel Corp.
10.17 Security Agreement dated August 1, 8/1/96 8-K
1996 between Bank One Arizona, Inc.
and Registrant and certain of its
subsidiaries
10.18 Purchase Agreement between Registrant's 10-Q for the
Registrant, GCK Entertainment quarter ended June 30, 1996
Services I, Inc., Talent Entertainment
and Media Services, Inc. (collectively,
"TEAM Services"), and the
shareholders of TEAM Services
10.18.1 Amendment No. 1 to Purchase Registrant's 8-K dated
Agreement between Registrant, TEAM June 22, 1996 ("6/22/96 8-
Services and the shareholders of K")
TEAM Services
10.19* Employment Agreement between 6/22/96 8-K
Registrant and Jeffery Colby
10.20 Asset Purchase Agreement between September 1996 10-Q
the Registrant and the McClary-Trapp
Companies dated as of November 1,
1996
</TABLE>
EI-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
- ------ ----------- --------------- --------
<C> <C> <C> <C>
10.21 Indemnification Agreements effective
as of November 21, 1996 between the
Registrant and:
10.21.1* Marvin D. Brody X
10.21.2* Edward L. Cain, Jr. X
10.21.3* Jeffery A. Colby X
10.21.4* Roy A. Flegenheimer X
10.21.5* Morris C. Aaron X
10.21.6* Paul M. Gales X
10.21.7* Henry G. Walker X
21.1 Subsidiaries of Registrant X
23.1 Consent of Arthur Andersen LLP X
27 Financial Data Schedule X
</TABLE>
- ------------------------------
*Designates management or compensatory agreements
EI-4
AMENDED AND COMPILED
ARTICLES OF INCORPORATION
OF
EMPLOYEE SOLUTIONS, INC.
The undersigned, for the purpose of forming a corporation
under the laws of the State of Arizona, hereby adopt the following Articles of
Incorporation:
ARTICLE I
Name. The name of the corporation is EMPLOYEE SOLUTIONS, INC.
ARTICLE II
Purpose. The purpose for which this Corporation is organized
is the transaction of any or all lawful business for which corporations may be
incorporated under the laws of the State of Arizona, as they may be amended from
time to time.
ARTICLE III
Initial Business. The initial business of the Corporation will
be leasing employees to professional and non-professional business.
ARTICLE IV
Initial Place of Business. The initial place of business of
the Corporation shall be 3833 North 60th Place, Scottsdale, Arizona 85251, and
such other locations as the directors may from time to time determine.
<PAGE>
ARTICLE V
Authorized Capital. The Corporation shall have authority to
issue 85,000,000 shares, consisting of 75,000,000 shares of Common Stock, having
no par value (the "Common Stock") and 10,000,000 shares of preferred stock,
having no par value (the "Preferred Stock").
Preferred Stock. The board of directors is authorized, subject
to limitations prescribed by law and these Articles of Incorporation, to provide
for the issuance of shares of preferred stock in series, and by filing a
certificate pursuant to the applicable law of the State of Arizona, to establish
from time to time the number of shares to be included in each such series, and
to fix the designation, powers, preferences and rights of the shares of each
such series and the qualifications, limitations or restrictions thereof,
including, without limitation, any rights of such series with respect to the
election of directors.
ARTICLE VI
Number of Directors. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of Directors
consisting of not less than one director nor more than nine directors, the exact
number of directors to be determined from time to time by resolution adopted by
the Board of Directors.
Director Liability. A director of the Corporation shall not be
personally liable to the Corporation or its shareholders for monetary damages
for any action taken or any failure to take any action as a director, except for
liability (i) for the
2
<PAGE>
amount of a financial benefit received by a director to which the director is
not entitled (ii) for an intentional infliction of harm on the Corporation or
the shareholders, (iii) for an intentional violation of criminal law, or (iv)
for a violation of Section 10-833 of the Arizona Business Corporation Act. If
the Arizona Business Corporation Act is amended after approval by the
shareholders of this Article to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Arizona Business Corporation Act, as so amended.
Any repeal or modification of the foregoing paragraph by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification. No amendment to the Arizona Revised Statutes that further
limits the acts, omissions or transactions for which elimination or limitation
of liability is permitted shall affect the liability of a director for any act,
omission or transaction which occurs prior to the effective date of such
amendment.
ARTICLE VIII
Statutory Agent. The name and address of the initial statutory
agent of the corporation are KEYT & LAWLESS, P.A., 5353 North 16th Street, Suite
405, Phoenix, Arizona 85016.
ARTICLE IX
[DELETED]
3
<PAGE>
ARTICLE X
Special Meetings. Special meetings of the shareholders of the
Corporation for any purpose or purposes may be called at any time only by the
Chairman of the Board, the Chief Executive Officer or the Board of Directors,
pursuant to a resolution approved by a majority of the whole Board of Directors,
or at the request in writing of shareholders owning 50% or more in amount of the
capital stock issued and outstanding and entitled to vote. Special meetings of
the shareholders may not be called by any other person or persons. Business
transacted at any special meeting of the shareholders shall be limited to the
purposes stated in the notice of such meeting.
4
AMENDED AND RESTATED
BYLAWS
OF
EMPLOYEE SOLUTIONS, INC.
ARTICLE I
OFFICES
SECTION 1.1 Principal Office.
-----------------
The corporation shall maintain a principal office at its known place of
business in Maricopa County, Arizona.
SECTION 1.2 Other Offices.
--------------
The Corporation also may have offices at such other places both within
and without the State of Arizona as the Board of Directors may from time to time
determine or the business of the Corporation may require.
ARTICLE II
SHAREHOLDERS
SECTION 2.1 Shareholder Meetings.
---------------------
(a) Time and Place of Meetings. Meetings of the shareholders shall be
held at such times and places, either within or without the State of Arizona, as
may from time to time be fixed by the Board of Directors and stated in the
notices or waivers of notice of such meetings.
(b) Annual Meeting. The annual meeting of the shareholders shall be
held when designated by the Board of Directors, for the election of directors
and the transaction of such other business properly brought before such annual
meeting of the shareholders and within the powers of the shareholders.
(c) Special Meetings. Special meetings of the shareholders of the
Corporation for any purpose or purposes may be called at any time only by the
Chairman of the Board, the Chief Executive Officer, or the Board of Directors
pursuant to a resolution approved by a majority of the whole Board of Directors,
or at the request in writing of
<PAGE>
shareholders owning at least 50% of the capital stock issued and outstanding and
entitled to vote. Business transacted at any special meeting of the shareholders
shall be limited to the purposes stated in the notice of such meeting.
(d) Notice of Meetings. Except as otherwise provided by law, the
Articles of Incorporation or these Bylaws, written notice of each meeting of the
shareholders shall be given not less than ten days nor more than sixty days
before the date of such meeting to each shareholder entitled to vote thereat,
directed to such shareholder's address as it appears upon the books of the
Corporation, such notice to specify the place, date, hour and purpose or
purposes of such meeting. If mailed, such notice shall be deemed to be given
when deposited in the United States mail, postage prepaid, addressed to the
shareholder at his address as it appears on the stock ledger of the Corporation.
When a meeting of the shareholders is adjourned to another time and/or place,
notice need not be given of such adjourned meeting if the time and place thereof
are announced at the meeting of the shareholders at which the adjournment is
taken, unless the adjournment is for more than thirty days or unless after the
adjournment a new record date is fixed for such adjourned meeting, in which
event a notice of such adjourned meeting shall be given to each shareholder of
record entitled to vote thereat. Notice of the time, place and purpose of any
meeting of the shareholders may be waived in writing either before or after such
meeting and will be waived by any shareholder by such shareholder's attendance
thereat in person or by proxy. Any shareholder so waiving notice of such a
meeting shall be bound by the proceedings of any such meeting in all respects as
if due notice thereof had been given.
(e) Quorum. Except as otherwise required by law, the Articles of
Incorporation or these Bylaws, the holders of not less than a majority of the
shares entitled to vote at any meeting of the shareholders, present in person or
by proxy, shall constitute a quorum and the affirmative vote of the majority of
such quorum shall be deemed the act of the shareholders. If a quorum shall fail
to attend any meeting of the shareholders, the presiding officer of such meeting
may adjourn such meeting from time to time to another place, date or time,
without notice other than announcement at such meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting of the shareholders as originally noticed. The foregoing
notwithstanding, if a notice of any adjourned special meeting of the
shareholders is sent to all shareholders entitled to vote thereat which states
that such adjourned special meeting will be held with those present in person or
by proxy constituting a quorum, then, except as otherwise required by law, those
present at such adjourned special meeting of the shareholders shall constitute a
quorum and all matters shall be determined by a majority of the votes cast at
such special meeting.
2
<PAGE>
SECTION 2.2 Determination of Shareholders Entitled to Notice and to Vote.
-------------------------------------------------------------
To determine the shareholders entitled to notice of any meeting of the
shareholders or to vote thereat, the Board of Directors may fix in advance a
record date as provided in Article VII, Section 7.1 of these Bylaws, or if no
record date is fixed by the Board of Directors, a record date shall be
determined as of 4:00 p.m. on the day before notice is sent.
SECTION 2.3 Voting.
-------
(a) Except as otherwise required by law, the Articles of Incorporation
or these Bylaws, each shareholder present in person or by proxy at a meeting of
the shareholders shall be entitled to one vote for each full share of stock
registered in the name of such shareholder at the time fixed by the Board of
Directors or by law at the record date of the determination of shareholders
entitled to vote at such meeting.
(b) Every shareholder entitled to vote at a meeting of the shareholders
may do so either (i) in person or (ii) by one or more agents authorized by a
written proxy executed by the person or such shareholder's duly authorized
agent, whether by manual signature, typewriting, telegraphic transmission or
otherwise as permitted by law. No proxy shall be voted on after three years from
its date, unless the proxy provides for a longer period.
(c) Voting may be by voice or by ballot as the presiding officer of the
meeting of the shareholders shall determine. On a vote by ballot, each ballot
shall be signed by the shareholder voting, or by such shareholder's proxy, and
shall state the number of shares voted.
(d) In advance of or at any meeting of the shareholders, the Chairman
of the Board or President shall appoint one or more persons as inspectors of
election (the "Inspectors") to act at such meeting. Such Inspectors shall take
charge of the ballots at such meeting. After the balloting, the Inspectors shall
count the ballots cast and make a written report to the secretary of such
meeting of the results. Subject to the direction of the chairman of the meeting,
the duties of such Inspectors may further include without limitation:
determining the number of shares outstanding and the voting power of each; the
shares represented at the meeting; the existence of a quorum; the authenticity,
validity, and effect of proxies; receiving votes, ballots, or consents; hearing
and determining all challenges and questions in any way arising in connection
with the right to vote; counting and tabulating all votes of consents and
determining when the polls shall close; determining the result; and doing such
acts as may be proper to conduct the election or vote with fairness to all
shareholders. An Inspector need not be a shareholder of the Corporation and any
officer of the Corporation may be an Inspector on any question other than a vote
for or against such officer's election to any position with the Corporation or
on any other questions in which such officer may be directly interested.
3
<PAGE>
If there are three or more Inspectors, the determination, report or certificate
of a majority of such Inspectors shall be effective as if unanimously made by
all Inspectors.
SECTION 2.4 List of Shareholders.
---------------------
The officer who has charge of the stock ledger of the Corporation shall
prepare and make available, at least 10 days before every meeting of
shareholders, a complete list of the shareholders entitled to vote thereat,
arranged in alphabetical order, showing the address of and the number of shares
registered in the name of each such shareholder. Such list shall be open to the
examination of any shareholder, for any purpose germane to such meeting, either
at a place within the city where such meeting is to be held and which place
shall be specified in the notice of such meeting, or, if not so specified, at
the place where such meeting is to be held. The list also shall be produced and
kept at the time and place of the meeting of the shareholders during the whole
time thereof, and may be inspected by any shareholder who is present.
SECTION 2.5 Action by Consent of Shareholders.
----------------------------------
A resolution in writing signed by the shareholders, representing all of
those shares entitled to vote shall be deemed to be the action of the
shareholders to the effect therein expressed with the same force and effect as
if the same had been duly passed by the same vote at a duly convened meeting,
and it shall be the duty of the Secretary of the Corporation to record such
resolution in the minute book of the Corporation under its proper date.
SECTION 2.6 Conduct of Meetings.
--------------------
The chairman of the meeting shall have full and complete authority to
determine the agenda, to set the procedures and order the conduct of meetings,
all as deemed appropriate by such person in his sole discretion with due regard
to the orderly conduct of business.
SECTION 2.7 Notice of Agenda Matters.
-------------------------
If a shareholder wishes to present to the Chairman of the Board or the
President an item for consideration as an agenda item for a meeting of
shareholders, he must give timely notice to the Secretary of the Corporation and
give a description of (i) the business desired to be brought before the meeting
and (ii) all arrangements or understandings between such shareholder and any
other person or persons (including their names) in connection with the proposal
of business by such shareholder and any material interest of such shareholder
and such other person(s) in such business. To be timely, a shareholder's notice
must be delivered to or mailed and received at the principal executive offices
of the Corporation, not less than sixty days nor more than ninety days prior to
the meeting; provided, however, that in the event that less than seventy days'
4
<PAGE>
notice or prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the fifteenth day following the date on
which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever is earlier, and provided further that any other
time period necessary to comply with federal proxy solicitation rules or other
regulations shall be deemed to be timely.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1 General Powers.
---------------
Unless otherwise restricted by law, the Articles of Incorporation or
these Bylaws as to action which shall be authorized or approved by the
shareholders, and subject to the duties of directors as prescribed by these
Bylaws, all corporate powers shall be exercised by or under the authority of,
and the business and affairs of the Corporation shall be controlled by, the
Board of Directors.
SECTION 3.2 Election of Directors.
----------------------
(a) Number, Qualification and Term of Office. The authorized number of
directors of the Corporation shall be fixed from time to time by a resolution
duly adopted by a majority of the whole Board of Directors, but shall not be
less than one nor more than nine. The exact number of directors shall be
determined from time to time by a resolution duly adopted by a majority of the
Board of Directors. Directors need not be shareholders and may succeed
themselves.
(b) Resignation. Any director may resign from the Board of Directors at
any time by giving written notice to the Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein, or if the time when
such resignation shall become effective shall not be so specified, then such
resignation shall take effect immediately upon its receipt by the Secretary;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
(c) Nomination of Directors. Candidates for director of the Corporation
shall be nominated only either by:
(i) the Board of Directors or a committee appointed by the
Board of Directors, or
(ii) nomination at any shareholders' meeting by or on behalf
of any shareholder entitled to vote thereat; provided, that written
notice of
5
<PAGE>
such shareholder's intent to make such nomination or nominations shall
have been given, either by personal delivery or by United States
certified mail, postage prepaid, to the Secretary of the Corporation
not later than (l) with respect to an election to be held at an annual
meeting of the shareholders, not less than sixty days nor more than
ninety days prior to the meeting; provided, however, that in the event
that less than seventy days' notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the
shareholder to be timely must be so received not later than the close
of business on the fifteenth day following the date on which such
notice of the date of the meeting was mailed or such public disclosure
was made, whichever is earlier, and (2) with respect to an election to
be held at a special meeting of the shareholders for the election of
directors, the close of business on the fifteenth day following the
date on which notice of such special meeting is first given to the
shareholders entitled to vote thereat or public disclosure of the
meeting date is made, whichever occurs first. Each such notice by a
shareholder shall set forth: (l) the name and address of the (A)
shareholder who intends to make the nomination and (B) person or
persons to be nominated; (2) a representation that the shareholder is a
holder of record of stock of the Corporation entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (3) a
description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations
are to be made by the shareholder; (4) such other information regarding
each nominee proposed by such shareholder as would be required to be
included in a proxy or information statement filed with the Securities
and Exchange Commission pursuant to the proxy rules promulgated under
the Securities Exchange Act of 1934, as amended, or any successor
statute thereto, had the nominee been nominated, or intended to be
nominated, by the Board of Directors; and (5) the manually signed
consent of each nominee to serve as a director of the Corporation if so
elected. The presiding officer of the meeting of the shareholders may
refuse to acknowledge the nominee of any person not made in compliance
with the foregoing procedure.
(d) Preferred Stock Directors. Notwithstanding the foregoing, whenever
the holders of any one or more classes or series of stock issued by the
Corporation having a preference over the Common Stock as to dividends or upon
liquidation shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of the shareholders, the election,
term of office, filling of vacancies, nomination, terms of removal and other
features of such directorships shall be governed by the terms of the Article of
the Articles of Incorporation authorizing the preferred stock and the resolution
or resolutions adopted by the Board of Directors establishing such class or
6
<PAGE>
series adopted pursuant thereto, and such directors so elected shall not be
divided into classes pursuant to the Articles of Incorporation unless expressly
provided by such terms.
(e) Vacancies. Vacancies and new directorships resulting from an
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by the sole
remaining director. Directors so chosen shall hold office until their successors
are duly elected at the annual meeting and qualified. If no directors are in
office, an election may be held as provided by statute.
SECTION 3.3 Meetings of the Board of Directors.
-----------------------------------
(a) Regular Meetings. Regular meetings of the Board of Directors shall
be held without call at the following times:
(i) at such times as the Board of Directors shall from time to
time by resolution determine; and
(ii) one-half hour prior to any special meeting of the
shareholders and immediately following the adjournment of any annual or
special meeting of the shareholders.
Notice of all such regular meetings hereby is dispensed with.
(b) Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman, the Chief Executive Officer, or the Board of Directors
pursuant to a resolution approved by a majority of the whole Board of Directors.
Notice of the time and place of special meetings of the Board of Directors shall
be given by the Secretary or an Assistant Secretary of the Corporation, or by
any other officer authorized by the Board of Directors. Such notice shall be
given to each director personally or by mail, messenger, telecopy, telephone or
telegraph at such director's business or residence address. Notice by mail shall
be deposited in the United States mail, postage prepaid, not later than the
fifth day prior to the date fixed for such special meeting. Notice by telecopy,
telephone or telegraph shall be sent, and notice given personally or by
messenger shall be delivered, at least twenty-four hours prior to the time set
for such special meeting. Notice of a special meeting of the Board of Directors
need not contain a statement of the purpose of such special meeting.
(c) Adjourned Meetings. A majority of directors present at any regular
or special meeting of the Board of Directors or any committee thereof, whether
or not constituting a quorum, may adjourn any meeting from time to time until a
quorum is present or otherwise. Notice of the time and place of holding any
adjourned meeting shall not be required if the time and place are fixed at the
meeting adjourned.
7
<PAGE>
(d) Place of Meetings. Meetings of the Board of Directors, both regular
and special, may be held within or without the State of Arizona.
(e) Participation by Telephone. Members of the Board of Directors or
any committee may participate in any meeting of the Board of Directors or
committee through the use of conference telephone or similar communications
equipment, so long as all members participating in such meeting can hear one
another, and such participation shall constitute presence in person at such
meeting.
(f) Quorum. At all meetings of the Board of Directors or any committee
thereof, a majority of the total number of directors of the entire then
authorized Board of Directors or such committee shall constitute a quorum for
the transaction of business and the act of a majority of the directors present
at any such meeting at which there is a quorum shall be the act of the Board of
Directors or any committee, except as may be otherwise specifically provided by
law, the Articles of Incorporation or these Bylaws. A meeting of the Board of
Directors or any committee at which a quorum initially is present may continue
to transact business notwithstanding the withdrawal of directors so long as any
action is approved by at least a majority of the required quorum for such
meeting.
(g) Waiver of Notice. The transactions of any meeting of the Board of
Directors or any committee for which notice is required, however called and
noticed or wherever held, shall be as valid as though had at a meeting duly held
after regular call and notice, if a quorum be present and if, either before or
after the meeting, each of the directors not present signs a written waiver of
notice, or a consent to hold such meeting, or an approval of the minutes
thereof. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
SECTION 3.4 Action Without Meeting.
-----------------------
Any action required or permitted to be taken by the Board of Directors
at any meeting or at any meeting of a committee may be taken without a meeting
if all members of the Board of Directors or such committee consent in writing
and the writing or writings are filed with the minutes of the proceedings of the
Board of Directors or such committee.
SECTION 3.5 Compensation of Directors.
--------------------------
Unless otherwise restricted by law, the Articles of Incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
8
<PAGE>
Members of committees of the Board of Directors may be allowed like compensation
for attending committee meetings.
SECTION 3.6 Committees of the Board.
------------------------
(a) Committees. The Board of Directors may, by resolution adopted by a
majority of the Board of Directors, designate one or more committees of the
Board of Directors, each committee to consist of one or more directors. Each
such committee, to the extent permitted by law, the Articles of Incorporation
and these Bylaws, shall have and may exercise such of the powers of the Board of
Directors in the management and affairs of the Corporation as may be prescribed
by the resolutions creating such committee. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the Board of Directors. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. The Board of Directors shall have the power, at any time for any reason,
to change the members of any such committee, to fill vacancies, and to
discontinue any such committee.
(b) Minutes of Meetings. Each committee shall keep regular minutes of
its meetings and report the same to the Board of Directors when required.
(c) Audit Committee. The Board of Directors shall appoint an Audit
Committee consisting of at least two directors, neither of which two directors
shall be employees of the Corporation. The Audit Committee shall review the
financial affairs and procedures of the Corporation from time to time with
management and meet with the auditors of the Corporation to review the financial
statements and procedures.
(d) Executive Committee. There may be an executive committee consisting
of at least three members of the Board of Directors elected by the whole Board.
Members of the executive committee shall serve at the pleasure of the Board of
Directors and each member of the executive committee may be removed with or
without cause at any time by the Board of Directors. Vacancies shall be filled
by the Board of Directors. The executive committee may exercise the powers of
the Board of Directors and the management of the business and affairs of the
corporation, but shall not possess any authority prohibited to it by law.
9
<PAGE>
SECTION 3.7 Interested Directors.
---------------------
In addition to the statutory and corporate common law of Arizona, no
contract or transaction between the Corporation and one or more of its directors
or officers, or between the Corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction, or solely because his or
their votes are counted for such purpose if (i) the material facts as to his or
their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the Board
of Directors or committee in good faith authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or (ii) the material
facts as to his or their relationship or interest and as to the contract or
transaction are disclosed or are known to the shareholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the shareholders; or (iii) the contract or transaction is fair as to
the Corporation as of the time it is authorized, approved or ratified, by the
Board of Directors, a committee thereof or the shareholders. Common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
ARTICLE IV
OFFICERS
SECTION 4.1 Officers.
---------
(a) Number. The officers of the Corporation shall be chosen by the
Board of Directors and may include a Chairman of the Board of Directors (who
must be a director as chosen by the Board of Directors) and shall include a
Chief Executive Officer, a President, a Vice President, a Secretary and a
Treasurer. The Board of Directors also may appoint one or more Assistant
Secretaries or Assistant Treasurers and such other officers and agents with such
powers and duties as it shall deem necessary. Any Vice President may be given
such specific designation as may be determined from time to time by the Board of
Directors. Any number of offices may be held by the same person, unless
otherwise required by law, the Articles of Incorporation or these Bylaws. The
Board of Directors may delegate to any other officer of the Corporation the
power to choose such other officers and to prescribe their respective duties and
powers.
(b) Election and Term of Office. The officers shall be elected annually
by the Board of Directors at its annual meeting and each officer shall hold
office until the next
10
<PAGE>
annual election of officers and until such officer's successor is elected and
qualified, or until such officer's death, resignation or removal. Any officer
may be removed at any time, with or without cause, by a vote of the majority of
the whole Board of Directors. Any vacancy occurring in any office may be filled
by the Board of Directors.
(c) Salaries. The salaries of all officers of the Corporation shall be
fixed by the Board of Directors or a committee thereof from time to time.
SECTION 4.2 Chairman of the Board of Directors.
-----------------------------------
The Chairman of the Board of Directors, if there be a Chairman, shall
preside at all meetings of the shareholders and the Board of Directors and shall
have such other power and authority as may from time to time be assigned by the
Board of Directors.
SECTION 4.3 Chief Executive Officer.
------------------------
The Chief Executive Officer shall preside at all meetings of the
shareholders and the Board of Directors (if a Chairman of the Board has not been
elected), and shall see that all orders and resolutions of the Board of
Directors are carried into effect. Subject to the provisions of these Bylaws and
to the direction of the Board of Directors, the Chief Executive Officer shall
have the general and active management of the business of the Corporation, may
execute all contracts and any mortgages, conveyances or other legal instruments
in the name of and on behalf of the Corporation, but this provision shall not
prohibit the delegation of such powers by the Board of Directors to some other
officer, agent or attorney-in-fact of the Corporation.
SECTION 4.4 President.
----------
In the absence or disability of the Chief Executive Officer, the
President shall perform all the duties of the Chief Executive Officer, and when
so acting shall have all the powers of, and be subject to all the restrictions
upon, the Chief Executive Officer. The President shall have such other powers
and perform such other duties as from time to time may be prescribed by the
Board of Directors or these Bylaws.
SECTION 4.5 Vice Presidents.
----------------
In the absence or disability of the Chief Executive Officer and the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them, respectively, by
the Board of Directors or these Bylaws.
11
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SECTION 4.6 Secretary and Assistant Secretaries.
------------------------------------
The Secretary shall record or cause to be recorded, in books provided
for the purpose, minutes of the meetings of the shareholders, the Board of
Directors and all committees of the Board of Directors; see that all notices are
duly given in accordance with the provisions of these Bylaws as required by law;
be custodian of all corporate records (other than financial) and of the seal of
the Corporation, and have authority to affix the seal to all documents requiring
it and attest to the same; give, or cause to be given, notice of all meetings of
the shareholders and special meetings of the Board of Directors; and, in
general, shall perform all duties incident to the office of Secretary and such
other duties as may, from time to time, be assigned to him by the Board of
Directors or by the President. At the request of the Secretary, or in the
Secretary's absence or disability, any Assistant Secretary shall perform any of
the duties of the Secretary and, when so acting, shall have all the powers of,
and be subject to all the restrictions upon, the Secretary.
SECTION 4.7 Treasurer and Assistant Treasurers.
-----------------------------------
The Treasurer shall keep or cause to be kept the books of account of
the Corporation and shall render statements of the financial affairs of the
Corporation in such form and as often as required by the Board of Directors or
the President. The Treasurer, subject to the order of the Board of Directors,
shall have custody of all funds and securities of the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements. The
Treasurer shall perform all other duties commonly incident to his office and
shall perform such other duties and have such other powers as the Board of
Directors or the President shall designate from time to time. At the request of
the Treasurer, or in the Treasurer's absence or disability, any Assistant
Treasurer may perform any of the duties of the Treasurer and, when so acting,
shall have all the powers of, and be subject to all the restrictions upon, the
Treasurer. Except where by law the signature of the Treasurer is required, each
of the Assistant Treasurers shall possess the same power as the Treasurer to
sign all certificates, contracts, obligations and other instruments of the
Corporation.
SECTION 4.8 Non-Executive Staff Officers.
-----------------------------
In addition to the executive officer positions which are described in
the preceding paragraphs of this Article IV, the Corporation shall have such
non-executive staff officer positions as may be created by the Board of
Directors, from time to time, which may include, but shall not necessarily be
limited to, a Vice-President of Risk Management and a Vice-President of Human
Resources and Benefits. Non-executive staff officers will be designated as such
in the resolutions of the Board of Directors which create or fill such
12
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positions. Non-executive staff officers will not have the power or right to sign
documents on behalf of the Corporation, to otherwise bind the corporation as to
legal matters, or to otherwise have any of the powers or rights of an executive
officer of the Corporation. It is the intent of the Corporation that such
restrictions be imposed to vest the day-to-day management of the Corporation
solely in the executive officers and not in the non-executive staff officers
and, furthermore, to not make the non-executive staff officers executive offers
for the purposes of reporting to the United States Securities and Exchange
Commission under applicable federal law or the Commission's Rules and
Regulations.
ARTICLE V
INDEMNIFICATION AND INSURANCE
SECTION 5.1 Right to Indemnification.
-------------------------
Subject to the terms and conditions of this Article V, each officer or
director of the Corporation who was or is made a party or witness or is
threatened to be made a party or witness to or is otherwise involved in any
threatened, pending or completed action, suit, alternative dispute resolution,
inquiry, hearing, investigation, or proceeding, whether civil, criminal,
administrative or investigative, including any derivative action (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director or
officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans (hereinafter an "indemnitee"), whether
the basis of such proceeding is alleged action or inaction in an official
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized or permitted by the Arizona Business Corporation Act (the "Act"), as
the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than such law permitted the Corporation
to provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith and such indemnification shall continue as to
an indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators; provided, however, that, except as provided herein with respect
to proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation.
13
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The right to indemnification conferred in this Section shall include
the right to be paid by the Corporation the expenses incurred in defending any
such proceeding in advance of its final disposition (hereinafter an "advancement
of expenses"); provided, however, that, if the Act requires, an advancement of
expenses incurred by an indemnitee shall be made only upon delivery to the
Corporation of an undertaking in the form then required by the Act (if any), by
or on behalf of such indemnitee, with respect to the repayment of amounts so
advanced (hereinafter an "undertaking").
SECTION 5.2 Advance of Expenses
-------------------
(a) If so requested by an indemnitee in writing, the Corporation shall
(subject to the expense advance rules hereinafter described) advance to an
indemnitee (an "expense advance") any and all expenses incurred in connection
with the investigation and preparation of the indemnitee's participation in any
indemnifiable action, whether as a witness or a party, pursuant to these Bylaws.
The Corporation shall comply with the indemnitee's written request for an
expense advance, and, if required by the Act, make any necessary determination
that the facts then known would not preclude indemnification under the Act,
within ten (10) business days of receipt of such written request, together with
the reimbursement commitment referred to in subparagraph (b) below.
(b) The obligation of the Corporation to make an expense advance shall
be subject to the condition that, if it is ultimately determined (by final
judicial determination from which there is no further right to appeal) that
there are matters to which indemnitee is not entitled to indemnity under these
Bylaws, the Corporation shall be entitled to be reimbursed by indemnitee for all
such amounts. Prior to obtaining the initial expense advance, indemnitee shall
confirm such reimbursement obligation by delivery to Corporation of a signed
undertaking to that effect. Such obligation shall be unsecured, and accepted
without reference to financial ability to make repayment.
(c) Expenses in all cases must be reasonable and comply with existing
or future billing procedures of the Company so that the Company can reasonably
monitor and audit such expenses. With respect to attorneys' fees, the Company
will give reasonable consideration to requests for specific counsel and to
requests for the grouping of individuals for joint defense purposes. Any
attorney representing more than one individual may be requested to render
separate statements to each individual or otherwise allocate billings by
individual.
(d) Expenses include attorneys' fees, court costs, deposition costs,
court reporter fees, travel and all other costs, expenses and obligations
actually paid to another or incurred in connection with investigating the facts
underlying a proceeding, preparing to defend and defending a proceeding or
preparing for and participating in a proceeding as a witness, or any of the
foregoing expenses incurred on appeal or in an action or other proceeding to
enforce indemnitee's rights hereunder, or any other reasonable expenses incurred
by indemnitee in participating in any indemnifiable proceeding.
14
<PAGE>
SECTION 5.3 Right of Indemnitee to Bring Suit.
----------------------------------
If a claim under Section 5.1 of this Article is not paid in full by the
Corporation within sixty days after a written claim has been received by the
Corporation, or a claim under Section 5.2 of this Article is not paid in full
within twenty days, the indemnitee may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim. If successful in
whole or in part in any such suit or in a suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expenses of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense that,
and (ii) any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has not met
the applicable standard of conduct set forth in the Act. Neither the failure of
the Corporation (including its Board of Directors, independent legal counsel, or
its shareholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Act, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel or its shareholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee has not met the applicable standard or conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit.
SECTION 5.4 Burden of Proof
---------------
In any determination thereunder, suit brought by the indemnitee to
enforce a right hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified or to such advancement of expenses
under this Section or otherwise shall be on the Corporation. For purposes of
these Bylaws, the termination of any proceeding by judgment, order, settlement
(whether with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not payable under these
Bylaws or permitted by applicable law.
SECTION 5.5 Specific Limitations on Indemnification.
----------------------------------------
Notwithstanding anything in this Article to the contrary, the
Corporation shall not be obligated to make any payment to any indemnitee with
respect to any proceeding (i) to the extent that payment is actually made to the
indemnitee under any insurance policy, or is made to indemnitee by the
Corporation or an affiliate thereof otherwise than
15
<PAGE>
pursuant to this Article, (ii) for any expense, liability or loss in connection
with a proceeding settled without the Corporation's written consent, which
consent, however, shall not be unreasonably withheld, (iii) for an accounting of
profits made from the purchase or sale by the indemnitee of securities of the
Corporation within the meaning of Section 16(b) of the Securities Exchange Act
of 1934, as amended, or similar provisions of any state statutory or common law,
or (iv) where prohibited by applicable law.
SECTION 5.6 Contract.
---------
The provisions of this Article shall be deemed to be a contract between
the Corporation and each director and officer who serves in such capacity at any
time while such Section is in effect, and any repeal or modification thereof
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter based in whole or in part upon any such state of
facts. However, nothing contained in these Bylaws is intended to, or shall,
create any right to continued employment by the Corporation.
SECTION 5.7 Partial Indemnity.
------------------
If the indemnitee is entitled under any provision of this Article to
indemnification by the Corporation for some or a portion of the expenses,
liabilities or losses incurred in connection with a proceeding but not, however,
for all of the total amount thereof, the Corporation shall nevertheless
indemnify the indemnitee for the portion thereof to which the indemnitee is
entitled. Moreover, notwithstanding any other provision of this Article, to the
extent that the indemnitee has been successful on the merits or otherwise in
defense of any or all claims relating in whole or in part to a proceeding or in
defense of any issue or matter therein, including dismissal without prejudice,
the indemnitee shall be indemnified against all loss, expense and liability
incurred in connection with the portion of the proceeding with respect to which
indemnitee was successful on the merits or otherwise.
SECTION 5.8 Non-Exclusivity of Rights.
--------------------------
The rights to indemnification and to the advancement of expenses
conferred in this Article shall not be exclusive of any other right which any
person may have or hereafter acquire under any contract, statute, the Articles
of Incorporation, bylaw, agreement, vote of shareholders or disinterested
directors or otherwise.
SECTION 5.9 Insurance.
----------
The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss,
16
<PAGE>
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under law.
SECTION 5.10 Indemnification of Employees and Agents of the Corporation.
-----------------------------------------------------------
The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses, to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation, or to such
lesser extent as may be determined by the Board of Directors.
SECTION 5.11 Notice by Indemnitee and Defense of Claim.
------------------------------------------
The indemnitee shall promptly notify the Corporation in writing upon
being served with any summons, citation, subpoena, complaint, indictment,
information or other document relating to any matter, whether civil, criminal,
administrative or investigative, but the omission so to notify the Corporation
will not relieve it from any liability which it may have to the indemnitee if
such omission does not prejudice the Corporation's rights. If such omission does
prejudice the Corporation's rights, the Corporation will be relieved from
liability only to the extent of such prejudice; nor will such omission relieve
the Corporation from any liability which is may have to the indemnitee otherwise
than under this Article V. With respect to any proceedings as to which the
indemnitee notifies the Corporation of the commencement thereof:
(a) The Corporation will be entitled to participate therein at its own
expense; and
(b) The Corporation will be entitled to assume the defense thereof,
with counsel reasonably satisfactory to the indemnitee; provided, however, that
the Corporation shall not be entitled to assume the defense of any proceeding
(and this Section 5.11 shall be inapplicable to such proceeding) if the
indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Corporation and the indemnitee with respect to such
proceeding. After notice from the Corporation to the indemnitee of its election
to assume the defense thereof, the Corporation will not be liable to the
indemnitee under this Article V for any expenses subsequently incurred by the
indemnitee in connection with the defense thereof, other than reasonable costs
of investigation or as otherwise provided below. The indemnitee shall have the
right to employ its own counsel in such proceeding but the fees and expenses of
such counsel incurred after notice from the Corporation of its assumption of the
defense thereof shall be at the expense of the indemnitee unless:
(i) The employment of counsel by the indemnitee has been
authorized by the Corporation in writing; or
17
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(ii) The Corporation shall not have employed counsel to assume
the defense in such proceeding or shall not have assumed such defense and be
acting in connection therewith with reasonable diligence;
in each of which cases the fees and expenses of such counsel
shall be at the expense of the Corporation.
(c) The Corporation shall not settle any proceeding in any manner which
would impose any penalty or limitation on the indemnitee without the
indemnitee's written consent; provided, however, that the indemnitee will not
unreasonably withhold his consent to any proposed settlement.
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 6.1 Certificates for Shares.
------------------------
Unless otherwise provided by a resolution of the Board of Directors,
the shares of the Corporation shall be represented by a certificate. The
certificates of stock of the Corporation shall be numbered and shall be entered
in the books of the Corporation as they are issued. They shall exhibit the
holder's name and number of shares and shall be signed by or in the name of the
Corporation by (a) the Chairman of the Board of Directors, the President or any
Vice President and (b) the Treasurer, any Assistant Treasurer, the Secretary or
any Assistant Secretary. Any or all of the signatures on a certificate may be
facsimile. In case any officer of the Corporation, transfer agent or registrar
who has signed, or whose facsimile signature has been placed upon such
certificate, shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may nevertheless be issued
by the Corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issuance.
SECTION 6.2 Classes of Stock.
-----------------
(a) If the Corporation shall be authorized to issue more than one class
of stock or more than one series of any class, the powers, designations,
preferences and relative participating, optional or other special rights of each
class of stock or series thereof and the qualification, limitations, or
restrictions of such preferences or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, that in lieu of the
foregoing requirements, there may be set forth on the face or back of the
certificate that the Corporation shall issue to represent such class or series
of stock, a statement that the Corporation will furnish without charge to each
shareholder who so requests the powers,
18
<PAGE>
designations, preferences and relative participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences or rights.
(b) Within a reasonable time after the issuance or transfer of
uncertificated stock, the Corporation shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to applicable law or a statement that the Corporation
will furnish without charge to each shareholder who so requests the powers,
designations, preferences and relative participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences or rights.
SECTION 6.3 Transfer.
---------
Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Upon receipt of proper transfer instructions from the registered owner of
uncertificated shares, such uncertificated shares shall be cancelled, issuance
of new equivalent uncertificated shares or certificated shares shall be made to
the person entitled thereto and the transaction shall be recorded upon the books
of the Corporation.
SECTION 6.4 Record Owner.
-------------
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock as the holder in fact thereof, and, accordingly, shall
not be bound to recognize any equitable or other claim to or interest in such
share on the part of any other person, whether or not it shall have express or
other notice thereof, save as expressly provided by the laws of the State of
Arizona.
SECTION 6.5 Lost Certificates.
------------------
The Board of Directors may direct a new certificate or certificates or
uncertificated shares to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates or uncertificated shares, the Board
of Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as the Board of Directors shall require and to give the Corporation a bond in
19
<PAGE>
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 Record Date.
------------
(a) In order that the Corporation may determine the shareholders
entitled to notice of or to vote at any meeting of the shareholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days prior to the date of
such meeting nor more than sixty days prior to any other action. If not fixed by
the Board of Directors, the record date shall be determined as provided by law.
(b) A determination of shareholders of record entitled to notice of or
to vote at a meeting of the shareholders shall apply to any adjournments of the
meeting, unless the Board of Directors fixes a new record date for the adjourned
meeting.
(c) Holders of stock on the record date are entitled to notice and to
vote or to receive the dividend, distribution or allotment of rights or to
exercise the rights, as the case may be, notwithstanding any transfer of the
shares on the books of the Corporation after the record date, except as
otherwise provided by agreement or by law, the Articles of Incorporation or
these Bylaws.
SECTION 7.2 Execution of Instruments.
-------------------------
The Board of Directors may, in its discretion, determine the method and
designate the signatory officer or officers, or other persons, to execute any
corporate instrument or document or to sign the corporate name without
limitation, except where otherwise provided by law, the Articles of
Incorporation or these Bylaws. Such designation may be general or confined to
specific instances.
SECTION 7.3 Voting of Securities Owned by the Corporation.
----------------------------------------------
All stock and other securities of other corporations held by the
Corporation shall be voted, and all proxies with respect thereto shall be
executed, by the person so authorized by resolution of the Board of Directors,
or, in the absence of such authorization, by the President.
20
<PAGE>
SECTION 7.4 Corporate Seal.
---------------
A corporate seal shall not be requisite to the validity of any
instrument executed by or on behalf of the Corporation. If a corporate seal is
used, the same shall be at the pleasure of the officer affixing seal either (a)
a circle having on the circumference thereof the words "Employee Solutions,
Inc." and in the center "Incorporated - 1991, Arizona," or (b) a seal containing
the words "Corporate Seal" in the center thereof.
SECTION 7.5 Construction and Definitions.
-----------------------------
Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the Act and the Articles of Incorporation shall
govern the construction of these Bylaws.
SECTION 7.6 Amendments.
-----------
These Bylaws may be altered, amended or repealed as set forth in the
Articles of Incorporation.
21
SECOND MODIFICATION AGREEMENT
-----------------------------
DATE: February 19, 1997
----
PARTIES: Borrower: Employee Solutions, Inc.,
------- an Arizona corporation
Borrower 2929 East Camelback Road,
Address: Suite 220,
Phoenix, Arizona 85016-4426
Bank: Bank One, Arizona, NA,
a national banking association
Bank P.O. Box 71
Address: Phoenix, Arizona 85001
RECITALS:
- ---------
A. Bank has extended to Borrower credit ("Loan") in the current
principal amount of $45,000,000.00 pursuant to the Loan Agreement dated August
1, 1996 ("Credit Agreement"), and evidenced by the Secured Promissory Note dated
August 1, 1996 ("Note"). The unpaid principal of the Loan as of the date hereof
is $43,500,000. 00.
B. The Loan is secured by, among other things, the Security Agreement
dated August 1, 1996, as modified by the Letter Agreement dated August 22, 1996
("Security Agreement"), between the Obligor (as defined therein) and Bank (the
agreements, documents, and instruments securing the Loan and the Note are
referred to individually and collectively as the "Security Documents").
C. Bank and Borrower have executed and delivered previously the
following agreements ("Modifications") modifying the terms of the Loan, the
Note, the Credit Agreement, and/or the Security Documents: Letter Agreement
dated August 22, 1996, and Modification Agreement dated October 15, 1996. The
Note, the Credit Agreement, the Security Documents, any arbitration resolution,
any environmental certification and indemnity agreement, and all other
agreements, documents, and instruments evidencing, securing, or otherwise
relating to the Loan, as modified in the Modifications, are sometimes referred
to individually and collectively as the "Loan Documents".
D. Borrower has requested that Bank modify the Loan and the Loan
Documents as provided herein. Bank is willing to so modify the Loan and the Loan
Documents, subject to the terms and conditions herein.
<PAGE>
AGREEMENT:
- ----------
For good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Borrower and Bank agree as follows:
1. ACCURACY OF RECITALS.
---------------------
Borrower acknowledges the accuracy of the Recitals.
2. MODIFICATION OF LOAN DOCUMENTS.
-------------------------------
2.1 The Loan Documents are modified as follows:
2.1.1 The Commitment Amount (as defined in the Credit
Agreement) is hereby increased from $45,000,000.00 to $60,000,000.00. All
references in the Loan Documents to the Commitment Amount are hereby modified to
refer to the increased Commitment Amount of $60,000,000.00. Notwithstanding the
preceding, with respect to the increased Commitment Amount of $15,000,000.00,
Bank and Borrower agree that until such time that Bank has obtained a
participant with respect to $10,000,000.00 of the increased Commitment Amount of
$15,000,000.00, Bank shall have no obligation to disburse any portion of such
$10,000,000.00 amount.
2.1.2 Commencing February 1, 1998, the Commitment Amount shall
be automatically reduced by $3,000,000.00, and thereafter shall automatically be
reduced by $3,000,000.00 every calendar quarter until the Scheduled Expiration
Date (as defined in the Credit Agreement).
2.1.3 As set forth in the Schedule of Terms in the Credit
Agreement, the Purpose of Advances is hereby modified to add letters of credit
thereto.
2.1.4 The following new entities are hereby added to the
Security Agreement as additional Obligors, and such entities hereby assign to
Bank, as security pledge to Bank, and grant to Bank, a security interest in the
Collateral (as defined therein) to secure the full and timely payment and
performance of the Obligations (as defined therein), all in accordance with the
terms and conditions of the Security Agreement:
Employee Solutions of Alabama, Inc., an Alabama corporation
GCK Entertainment Services I, Inc., a Delaware corporation
Talent, Entertainment and Media Services, Inc., a Delaware corporation
In addition, all such new Obligors shall execute perfection certificates and UCC
financing statements as Bank shall require.
2
<PAGE>
2.1.5 The following new entities are hereby added as
Guarantors for the Loan, and Borrower shall cause such entities to execute
Bank's form of Continuing Guaranty of Payment:
Employee Solutions of Alabama, Inc., an Alabama corporation
GCK Entertainment Services I, Inc., a Delaware corporation
Talent, Entertainment and Media Services, Inc., a Delaware corporation
2.1.6 Bank hereby consents to the guarantee to be provided by
Borrower for Employee Solutions of Texas, Inc. in order to satisfy the audit
requirements of the State of Texas, all as outlined in the January 29, 1997
letter from Morris C. Aaron to the Bank.
2.2 Each of the Loan Documents is modified to provide that it shall be
a default or an event of default thereunder if Borrower shall fail to comply
with any of the covenants of Borrower herein or if any representation or
warranty by Borrower herein or by any guarantor in any related Consent and
Agreement of Guarantor(s) is materially incomplete, incorrect, or misleading as
of the date hereof.
2.3 Each reference in the Loan Documents to any of the Loan Documents
shall be a reference to such document as modified herein,
3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.
----------------------------------------------
The Loan Documents are ratified and affirmed by Borrower and shall remain in
full force and effect as modified herein. Any property or rights to or interests
in property granted as security in the Loan Documents shall remain as security
for the Loan and the obligations of Borrower in the Loan Documents.
4. BORROWER REPRESENTATIONS AND WARRANTIES.
----------------------------------------
Borrower represents and warrants to Bank:
4.1 No default or event of default under any of the Loan Documents as
modified herein, nor any event, that, with the giving of notice or the passage
of time or both, would be a default or an event of default under the Loan
Documents as modified herein has occurred and is continuing.
4.2 There has been no material adverse change in the financial
condition of Borrower or any other person whose financial statement has been
delivered to Bank in connection with the Loan from the most recent financial
statement received by Bank.
4.3 Each and all representations and warranties of Borrower in the Loan
Documents are accurate on the date hereof.
3
<PAGE>
4.4 Borrower has no claims, counterclaims, defenses, or set-offs with
respect to the Loan or the Loan Documents as modified herein.
4.5 The Loan Documents as modified herein are the legal, valid, and
binding obligation of Borrower, enforceable against Borrower in accordance with
their terms.
4.6 Borrower is validly existing under the laws of the State of its
formation or organization and has the requisite power and authority to execute
and deliver this Agreement and to perform the Loan Documents as modified herein.
The execution and delivery of this Agreement and the performance of the Loan
Documents as modified herein have been duly authorized by all requisite action
by or on behalf of Borrower. This Agreement has been duly executed and delivered
on behalf of Borrower.
5. BORROWER COVENANTS.
-------------------
Borrower covenants with Bank:
5.1 Borrower shall execute, deliver, and provide to Bank such
additional agreements, documents, and instruments as reasonably required by Bank
to effectuate the intent of this Agreement.
5.2 Borrower fully, finally, and forever releases and discharges Bank
and its successors, assigns, directors, officers, employees, agents, and
representatives from any and all actions, causes of action, claims, debts,
demands, liabilities, obligations, and suits, of whatever kind or nature, in law
or equity, that Borrower has or in the future may have, whether known or
unknown, arising from events occurring prior to the date of this Agreement and
in respect of the Loan, the Loan Documents, or the actions or omissions of Bank
in respect of the Loan or the Loan Documents.
5.3 Contemporaneously with the execution and delivery of this
Agreement, Borrower has paid to Bank:
5.3.1 All accrued and unpaid interest under the Note and all
amounts, other than interest and principal, due and payable by Borrower under
the Loan Documents as of the date hereof.
5.3.2 All of the internal and external costs and expenses
incurred by Bank in connection with this Agreement (including, without
limitation, inside and outside attorneys, processing, filing, and all other
costs, expenses, and fees).
5.3.3 The increased commitment fee on the portion of the Loan
that is fully committed, which may be advanced from the Loan.
4
<PAGE>
5.4 Contemporaneously with the execution and delivery of this
Agreement, Borrower shall provide to Bank:
5.4.1 Corporate resolutions and/or secretary certificates for
Borrower and each guarantor authorizing the increased Commitment Amount and the
other matters set forth in this Agreement.
5.4.2 Such additional Loan Documents as may be required by the
terms of this Second Modification Agreement as provided in Section 2 above. If
necessary, Borrower agrees to cooperate with Bank in completing and delivering
all such documentation after the closing of this Second Modification Agreement.
6. EXECUTION AND DELIVERY OF AGREEMENT BY BANK.
--------------------------------------------
Bank shall not be bound by this Agreement until each of the following shall have
occurred: (i) Bank has executed and delivered this Agreement, (ii) Borrower has
performed all of the obligations of Borrower under this Agreement to be
performed contemporaneously with the execution and delivery of this Agreement,
(iii) each guarantor(s) of the Loan, if any, has executed and delivered to Bank
a Consent and Agreement of Guarantor(s), and (iv) if required by Bank, Borrower
and any guarantor(s) have executed and delivered to Bank an arbitration
resolution, an environmental questionnaire, and an environmental certification
and indemnity agreement.
7. ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER.
------------------------------------------------------------
The Loan Documents as modified herein contain the entire understanding and
agreement of Borrower and Bank in respect of the Loan and supersede all prior
representations, warranties, agreements, arrangements, and understandings. No
provision of the Loan Documents as modified herein may be changed, discharged,
supplemented, terminated, or waived except in a writing signed by Bank and
Borrower.
8. BINDING EFFECT.
---------------
The Loan Documents as modified herein shall be binding upon, and inure to the
benefit of, Borrower and Bank and their respective successors and assigns.
9. CHOICE OF LAW.
--------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of Arizona, without giving effect to conflicts of law principles.
5
<PAGE>
10. COUNTERPART EXECUTION.
----------------------
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original and all of which together shall constitute one and the
same document. Signature pages may be detached from the counterparts and
attached to a single copy of this Agreement to physically form one document.
11. ARBITRATION.
------------
11.1 Binding Arbitration. Bank, Borrower and each guarantor executing a
Consent and Agreement of Guarantor(s) with respect to this Agreement hereby
agree that all controversies and claims arising directly or indirectly out of
this Agreement and the Loan Documents, shall at the written request of any party
be arbitrated pursuant to the applicable rules of the American Arbitration
Association. The arbitration shall occur in the State of Arizona. Judgment upon
any award rendered by the arbitrator(s) may be entered in any court having
jurisdiction. The Federal Arbitration Act shall apply to the construction and
interpretation of this arbitration agreement.
11.2 Arbitration Panel. A single arbitrator shall have the power to
render a maximum award of one hundred thousand dollars. When any party files a
claim in excess of this amount, the arbitration decision shall be made by the
majority vote of three arbitrators. No arbitrator shall have the power to
restrain any act of any party.
11.3 Provisional Remedies, Self Help and Foreclosure. No provision of
Section 11.1 shall limit the right of any party to exercise self help remedies,
to foreclose against any real or personal property collateral, or to obtain any
provisional or ancillary remedies (including but not limited to injunctive
relief or the appointment of a receiver) from a court of competent jurisdiction.
At Bank's option, it may enforce its right under a mortgage by judicial
foreclosure, and under a deed of trust either by exercise of power of sale or by
judicial foreclosure. The institution and maintenance of any remedy permitted
above shall not constitute a waiver of the rights to submit any controversy or
claim to arbitration. The statute of limitations, estoppel, waiver, laches, and
similar doctrines which would otherwise be applicable in an action brought by a
party shall be applicable in any arbitration proceeding.
DATED as of the date first above stated.
EMPLOYEE SOLUTIONS, INC., an Arizona
corporation
By: _____________________________________
Name: ___________________________________
Title: __________________________________
6
<PAGE>
BANK ONE, ARIZONA, NA, a national banking
association
By: _____________________________________
Name: ___________________________________
Title: __________________________________
7
<PAGE>
CONSENT AND AGREEMENT OF GUARANTOR(S) AND
MODIFICATION OF GUARANTY
With respect to the Second Modification Agreement dated February 19,
1997 ("Agreement"), between Employee Solutions, Inc., an Arizona corporation
("Borrower") and Bank One, Arizona, NA, a national banking association ("Bank"),
the undersigned (individually and, if more than one, collectively "Guarantor")
agrees for the benefit of Bank as follows:
1. Guarantor acknowledges (i) receiving a copy of and reading the
Agreement, (ii) the accuracy of the Recitals in the Agreement, and (iii) the
effectiveness of (A) the Continuing Guaranty of Payment dated August 1, 1996
("Guaranty"), by the undersigned for the benefit of Bank, as modified herein,
and (B) any other agreements, documents, or instruments securing or otherwise
relating to the Guaranty, (including, without limitation, any arbitration
resolution and any environmental certification and indemnity agreement
previously executed and delivered by the undersigned), as modified herein. The
Guaranty and such other agreements, documents, and instruments, as modified
herein, are referred to individually and collectively as the "Guarantor
Documents". All capitalized terms used herein and not otherwise defined shall
have the meaning given to such terms in the Agreement.
2. Guarantor consents to the modification of the Loan Documents and all
other matters in the Agreement. Guarantor agrees to the arbitration provisions
set forth in Section 11.1 of the Agreement.
3. Guarantor fully, finally, and forever releases and discharges Bank
and its successors, assigns, directors, officers, employees, agents, and
representatives from any and all actions, causes of action, claims, debts,
demands, liabilities, obligations, and suits of whatever kind or nature, in law
or equity, that Guarantor has or in the future may have, whether known or
unknown, arising from events occurring prior to the date hereof and in respect
of the Loan, the Loan Documents, the Guarantor Documents, or the actions or
omissions of Bank in respect of the Loan, the Loan Documents, or the Guarantor
Documents.
4. Guarantor agrees that all references, if any, to the Note, the
Credit Agreement, the Deed of Trust, the Security Documents, and the Loan
Documents in the Guarantor Documents shall be deemed to refer to such
agreements, documents, and instruments as modified by the Agreement.
5. Guarantor reaffirms the Guarantor Documents and agrees that the
Guarantor Documents continue in full force and effect and remain unchanged,
except as specifically modified by this Consent and Agreement of Guarantor(s).
Any property or rights to or interests in property granted as security in the
Guarantor Documents shall remain as security for the Guaranty and the
obligations of Guarantor in the Guaranty.
8
<PAGE>
6. Guarantor represents and warrants that the Loan Documents, as
modified by the Agreement, and the Guarantor Documents, as modified by this
Consent and Agreement of Guarantor(s), are the legal, valid, and binding
obligations of Borrower and the undersigned, respectively, enforceable in
accordance with their terms against Borrower and the undersigned, respectively.
7. Guarantor represents and warrants that Guarantor has no claims,
counterclaims, defenses, or off sets with respect to the enforcement against
Guarantor of the Guarantor Documents.
8. Guarantor represents and warrants that there has been no material
adverse change in the financial condition of any Guarantor from the most recent
financial statement received by Bank.
9. Guarantor agrees that this Consent and Agreement of Guarantor(s) may
be executed in one or more counterparts, each of which shall be deemed an
original and all of which together shall constitute one and the same document.
Signature and acknowledgment pages may be detached from the counterparts and
attached to a single copy of this Consent and Agreement of Guarantor(s) to
physically form one document.
10. The Guaranty is hereby modified to increase the principal amount of
indebtedness of Borrower to Bank from $45,000,000.00 to $60,000,000.00, as all
set forth in the Agreement.
DATED as of the date of the Agreement.
LOGISTICS PERSONNEL CORP., a Nevada
corporation
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
EMPLOYEE SOLUTIONS OF TEXAS, INC.,
a Texas corporation
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
9
<PAGE>
EMPLOYEE SOLUTIONS-EAST, INC., a Georgia
corporation
By _______________________________________
Name: ____________________________________
Title: ___________________________________
EMPLOYEE SOLUTIONS-MIDWEST, INC., a
Michigan corporation
By _______________________________________
Name: ____________________________________
Title: ___________________________________
ESI AMERICA, INC., a Michigan corporation
By _______________________________________
Name: ____________________________________
Title: ___________________________________
ESI-MIDWEST, INC., a Nevada corporation
By _______________________________________
Name: ____________________________________
Title: ___________________________________
EMPLOYEE SOLUTIONS OF CALIFORNIA, INC., a
Nevada corporation
By _______________________________________
Name: ____________________________________
Title: ___________________________________
10
<PAGE>
EMPLOYEE SOLUTIONS - OHIO, INC., an
Indiana corporation, formerly known
as POKAGON OFFICE SERVICES, INC.
By _______________________________________
Name: ____________________________________
Title: ___________________________________
ESI RISK MANAGEMENT AGENCY, INC., an
Arizona corporation
By _______________________________________
Name: ____________________________________
Title: ___________________________________
EMPLOYEE SOLUTIONS OF ALABAMA, INC., an
Alabama corporation
By _______________________________________
Name: ____________________________________
Title: ___________________________________
GCK ENTERTAINMENT SERVICES I, INC., a
Delaware corporation
By _______________________________________
Name: ____________________________________
Title: ___________________________________
TALENT, ENTERTAINMENT AND MEDIA SERVICES,
INC., a Delaware corporation
By _______________________________________
Name: ____________________________________
Title: ___________________________________
11
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is made this 19th day of
March, 1997 by and between EMPLOYEE SOLUTIONS, INC., an Arizona corporation (the
"Company"), and ROY A. FLEGENHEIMER ("Employee").
RECITALS
--------
A. The Company wishes to employ Employee, and Employee wishes to be
employed by the Company.
B. The parties wish to set forth in this Agreement the terms and
conditions of such employment.
C. The Compensation Committee of the Company's Board of Directors has
considered (and requested certain changes to previous drafts of) the form of
this Agreement prior to and at meetings held on February 18, 1997 and March 18,
1997, and has unanimously approved this form of the Agreement following
completion of such review and revision process.
AGREEMENTS
----------
In consideration of the mutual promises and covenants set forth herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. Employment. Subject to the terms and conditions of this
Agreement, the Company employs Employee to serve in an executive capacity and
Employee accepts such employment and agrees to dedicate all of his business time
and effort to Company business and perform such reasonable responsibilities and
duties as may be assigned to him from time to time by the Company's Chief
Executive Officer, President and/or Board of Directors (the "Board"). Employee's
title shall be Chief Operating Officer, with responsibility for the Company's
operational affairs and related functions and such executive responsibilities as
may be assigned from time to time by, and subject to the direction of, the
Board, the Chief Executive Officer and/or the President. Employee shall report
directly to the Chief Executive Officer. Subject to Sections 7.f and 8, such
title and duties may be changed from time to time by the Board, so long as
Employee is maintained in an executive capacity throughout the term of his
employment.
2. Term. The employment of Employee by the Company pursuant to
this Agreement shall commence on the date hereof and continue until terminated
as provided elsewhere herein.
3. Compensation.
<PAGE>
a. Salary. The initial annual base salary payable to
Employee shall be $185,000. The base salary shall be reviewed at least annually
and may be increased from time to time in accordance with the Company's policies
and practices regarding periodic review and adjustment of executive
compensation.
b. Incentive Plan. The Company may establish and
implement an incentive compensation system which will provide additional
incentive payments to Employee based upon his performance and the performance of
the Company.
4. Fringe Benefits. In addition to the options for shares of
the Company's Common Stock available to Employee under the same terms as those
available to Company employees, and any other employee benefit plans generally
available to Company employees, the Company shall include Employee (and
Employee's dependents) in any group medical insurance plan maintained for the
employees of the Company at the Company's expense. The manner of implementation
of such benefits with respect to such items as procedures and amounts is
discretionary with the Company but shall be commensurate with Employee's
executive status and shall include medical, dental and hospital coverage for
Employee and Employee's dependents who are eligible under the applicable plans.
The Company shall also pay Employee $5,000 per year (payable at the beginning of
each year of employment) for individual purchase by Employee of supplemental
insurance products or for use in such other manner as Employee sees fit.
5. Vacation. Employee shall be entitled to vacation with pay
in keeping with Employee's established vacation practices, but in no event less
than four weeks per calendar year. In addition, Employee shall be entitled to
such holidays as the Company may approve for its executive personnel.
6. Expense Reimbursement. In addition to the compensation and
benefits provided above, the Company shall pay all reasonable expenses of
Employee incurred in connection with the performance of Employee's duties and
responsibilities to the Company pursuant to this Agreement, upon submission of
appropriate vouchers and supporting documentation in accordance with the
Company's usual and ordinary practices, provided that such expenses are
reasonable and necessary business expenses of the Company. The Company shall pay
Employee's reasonable cellular telephone expenses that are related to Company
business. The Company further shall pay Employee a $700 per month allowance for
automobile expense (provided that such amount may be used by Employee in such
manner as Employee sees fit).
7. Termination. This Agreement may be terminated in the manner
provided below:
a. For Cause. The Company may terminate Employee's
employment by the Company, for cause, upon written notice to the Employee
stating the facts constituting such cause, provided that Employee shall have 20
days following such notice to cure any conduct or act, if curable, alleged to
provide grounds for termination for cause hereunder. In the event of termination
for cause, the Company shall be obligated to pay the Employee only the base
salary due him through the date of termination. Cause shall include willful and
persistent failure to
<PAGE>
abide by instructions or policies from or set by the Board of Directors, wilful
and persistent failure to attend to material duties or obligations imposed under
this Agreement, or commission of a felony or serious misdemeanor offense or
pleading guilty or nolo contendere to same.
b. Without Cause. The Chairman or the Company may
terminate Employee's employment by the Company at any time, without cause, by
giving 90 days written notice to the Employee. If the Company terminates under
this Section 7.b, it shall pay to Employee an amount equal to 12 months base
salary, payable monthly, less applicable withholdings; and shall continue
coverage of Employee and Employee's dependents under its medical plans and other
benefit arrangements for 12 months or until Employee secures other employment
(unless continuation of coverage under such plans is unfeasible, in which event
the Company will provide substantially similar benefits). The two 12-month
periods mentioned above each shall be extended to 24 months in the event
termination pursuant to this Section 7.b occurs within two years of the date of
this Agreement.
c. Disability. If Employee experiences a permanent
disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986,
as amended), the Company shall have the right to terminate this Agreement
without further obligation hereunder except for any bonus amount payable in
accordance with the next sentence and any amounts payable pursuant to disability
plans generally applicable to executive employees. Within 90 days after the end
of the fiscal year in which termination pursuant to this Section 7.c occurs, so
long as Employee is in full compliance with this Agreement, Employee shall be
entitled to receive an incentive compensation payment (calculated and payable in
the manner referred to in Section 3.b), if any, based upon the Company's
financial performance for such fiscal year, which shall be prorated to the
extent that Employees employment during such fiscal year was for a period of
less than the full year.
d. Death. If Employee dies, this Agreement shall
terminate immediately, and Employee's legal representative shall be entitled to
receive the base salary due to Employee through the 60th day from the date on
which his death shall have occurred and any other death benefits generally
applicable to executive employees. In addition, Employee's legal representative
shall be entitled to receive, at the end of the first quarter of the year
following the fiscal year in which such death shall have occurred, an incentive
compensation payment (calculated and payable in the manner referred to in
Section 3.b), if any, based upon the Company's financial performance for such
fiscal year, which shall be prorated to the extent that Employee's employment
during such fiscal year was for a period of less than the full year.
e. Resignation Without Good Reason. Employee may
resign at any time by giving 90 days written notice to the Company, in which
event Employee shall be entitled to receive only the base salary due him through
the date of termination plus any other vested rights under employee stock
options (pursuant to the terms of such options) or other employee benefit plans.
f. Resignation for Good Reason. Employee may resign
at any time for Good
<PAGE>
Reason (as defined in Section 8.c), in which event Employee shall be entitled to
payments and benefits to the same extent and payable in the same manner as if
Employee was terminated without cause as described in Section 7.b above.
8 Change in Control.
a. Severance Benefits. Notwithstanding Section 7.b.
or 7.f above, if Employee's employment with the Company terminates within 12
months after a Change in Control (as defined in Section 8.b below), Employee
shall be entitled to the severance benefits provided in Section 8.e unless such
termination is in accordance with Section 7.a, 7.c, 7.d or 7.e above, in which
case such other section shall apply. Any amount paid pursuant to Section 8 shall
be in lieu of any payment otherwise due under Section 7.b or 7.f.
b. "Change in Control" shall be deemed to have
occurred if (i) any "person" (as such term is used in Paragraphs 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended [the "Exchange Act"]), other
than a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 20% or more of the total voting power represented by
the Company's then outstanding Voting Securities, or (ii) during any period of
two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company and any new director whose
election by the Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof, or (iii) the stockholders
of the Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all the Company's
assets.
c. "Good Reason" shall mean, for purposes of this
Agreement, (i) without Employee's express written consent, a reduction of
Employee's compensation or the assignment to Employee of duties inconsistent
with Employee's positions, duties, responsibilities and status with the Company
immediately prior to the Change in Control, or a demotion or a change in titles
or offices as in effect immediately prior to a Change in Control (except in
connection with termination of Employee's employment in compliance with Section
7.a, 7.c, 7.d or 7.e above); (ii) a material breach by the Company of any of its
obligations hereunder which (if curable) is not cured by the Company within 20
days after written notice thereof; or (iii) without Employee's express written
consent, relocation of the site of Employee's duties to a location outside the
Phoenix, Arizona metropolitan area, or a requirement that Employee average more
<PAGE>
than 10 business days outside of the Phoenix, Arizona metropolitan area per
month.
d. "Voting Securities" shall mean any securities of
the Company which vote generally in the election of directors.
e. Amount of Benefit. If Employee is entitled to
severance benefits under Section 8.a, the amount of such benefit shall equal (i)
a lump-sum payment equal to 2.99 times the "Base Amount" (as such term is
defined in Section 280G of the Internal Revenue Code of 1986) applicable to
Employee, whether or not the provisions of Section 280G actually apply to the
payment; (ii) a continuation of medical coverage and other benefits in the
manner contemplated in Section 7.b above; and (iii) such other benefits to which
the Employee is entitled under the Company's benefits plans and policies as in
effect immediately prior to the Change in Control with respect to terminated
Employees.
9. Return of the Company's Materials. Upon the termination of
this Agreement, Employee shall promptly return to the Company all files, credit
cards, keys, instruments, equipment, and other materials owned or provided by
the Company.
10. Insurance. The Company shall use commercially reasonable
efforts to carry director's and officer's professional liability insurance
coverage for Employee while in the performance of Employee's duties hereunder in
an amount of at least $10,000,000.
11. Nondelegability of Employee's Rights and Company
Assignment Rights. The obligations, rights and benefits of Employee hereunder
are personal and may not be delegated, assigned, or transferred in any manner
whatsoever, nor are such obligations, rights or benefits subject to involuntary
alienation, assignment or transfer. The Company may transfer its obligations
hereunder to a subsidiary, affiliate or successor.
12. Notices. All notices, demands and communications required
by this Agreement shall be in writing and shall be deemed to have been given for
all purposes when sent to the respective addresses set forth below, (i) upon
personal delivery, (ii) one day after being sent, when sent by overnight courier
service to and from locations within the continental United States, (iii) three
days after posting when sent by registered, certified, or regular United States
mail, with postage prepaid and return receipt requested, or (iv) on the date of
transmission when sent by confirmed facsimile.
If to the Company: Employee Solutions, Inc.
2929 East Camelback Road
Suite 220
Phoenix Arizona 85016
Attn: Marvin D. Brody
Chief Executive Officer
If to Employee: Roy A. Flegenheimer
<PAGE>
10425 N. 55 Place
Scottsdale, Arizona
85253
(Or when sent to such other address as any party shall specify by written notice
so given.)
13. Entire Agreement. This Agreement, together with the
Indemnification Agreement dated November 21, 1996 and agreements evidencing
stock options grants issued to Employee from time to time (the "Other
Agreements") constitutes the final written expression of all of the agreements
between the parties, and is a complete and exclusive statement of those terms.
It supersedes all understandings and negotiations concerning the matters
specified herein (including all prior written employment agreements and
arrangements, if any), except as provided in the Other Agreements. Any
representations, promises, warranties or statements made by either party that
differ in any way from the terms of this written Agreement or the Other
Agreements shall be given no force or effect. Except as provided in the Other
Agreements, the parties specifically represent, each to the other, that there
are no additional or supplemental agreements between them related in any way to
the matters herein contained unless specifically included or referred to herein.
No addition to or modification of any provision of this Agreement shall be
binding upon any party unless made in writing and signed by all parties.
14. Waiver. The waiver by either party of the breach of any
covenant or provision in this Agreement shall not operate or be construed as a
waiver of any subsequent breach by either party.
15. Invalidity of Any Provision. The provision of this
Agreement are severable, it being the intention of the parties hereto that
should any provisions hereof be invalid or unenforceable, such invalidity or
unenforceability of any provision shall not affect the remaining provisions
hereof, but the same shall remain in full force and effect as if such invalid or
unenforceable provisions were omitted.
16. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Arizona exclusive
of the conflict of law provisions thereof. The parties agree that in the event
of litigation, venue shall lie exclusively in Maricopa County, Arizona.
17. Headings; Construction. Headings in this Agreement are for
informational purposes only and shall not be used to construe the intent of this
Agreement. The language in all parts of this Agreement shall in all cases be
construed as a whole according to its fair meaning and not strictly for nor
against any party.
18. Counterparts; Facsimile Signatures. This Agreement may be
executed simultaneously in any number of counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same
agreement. Delivery by any party of a
<PAGE>
facsimile signature to the other parties to this Agreement shall constitute
effective delivery by said party of an original counterpart signature to this
Agreement.
19. Binding Effect; Benefits. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, successors, executors, administrators and assigns. Notwithstanding
anything contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
20. Binding Effect on Marital Community. Employee represents
and warrants to the Company that he has the power to bind his marital community
(if any) to all terms and provisions of this agreement by his execution hereof.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement and caused the same to be duly delivered on its behalf as
of the date first above written.
EMPLOYEE SOLUTIONS, INC.,
an Arizona corporation
By
Marvin D. Brody, Chief Executive
Officer
"COMPANY"
Roy A. Flegenheimer
"EMPLOYEE"
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is made this 19th day of
March, 1997 by and between EMPLOYEE SOLUTIONS, INC., an Arizona corporation (the
"Company"), and MORRIS C. AARON ("Employee").
RECITALS
--------
A. The Company wishes to employ Employee, and Employee wishes to be
employed by the Company.
B. The parties wish to set forth in this Agreement the terms and
conditions of such employment.
C. The Compensation Committee of the Company's Board of Directors has
considered (and requested certain changes to previous drafts of) the form of
this Agreement prior to and at meetings held on February 18, 1997 and March 18,
1997, and has unanimously approved this form of the Agreement following
completion of such review and revision process.
AGREEMENTS
----------
In consideration of the mutual promises and covenants set forth herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. Employment. Subject to the terms and conditions of this
Agreement, the Company employs Employee to serve in an executive capacity and
Employee accepts such employment and agrees to dedicate all of his business time
and effort to Company business and perform such reasonable responsibilities and
duties as may be assigned to him from time to time by the Company's Chief
Executive Officer, President and/or Board of Directors (the "Board"). Employee's
title shall be Chief Financial Officer, with responsibility for the Company's
financial reporting and related functions and such executive responsibilities as
may be assigned from time to time by, and subject to the direction of, the
Board, the Chief Executive Officer and/or the President. Employee shall report
directly to the Chief Executive Officer. Subject to Sections 7.f and 8, such
title and duties may be changed from time to time by the Board, so long as
Employee is maintained in an executive capacity throughout the term of his
employment.
2. Term. The employment of Employee by the Company pursuant to
this Agreement shall commence on the date hereof and continue until terminated
as provided elsewhere herein.
<PAGE>
3. Compensation.
a. Salary. The initial annual base salary payable to
Employee shall be $150,000, retroactive to January 29, 1997 (Employee's
anniversary date of employment). The base salary shall be reviewed at least
annually and may be increased from time to time in accordance with the Company's
policies and practices regarding periodic review and adjustment of executive
compensation.
b. Incentive Plan. The Company may establish and
implement an incentive compensation system which will provide additional
incentive payments to Employee based upon his performance and the performance of
the Company.
4. Fringe Benefits. In addition to the options for shares of
the Company's Common Stock available to Employee under the same terms as those
available to Company employees, and any other employee benefit plans generally
available to Company employees, the Company shall include Employee (and
Employee's dependents) in any group medical insurance plan maintained for the
employees of the Company at the Company's expense. The manner of implementation
of such benefits with respect to such items as procedures and amounts is
discretionary with the Company but shall be commensurate with Employee's
executive status and shall include medical, dental and hospital coverage for
Employee and Employee's dependents who are eligible under the applicable plans.
The Company shall also pay Employee $5,000 per year (payable at the beginning of
each year of employment) for individual purchase by Employee of supplemental
insurance products or for use in such other manner as Employee sees fit.
5. Vacation. Employee shall be entitled to vacation with pay
in keeping with Employee's established vacation practices, but in no event less
than four weeks per calendar year. In addition, Employee shall be entitled to
such holidays as the Company may approve for its executive personnel.
6. Expense Reimbursement. In addition to the compensation and
benefits provided above, the Company shall pay all reasonable expenses of
Employee incurred in connection with the performance of Employee's duties and
responsibilities to the Company pursuant to this Agreement, upon submission of
appropriate vouchers and supporting documentation in accordance with the
Company's usual and ordinary practices, provided that such expenses are
reasonable and necessary business expenses of the Company. The Company shall pay
Employee's reasonable cellular telephone expenses that are related to Company
business. The Company further shall pay Employee a $500 per month allowance for
automobile expense (provided that such amount may be used by Employee in such
manner as Employee sees fit).
7. Termination. This Agreement may be terminated in the manner
provided below:
a. For Cause. The Company may terminate Employee's
employment by the Company, for cause, upon written notice to the Employee
stating the facts constituting such cause, provided that Employee shall have 20
days following such notice to cure any conduct or act, if curable, alleged to
provide grounds for termination for cause hereunder. In the event of termination
for cause, the Company shall be obligated to pay the Employee only the base
salary
<PAGE>
due him through the date of termination. Cause shall include willful and
persistent failure to abide by instructions or policies from or set by the Board
of Directors, wilful and persistent failure to attend to material duties or
obligations imposed under this Agreement, or commission of a felony or serious
misdemeanor offense or pleading guilty or nolo contendere to same.
b. Without Cause. The Chairman or the Company may
terminate Employee's employment by the Company at any time, without cause, by
giving 90 days written notice to the Employee. If the Company terminates under
this Section 7.b, it shall pay to Employee an amount equal to 12 months base
salary, payable monthly, less applicable withholdings; and shall continue
coverage of Employee and Employee's dependents under its medical plans and other
benefit arrangements for 12 months or until Employee secures other employment
(unless continuation of coverage under such plans is unfeasible, in which event
the Company will provide substantially similar benefits). The two 12-month
periods mentioned above each shall be extended to 24 months in the event
termination pursuant to this Section 7.b occurs within two years of the date of
this Agreement.
c. Disability. If Employee experiences a permanent
disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986,
as amended), the Company shall have the right to terminate this Agreement
without further obligation hereunder except for any bonus amount payable in
accordance with the next sentence and any amounts payable pursuant to disability
plans generally applicable to executive employees. Within 90 days after the end
of the fiscal year in which termination pursuant to this Section 7.c occurs, so
long as Employee is in full compliance with this Agreement, Employee shall be
entitled to receive an incentive compensation payment (calculated and payable in
the manner referred to in Section 3.b), if any, based upon the Company's
financial performance for such fiscal year, which shall be prorated to the
extent that Employees employment during such fiscal year was for a period of
less than the full year.
d. Death. If Employee dies, this Agreement shall
terminate immediately, and Employee's legal representative shall be entitled to
receive the base salary due to Employee through the 60th day from the date on
which his death shall have occurred and any other death benefits generally
applicable to executive employees. In addition, Employee's legal representative
shall be entitled to receive, at the end of the first quarter of the year
following the fiscal year in which such death shall have occurred, an incentive
compensation payment (calculated and payable in the manner referred to in
Section 3.b), if any, based upon the Company's financial performance for such
fiscal year, which shall be prorated to the extent that Employee's employment
during such fiscal year was for a period of less than the full year.
e. Resignation Without Good Reason. Employee may
resign at any time by giving 90 days written notice to the Company, in which
event Employee shall be entitled to receive only the base salary due him through
the date of termination plus any other vested rights under employee stock
options (pursuant to the terms of such options) or other employee benefit plans.
f. Resignation for Good Reason. Employee may resign
at any time for Good Reason (as defined in Section 8.c), in which event Employee
shall be entitled to payments and benefits to the same extent and payable in the
same manner as if Employee was terminated
<PAGE>
without cause as described in Section 7.b above.
8. Change in Control.
a. Severance Benefits. Notwithstanding Section 7.b.
or 7.f above, if Employee's employment with the Company terminates within 12
months after a Change in Control (as defined in Section 8.b below), Employee
shall be entitled to the severance benefits provided in Section 8.e unless such
termination is in accordance with Section 7.a, 7.c, 7.d or 7.e above, in which
case such other section shall apply. Any amount paid pursuant to Section 8 shall
be in lieu of any payment otherwise due under Section 7.b or 7.f.
b. "Change in Control" shall be deemed to have
occurred if (i) any "person" (as such term is used in Paragraphs 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended [the "Exchange Act"]), other
than a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 20% or more of the total voting power represented by
the Company's then outstanding Voting Securities, or (ii) during any period of
two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company and any new director whose
election by the Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof, or (iii) the stockholders
of the Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all the Company's
assets.
c. "Good Reason" shall mean, for purposes of this
Agreement, (i) without Employee's express written consent, a reduction of
Employee's compensation or the assignment to Employee of duties inconsistent
with Employee's positions, duties, responsibilities and status with the Company
immediately prior to the Change in Control, or a demotion or a change in titles
or offices as in effect immediately prior to a Change in Control (except in
connection with termination of Employee's employment in compliance with Section
7.a, 7.c, 7.d or 7.e above); (ii) a material breach by the Company of any of its
obligations hereunder which (if curable) is not cured by the Company within 20
days after written notice thereof; or (iii) without Employee's express written
consent, relocation of the site of Employee's duties to a location outside the
Phoenix, Arizona metropolitan area, or a requirement that Employee average more
than 10 business days outside of the Phoenix, Arizona metropolitan area per
month.
<PAGE>
d. "Voting Securities" shall mean any securities of
the Company which vote generally in the election of directors.
e. Amount of Benefit. If Employee is entitled to
severance benefits under Section 8.a, the amount of such benefit shall equal (i)
a lump-sum payment equal to 2.99 times the "Base Amount" (as such term is
defined in Section 280G of the Internal Revenue Code of 1986) applicable to
Employee, whether or not the provisions of Section 280G actually apply to the
payment; (ii) a continuation of medical coverage and other benefits in the
manner contemplated in Section 7.b above; and (iii) such other benefits to which
the Employee is entitled under the Company's benefits plans and policies as in
effect immediately prior to the Change in Control with respect to terminated
Employees.
9. Return of the Company's Materials. Upon the termination of
this Agreement, Employee shall promptly return to the Company all files, credit
cards, keys, instruments, equipment, and other materials owned or provided by
the Company.
10. Insurance. The Company shall use commercially reasonable
efforts to carry director's and officer's professional liability insurance
coverage for Employee while in the performance of Employee's duties hereunder in
an amount of at least $10,000,000.
11. Nondelegability of Employee's Rights and Company
Assignment Rights. The obligations, rights and benefits of Employee hereunder
are personal and may not be delegated, assigned, or transferred in any manner
whatsoever, nor are such obligations, rights or benefits subject to involuntary
alienation, assignment or transfer. The Company may transfer its obligations
hereunder to a subsidiary, affiliate or successor.
12. Notices. All notices, demands and communications required
by this Agreement shall be in writing and shall be deemed to have been given for
all purposes when sent to the respective addresses set forth below, (i) upon
personal delivery, (ii) one day after being sent, when sent by overnight courier
service to and from locations within the continental United States, (iii) three
days after posting when sent by registered, certified, or regular United States
mail, with postage prepaid and return receipt requested, or (iv) on the date of
transmission when sent by confirmed facsimile.
If to the Company: Employee Solutions, Inc.
2929 East Camelback Road
Suite 220
Phoenix Arizona 85016
Attn: Marvin D. Brody
Chief Executive Officer
If to Employee: Morris C. Aaron
c/o Employee Solutions, Inc.
2929 East Camelback Road
Suite 220
Phoenix, Arizona 85016
<PAGE>
(Or when sent to such other address as any party shall specify by written notice
so given.)
13. Entire Agreement. This Agreement, together with the
Indemnification Agreement dated November 21, 1996 and agreements evidencing
stock options grants issued to Employee from time to time (the "Other
Agreements") constitutes the final written expression of all of the agreements
between the parties, and is a complete and exclusive statement of those terms.
It supersedes all understandings and negotiations concerning the matters
specified herein (including all prior written employment agreements and
arrangements, if any), except as provided in the Other Agreements. Any
representations, promises, warranties or statements made by either party that
differ in any way from the terms of this written Agreement or the Other
Agreements shall be given no force or effect. Except as provided in the Other
Agreements, the parties specifically represent, each to the other, that there
are no additional or supplemental agreements between them related in any way to
the matters herein contained unless specifically included or referred to herein.
No addition to or modification of any provision of this Agreement shall be
binding upon any party unless made in writing and signed by all parties.
14. Waiver. The waiver by either party of the breach of any
covenant or provision in this Agreement shall not operate or be construed as a
waiver of any subsequent breach by either party.
15. Invalidity of Any Provision. The provision of this
Agreement are severable, it being the intention of the parties hereto that
should any provisions hereof be invalid or unenforceable, such invalidity or
unenforceability of any provision shall not affect the remaining provisions
hereof, but the same shall remain in full force and effect as if such invalid or
unenforceable provisions were omitted.
16. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Arizona exclusive
of the conflict of law provisions thereof. The parties agree that in the event
of litigation, venue shall lie exclusively in Maricopa County, Arizona.
17. Headings; Construction. Headings in this Agreement are for
informational purposes only and shall not be used to construe the intent of this
Agreement. The language in all parts of this Agreement shall in all cases be
construed as a whole according to its fair meaning and not strictly for nor
against any party.
18. Counterparts; Facsimile Signatures. This Agreement may be
executed simultaneously in any number of counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same
agreement. Delivery by any party of a facsimile signature to the other parties
to this Agreement shall constitute effective delivery by said party of an
original counterpart signature to this Agreement.
19. Binding Effect; Benefits. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, successors, executors, administrators and assigns. Notwithstanding
anything contained in this Agreement to the
<PAGE>
contrary, nothing in this Agreement, expressed or implied, is intended to confer
on any person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
20. Binding Effect on Marital Community. Employee represents
and warrants to the Company that he has the power to bind his marital community
(if any) to all terms and provisions of this agreement by his execution hereof.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement and caused the same to be duly delivered on its behalf as
of the date first above written.
EMPLOYEE SOLUTIONS, INC.,
an Arizona corporation
By
Marvin D. Brody, Chief Executive
Officer
"COMPANY"
Morris C. Aaron
"EMPLOYEE"
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is made this 19th day of
March, 1997 by and between EMPLOYEE SOLUTIONS, INC., an Arizona corporation (the
"Company"), and PAUL M. GALES ("Employee").
RECITALS
--------
A. The Company wishes to employ Employee, and Employee wishes to be
employed by the Company.
B. The parties wish to set forth in this Agreement the terms and
conditions of such employment.
C. The Compensation Committee of the Company's Board of Directors has
considered (and requested certain changes to previous drafts of) the form of
this Agreement prior to and at meetings held on February 18, 1997 and March 18,
1997, and has unanimously approved this form of the Agreement following
completion of such review and revision process.
AGREEMENTS
----------
In consideration of the mutual promises and covenants set forth herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. Employment. Subject to the terms and conditions of this
Agreement, the Company employs Employee to serve in an executive capacity and
Employee accepts such employment and agrees to dedicate all of his business time
and effort to Company business and perform such reasonable responsibilities and
duties as may be assigned to him from time to time by the Company's Chief
Executive Officer, President and/or Board of Directors (the "Board"). Employee's
title shall be Vice President and General Counsel, with responsibility for the
Company's legal affairs and related functions and such executive
responsibilities as may be assigned from time to time by, and subject to the
direction of, the Board, the Chief Executive Officer and/or the President.
Employee shall report directly to the Chief Executive Officer. Subject to
Sections 7.f and 8, such title and duties may be changed from time to time by
the Board, so long as Employee is maintained in an executive capacity throughout
the term of his employment.
2. Term. The employment of Employee by the Company pursuant to
this Agreement shall commence on the date hereof and continue until terminated
as provided elsewhere herein.
<PAGE>
3. Compensation.
a. Salary. The initial annual base salary payable to
Employee shall be $175,000. The base salary shall be reviewed at least annually
and may be increased from time to time in accordance with the Company's policies
and practices regarding periodic review and adjustment of executive
compensation.
b. Incentive Plan. The Company may establish and
implement an incentive compensation system which will provide additional
incentive payments to Employee based upon his performance and the performance of
the Company.
4. Fringe Benefits. In addition to the options for shares of
the Company's Common Stock available to Employee under the same terms as those
available to Company employees, and any other employee benefit plans generally
available to Company employees, the Company shall include Employee (and
Employee's dependents) in any group medical insurance plan maintained for the
employees of the Company at the Company's expense. The manner of implementation
of such benefits with respect to such items as procedures and amounts is
discretionary with the Company but shall be commensurate with Employee's
executive status and shall include medical, dental and hospital coverage for
Employee and Employee's dependents who are eligible under the applicable plans.
The Company shall also pay Employee $5,000 per year (payable at the beginning of
each year of employment) for individual purchase by Employee of supplemental
insurance products or for use in such other manner as Employee sees fit.
5. Vacation. Employee shall be entitled to vacation with pay
in keeping with Employee's established vacation practices, but in no event less
than four weeks per calendar year. In addition, Employee shall be entitled to
such holidays as the Company may approve for its executive personnel.
6. Expense Reimbursement. In addition to the compensation and
benefits provided above, the Company shall pay all reasonable expenses of
Employee incurred in connection with the performance of Employee's duties and
responsibilities to the Company pursuant to this Agreement, upon submission of
appropriate vouchers and supporting documentation in accordance with the
Company's usual and ordinary practices, provided that such expenses are
reasonable and necessary business expenses of the Company. The Company shall pay
Employee's reasonable cellular telephone expenses that are related to Company
business. The Company further shall pay Employee a $500 per month allowance for
automobile expense (provided that such amount may be used by Employee in such
manner as Employee sees fit).
7. Termination. This Agreement may be terminated in the manner
provided below:
a. For Cause. The Company may terminate Employee's
employment by the Company, for cause, upon written notice to the Employee
stating the facts constituting such cause, provided that Employee shall have 20
days following such notice to cure any conduct or
<PAGE>
act, if curable, alleged to provide grounds for termination for cause hereunder.
In the event of termination for cause, the Company shall be obligated to pay the
Employee only the base salary due him through the date of termination. Cause
shall include willful and persistent failure to abide by instructions or
policies from or set by the Board of Directors, wilful and persistent failure to
attend to material duties or obligations imposed under this Agreement, or
commission of a felony or serious misdemeanor offense or pleading guilty or nolo
contendere to same.
b. Without Cause. The Chairman or the Company may
terminate Employee's employment by the Company at any time, without cause, by
giving 90 days written notice to the Employee. If the Company terminates under
this Section 7.b, it shall pay to Employee an amount equal to 12 months base
salary, payable monthly, less applicable withholdings; and shall continue
coverage of Employee and Employee's dependents under its medical plans and other
benefit arrangements for 12 months or until Employee secures other employment
(unless continuation of coverage under such plans is unfeasible, in which event
the Company will provide substantially similar benefits). The two 12-month
periods mentioned above each shall be extended to 24 months in the event
termination pursuant to this Section 7.b occurs within two years of the date of
this Agreement.
c. Disability. If Employee experiences a permanent
disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986,
as amended), the Company shall have the right to terminate this Agreement
without further obligation hereunder except for any bonus amount payable in
accordance with the next sentence and any amounts payable pursuant to disability
plans generally applicable to executive employees. Within 90 days after the end
of the fiscal year in which termination pursuant to this Section 7.c occurs, so
long as Employee is in full compliance with this Agreement, Employee shall be
entitled to receive an incentive compensation payment (calculated and payable in
the manner referred to in Section 3.b), if any, based upon the Company's
financial performance for such fiscal year, which shall be prorated to the
extent that Employees employment during such fiscal year was for a period of
less than the full year.
d. Death. If Employee dies, this Agreement shall
terminate immediately, and Employee's legal representative shall be entitled to
receive the base salary due to Employee through the 60th day from the date on
which his death shall have occurred and any other death benefits generally
applicable to executive employees. In addition, Employee's legal representative
shall be entitled to receive, at the end of the first quarter of the year
following the fiscal year in which such death shall have occurred, an incentive
compensation payment (calculated and payable in the manner referred to in
Section 3.b), if any, based upon the Company's financial performance for such
fiscal year, which shall be prorated to the extent that Employee's employment
during such fiscal year was for a period of less than the full year.
e. Resignation Without Good Reason. Employee may
resign at any time by giving 90 days written notice to the Company, in which
event Employee shall be entitled to receive only the base salary due him through
the date of termination plus any other vested rights
<PAGE>
under employee stock options (pursuant to the terms of such options) or other
employee benefit plans.
f. Resignation for Good Reason. Employee may resign
at any time for Good Reason (as defined in Section 8.c), in which event Employee
shall be entitled to payments and benefits to the same extent and payable in the
same manner as if Employee was terminated without cause as described in Section
7.b above.
8. Change in Control.
a. Severance Benefits. Notwithstanding Section 7.b.
or 7.f above, if Employee's employment with the Company terminates within 12
months after a Change in Control (as defined in Section 8.b below), Employee
shall be entitled to the severance benefits provided in Section 8.e unless such
termination is in accordance with Section 7.a, 7.c, 7.d or 7.e above, in which
case such other section shall apply. Any amount paid pursuant to Section 8 shall
be in lieu of any payment otherwise due under Section 7.b or 7.f.
b. "Change in Control" shall be deemed to have
occurred if (i) any "person" (as such term is used in Paragraphs 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended [the "Exchange Act"]), other
than a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 20% or more of the total voting power represented by
the Company's then outstanding Voting Securities, or (ii) during any period of
two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company and any new director whose
election by the Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof, or (iii) the stockholders
of the Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all the Company's
assets.
c. "Good Reason" shall mean, for purposes of this
Agreement, (i) without Employee's express written consent, a reduction of
Employee's compensation or the assignment to Employee of duties inconsistent
with Employee's positions, duties, responsibilities and status
<PAGE>
with the Company immediately prior to the Change in Control, or a demotion or a
change in titles or offices as in effect immediately prior to a Change in
Control (except in connection with termination of Employee's employment in
compliance with Section 7.a, 7.c, 7.d or 7.e above); (ii) a material breach by
the Company of any of its obligations hereunder which (if curable) is not cured
by the Company within 20 days after written notice thereof; or (iii) without
Employee's express written consent, relocation of the site of Employee's duties
to a location outside the Phoenix, Arizona metropolitan area, or a requirement
that Employee average more than 10 business days outside of the Phoenix, Arizona
metropolitan area per month.
d. "Voting Securities" shall mean any securities of
the Company which vote generally in the election of directors.
e. Amount of Benefit. If Employee is entitled to
severance benefits under Section 8.a, the amount of such benefit shall equal (i)
a lump-sum payment equal to 2.99 times the "Base Amount" (as such term is
defined in Section 280G of the Internal Revenue Code of 1986) applicable to
Employee, whether or not the provisions of Section 280G actually apply to the
payment; (ii) a continuation of medical coverage and other benefits in the
manner contemplated in Section 7.b above; and (iii) such other benefits to which
the Employee is entitled under the Company's benefits plans and policies as in
effect immediately prior to the Change in Control with respect to terminated
Employees.
9. Return of the Company's Materials. Upon the termination of
this Agreement, Employee shall promptly return to the Company all files, credit
cards, keys, instruments, equipment, and other materials owned or provided by
the Company.
10. Insurance. The Company shall use commercially reasonable
efforts to carry director's and officer's professional liability insurance
coverage for Employee while in the performance of Employee's duties hereunder in
an amount of at least $10,000,000.
11. Nondelegability of Employee's Rights and Company
Assignment Rights. The obligations, rights and benefits of Employee hereunder
are personal and may not be delegated, assigned, or transferred in any manner
whatsoever, nor are such obligations, rights or benefits subject to involuntary
alienation, assignment or transfer. The Company may transfer its obligations
hereunder to a subsidiary, affiliate or successor.
12. Notices. All notices, demands and communications required
by this Agreement shall be in writing and shall be deemed to have been given for
all purposes when sent to the respective addresses set forth below, (i) upon
personal delivery, (ii) one day after being sent, when sent by overnight courier
service to and from locations within the continental United States, (iii) three
days after posting when sent by registered, certified, or regular United States
mail, with postage prepaid and return receipt requested, or (iv) on the date of
transmission when sent by confirmed facsimile.
<PAGE>
If to the Company: Employee Solutions, Inc.
2929 East Camelback Road
Suite 220
Phoenix Arizona 85016
Attn: Marvin D. Brody
Chief Executive Officer
If to Employee: Paul M. Gales
c/o Employee Solutions, Inc.
2929 East Camelback Road
Suite 220
Phoenix, Arizona 85016
(Or when sent to such other address as any party shall specify by written notice
so given.)
13. Entire Agreement. This Agreement, together with the
Indemnification Agreement dated November 21, 1996 and agreements evidencing
stock options grants issued to Employee from time to time (the "Other
Agreements") constitutes the final written expression of all of the agreements
between the parties, and is a complete and exclusive statement of those terms.
It supersedes all understandings and negotiations concerning the matters
specified herein (including all prior written employment agreements and
arrangements, if any), except as provided in the Other Agreements. Any
representations, promises, warranties or statements made by either party that
differ in any way from the terms of this written Agreement or the Other
Agreements shall be given no force or effect. Except as provided in the Other
Agreements, the parties specifically represent, each to the other, that there
are no additional or supplemental agreements between them related in any way to
the matters herein contained unless specifically included or referred to herein.
No addition to or modification of any provision of this Agreement shall be
binding upon any party unless made in writing and signed by all parties.
14. Waiver. The waiver by either party of the breach of any
covenant or provision in this Agreement shall not operate or be construed as a
waiver of any subsequent breach by either party.
15. Invalidity of Any Provision. The provision of this
Agreement are severable, it being the intention of the parties hereto that
should any provisions hereof be invalid or unenforceable, such invalidity or
unenforceability of any provision shall not affect the remaining provisions
hereof, but the same shall remain in full force and effect as if such invalid or
unenforceable provisions were omitted.
16. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Arizona exclusive
of the conflict of law provisions thereof. The parties agree that in the event
of litigation, venue shall lie exclusively in Maricopa County, Arizona.
<PAGE>
17. Headings; Construction. Headings in this Agreement are for
informational purposes only and shall not be used to construe the intent of this
Agreement. The language in all parts of this Agreement shall in all cases be
construed as a whole according to its fair meaning and not strictly for nor
against any party.
18. Counterparts; Facsimile Signatures. This Agreement may be
executed simultaneously in any number of counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same
agreement. Delivery by any party of a facsimile signature to the other parties
to this Agreement shall constitute effective delivery by said party of an
original counterpart signature to this Agreement.
19. Binding Effect; Benefits. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, successors, executors, administrators and assigns. Notwithstanding
anything contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
20. Binding Effect on Marital Community. Employee represents
and warrants to the Company that he has the power to bind his marital community
(if any) to all terms and provisions of this agreement by his execution hereof.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement and caused the same to be duly delivered on its behalf as
of the date first above written.
EMPLOYEE SOLUTIONS, INC.,
an Arizona corporation
By
Marvin D. Brody, Chief Executive
Officer
"COMPANY"
Paul M. Gales
"EMPLOYEE"
EMPLOYEE SOLUTIONS, INC.
1995 STOCK OPTION PLAN,
AS AMENDED
1. Purpose
The purposes of the 1995 Stock Option Plan ("Plan") of Employee
Solutions, Inc., an Arizona corporation, are to attract and retain the best
available employees and directors of Employee Solutions, Inc. or any parent or
subsidiary or affiliate of Employee Solutions, Inc. which now exists or
hereafter is organized or acquired by or acquires Employee Solutions, Inc.
(collectively or individually as the context requires the "Company") as well as
appropriate third parties who can provide valuable services to the Company, to
provide additional incentive to such persons and to promote the success of the
business of the Company. This Plan is intended to comply with Rule 16b-3 under
Section 16 of the Securities Exchange Act of 1934, as amended or any successor
rule ("Rule 16b-3"), and the Plan shall be construed, interpreted and
administered to comply with Rule 16b-3.
2. Definitions
(a) "Affiliate" means any corporation, partnership, joint venture or
other entity, domestic or foreign, in which the Company, either directly or
through another affiliate or affiliates, has a 50% or more ownership interest.
(b) "Affiliated Group" means the group consisting of the Company and
any entity that is an "affiliate," a "parent" or a "subsidiary" of the Company.
(c) "Board" means the Board of Directors of the Company.
(d) "Committee" means the Compensation or Stock Option Committee of the
Board (as designated by the Board), if such a committee has been appointed.
(e) "Code" means the United States Internal Revenue Code of 1986, as
amended.
(f) "Incentive Stock Options" means options intended to qualify as
incentive stock options under Section 422 of the Code, or any successor
provision.
(g) "ISO Group" means the group consisting of the Company and any
corporation that is a "parent" or a "subsidiary" of the Company.
(h) "Nonemployee Director" shall have the meaning assigned in Section
4(a)(ii) hereof.
<PAGE>
(i) "Nonqualified Stock Options" means options that are not intended to
qualify for favorable income tax treatment under Sections 421 through 424 of the
Code.
(j) "Parent" means a corporation that is a "parent" of the Company
within the meaning of Code Section 424(e).
(k) "Section 16" means Section 16 of the Securities Exchange Act of
1934, as amended.
(l) "Subsidiary" means a corporation that is a "subsidiary" of the
Company within the meaning of Code Section 424(f).
3. Incentive and Nonqualified Stock Options
Two types of options (referred to herein as "options," without
distinction between such two types) may be granted under the Plan: Incentive
Stock Options and Nonqualified Stock Options.
4. Eligibility and Administration
(a) Eligibility. The following individuals shall be eligible to receive
grants pursuant to the Plan as follows:
(i) Any employee (including any officer or director who is an
employee) of the Company or any ISO Group member shall be eligible to receive
either Incentive Stock Options or Nonqualified Stock Options under the Plan. An
employee may receive more than one option under the Plan.
(ii) Any director who is not an employee of the Company or any
Affiliated Group member (a "Nonemployee Director") shall be eligible to receive
only Nonqualified Stock Options in the manner provided in paragraph 12 hereof.
(iii) Any other individual whose participation the Board or
the Committee determines is in the best interests of the Company shall be
eligible to receive Nonqualified Stock Options.
(b) Administration. The Plan may be administered by the Board or by a
Committee appointed by the Board which is constituted so to permit the Plan to
comply under Rule 16b-3. The Company shall indemnify and hold harmless each
director and Committee member for any action or determination made in good faith
with respect to the Plan or any option. Determinations by the Committee or the
Board shall be final and conclusive upon all parties.
<PAGE>
5. Shares Subject to Options
The stock available for grant of options under the Plan shall be shares
of the Company's authorized but unissued or reacquired voting common stock. The
aggregate number of shares that may be issued pursuant to exercise of options
granted under the Plan shall be 3,370,000 shares. If any outstanding option
grant under the Plan for any reason expires or is terminated, the shares of
common stock allocable to the unexercised portion of the option grant shall
again be available for options under the Plan as if no options had been granted
with respect to such shares.
6. Terms and Condition of Options
Option grants under the Plan shall be evidenced by agreements in such
form and containing such provisions as are consistent with the Plan as the Board
or the Committee shall from time to time approve. Each agreement shall specify
whether the option(s) granted thereby are Incentive Stock Options or
Nonqualified Stock Options. Such agreements may incorporate all or any of the
terms hereof by reference and shall comply with and be subject to the following
terms and conditions:
(a) Shares Granted. Each option grant agreement shall specify the
number of Incentive Stock Options and/or Nonqualified Stock Options being
granted; one option shall be deemed granted for each share of stock. In
addition, each option grant agreement shall specify the exercisability and/or
vesting schedule of such options, if any.
(b) Purchase Price. The purchase price for a share subject to (i) a
Nonqualified Stock Option may be any amount determined in good faith by the
Committee, and (ii) an Incentive Stock Option shall not be less than 100% of the
fair market value of the share on the date the option is granted, provided,
however, the option price of an Incentive Stock Option shall not be less than
110% of the fair market value of such share on the date the option is granted to
an individual then owning (after the application of the family and other
attribution rules of Section 424(d) or any successor rule of the Code) more than
10% of the total combined voting power of all classes of stock of the Company or
any ISO Group member. For purposes of the Plan, "fair market value" at any date
shall be (i) the reported closing price of such stock on the New York Stock
Exchange or other established stock exchange or Nasdaq National Market on such
date, or if no sale of such stock shall have been made on that date, on the
preceding date on which there was such a sale, (ii) if such stock is not then
listed on an exchange or the Nasdaq National Market, the last trade price per
share for such stock in the over-the-counter market as quoted on Nasdaq or the
pink sheets or successor publication of the National Quotation Bureau on such
date, or (iii) if such stock is not then listed or quoted as referenced above,
an amount determined in good faith by the Board or the Committee.
(c) Termination. Unless otherwise provided herein or in a specific
option grant agreement which may provide for accelerated vesting and/or longer
or shorter periods of exercisability, no option shall be exercisable after the
expiration of the earliest of
<PAGE>
(i) in the case of an Incentive Stock Option:
(1) 10 years from the date the option is granted, or
five years from the date the option is granted to an
individual owning (after the application of the family and
other attribution rules of Section 424(d) of the Code) at the
time such option was granted, more than 10% of the total
combined voting power of all classes of stock of the Company
or any ISO Group member,
(2) three months after the date the optionee ceases
to perform services for the Company or any ISO Group member,
if such cessation is for any reason other than death,
disability (within the meaning of Code Section 22(e)(3)), or
cause,
(3) one year after the date the optionee ceases to
perform services for the Company or any ISO Group member, if
such cessation is by reason of death or disability (within the
meaning of Code Section 22(e)(3)), or
(4) the date the optionee ceases to perform services
for the Company or any ISO Group member, if such cessation is
for cause, as determined by the Board or the Committee in its
sole discretion;
(ii) in the case of a Nonqualified Stock Option;
(1) 10 years from the date the option is granted,
(2) two years after the date the optionee ceases to
perform services for the Company or any Affiliated Group
member, if such cessation is for any reason other than death,
permanent disability, retirement or cause,
(3) three years after the date the optionee ceases to
perform services for the Company or any Affiliated Group
member, if such cessation is by reason of death, permanent
disability or retirement, or
(4) the date the optionee ceases to perform services
for the Company or any Affiliated Group member, if such
cessation is for cause, as determined by the Board or the
Committee in its sole discretion;
provided, that, unless otherwise provided in a specific option grant agreement,
an option shall only be exercisable for the periods above following the date an
optionee ceases to perform services to the extent the option was exercisable on
the date of such cessation.
(d) Method of Payment. The purchase price for any share purchased
pursuant to the exercise of an option granted under the Plan shall be paid in
full upon exercise of the option by any of the following methods, (i) by cash,
(ii) by check, or (iii) to the extent permitted under
<PAGE>
the particular grant agreement, by transferring to the Company shares of stock
of the Company at their fair market value as of the date of exercise of the
option as determined in accordance with paragraph 6(b), provided that the
optionee held the shares of stock for at least six months. Notwithstanding the
foregoing, the Company may arrange for or cooperate in permitting broker-
assisted cashless exercise procedures. The Company may also extend and maintain,
or arrange for the extension and maintenance of, credit to an optionee to
finance the optionee's purchase of shares pursuant to the exercise of options,
on such terms as may be approved by the Board or the Committee, subject to
applicable regulations of the Federal Reserve Board and any other applicable
laws or regulations in effect at the time such credit is extended.
(e) Exercise. Except for options which have been transferred pursuant
to paragraph 6(f), no option shall be exercisable during the lifetime of an
optionee by any person other than the optionee, his or her guardian or legal
representative. The Board or the Committee shall have the power to set the time
or times within which each option shall be exercisable and to accelerate the
time or times of exercise; provided, however, except as provided in paragraph
12, no options may be exercised prior to the later of the expiration of six
months from the date of grant thereof or shareholder approval, unless otherwise
provided by the Board or Committee. To the extent that an optionee has the right
to exercise one or more options and purchase shares pursuant thereto, the
option(s) may be exercised from time to time by written notice to the Company
stating the number of shares being purchased and accompanied by payment in full
of the purchase price for such shares. Any certificate for shares of outstanding
stock used to pay the purchase price shall be accompanied by a stock power duly
endorsed in blank by the registered owner of the certificate (with the signature
thereon guaranteed). If the certificate tendered by the optionee in such payment
covers more shares than are required for such payment, the certificate shall
also be accompanied by instructions from the optionee to the Company's transfer
agent with respect to the disposition of the balance of the shares covered
thereby.
(f) Nontransferability. No option shall be transferable by an optionee
otherwise than by will or the laws of descent and distribution, provided that
the Committee in its discretion may grant options that are transferable, without
payment of consideration, to immediate family members of the optionee or to
trusts or partnerships for such family members; the Committee may also amend
outstanding options to provide for such transferability.
(g) ISO $100,000 Limit. If required by applicable tax rules regarding a
particular grant, to the extent that the aggregate fair market value (determined
as of the date an Incentive Stock Option is granted) of the shares with respect
to which an Incentive Stock Option grant under this Plan (when aggregated, if
appropriate, with shares subject to other Incentive Stock Option grants made
before said grant under this Plan or another plan maintained by the Company or
any ISO Group member) is exercisable for the first time by an optionee during
any calendar year exceeds $100,000 (or such other limit as is prescribed by the
Code), such option grant shall be treated as a grant of Nonqualified Stock
Options pursuant to Code Section 422(d).
(h) Investment Representation. Unless the shares of stock covered by
the Plan have been registered with the Securities and Exchange Commission
pursuant to Section 5 of the
<PAGE>
Securities Act of 1933, as amended, each optionee by accepting an option grant
represents and agrees, for himself or herself and his or her transferees by will
or the laws of descent and distribution, that all shares of stock purchased upon
the exercise of the option grant will be acquired for investment and not for
resale or distribution. Upon such exercise of any portion of any option grant,
the person entitled to exercise the same shall upon request of the Company
furnish evidence satisfactory to the Company (including a written and signed
representation) to the effect that the shares of stock are being acquired in
good faith for investment and not for resale or distribution. Furthermore, the
Company may if it deems appropriate affix a legend to certificates representing
shares of stock purchased upon exercise of options indicating that such shares
have not been registered with the Securities and Exchange Commission and may so
notify its transfer agent.
(i) Rights of Optionee. An optionee or transferee holding an option
grant shall have no rights as a shareholder of the Company with respect to any
shares covered by any option grant until the date one or more of the options
granted thereunder have been properly exercised and the purchase price for such
shares has been paid in full. No adjustment shall be made for dividends
(ordinary or extraordinary, whether cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such share certificate is issued, except as provided for in paragraph 6(k).
Nothing in the Plan or in any option grant agreement shall confer upon any
optionee any right to continue performing services for the Company or any
Affiliated Group member, or interfere in any way with any right of the Company
or any Affiliated Group member to terminate the optionee's services at any time.
(j) Fractional Shares. The Company shall not be required to issue
fractional shares upon the exercise of an option. The value of any fractional
share subject to an option grant shall be paid in cash in connection with an
exercise that results in all full shares subject to the grant having been
exercised.
(k) Reorganizations, Etc. Subject to paragraph 9 hereof, if the
outstanding shares of stock of the class then subject to this Plan are increased
or decreased, or are changed into or exchanged for a different number or kind of
shares or securities, as a result of one or more reorganizations, stock splits,
reverse stock splits, stock dividends, spin-offs, other distributions of assets
to shareholders, appropriate adjustments shall be made in the number and/or type
of shares or securities for which options may thereafter be granted under this
Plan and for which options then outstanding under this Plan may thereafter be
exercised. Any such adjustments in outstanding options shall be made without
changing the aggregate exercise price applicable to the unexercised portions of
such options.
(l) Option Modification. Subject to the terms and conditions and within
the limitations of the Plan, the Board or the Committee may modify, extend or
renew outstanding options granted under the Plan, accept the surrender of
outstanding options (to the extent not theretofore exercised), reduce the
exercise price of outstanding options, or authorize the granting of new options
in substitution therefor (to the extent not theretofore exercised).
Notwithstanding the foregoing, no modification of an option (either directly or
through modification of the Plan)
<PAGE>
shall, without the consent of the optionee, alter or impair any rights of the
optionee under the option.
(m) Grants to Foreign Optionees. The Board or the Committee in order to
fulfill the Plan purposes and without amending the Plan may modify grants to
participants who are foreign nationals or performing services for the Company or
an Affiliated Group member outside the United States to recognize differences in
local law, tax policy or custom.
(n) Other Terms. Each option grant agreement may contain such other
terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Board or the Committee, such as without limitation
discretionary performance standards, tax withholding provisions, or other
forfeiture provisions regarding competition and confidential information.
7. Termination or Amendment of the Plan
The Board may at any time terminate or amend the Plan; provided, that
shareholder approval shall be obtained of any action for which shareholder
approval is required in order to comply with Rule 16b-3, the Code or other
applicable laws or regulatory requirements within such time periods prescribed.
8. Shareholder Approval and Term of the Plan
The Plan shall be effective as of April 6, 1995, the date as of which
it was adopted by the Board, subject to ratification by the shareholders of the
Company within (each of) the time period(s) prescribed under Rule 16b-3, the
Code, and any other applicable laws or regulatory requirements, and shall
continue thereafter until terminated by the Board. Unless sooner terminated by
the Board, in its sole discretion, the Plan will expire on April 6, 2005 solely
with respect to the granting of Incentive Stock Options or such later date as
may be permitted by the Code for Incentive Stock Options, provided that options
outstanding upon termination or expiration of the Plan shall remain in effect
until they have been exercised or have expired or been forfeited.
9. Merger, Consolidation or Reorganization
In the event of a merger, consolidation or reorganization with another
corporation in which the Company is not the surviving corporation, the Board,
the Committee (subject to the approval of the Board) or the board of directors
of any corporation assuming the obligations of the Company hereunder shall take
action regarding each outstanding and unexercised option pursuant to either
clause (a) or (b) below:
(a) Appropriate provision may be made for the protection of such option
by the substitution on an equitable basis of appropriate shares of the surviving
corporation, provided that the excess of the aggregate fair market value (as
defined in paragraph 6(b)) of the shares subject to such option immediately
before such substitution over the exercise price thereof is not
<PAGE>
more than the excess of the aggregate fair market value of the substituted
shares made subject to option immediately after such substitution over the
exercise price thereof; or
(b) Appropriate provision may be made for the cancellation of such
option. In such event, the Company, or the corporation assuming the obligations
of the Company hereunder, shall pay the optionee an amount of cash (less normal
withholding taxes) equal to the excess of the highest fair market value (as
defined in paragraph 6(b)) per share of the Common Stock during the 60-day
period immediately preceding the merger, consolidation or reorganization over
the option exercise price, multiplied by the number of shares subject to such
options (whether or not then exercisable).
10. Dissolution or Liquidation
Anything contained herein to the contrary notwithstanding, on the
effective date of any dissolution or liquidation of the Company, the holder of
each then outstanding option (whether or not then exercisable) shall receive the
cash amount described in paragraph 9(b) hereof and such option shall be
cancelled.
11. Withholding Taxes
(a) General Rule. Pursuant to applicable federal and state laws, the
Company is or may be required to collect withholding taxes upon the exercise of
an option. The Company may require, as a condition to the exercise of an option
or the issuance of a stock certificate, that the optionee concurrently pay to
the Company (either in cash or, at the request of optionee but in the discretion
of the Board or the Committee and subject to such rules and regulations as the
Board or the Committee may adopt from time to time, in shares of Common Stock of
the Company) the entire amount or a portion of any taxes which the Company is
required to withhold by reason of such exercise, in such amount as the Committee
or the Board in its discretion may determine.
(b) Withholding from Shares to be Issued. In lieu of part or all of any
such payment, the optionee may elect, subject to such rules and regulations as
the Board or the Committee may adopt from time to time, or the Company may
require that the Company withhold from the shares to be issued that number of
shares having a fair market value (as defined in paragraph 6(b)) equal to the
amount which the Company is required to withhold.
(c) Special Rule for Insiders. Any such request or election (to satisfy
a withholding obligation using shares) by an individual who is subject to the
provisions of Section 16 shall be made in accordance with the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
12. Automatic Grants to Certain Directors
(a) Grant. Each person who is elected as a Nonemployee Director at any
Annual
<PAGE>
Meeting of Shareholders automatically shall be granted, effective as of the date
of such Annual Meeting, options to acquire 2,500 shares of the Company's Common
Stock for each year of the term to which such Nonemployee Director is elected.
Options granted pursuant to this paragraph 12 shall become exercisable at the
rate of 2,500 shares of the Company's Common Stock upon the date of each Annual
Meeting following the date of grant, provided that the Nonemployee Director has
served as such throughout the preceding year. Notwithstanding anything herein to
the contrary, any person who is a Nonemployee Director as of April 30, 1996
shall not be entitled to receive any grant under this paragraph 12 until the
2000 Annual Meeting of Shareholders.
(b) Certain Option Terms. Options granted pursuant to this paragraph 12
shall have a 10-year term from the date of grant, provided that any option held
by a Nonemployee Director who is removed from the Board for cause shall expire
on the date of such removal. The exercise price of all options granted pursuant
to this paragraph 12 shall be the fair market value of the Company's Common
Stock on the date of grant.
c. Election to Board of Directors between Annual Meetings. Any person
who initially becomes a Nonemployee Director at any time other than on the date
of an Annual Meeting of Shareholders shall automatically be granted options
exercisable for 2,500 shares of Common Stock for each full and partial year of
the term to which such Nonemployee Director is elected. Vesting and other terms
of such options shall be as set forth elsewhere in this paragraph 12.
d. Stock Splits. Notwithstanding anything in the Plan to the contrary,
the number of options to be granted pursuant to paragraphs 12(a) and 12(c) shall
not be adjusted for forward stock splits or similar occurrences which are
effected during the year ending December 31, 1996, provided that options granted
pursuant to paragraphs 12(a) or 12(c) prior to the effective date of any such
occurrence shall be subject to adjustment in the same manner as other options
granted pursuant to the Plan.
e. Limitation on Amendment. This paragraph 12 shall not be amended more
than once every six months other than to comport with changes in the Code, the
Employee Retirement Income Security Act, or the rules thereunder.
EMPLOYEE SOLUTIONS, INC.
DIRECTOR AND OFFICER'S INDEMNIFICATION AGREEMENT
This Agreement, which shall be effective as of November 21,
1996, is by and between Employee Solutions, Inc., an Arizona corporation (the
"Company"), and Marvin D. Brody, the undersigned officer and director of the
Company (the "Indemnitee").
RECITALS
WHEREAS, it is essential for the Company to be able to retain
and attract as officers and directors the most capable persons available.
WHEREAS, Indemnitee is an executive officer and director of
the Company.
WHEREAS, both the Company and Indemnitee recognize the risk
created by the increased risk of litigation and other claims being asserted
against officers and directors of public companies in today's environment.
WHEREAS, effective January 1, 1996, the Arizona Business
Corporation Act ("ABCA") has been changed, and the Company and Indemnitee wish
to avail themselves of the revised provisions of the ABCA, and to specify
certain matters not specifically provided in the ABCA.
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, the Company wishes to provide in
this Agreement for the indemnification of, and the advancing of expenses to,
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of Indemnitee under the Company's directors' and
officers' liability insurance policies.
COVENANTS
THEREFORE, in consideration of the promises in this Agreement,
and intending to be legally bound hereby, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged, the parties agree
as follows:
1. Certain Definitions.
(a) Action: any threatened, pending or completed action, suit,
proceeding or alternate dispute resolution mechanism, or any inquiry, hearing or
investigation, whether conducted by the Company or any other party, that
Indemnitee in
<PAGE>
good faith believes might lead to the institution of any such action, suit,
proceeding or alternate dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other, and whether formal or informal.
(b) Change in Control: shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding Voting
Securities, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the shareholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company (in one transaction or a series of transactions) of
all or substantially all the Company's assets.
(c) Derivative Action: an Action by or in the right of the
Company.
(d) Expenses: include attorneys' fees, court costs, deposition
costs, court reporter fees, travel and all other costs, expenses and obligations
actually paid to another or incurred in connection with investigating the facts
underlying the Action, preparing to defend and defending the Action or preparing
for and participating in the Action as a witness, or any of the foregoing
expenses incurred on appeal or in an action or other proceeding to enforce
Indemnitee's rights hereunder, or any other reasonable expenses incurred by
Indemnitee in
-2-
<PAGE>
participating in any Indemnifiable Action or Indemnifiable Derivative Action.
(e) Indemnifiable Action or Indemnifiable Derivative Action:
any Action or Derivative Action arising out of or relating, directly or
indirectly, to the fact that Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or a subsidiary of the Company, or is or was
serving at the request of the Company as a director, officer, employee, trustee,
agent or fiduciary of another corporation, limited liability company,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
(f) Potential Change in Control: shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions which if consummated would constitute a Change in
Control; (iii) any person, other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company acting in such capacity
or a corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of stock of the
Company, who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases such person's
beneficial ownership of such securities by 5% or more over the percentage so
owned by such person on the date hereof; or (iv) the Board of Directors adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change in Control has occurred.
(g) Voting Securities: any securities of the Company which
vote generally in the election of directors.
2. No Pending Actions. Indemnitee represents to the Company that, to
Indemnitee's actual knowledge, (i) there is no Indemnifiable Action or
Indemnifiable Derivative Action involving Indemnitee as of the date of this
Agreement and (ii) no facts exist that may form the basis for any such Action
involving Indemnitee.
3. Indemnification For Actions Other Than Derivative Actions. If
Indemnitee was, is, or becomes a party to or a witness or other participant in,
or is threatened to be made a party to or witness or other participant in, an
Indemnifiable Action other than an Indemnifiable Derivative Action, the Company
shall, subject to the provisions of this Agreement, indemnify Indemnitee to the
fullest extent permitted by law against any and all Expenses, judgments, fines,
penalties, and amounts paid in settlement of such Action.
-3-
<PAGE>
4. Indemnification For Derivative Actions.
(a) Basic Indemnification. If Indemnitee was, is, or becomes a
party to or a witness or other participant in, or is threatened to be made a
party to or witness or other participant in an Indemnifiable Derivative Action,
the Company shall, subject to the provisions of this Agreement, indemnify
Indemnitee to the fullest extent permitted by law against any and all Expenses,
but not judgments, fines, or, except as set forth below, amounts paid in
settlement of such Derivative Action.
(b) Adjudication of Liability in Derivative Actions.
Notwithstanding Paragraph 4(a), no indemnification shall be made in respect of
any claim, issue, or matter as to which Indemnitee shall have been adjudged (by
final judicial determination from which there is no further right to appeal) to
be liable to the Company unless and only to the extent that the court in which
such Derivative Action was brought shall determine upon application by
Indemnitee that despite the adjudication of liability and in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnification which such court shall deem proper.
(c) Settlement of Derivative Actions. Notwithstanding
Paragraph 4(a), the court in which such Derivative Action was brought may
determine upon application of Indemnitee that, in view of all circumstances of
the case, indemnity for amounts paid in settlement is proper and may order
indemnity for the amounts so paid in settlement and for the Expenses actually
and reasonably paid in connection with such application, to the extent the court
deems proper.
5. Limits on Indemnification. Except as stated in Paragraph 6, there
shall be no indemnification pursuant to this Indemnification Agreement:
(a) to the extent that payment for the same claims or amounts
are actually made to the Indemnitee under a valid and collectible insurance
policy; provided, however, that if it should subsequently be determined that the
Indemnitee is not legally entitled to retain any such payment, the restriction
on indemnification pursuant to this subparagraph (a) shall no longer apply;
(b) to the extent that the Indemnitee is indemnified or
receives a recovery for the same claims or amounts otherwise than pursuant to
this Indemnification Agreement; provided, however, that if it should
subsequently be determined that the Indemnitee is not legally entitled to retain
any such recovery, the restriction on indemnification pursuant to this
subparagraph (b) shall no longer apply;
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<PAGE>
(c) on account of any violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and rules promulgated thereunder;
(d) on account of any violation of Section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any rules
promulgated thereunder, or similar state law, to the extent that such violation
is based on (i) the purchase or sale of a security by Indemnitee or a person
affiliated with Indemnitee while Indemnitee is in possession of material
nonpublic information about the Company, or (b) the communication of material
nonpublic information about the Company in connection with any transaction on or
through the facilities of a national securities exchange or from or through a
broker or dealer, other than as part of a securities offering by the Company;
(e) with respect to any transaction from which the Indemnitee
derived an improper personal benefit to which he or she is not legally entitled;
(f) for the return of any remuneration paid to the Indemnitee
that is held by any court in a final judgment to have been illegal or improper;
(g) to the extent that the Indemnitee's action or failure to
act was (i) not in good faith, or (ii) in the case of conduct Indemnitee's
official capacity with the Company, not in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Company, or, in
other cases, conduct was opposed to the Company's best interests, or (iii) with
respect to any criminal Action, with reasonable cause to believe his or her
conduct was unlawful; or
(h) if a final nonappealable decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
6. Partial and Mandatory Indemnity. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company of some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of an Action but not for the total amount, the Company shall
indemnify Indemnitee for the portion to which Indemnitee is entitled. To the
extent that Indemnitee has been successful on the merits or otherwise (including
dismissal with or without prejudice) in defense of any Indemnifiable Action or
Indemnifiable Derivative Action, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against Expenses actually and reasonably
incurred by him in connection therewith, except as stated in Paragraph 5(a) or
5(b).
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<PAGE>
7. Notification of Indemnifiable Action or Indemnifiable Derivative
Action. Indemnitee shall promptly notify the Company of any Indemnifiable Action
or Indemnifiable Derivative Action promptly after receipt by Indemnitee of
notice of the commencement of such Indemnifiable Action or Indemnifiable
Derivative Action. With respect thereto:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, the Company jointly
with any other indemnifying party may assume the defense thereof, with counsel
reasonably satisfactory to Indemnitee to be chosen or approved by the Company.
After notice from the Company to Indemnitee of its election to so assume the
defense thereof, the Company will not be liable to Indemnitee for any legal or
other expenses subsequently incurred by Indemnitee in connection with the
defense thereof other than reasonable costs of investigation or participation in
such Action or Derivative Action (including travel expenses) or as otherwise
provided below. Indemnitee shall have the right to employ independent counsel in
such Action or Derivative Action; however, the fees and expenses of such counsel
incurred after notice from the Company of its assumption of the defense thereof
shall be at the expense of Indemnitee unless:
(i) the employment of independent counsel by
Indemnitee has been authorized by the Company;
(ii) counsel employed by the Company to represent the
Indemnitee shall have reasonably concluded that there may be a conflict
of interest in the conduct of the defense of such action that prevents
such counsel from representing Indemnitee; or
(iii) the Company shall not in fact have employed
counsel to assume the defense of such Action or Derivative Action on
behalf of Indemnitee.
The fees and expenses of independent counsel of Indemnitee in subparagraphs
7(b)(i), (ii) and (iii) shall be borne by the Company.
(c) If the Company has assumed the defense of the Indemnitee
pursuant to subparagraph (b) above, the Company shall not be liable to indemnify
Indemnitee under this Agreement for any amount paid in settlement of any Action
or Derivative Action effected without its written consent, the Company shall not
settle any Action or Derivative Action in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written consent, and
neither the Company nor Indemnitee will unreasonably withhold their consent to
any proposed settlement.
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<PAGE>
8. Advance of Expenses; Failure to Pay Claim.
(a) Written Request. If so requested by Indemnitee in writing,
the Company shall (subject to the Expense Advance Rules hereinafter described)
advance to Indemnitee (an "Expense Advance") any and all Expenses incurred in
connection with the investigation and preparation of the Indemnitee's
participation in any Indemnifiable Action or Indemnifiable Derivative Action,
whether as a witness or a party, pursuant to this Agreement. The Company shall
comply with the Indemnitee's written request for an Expense Advance, and make
any necessary determination that the facts then known would not preclude
indemnification under the ABCA, within ten (10) business days of receipt of such
written request together with the reimbursement commitment referred to in
subparagraph (b) below. If the Company does not honor Indemnitee's request for
an Expense Advance, Indemnitee may bring an action in any court of competent
jurisdiction to enforce the right to an Expense Advance, the Company shall have
the burden of proof in such action to demonstrate that the Expense Advance is
not payable, and the Company shall reimburse Indemnity for all Expense thereof
unless the court denies indemnification.
(b) Reimbursement by Indemnitee. The obligation of the Company
to make an Expense Advance shall be subject to the condition that, if it is
ultimately determined (by final judicial determination from which there is no
further right to appeal) that there are matters to which Indemnitee is not
entitled to indemnity under this Agreement, the Company shall be entitled to be
reimbursed by Indemnitee for all such amounts. Prior to obtaining the initial
Expense Advance, Indemnitee must confirm such reimbursement obligation by
delivery to Company of a signed undertaking in the form of Exhibit A or in such
other form as Company may reasonably accept.
(c) Expense Advance Rules. Expenses in all cases must be
reasonable and comply with existing or future billing procedures of the Company
so that the Company can reasonably monitor and audit such Expenses. With respect
to attorneys' fees, the Company will give reasonable consideration to requests
for specific counsel and to requests for the grouping of individuals for joint
defense purposes. Any attorney representing more than one individual may be
requested to render separate statements to each individual or otherwise allocate
billings by individual.
(d) Failure to Pay Claim. If loss has been incurred and a
claim for indemnification under this Agreement is not paid by the Company within
ten (10) business days after a written claim has been received by the Company,
Indemnitee may at any time thereafter bring suit against the Company to recover
any unpaid amount of the claim and all Expenses incurred by Indemnitee to obtain
such court ordered indemnification.
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<PAGE>
9. Burden of Proof. In connection with any determination as to whether
Indemnitee is entitled to be indemnified hereunder the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
10. No Presumption. For purposes of this Agreement, the termination of
any Action by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not payable under this Indemnification Agreement or
permitted by applicable law.
11. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall
be in addition to any other rights Indemnitee may have under the Company's
Articles of Incorporation or bylaws, or the ABCA or otherwise. To the extent
that a change in the ABCA (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's Articles of Incorporation, bylaws and this Agreement, it is the intent
of the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
12. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing Directors' and Officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company Director, Officer or Indemnitee. If Indemnitee incurs any Expenses in
tendering the defense of the Action to the insurance company providing the
Directors and Officers insurance, such Expenses shall be considered
indemnifiable Expenses.
13. Period of Limitations. No legal action shall be brought and no
cause of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
14. No Right To Continued Employment. Nothing contained in this
Indemnification Agreement is intended to, or shall, create any right to
continued employment by the Company.
15. Amendments and Waiver. No supplement, modification, or amendment of
this Agreement shall be binding unless executed in
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<PAGE>
writing by both of the parties hereto; provided, however, that if any provision
of this Agreement is challenged as being unlawful, the parties agree that the
court in which such challenge is litigated may modify such provision so that it
is enforceable to the maximum extent permitted by law and may enforce the
Agreement as so modified. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
16. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
17. Binding Effect. Etc. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors, heirs, and assigns.
18. Termination by Company. This Agreement shall continue in full force
and effect, regardless of whether Indemnitee continues to serve as an officer or
director of the Company or any other enterprise at the Company's request, unless
terminated pursuant to this Paragraph. By giving written notice to Indemnitee at
his or her address according to Company records, the Company, prior to a
Potential Change of Control or Change of Control, may terminate its obligations
under this Indemnification Agreement as to any act or omission of Indemnitee
after such written notice is given. Any such termination of this Agreement shall
not terminate the Company's obligations hereunder with respect to actions which
occurred prior to such termination. Notice is deemed given when actually
received or two days after being sent by registered or certified mail, whichever
is earlier.
19. Severability. The provisions of this Agreement shall be severable
and, in the event that any of the provisions hereof (including any provision
within a single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, the remaining
provisions shall remain enforceable to the fullest extent permitted by law,
including the provisions that have been modified by a court pursuant to
Paragraph 15 hereof.
20. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Arizona applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
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<PAGE>
21. Prior Agreements. This Agreement supersedes all prior
Indemnification Agreements between the Company and Indemnitee.
EMPLOYEE SOLUTIONS, INC.
By:_____________________________
Its:____________________________
________________________________
MARVIN D. BRODY
Address for notices: __________________________
__________________________
__________________________
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<PAGE>
EXHIBIT A
---------
______________________, 199_
Employee Solutions, Inc.
Attention: Chief Executive Officer
2929 East Camelback Road
Suite 220
Phoenix AZ 85016
Re: Indemnification Agreement Dated , 1996 (the "Agreement")
-----------------------------------------------------------------
Gentlemen:
I am the beneficiary of the above Agreement and am a defendant,
witness, or other participant in the following legal action:
___________________________________. A copy of the Complaint in this action is
attached for your information.
Pursuant to Paragraph 8 of the Agreement, I hereby request that
Employee Solutions, Inc. advance my Expenses as such term is used in the
Agreement, subject to the Expense Advance Rules, as such Rules are applied in
the Agreement. I hereby confirm that I will reimburse Employee Solutions, Inc.
for all the amounts advanced to me that are ultimately determined (by final
judicial determination from which there is no further right to appeal) to be
associated with matters to which I am not entitled to indemnity under the
Agreement.
If any additional information is needed, my address and telephone
number are listed below:
Address:
_________________________
_________________________
_________________________
Telephone Number:
_________________________
Very truly yours,
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EMPLOYEE SOLUTIONS, INC.
DIRECTOR AND OFFICER'S INDEMNIFICATION AGREEMENT
This Agreement, which shall be effective as of November 21,
1996, is by and between Employee Solutions, Inc., an Arizona corporation (the
"Company"), and Edward L. Cain, Jr., the undersigned officer and director of the
Company (the "Indemnitee").
RECITALS
WHEREAS, it is essential for the Company to be able to retain
and attract as officers and directors the most capable persons available.
WHEREAS, Indemnitee is an executive officer and director of
the Company.
WHEREAS, both the Company and Indemnitee recognize the risk
created by the increased risk of litigation and other claims being asserted
against officers and directors of public companies in today's environment.
WHEREAS, effective January 1, 1996, the Arizona Business
Corporation Act ("ABCA") has been changed, and the Company and Indemnitee wish
to avail themselves of the revised provisions of the ABCA, and to specify
certain matters not specifically provided in the ABCA.
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, the Company wishes to provide in
this Agreement for the indemnification of, and the advancing of expenses to,
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of Indemnitee under the Company's directors' and
officers' liability insurance policies.
COVENANTS
THEREFORE, in consideration of the promises in this Agreement,
and intending to be legally bound hereby, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged, the parties agree
as follows:
1. Certain Definitions.
(a) Action: any threatened, pending or completed action, suit,
proceeding or alternate dispute resolution mechanism, or any inquiry, hearing or
investigation, whether conducted by the Company or any other party, that
Indemnitee in
<PAGE>
good faith believes might lead to the institution of any such action, suit,
proceeding or alternate dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other, and whether formal or informal.
(b) Change in Control: shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding Voting
Securities, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the shareholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company (in one transaction or a series of transactions) of
all or substantially all the Company's assets.
(c) Derivative Action: an Action by or in the right of the
Company.
(d) Expenses: include attorneys' fees, court costs, deposition
costs, court reporter fees, travel and all other costs, expenses and obligations
actually paid to another or incurred in connection with investigating the facts
underlying the Action, preparing to defend and defending the Action or preparing
for and participating in the Action as a witness, or any of the foregoing
expenses incurred on appeal or in an action or other proceeding to enforce
Indemnitee's rights hereunder, or any other reasonable expenses incurred by
Indemnitee in
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<PAGE>
participating in any Indemnifiable Action or Indemnifiable Derivative Action.
(e) Indemnifiable Action or Indemnifiable Derivative Action:
any Action or Derivative Action arising out of or relating, directly or
indirectly, to the fact that Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or a subsidiary of the Company, or is or was
serving at the request of the Company as a director, officer, employee, trustee,
agent or fiduciary of another corporation, limited liability company,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
(f) Potential Change in Control: shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions which if consummated would constitute a Change in
Control; (iii) any person, other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company acting in such capacity
or a corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of stock of the
Company, who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases such person's
beneficial ownership of such securities by 5% or more over the percentage so
owned by such person on the date hereof; or (iv) the Board of Directors adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change in Control has occurred.
(g) Voting Securities: any securities of the Company which
vote generally in the election of directors.
2. No Pending Actions. Indemnitee represents to the Company that, to
Indemnitee's actual knowledge, (i) there is no Indemnifiable Action or
Indemnifiable Derivative Action involving Indemnitee as of the date of this
Agreement and (ii) no facts exist that may form the basis for any such Action
involving Indemnitee.
3. Indemnification For Actions Other Than Derivative Actions. If
Indemnitee was, is, or becomes a party to or a witness or other participant in,
or is threatened to be made a party to or witness or other participant in, an
Indemnifiable Action other than an Indemnifiable Derivative Action, the Company
shall, subject to the provisions of this Agreement, indemnify Indemnitee to the
fullest extent permitted by law against any and all Expenses, judgments, fines,
penalties, and amounts paid in settlement of such Action.
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<PAGE>
4. Indemnification For Derivative Actions.
(a) Basic Indemnification. If Indemnitee was, is, or becomes a
party to or a witness or other participant in, or is threatened to be made a
party to or witness or other participant in an Indemnifiable Derivative Action,
the Company shall, subject to the provisions of this Agreement, indemnify
Indemnitee to the fullest extent permitted by law against any and all Expenses,
but not judgments, fines, or, except as set forth below, amounts paid in
settlement of such Derivative Action.
(b) Adjudication of Liability in Derivative Actions.
Notwithstanding Paragraph 4(a), no indemnification shall be made in respect of
any claim, issue, or matter as to which Indemnitee shall have been adjudged (by
final judicial determination from which there is no further right to appeal) to
be liable to the Company unless and only to the extent that the court in which
such Derivative Action was brought shall determine upon application by
Indemnitee that despite the adjudication of liability and in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnification which such court shall deem proper.
(c) Settlement of Derivative Actions. Notwithstanding
Paragraph 4(a), the court in which such Derivative Action was brought may
determine upon application of Indemnitee that, in view of all circumstances of
the case, indemnity for amounts paid in settlement is proper and may order
indemnity for the amounts so paid in settlement and for the Expenses actually
and reasonably paid in connection with such application, to the extent the court
deems proper.
5. Limits on Indemnification. Except as stated in Paragraph 6, there
shall be no indemnification pursuant to this Indemnification Agreement:
(a) to the extent that payment for the same claims or amounts
are actually made to the Indemnitee under a valid and collectible insurance
policy; provided, however, that if it should subsequently be determined that the
Indemnitee is not legally entitled to retain any such payment, the restriction
on indemnification pursuant to this subparagraph (a) shall no longer apply;
(b) to the extent that the Indemnitee is indemnified or
receives a recovery for the same claims or amounts otherwise than pursuant to
this Indemnification Agreement; provided, however, that if it should
subsequently be determined that the Indemnitee is not legally entitled to retain
any such recovery, the restriction on indemnification pursuant to this
subparagraph (b) shall no longer apply;
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<PAGE>
(c) on account of any violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and rules promulgated thereunder;
(d) on account of any violation of Section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any rules
promulgated thereunder, or similar state law, to the extent that such violation
is based on (i) the purchase or sale of a security by Indemnitee or a person
affiliated with Indemnitee while Indemnitee is in possession of material
nonpublic information about the Company, or (b) the communication of material
nonpublic information about the Company in connection with any transaction on or
through the facilities of a national securities exchange or from or through a
broker or dealer, other than as part of a securities offering by the Company;
(e) with respect to any transaction from which the Indemnitee
derived an improper personal benefit to which he or she is not legally entitled;
(f) for the return of any remuneration paid to the Indemnitee
that is held by any court in a final judgment to have been illegal or improper;
(g) to the extent that the Indemnitee's action or failure to
act was (i) not in good faith, or (ii) in the case of conduct Indemnitee's
official capacity with the Company, not in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Company, or, in
other cases, conduct was opposed to the Company's best interests, or (iii) with
respect to any criminal Action, with reasonable cause to believe his or her
conduct was unlawful; or
(h) if a final nonappealable decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
6. Partial and Mandatory Indemnity. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company of some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of an Action but not for the total amount, the Company shall
indemnify Indemnitee for the portion to which Indemnitee is entitled. To the
extent that Indemnitee has been successful on the merits or otherwise (including
dismissal with or without prejudice) in defense of any Indemnifiable Action or
Indemnifiable Derivative Action, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against Expenses actually and reasonably
incurred by him in connection therewith, except as stated in Paragraph 5(a) or
5(b).
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<PAGE>
7. Notification of Indemnifiable Action or Indemnifiable Derivative
Action. Indemnitee shall promptly notify the Company of any Indemnifiable Action
or Indemnifiable Derivative Action promptly after receipt by Indemnitee of
notice of the commencement of such Indemnifiable Action or Indemnifiable
Derivative Action. With respect thereto:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, the Company jointly
with any other indemnifying party may assume the defense thereof, with counsel
reasonably satisfactory to Indemnitee to be chosen or approved by the Company.
After notice from the Company to Indemnitee of its election to so assume the
defense thereof, the Company will not be liable to Indemnitee for any legal or
other expenses subsequently incurred by Indemnitee in connection with the
defense thereof other than reasonable costs of investigation or participation in
such Action or Derivative Action (including travel expenses) or as otherwise
provided below. Indemnitee shall have the right to employ independent counsel in
such Action or Derivative Action; however, the fees and expenses of such counsel
incurred after notice from the Company of its assumption of the defense thereof
shall be at the expense of Indemnitee unless:
(i) the employment of independent counsel by
Indemnitee has been authorized by the Company;
(ii) counsel employed by the Company to represent the
Indemnitee shall have reasonably concluded that there may be a conflict
of interest in the conduct of the defense of such action that prevents
such counsel from representing Indemnitee; or
(iii) the Company shall not in fact have employed
counsel to assume the defense of such Action or Derivative Action on
behalf of Indemnitee.
The fees and expenses of independent counsel of Indemnitee in subparagraphs
7(b)(i), (ii) and (iii) shall be borne by the Company.
(c) If the Company has assumed the defense of the Indemnitee
pursuant to subparagraph (b) above, the Company shall not be liable to indemnify
Indemnitee under this Agreement for any amount paid in settlement of any Action
or Derivative Action effected without its written consent, the Company shall not
settle any Action or Derivative Action in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written consent, and
neither the Company nor Indemnitee will unreasonably withhold their consent to
any proposed settlement.
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<PAGE>
8. Advance of Expenses; Failure to Pay Claim.
(a) Written Request. If so requested by Indemnitee in writing,
the Company shall (subject to the Expense Advance Rules hereinafter described)
advance to Indemnitee (an "Expense Advance") any and all Expenses incurred in
connection with the investigation and preparation of the Indemnitee's
participation in any Indemnifiable Action or Indemnifiable Derivative Action,
whether as a witness or a party, pursuant to this Agreement. The Company shall
comply with the Indemnitee's written request for an Expense Advance, and make
any necessary determination that the facts then known would not preclude
indemnification under the ABCA, within ten (10) business days of receipt of such
written request together with the reimbursement commitment referred to in
subparagraph (b) below. If the Company does not honor Indemnitee's request for
an Expense Advance, Indemnitee may bring an action in any court of competent
jurisdiction to enforce the right to an Expense Advance, the Company shall have
the burden of proof in such action to demonstrate that the Expense Advance is
not payable, and the Company shall reimburse Indemnity for all Expense thereof
unless the court denies indemnification.
(b) Reimbursement by Indemnitee. The obligation of the Company
to make an Expense Advance shall be subject to the condition that, if it is
ultimately determined (by final judicial determination from which there is no
further right to appeal) that there are matters to which Indemnitee is not
entitled to indemnity under this Agreement, the Company shall be entitled to be
reimbursed by Indemnitee for all such amounts. Prior to obtaining the initial
Expense Advance, Indemnitee must confirm such reimbursement obligation by
delivery to Company of a signed undertaking in the form of Exhibit A or in such
other form as Company may reasonably accept.
(c) Expense Advance Rules. Expenses in all cases must be
reasonable and comply with existing or future billing procedures of the Company
so that the Company can reasonably monitor and audit such Expenses. With respect
to attorneys' fees, the Company will give reasonable consideration to requests
for specific counsel and to requests for the grouping of individuals for joint
defense purposes. Any attorney representing more than one individual may be
requested to render separate statements to each individual or otherwise allocate
billings by individual.
(d) Failure to Pay Claim. If loss has been incurred and a
claim for indemnification under this Agreement is not paid by the Company within
ten (10) business days after a written claim has been received by the Company,
Indemnitee may at any time thereafter bring suit against the Company to recover
any unpaid amount of the claim and all Expenses incurred by Indemnitee to obtain
such court ordered indemnification.
-7-
<PAGE>
9. Burden of Proof. In connection with any determination as to whether
Indemnitee is entitled to be indemnified hereunder the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
10. No Presumption. For purposes of this Agreement, the termination of
any Action by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not payable under this Indemnification Agreement or
permitted by applicable law.
11. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall
be in addition to any other rights Indemnitee may have under the Company's
Articles of Incorporation or bylaws, or the ABCA or otherwise. To the extent
that a change in the ABCA (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's Articles of Incorporation, bylaws and this Agreement, it is the intent
of the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
12. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing Directors' and Officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company Director, Officer or Indemnitee. If Indemnitee incurs any Expenses in
tendering the defense of the Action to the insurance company providing the
Directors and Officers insurance, such Expenses shall be considered
indemnifiable Expenses.
13. Period of Limitations. No legal action shall be brought and no
cause of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
14. No Right To Continued Employment. Nothing contained in this
Indemnification Agreement is intended to, or shall, create any right to
continued employment by the Company.
15. Amendments and Waiver. No supplement, modification, or amendment of
this Agreement shall be binding unless executed in
-8-
<PAGE>
writing by both of the parties hereto; provided, however, that if any provision
of this Agreement is challenged as being unlawful, the parties agree that the
court in which such challenge is litigated may modify such provision so that it
is enforceable to the maximum extent permitted by law and may enforce the
Agreement as so modified. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
16. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
17. Binding Effect. Etc. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors, heirs, and assigns.
18. Termination by Company. This Agreement shall continue in full force
and effect, regardless of whether Indemnitee continues to serve as an officer or
director of the Company or any other enterprise at the Company's request, unless
terminated pursuant to this Paragraph. By giving written notice to Indemnitee at
his or her address according to Company records, the Company, prior to a
Potential Change of Control or Change of Control, may terminate its obligations
under this Indemnification Agreement as to any act or omission of Indemnitee
after such written notice is given. Any such termination of this Agreement shall
not terminate the Company's obligations hereunder with respect to actions which
occurred prior to such termination. Notice is deemed given when actually
received or two days after being sent by registered or certified mail, whichever
is earlier.
19. Severability. The provisions of this Agreement shall be severable
and, in the event that any of the provisions hereof (including any provision
within a single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, the remaining
provisions shall remain enforceable to the fullest extent permitted by law,
including the provisions that have been modified by a court pursuant to
Paragraph 15 hereof.
20. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Arizona applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
-9-
<PAGE>
21. Prior Agreements. This Agreement supersedes all prior
Indemnification Agreements between the Company and Indemnitee.
EMPLOYEE SOLUTIONS, INC.
By:_____________________________
Its:____________________________
- --------------------------------
EDWARD L. CAIN, JR.
Address for notices: __________________________
__________________________
__________________________
-10-
<PAGE>
EXHIBIT A
---------
______________________, 199_
Employee Solutions, Inc.
Attention: Chief Executive Officer
2929 East Camelback Road
Suite 220
Phoenix AZ 85016
Re: Indemnification Agreement Dated , 1996 (the "Agreement")
-----------------------------------------------------------------
Gentlemen:
I am the beneficiary of the above Agreement and am a defendant,
witness, or other participant in the following legal action:
___________________________________. A copy of the Complaint in this action is
attached for your information.
Pursuant to Paragraph 8 of the Agreement, I hereby request that
Employee Solutions, Inc. advance my Expenses as such term is used in the
Agreement, subject to the Expense Advance Rules, as such Rules are applied in
the Agreement. I hereby confirm that I will reimburse Employee Solutions, Inc.
for all the amounts advanced to me that are ultimately determined (by final
judicial determination from which there is no further right to appeal) to be
associated with matters to which I am not entitled to indemnity under the
Agreement.
If any additional information is needed, my address and telephone
number are listed below:
Address:
- -------------------------
- -------------------------
- -------------------------
Telephone Number:
- -------------------------
Very truly yours,
-11-
EMPLOYEE SOLUTIONS, INC.
DIRECTOR AND OFFICER'S INDEMNIFICATION AGREEMENT
This Agreement, which shall be effective as of November 21,
1996, is by and between Employee Solutions, Inc., an Arizona corporation (the
"Company"), and Jeffery A. Colby, the undersigned officer and director of the
Company (the "Indemnitee").
RECITALS
WHEREAS, it is essential for the Company to be able to retain
and attract as officers and directors the most capable persons available.
WHEREAS, Indemnitee is a director of the Company and an
officer of a Company subsidiary.
WHEREAS, both the Company and Indemnitee recognize the risk
created by the increased risk of litigation and other claims being asserted
against officers and directors of public companies in today's environment.
WHEREAS, effective January 1, 1996, the Arizona Business
Corporation Act ("ABCA") has been changed, and the Company and Indemnitee wish
to avail themselves of the revised provisions of the ABCA, and to specify
certain matters not specifically provided in the ABCA.
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, the Company wishes to provide in
this Agreement for the indemnification of, and the advancing of expenses to,
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of Indemnitee under the Company's directors' and
officers' liability insurance policies.
COVENANTS
THEREFORE, in consideration of the promises in this Agreement,
and intending to be legally bound hereby, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged, the parties agree
as follows:
1. Certain Definitions.
(a) Action: any threatened, pending or completed action, suit,
proceeding or alternate dispute resolution mechanism, or any inquiry, hearing or
investigation, whether conducted by the Company or any other party, that
Indemnitee in
<PAGE>
good faith believes might lead to the institution of any such action, suit,
proceeding or alternate dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other, and whether formal or informal.
(b) Change in Control: shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding Voting
Securities, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the shareholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company (in one transaction or a series of transactions) of
all or substantially all the Company's assets.
(c) Derivative Action: an Action by or in the right of the
Company.
(d) Expenses: include attorneys' fees, court costs, deposition
costs, court reporter fees, travel and all other costs, expenses and obligations
actually paid to another or incurred in connection with investigating the facts
underlying the Action, preparing to defend and defending the Action or preparing
for and participating in the Action as a witness, or any of the foregoing
expenses incurred on appeal or in an action or other proceeding to enforce
Indemnitee's rights hereunder, or any other reasonable expenses incurred by
Indemnitee in
-2-
<PAGE>
participating in any Indemnifiable Action or Indemnifiable Derivative Action.
(e) Indemnifiable Action or Indemnifiable Derivative Action:
any Action or Derivative Action arising out of or relating, directly or
indirectly, to the fact that Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or a subsidiary of the Company, or is or was
serving at the request of the Company as a director, officer, employee, trustee,
agent or fiduciary of another corporation, limited liability company,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
(f) Potential Change in Control: shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions which if consummated would constitute a Change in
Control; (iii) any person, other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company acting in such capacity
or a corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of stock of the
Company, who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases such person's
beneficial ownership of such securities by 5% or more over the percentage so
owned by such person on the date hereof; or (iv) the Board of Directors adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change in Control has occurred.
(g) Voting Securities: any securities of the Company which
vote generally in the election of directors.
2. No Pending Actions. Indemnitee represents to the Company that, to
Indemnitee's actual knowledge, (i) there is no Indemnifiable Action or
Indemnifiable Derivative Action involving Indemnitee as of the date of this
Agreement and (ii) no facts exist that may form the basis for any such Action
involving Indemnitee.
3. Indemnification For Actions Other Than Derivative Actions. If
Indemnitee was, is, or becomes a party to or a witness or other participant in,
or is threatened to be made a party to or witness or other participant in, an
Indemnifiable Action other than an Indemnifiable Derivative Action, the Company
shall, subject to the provisions of this Agreement, indemnify Indemnitee to the
fullest extent permitted by law against any and all Expenses, judgments, fines,
penalties, and amounts paid in settlement of such Action.
-3-
<PAGE>
4. Indemnification For Derivative Actions.
(a) Basic Indemnification. If Indemnitee was, is, or becomes a
party to or a witness or other participant in, or is threatened to be made a
party to or witness or other participant in an Indemnifiable Derivative Action,
the Company shall, subject to the provisions of this Agreement, indemnify
Indemnitee to the fullest extent permitted by law against any and all Expenses,
but not judgments, fines, or, except as set forth below, amounts paid in
settlement of such Derivative Action.
(b) Adjudication of Liability in Derivative Actions.
Notwithstanding Paragraph 4(a), no indemnification shall be made in respect of
any claim, issue, or matter as to which Indemnitee shall have been adjudged (by
final judicial determination from which there is no further right to appeal) to
be liable to the Company unless and only to the extent that the court in which
such Derivative Action was brought shall determine upon application by
Indemnitee that despite the adjudication of liability and in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnification which such court shall deem proper.
(c) Settlement of Derivative Actions. Notwithstanding
Paragraph 4(a), the court in which such Derivative Action was brought may
determine upon application of Indemnitee that, in view of all circumstances of
the case, indemnity for amounts paid in settlement is proper and may order
indemnity for the amounts so paid in settlement and for the Expenses actually
and reasonably paid in connection with such application, to the extent the court
deems proper.
5. Limits on Indemnification. Except as stated in Paragraph 6, there
shall be no indemnification pursuant to this Indemnification Agreement:
(a) to the extent that payment for the same claims or amounts
are actually made to the Indemnitee under a valid and collectible insurance
policy; provided, however, that if it should subsequently be determined that the
Indemnitee is not legally entitled to retain any such payment, the restriction
on indemnification pursuant to this subparagraph (a) shall no longer apply;
(b) to the extent that the Indemnitee is indemnified or
receives a recovery for the same claims or amounts otherwise than pursuant to
this Indemnification Agreement; provided, however, that if it should
subsequently be determined that the Indemnitee is not legally entitled to retain
any such recovery, the restriction on indemnification pursuant to this
subparagraph (b) shall no longer apply;
-4-
<PAGE>
(c) on account of any violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and rules promulgated thereunder;
(d) on account of any violation of Section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any rules
promulgated thereunder, or similar state law, to the extent that such violation
is based on (i) the purchase or sale of a security by Indemnitee or a person
affiliated with Indemnitee while Indemnitee is in possession of material
nonpublic information about the Company, or (b) the communication of material
nonpublic information about the Company in connection with any transaction on or
through the facilities of a national securities exchange or from or through a
broker or dealer, other than as part of a securities offering by the Company;
(e) with respect to any transaction from which the Indemnitee
derived an improper personal benefit to which he or she is not legally entitled;
(f) for the return of any remuneration paid to the Indemnitee
that is held by any court in a final judgment to have been illegal or improper;
(g) to the extent that the Indemnitee's action or failure to
act was (i) not in good faith, or (ii) in the case of conduct Indemnitee's
official capacity with the Company, not in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Company, or, in
other cases, conduct was opposed to the Company's best interests, or (iii) with
respect to any criminal Action, with reasonable cause to believe his or her
conduct was unlawful; or
(h) if a final nonappealable decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
6. Partial and Mandatory Indemnity. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company of some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of an Action but not for the total amount, the Company shall
indemnify Indemnitee for the portion to which Indemnitee is entitled. To the
extent that Indemnitee has been successful on the merits or otherwise (including
dismissal with or without prejudice) in defense of any Indemnifiable Action or
Indemnifiable Derivative Action, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against Expenses actually and reasonably
incurred by him in connection therewith, except as stated in Paragraph 5(a) or
5(b).
-5-
<PAGE>
7. Notification of Indemnifiable Action or Indemnifiable Derivative
Action. Indemnitee shall promptly notify the Company of any Indemnifiable Action
or Indemnifiable Derivative Action promptly after receipt by Indemnitee of
notice of the commencement of such Indemnifiable Action or Indemnifiable
Derivative Action. With respect thereto:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, the Company jointly
with any other indemnifying party may assume the defense thereof, with counsel
reasonably satisfactory to Indemnitee to be chosen or approved by the Company.
After notice from the Company to Indemnitee of its election to so assume the
defense thereof, the Company will not be liable to Indemnitee for any legal or
other expenses subsequently incurred by Indemnitee in connection with the
defense thereof other than reasonable costs of investigation or participation in
such Action or Derivative Action (including travel expenses) or as otherwise
provided below. Indemnitee shall have the right to employ independent counsel in
such Action or Derivative Action; however, the fees and expenses of such counsel
incurred after notice from the Company of its assumption of the defense thereof
shall be at the expense of Indemnitee unless:
(i) the employment of independent counsel by
Indemnitee has been authorized by the Company;
(ii) counsel employed by the Company to represent the
Indemnitee shall have reasonably concluded that there may be a conflict
of interest in the conduct of the defense of such action that prevents
such counsel from representing Indemnitee; or
(iii) the Company shall not in fact have employed
counsel to assume the defense of such Action or Derivative Action on
behalf of Indemnitee.
The fees and expenses of independent counsel of Indemnitee in subparagraphs
7(b)(i), (ii) and (iii) shall be borne by the Company.
(c) If the Company has assumed the defense of the Indemnitee
pursuant to subparagraph (b) above, the Company shall not be liable to indemnify
Indemnitee under this Agreement for any amount paid in settlement of any Action
or Derivative Action effected without its written consent, the Company shall not
settle any Action or Derivative Action in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written consent, and
neither the Company nor Indemnitee will unreasonably withhold their consent to
any proposed settlement.
-6-
<PAGE>
8. Advance of Expenses; Failure to Pay Claim.
(a) Written Request. If so requested by Indemnitee in writing,
the Company shall (subject to the Expense Advance Rules hereinafter described)
advance to Indemnitee (an "Expense Advance") any and all Expenses incurred in
connection with the investigation and preparation of the Indemnitee's
participation in any Indemnifiable Action or Indemnifiable Derivative Action,
whether as a witness or a party, pursuant to this Agreement. The Company shall
comply with the Indemnitee's written request for an Expense Advance, and make
any necessary determination that the facts then known would not preclude
indemnification under the ABCA, within ten (10) business days of receipt of such
written request together with the reimbursement commitment referred to in
subparagraph (b) below. If the Company does not honor Indemnitee's request for
an Expense Advance, Indemnitee may bring an action in any court of competent
jurisdiction to enforce the right to an Expense Advance, the Company shall have
the burden of proof in such action to demonstrate that the Expense Advance is
not payable, and the Company shall reimburse Indemnity for all Expense thereof
unless the court denies indemnification.
(b) Reimbursement by Indemnitee. The obligation of the Company
to make an Expense Advance shall be subject to the condition that, if it is
ultimately determined (by final judicial determination from which there is no
further right to appeal) that there are matters to which Indemnitee is not
entitled to indemnity under this Agreement, the Company shall be entitled to be
reimbursed by Indemnitee for all such amounts. Prior to obtaining the initial
Expense Advance, Indemnitee must confirm such reimbursement obligation by
delivery to Company of a signed undertaking in the form of Exhibit A or in such
other form as Company may reasonably accept.
(c) Expense Advance Rules. Expenses in all cases must be
reasonable and comply with existing or future billing procedures of the Company
so that the Company can reasonably monitor and audit such Expenses. With respect
to attorneys' fees, the Company will give reasonable consideration to requests
for specific counsel and to requests for the grouping of individuals for joint
defense purposes. Any attorney representing more than one individual may be
requested to render separate statements to each individual or otherwise allocate
billings by individual.
(d) Failure to Pay Claim. If loss has been incurred and a
claim for indemnification under this Agreement is not paid by the Company within
ten (10) business days after a written claim has been received by the Company,
Indemnitee may at any time thereafter bring suit against the Company to recover
any unpaid amount of the claim and all Expenses incurred by Indemnitee to obtain
such court ordered indemnification.
-7-
<PAGE>
9. Burden of Proof. In connection with any determination as to whether
Indemnitee is entitled to be indemnified hereunder the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
10. No Presumption. For purposes of this Agreement, the termination of
any Action by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not payable under this Indemnification Agreement or
permitted by applicable law.
11. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall
be in addition to any other rights Indemnitee may have under the Company's
Articles of Incorporation or bylaws, or the ABCA or otherwise. To the extent
that a change in the ABCA (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's Articles of Incorporation, bylaws and this Agreement, it is the intent
of the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
12. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing Directors' and Officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company Director, Officer or Indemnitee. If Indemnitee incurs any Expenses in
tendering the defense of the Action to the insurance company providing the
Directors and Officers insurance, such Expenses shall be considered
indemnifiable Expenses.
13. Period of Limitations. No legal action shall be brought and no
cause of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
14. No Right To Continued Employment. Nothing contained in this
Indemnification Agreement is intended to, or shall, create any right to
continued employment by the Company.
15. Amendments and Waiver. No supplement, modification, or amendment of
this Agreement shall be binding unless executed in
-8-
<PAGE>
writing by both of the parties hereto; provided, however, that if any provision
of this Agreement is challenged as being unlawful, the parties agree that the
court in which such challenge is litigated may modify such provision so that it
is enforceable to the maximum extent permitted by law and may enforce the
Agreement as so modified. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
16. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
17. Binding Effect. Etc. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors, heirs, and assigns.
18. Termination by Company. This Agreement shall continue in full force
and effect, regardless of whether Indemnitee continues to serve as an officer or
director of the Company or any other enterprise at the Company's request, unless
terminated pursuant to this Paragraph. By giving written notice to Indemnitee at
his or her address according to Company records, the Company, prior to a
Potential Change of Control or Change of Control, may terminate its obligations
under this Indemnification Agreement as to any act or omission of Indemnitee
after such written notice is given. Any such termination of this Agreement shall
not terminate the Company's obligations hereunder with respect to actions which
occurred prior to such termination. Notice is deemed given when actually
received or two days after being sent by registered or certified mail, whichever
is earlier.
19. Severability. The provisions of this Agreement shall be severable
and, in the event that any of the provisions hereof (including any provision
within a single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, the remaining
provisions shall remain enforceable to the fullest extent permitted by law,
including the provisions that have been modified by a court pursuant to
Paragraph 15 hereof.
20. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Arizona applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
-9-
<PAGE>
21. Prior Agreements. This Agreement supersedes all prior
Indemnification Agreements between the Company and Indemnitee.
EMPLOYEE SOLUTIONS, INC.
By:_____________________________
Its:____________________________
- --------------------------------
JEFFERY A. COLBY
Address for notices: __________________________
__________________________
__________________________
-10-
<PAGE>
EXHIBIT A
---------
______________________, 199_
Employee Solutions, Inc.
Attention: Chief Executive Officer
2929 East Camelback Road
Suite 220
Phoenix AZ 85016
Re: Indemnification Agreement Dated , 1996 (the "Agreement")
-----------------------------------------------------------------
Gentlemen:
I am the beneficiary of the above Agreement and am a defendant,
witness, or other participant in the following legal action:
___________________________________. A copy of the Complaint in this action is
attached for your information.
Pursuant to Paragraph 8 of the Agreement, I hereby request that
Employee Solutions, Inc. advance my Expenses as such term is used in the
Agreement, subject to the Expense Advance Rules, as such Rules are applied in
the Agreement. I hereby confirm that I will reimburse Employee Solutions, Inc.
for all the amounts advanced to me that are ultimately determined (by final
judicial determination from which there is no further right to appeal) to be
associated with matters to which I am not entitled to indemnity under the
Agreement.
If any additional information is needed, my address and telephone
number are listed below:
Address:
- -------------------------
- -------------------------
- -------------------------
Telephone Number:
- -------------------------
Very truly yours,
-11-
EMPLOYEE SOLUTIONS, INC.
NON-DIRECTOR OFFICER'S INDEMNIFICATION AGREEMENT
This Agreement, which shall be effective as of November 21,
1996, is by and between Employee Solutions, Inc., an Arizona corporation (the
"Company"), and Roy A. Flegenheimer, the undersigned officer of the Company (the
"Indemnitee").
RECITALS
WHEREAS, it is essential for the Company to be able to retain
and attract as officers the most capable persons available.
WHEREAS, Indemnitee is an executive officer of the Company.
WHEREAS, both the Company and Indemnitee recognize the risk
created by the increased risk of litigation and other claims being asserted
against officers of public companies in today's environment.
WHEREAS, effective January 1, 1996, the Arizona Business
Corporation Act ("ABCA") has been changed, and the Company and Indemnitee wish
to avail themselves of the revised provisions of the ABCA, and to specify
certain matters not specifically provided in the ABCA.
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, the Company wishes to provide in
this Agreement for the indemnification of, and the advancing of expenses to,
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of Indemnitee under the Company's directors' and
officers' liability insurance policies.
COVENANTS
THEREFORE, in consideration of the promises in this Agreement,
and intending to be legally bound hereby, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged, the parties agree
as follows:
1. Certain Definitions.
(a) Action: any threatened, pending or completed action, suit,
proceeding or alternate dispute resolution mechanism, or any inquiry, hearing or
investigation, whether conducted by the Company or any other party, that
Indemnitee in good faith believes might lead to the institution of any such
<PAGE>
action, suit, proceeding or alternate dispute resolution mechanism, whether
civil, criminal, administrative, investigative or other, and whether formal or
informal.
(b) Change in Control: shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding Voting
Securities, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the shareholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company (in one transaction or a series of transactions) of
all or substantially all the Company's assets.
(c) Derivative Action: an Action by or in the right of the
Company.
(d) Expenses: include attorneys' fees, court costs, deposition
costs, court reporter fees, travel and all other costs, expenses and obligations
actually paid to another or incurred in connection with investigating the facts
underlying the Action, preparing to defend and defending the Action or preparing
for and participating in the Action as a witness, or any of the foregoing
expenses incurred on appeal or in an action or other proceeding to enforce
Indemnitee's rights hereunder, or any other reasonable expenses incurred by
Indemnitee in participating in any Indemnifiable Action or Indemnifiable
Derivative Action.
-2-
<PAGE>
(e) Indemnifiable Action or Indemnifiable Derivative Action:
any Action or Derivative Action arising out of or relating, directly or
indirectly, to the fact that Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or a subsidiary of the Company, or is or was
serving at the request of the Company as a director, officer, employee, trustee,
agent or fiduciary of another corporation, limited liability company,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
(f) Potential Change in Control: shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions which if consummated would constitute a Change in
Control; (iii) any person, other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company acting in such capacity
or a corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of stock of the
Company, who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases such person's
beneficial ownership of such securities by 5% or more over the percentage so
owned by such person on the date hereof; or (iv) the Board of Directors adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change in Control has occurred.
(g) Voting Securities: any securities of the Company which
vote generally in the election of directors.
2. No Pending Actions. Indemnitee represents to the Company that, to
Indemnitee's actual knowledge, (i) there is no Indemnifiable Action or
Indemnifiable Derivative Action involving Indemnitee as of the date of this
Agreement and (ii) no facts exist that may form the basis for any such Action
involving Indemnitee.
3. Indemnification For Actions Other Than Derivative Actions. If
Indemnitee was, is, or becomes a party to or a witness or other participant in,
or is threatened to be made a party to or witness or other participant in, an
Indemnifiable Action other than an Indemnifiable Derivative Action, the Company
shall, subject to the provisions of this Agreement, indemnify Indemnitee to the
fullest extent permitted by law against any and all Expenses, judgments, fines,
penalties, and amounts paid in settlement of such Action.
-3-
<PAGE>
4. Indemnification For Derivative Actions.
(a) Basic Indemnification. If Indemnitee was, is, or becomes a
party to or a witness or other participant in, or is threatened to be made a
party to or witness or other participant in an Indemnifiable Derivative Action,
the Company shall, subject to the provisions of this Agreement, indemnify
Indemnitee to the fullest extent permitted by law against any and all Expenses,
but not judgments, fines, or, except as set forth below, amounts paid in
settlement of such Derivative Action.
(b) Adjudication of Liability in Derivative Actions.
Notwithstanding Paragraph 4(a), no indemnification shall be made in respect of
any claim, issue, or matter as to which Indemnitee shall have been adjudged (by
final judicial determination from which there is no further right to appeal) to
be liable to the Company unless and only to the extent that the court in which
such Derivative Action was brought shall determine upon application by
Indemnitee that despite the adjudication of liability and in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnification which such court shall deem proper.
(c) Settlement of Derivative Actions. Notwithstanding
Paragraph 4(a), the court in which such Derivative Action was brought may
determine upon application of Indemnitee that, in view of all circumstances of
the case, indemnity for amounts paid in settlement is proper and may order
indemnity for the amounts so paid in settlement and for the Expenses actually
and reasonably paid in connection with such application, to the extent the court
deems proper.
5. Limits on Indemnification. Except as stated in Paragraph 6, there
shall be no indemnification pursuant to this Indemnification Agreement:
(a) to the extent that payment for the same claims or amounts
are actually made to the Indemnitee under a valid and collectible insurance
policy; provided, however, that if it should subsequently be determined that the
Indemnitee is not legally entitled to retain any such payment, the restriction
on indemnification pursuant to this subparagraph (a) shall no longer apply;
(b) to the extent that the Indemnitee is indemnified or
receives a recovery for the same claims or amounts otherwise than pursuant to
this Indemnification Agreement; provided, however, that if it should
subsequently be determined that the Indemnitee is not legally entitled to retain
any such recovery, the restriction on indemnification pursuant to this
subparagraph (b) shall no longer apply;
-4-
<PAGE>
(c) on account of any violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and rules promulgated thereunder;
(d) on account of any violation of Section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any rules
promulgated thereunder, or similar state law, to the extent that such violation
is based on (i) the purchase or sale of a security by Indemnitee or a person
affiliated with Indemnitee while Indemnitee is in possession of material
nonpublic information about the Company, or (b) the communication of material
nonpublic information about the Company in connection with any transaction on or
through the facilities of a national securities exchange or from or through a
broker or dealer, other than as part of a securities offering by the Company;
(e) with respect to any transaction from which the Indemnitee
derived an improper personal benefit to which he or she is not legally entitled;
(f) for the return of any remuneration paid to the Indemnitee
that is held by any court in a final judgment to have been illegal or improper;
(g) to the extent that the Indemnitee's action or failure to
act was (i) not in good faith, or (ii) in the case of conduct Indemnitee's
official capacity with the Company, not in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Company, or, in
other cases, conduct was opposed to the Company's best interests, or (iii) with
respect to any criminal Action, with reasonable cause to believe his or her
conduct was unlawful; or
(h) if a final nonappealable decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
6. Partial and Mandatory Indemnity. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company of some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of an Action but not for the total amount, the Company shall
indemnify Indemnitee for the portion to which Indemnitee is entitled. To the
extent that Indemnitee has been successful on the merits or otherwise (including
dismissal with or without prejudice) in defense of any Indemnifiable Action or
Indemnifiable Derivative Action, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against Expenses actually and reasonably
incurred by him in connection therewith, except as stated in Paragraph 5(a) or
5(b).
-5-
<PAGE>
7. Notification of Indemnifiable Action or Indemnifiable Derivative
Action. Indemnitee shall promptly notify the Company of any Indemnifiable Action
or Indemnifiable Derivative Action promptly after receipt by Indemnitee of
notice of the commencement of such Indemnifiable Action or Indemnifiable
Derivative Action. With respect thereto:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, the Company jointly
with any other indemnifying party may assume the defense thereof, with counsel
reasonably satisfactory to Indemnitee to be chosen or approved by the Company.
After notice from the Company to Indemnitee of its election to so assume the
defense thereof, the Company will not be liable to Indemnitee for any legal or
other expenses subsequently incurred by Indemnitee in connection with the
defense thereof other than reasonable costs of investigation or participation in
such Action or Derivative Action (including travel expenses) or as otherwise
provided below. Indemnitee shall have the right to employ independent counsel in
such Action or Derivative Action; however, the fees and expenses of such counsel
incurred after notice from the Company of its assumption of the defense thereof
shall be at the expense of Indemnitee unless:
(i) the employment of independent counsel by
Indemnitee has been authorized by the Company;
(ii) counsel employed by the Company to represent the
Indemnitee shall have reasonably concluded that there may be a conflict
of interest in the conduct of the defense of such action that prevents
such counsel from representing Indemnitee; or
(iii) the Company shall not in fact have employed
counsel to assume the defense of such Action or Derivative Action on
behalf of Indemnitee.
The fees and expenses of independent counsel of Indemnitee in subparagraphs
7(b)(i), (ii) and (iii) shall be borne by the Company.
(c) If the Company has assumed the defense of the Indemnitee
pursuant to subparagraph (b) above, the Company shall not be liable to indemnify
Indemnitee under this Agreement for any amount paid in settlement of any Action
or Derivative Action effected without its written consent, the Company shall not
settle any Action or Derivative Action in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written consent, and
neither the Company nor Indemnitee will unreasonably withhold their consent to
any proposed settlement.
-6-
<PAGE>
8. Advance of Expenses; Failure to Pay Claim.
(a) Written Request. If so requested by Indemnitee in writing,
the Company shall (subject to the Expense Advance Rules hereinafter described)
advance to Indemnitee (an "Expense Advance") any and all Expenses incurred in
connection with the investigation and preparation of the Indemnitee's
participation in any Indemnifiable Action or Indemnifiable Derivative Action,
whether as a witness or a party, pursuant to this Agreement. The Company shall
comply with the Indemnitee's written request for an Expense Advance, and make
any necessary determination that the facts then known would not preclude
indemnification under the ABCA, within ten (10) business days of receipt of such
written request together with the reimbursement commitment referred to in
subparagraph (b) below. If the Company does not honor Indemnitee's request for
an Expense Advance, Indemnitee may bring an action in any court of competent
jurisdiction to enforce the right to an Expense Advance, the Company shall have
the burden of proof in such action to demonstrate that the Expense Advance is
not payable, and the Company shall reimburse Indemnity for all Expense thereof
unless the court denies indemnification.
(b) Reimbursement by Indemnitee. The obligation of the Company
to make an Expense Advance shall be subject to the condition that, if it is
ultimately determined (by final judicial determination from which there is no
further right to appeal) that there are matters to which Indemnitee is not
entitled to indemnity under this Agreement, the Company shall be entitled to be
reimbursed by Indemnitee for all such amounts. Prior to obtaining the initial
Expense Advance, Indemnitee must confirm such reimbursement obligation by
delivery to Company of a signed undertaking in the form of Exhibit A or in such
other form as Company may reasonably accept.
(c) Expense Advance Rules. Expenses in all cases must be
reasonable and comply with existing or future billing procedures of the Company
so that the Company can reasonably monitor and audit such Expenses. With respect
to attorneys' fees, the Company will give reasonable consideration to requests
for specific counsel and to requests for the grouping of individuals for joint
defense purposes. Any attorney representing more than one individual may be
requested to render separate statements to each individual or otherwise allocate
billings by individual.
(d) Failure to Pay Claim. If loss has been incurred and a
claim for indemnification under this Agreement is not paid by the Company within
ten (10) business days after a written claim has been received by the Company,
Indemnitee may at any time thereafter bring suit against the Company to recover
any unpaid amount of the claim and all Expenses incurred by Indemnitee to obtain
such court ordered indemnification.
-7-
<PAGE>
9. Burden of Proof. In connection with any determination as to whether
Indemnitee is entitled to be indemnified hereunder the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
10. No Presumption. For purposes of this Agreement, the termination of
any Action by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not payable under this Indemnification Agreement or
permitted by applicable law.
11. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall
be in addition to any other rights Indemnitee may have under the Company's
Articles of Incorporation or bylaws, or the ABCA or otherwise. To the extent
that a change in the ABCA (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's Articles of Incorporation, bylaws and this Agreement, it is the intent
of the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
12. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing Directors' and Officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company Director, Officer or Indemnitee. If Indemnitee incurs any Expenses in
tendering the defense of the Action to the insurance company providing the
Directors and Officers insurance, such Expenses shall be considered
indemnifiable Expenses.
13. Period of Limitations. No legal action shall be brought and no
cause of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
14. No Right To Continued Employment. Nothing contained in this
Indemnification Agreement is intended to, or shall, create any right to
continued employment by the Company.
15. Amendments and Waiver. No supplement, modification, or amendment of
this Agreement shall be binding unless executed in
-8-
<PAGE>
writing by both of the parties hereto; provided, however, that if any provision
of this Agreement is challenged as being unlawful, the parties agree that the
court in which such challenge is litigated may modify such provision so that it
is enforceable to the maximum extent permitted by law and may enforce the
Agreement as so modified. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
16. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
17. Binding Effect. Etc. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors, heirs, and assigns.
18. Termination by Company. This Agreement shall continue in full force
and effect, regardless of whether Indemnitee continues to serve as an officer or
director of the Company or any other enterprise at the Company's request, unless
terminated pursuant to this Paragraph. By giving written notice to Indemnitee at
his or her address according to Company records, the Company, prior to a
Potential Change of Control or Change of Control, may terminate its obligations
under this Indemnification Agreement as to any act or omission of Indemnitee
after such written notice is given. Any such termination of this Agreement shall
not terminate the Company's obligations hereunder with respect to actions which
occurred prior to such termination. Notice is deemed given when actually
received or two days after being sent by registered or certified mail, whichever
is earlier.
19. Severability. The provisions of this Agreement shall be severable
and, in the event that any of the provisions hereof (including any provision
within a single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, the remaining
provisions shall remain enforceable to the fullest extent permitted by law,
including the provisions that have been modified by a court pursuant to
Paragraph 15 hereof.
20. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Arizona applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
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<PAGE>
21. Prior Agreements. This Agreement supersedes all prior
Indemnification Agreements between the Company and Indemnitee.
EMPLOYEE SOLUTIONS, INC.
By:_____________________________
Its:____________________________
________________________________
ROY A. FLEGENHEIMER
Address for notices: __________________________
__________________________
__________________________
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<PAGE>
EXHIBIT A
---------
______________________, 199_
Employee Solutions, Inc.
Attention: Chief Executive Officer
2929 East Camelback Road
Suite 220
Phoenix AZ 85016
Re: Indemnification Agreement Dated , 1996 (the "Agreement")
-----------------------------------------------------------------
Gentlemen:
I am the beneficiary of the above Agreement and am a defendant,
witness, or other participant in the following legal action:
___________________________________. A copy of the Complaint in this action is
attached for your information.
Pursuant to Paragraph 8 of the Agreement, I hereby request that
Employee Solutions, Inc. advance my Expenses as such term is used in the
Agreement, subject to the Expense Advance Rules, as such Rules are applied in
the Agreement. I hereby confirm that I will reimburse Employee Solutions, Inc.
for all the amounts advanced to me that are ultimately determined (by final
judicial determination from which there is no further right to appeal) to be
associated with matters to which I am not entitled to indemnity under the
Agreement.
If any additional information is needed, my address and telephone
number are listed below:
Address:
_________________________
_________________________
_________________________
Telephone Number:
_________________________
Very truly yours,
-11-
EMPLOYEE SOLUTIONS, INC.
NON-DIRECTOR OFFICER'S INDEMNIFICATION AGREEMENT
This Agreement, which shall be effective as of November 21,
1996, is by and between Employee Solutions, Inc., an Arizona corporation (the
"Company"), and Morris C. Aaron, the undersigned officer of the Company (the
"Indemnitee").
RECITALS
WHEREAS, it is essential for the Company to be able to retain
and attract as officers the most capable persons available.
WHEREAS, Indemnitee is an executive officer of the Company.
WHEREAS, both the Company and Indemnitee recognize the risk
created by the increased risk of litigation and other claims being asserted
against officers of public companies in today's environment.
WHEREAS, effective January 1, 1996, the Arizona Business
Corporation Act ("ABCA") has been changed, and the Company and Indemnitee wish
to avail themselves of the revised provisions of the ABCA, and to specify
certain matters not specifically provided in the ABCA.
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, the Company wishes to provide in
this Agreement for the indemnification of, and the advancing of expenses to,
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of Indemnitee under the Company's directors' and
officers' liability insurance policies.
COVENANTS
THEREFORE, in consideration of the promises in this Agreement,
and intending to be legally bound hereby, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged, the parties agree
as follows:
1. Certain Definitions.
(a) Action: any threatened, pending or completed action, suit,
proceeding or alternate dispute resolution mechanism, or any inquiry, hearing or
investigation, whether conducted by the Company or any other party, that
Indemnitee in good faith believes might lead to the institution of any such
<PAGE>
action, suit, proceeding or alternate dispute resolution mechanism, whether
civil, criminal, administrative, investigative or other, and whether formal or
informal.
(b) Change in Control: shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding Voting
Securities, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the shareholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company (in one transaction or a series of transactions) of
all or substantially all the Company's assets.
(c) Derivative Action: an Action by or in the right of the
Company.
(d) Expenses: include attorneys' fees, court costs, deposition
costs, court reporter fees, travel and all other costs, expenses and obligations
actually paid to another or incurred in connection with investigating the facts
underlying the Action, preparing to defend and defending the Action or preparing
for and participating in the Action as a witness, or any of the foregoing
expenses incurred on appeal or in an action or other proceeding to enforce
Indemnitee's rights hereunder, or any other reasonable expenses incurred by
Indemnitee in participating in any Indemnifiable Action or Indemnifiable
Derivative Action.
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<PAGE>
(e) Indemnifiable Action or Indemnifiable Derivative Action:
any Action or Derivative Action arising out of or relating, directly or
indirectly, to the fact that Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or a subsidiary of the Company, or is or was
serving at the request of the Company as a director, officer, employee, trustee,
agent or fiduciary of another corporation, limited liability company,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
(f) Potential Change in Control: shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions which if consummated would constitute a Change in
Control; (iii) any person, other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company acting in such capacity
or a corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of stock of the
Company, who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases such person's
beneficial ownership of such securities by 5% or more over the percentage so
owned by such person on the date hereof; or (iv) the Board of Directors adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change in Control has occurred.
(g) Voting Securities: any securities of the Company which
vote generally in the election of directors.
2. No Pending Actions. Indemnitee represents to the Company that, to
Indemnitee's actual knowledge, (i) there is no Indemnifiable Action or
Indemnifiable Derivative Action involving Indemnitee as of the date of this
Agreement and (ii) no facts exist that may form the basis for any such Action
involving Indemnitee.
3. Indemnification For Actions Other Than Derivative Actions. If
Indemnitee was, is, or becomes a party to or a witness or other participant in,
or is threatened to be made a party to or witness or other participant in, an
Indemnifiable Action other than an Indemnifiable Derivative Action, the Company
shall, subject to the provisions of this Agreement, indemnify Indemnitee to the
fullest extent permitted by law against any and all Expenses, judgments, fines,
penalties, and amounts paid in settlement of such Action.
-3-
<PAGE>
4. Indemnification For Derivative Actions.
(a) Basic Indemnification. If Indemnitee was, is, or becomes a
party to or a witness or other participant in, or is threatened to be made a
party to or witness or other participant in an Indemnifiable Derivative Action,
the Company shall, subject to the provisions of this Agreement, indemnify
Indemnitee to the fullest extent permitted by law against any and all Expenses,
but not judgments, fines, or, except as set forth below, amounts paid in
settlement of such Derivative Action.
(b) Adjudication of Liability in Derivative Actions.
Notwithstanding Paragraph 4(a), no indemnification shall be made in respect of
any claim, issue, or matter as to which Indemnitee shall have been adjudged (by
final judicial determination from which there is no further right to appeal) to
be liable to the Company unless and only to the extent that the court in which
such Derivative Action was brought shall determine upon application by
Indemnitee that despite the adjudication of liability and in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnification which such court shall deem proper.
(c) Settlement of Derivative Actions. Notwithstanding
Paragraph 4(a), the court in which such Derivative Action was brought may
determine upon application of Indemnitee that, in view of all circumstances of
the case, indemnity for amounts paid in settlement is proper and may order
indemnity for the amounts so paid in settlement and for the Expenses actually
and reasonably paid in connection with such application, to the extent the court
deems proper.
5. Limits on Indemnification. Except as stated in Paragraph 6, there
shall be no indemnification pursuant to this Indemnification Agreement:
(a) to the extent that payment for the same claims or amounts
are actually made to the Indemnitee under a valid and collectible insurance
policy; provided, however, that if it should subsequently be determined that the
Indemnitee is not legally entitled to retain any such payment, the restriction
on indemnification pursuant to this subparagraph (a) shall no longer apply;
(b) to the extent that the Indemnitee is indemnified or
receives a recovery for the same claims or amounts otherwise than pursuant to
this Indemnification Agreement; provided, however, that if it should
subsequently be determined that the Indemnitee is not legally entitled to retain
any such recovery, the restriction on indemnification pursuant to this
subparagraph (b) shall no longer apply;
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<PAGE>
(c) on account of any violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and rules promulgated thereunder;
(d) on account of any violation of Section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any rules
promulgated thereunder, or similar state law, to the extent that such violation
is based on (i) the purchase or sale of a security by Indemnitee or a person
affiliated with Indemnitee while Indemnitee is in possession of material
nonpublic information about the Company, or (b) the communication of material
nonpublic information about the Company in connection with any transaction on or
through the facilities of a national securities exchange or from or through a
broker or dealer, other than as part of a securities offering by the Company;
(e) with respect to any transaction from which the Indemnitee
derived an improper personal benefit to which he or she is not legally entitled;
(f) for the return of any remuneration paid to the Indemnitee
that is held by any court in a final judgment to have been illegal or improper;
(g) to the extent that the Indemnitee's action or failure to
act was (i) not in good faith, or (ii) in the case of conduct Indemnitee's
official capacity with the Company, not in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Company, or, in
other cases, conduct was opposed to the Company's best interests, or (iii) with
respect to any criminal Action, with reasonable cause to believe his or her
conduct was unlawful; or
(h) if a final nonappealable decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
6. Partial and Mandatory Indemnity. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company of some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of an Action but not for the total amount, the Company shall
indemnify Indemnitee for the portion to which Indemnitee is entitled. To the
extent that Indemnitee has been successful on the merits or otherwise (including
dismissal with or without prejudice) in defense of any Indemnifiable Action or
Indemnifiable Derivative Action, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against Expenses actually and reasonably
incurred by him in connection therewith, except as stated in Paragraph 5(a) or
5(b).
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<PAGE>
7. Notification of Indemnifiable Action or Indemnifiable Derivative
Action. Indemnitee shall promptly notify the Company of any Indemnifiable Action
or Indemnifiable Derivative Action promptly after receipt by Indemnitee of
notice of the commencement of such Indemnifiable Action or Indemnifiable
Derivative Action. With respect thereto:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, the Company jointly
with any other indemnifying party may assume the defense thereof, with counsel
reasonably satisfactory to Indemnitee to be chosen or approved by the Company.
After notice from the Company to Indemnitee of its election to so assume the
defense thereof, the Company will not be liable to Indemnitee for any legal or
other expenses subsequently incurred by Indemnitee in connection with the
defense thereof other than reasonable costs of investigation or participation in
such Action or Derivative Action (including travel expenses) or as otherwise
provided below. Indemnitee shall have the right to employ independent counsel in
such Action or Derivative Action; however, the fees and expenses of such counsel
incurred after notice from the Company of its assumption of the defense thereof
shall be at the expense of Indemnitee unless:
(i) the employment of independent counsel by
Indemnitee has been authorized by the Company;
(ii) counsel employed by the Company to represent the
Indemnitee shall have reasonably concluded that there may be a conflict
of interest in the conduct of the defense of such action that prevents
such counsel from representing Indemnitee; or
(iii) the Company shall not in fact have employed
counsel to assume the defense of such Action or Derivative Action on
behalf of Indemnitee.
The fees and expenses of independent counsel of Indemnitee in subparagraphs
7(b)(i), (ii) and (iii) shall be borne by the Company.
(c) If the Company has assumed the defense of the Indemnitee
pursuant to subparagraph (b) above, the Company shall not be liable to indemnify
Indemnitee under this Agreement for any amount paid in settlement of any Action
or Derivative Action effected without its written consent, the Company shall not
settle any Action or Derivative Action in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written consent, and
neither the Company nor Indemnitee will unreasonably withhold their consent to
any proposed settlement.
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<PAGE>
8. Advance of Expenses; Failure to Pay Claim.
(a) Written Request. If so requested by Indemnitee in writing,
the Company shall (subject to the Expense Advance Rules hereinafter described)
advance to Indemnitee (an "Expense Advance") any and all Expenses incurred in
connection with the investigation and preparation of the Indemnitee's
participation in any Indemnifiable Action or Indemnifiable Derivative Action,
whether as a witness or a party, pursuant to this Agreement. The Company shall
comply with the Indemnitee's written request for an Expense Advance, and make
any necessary determination that the facts then known would not preclude
indemnification under the ABCA, within ten (10) business days of receipt of such
written request together with the reimbursement commitment referred to in
subparagraph (b) below. If the Company does not honor Indemnitee's request for
an Expense Advance, Indemnitee may bring an action in any court of competent
jurisdiction to enforce the right to an Expense Advance, the Company shall have
the burden of proof in such action to demonstrate that the Expense Advance is
not payable, and the Company shall reimburse Indemnity for all Expense thereof
unless the court denies indemnification.
(b) Reimbursement by Indemnitee. The obligation of the Company
to make an Expense Advance shall be subject to the condition that, if it is
ultimately determined (by final judicial determination from which there is no
further right to appeal) that there are matters to which Indemnitee is not
entitled to indemnity under this Agreement, the Company shall be entitled to be
reimbursed by Indemnitee for all such amounts. Prior to obtaining the initial
Expense Advance, Indemnitee must confirm such reimbursement obligation by
delivery to Company of a signed undertaking in the form of Exhibit A or in such
other form as Company may reasonably accept.
(c) Expense Advance Rules. Expenses in all cases must be
reasonable and comply with existing or future billing procedures of the Company
so that the Company can reasonably monitor and audit such Expenses. With respect
to attorneys' fees, the Company will give reasonable consideration to requests
for specific counsel and to requests for the grouping of individuals for joint
defense purposes. Any attorney representing more than one individual may be
requested to render separate statements to each individual or otherwise allocate
billings by individual.
(d) Failure to Pay Claim. If loss has been incurred and a
claim for indemnification under this Agreement is not paid by the Company within
ten (10) business days after a written claim has been received by the Company,
Indemnitee may at any time thereafter bring suit against the Company to recover
any unpaid amount of the claim and all Expenses incurred by Indemnitee to obtain
such court ordered indemnification.
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<PAGE>
9. Burden of Proof. In connection with any determination as to whether
Indemnitee is entitled to be indemnified hereunder the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
10. No Presumption. For purposes of this Agreement, the termination of
any Action by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not payable under this Indemnification Agreement or
permitted by applicable law.
11. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall
be in addition to any other rights Indemnitee may have under the Company's
Articles of Incorporation or bylaws, or the ABCA or otherwise. To the extent
that a change in the ABCA (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's Articles of Incorporation, bylaws and this Agreement, it is the intent
of the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
12. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing Directors' and Officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company Director, Officer or Indemnitee. If Indemnitee incurs any Expenses in
tendering the defense of the Action to the insurance company providing the
Directors and Officers insurance, such Expenses shall be considered
indemnifiable Expenses.
13. Period of Limitations. No legal action shall be brought and no
cause of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
14. No Right To Continued Employment. Nothing contained in this
Indemnification Agreement is intended to, or shall, create any right to
continued employment by the Company.
15. Amendments and Waiver. No supplement, modification, or amendment of
this Agreement shall be binding unless executed in
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<PAGE>
writing by both of the parties hereto; provided, however, that if any provision
of this Agreement is challenged as being unlawful, the parties agree that the
court in which such challenge is litigated may modify such provision so that it
is enforceable to the maximum extent permitted by law and may enforce the
Agreement as so modified. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
16. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
17. Binding Effect. Etc. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors, heirs, and assigns.
18. Termination by Company. This Agreement shall continue in full force
and effect, regardless of whether Indemnitee continues to serve as an officer or
director of the Company or any other enterprise at the Company's request, unless
terminated pursuant to this Paragraph. By giving written notice to Indemnitee at
his or her address according to Company records, the Company, prior to a
Potential Change of Control or Change of Control, may terminate its obligations
under this Indemnification Agreement as to any act or omission of Indemnitee
after such written notice is given. Any such termination of this Agreement shall
not terminate the Company's obligations hereunder with respect to actions which
occurred prior to such termination. Notice is deemed given when actually
received or two days after being sent by registered or certified mail, whichever
is earlier.
19. Severability. The provisions of this Agreement shall be severable
and, in the event that any of the provisions hereof (including any provision
within a single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, the remaining
provisions shall remain enforceable to the fullest extent permitted by law,
including the provisions that have been modified by a court pursuant to
Paragraph 15 hereof.
20. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Arizona applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
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<PAGE>
21. Prior Agreements. This Agreement supersedes all prior
Indemnification Agreements between the Company and Indemnitee.
EMPLOYEE SOLUTIONS, INC.
By:_____________________________
Its:____________________________
________________________________
MORRIS C. AARON
Address for notices: __________________________
__________________________
__________________________
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<PAGE>
EXHIBIT A
---------
______________________, 199_
Employee Solutions, Inc.
Attention: Chief Executive Officer
2929 East Camelback Road
Suite 220
Phoenix AZ 85016
Re: Indemnification Agreement Dated , 1996 (the "Agreement")
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Gentlemen:
I am the beneficiary of the above Agreement and am a defendant,
witness, or other participant in the following legal action:
___________________________________. A copy of the Complaint in this action is
attached for your information.
Pursuant to Paragraph 8 of the Agreement, I hereby request that
Employee Solutions, Inc. advance my Expenses as such term is used in the
Agreement, subject to the Expense Advance Rules, as such Rules are applied in
the Agreement. I hereby confirm that I will reimburse Employee Solutions, Inc.
for all the amounts advanced to me that are ultimately determined (by final
judicial determination from which there is no further right to appeal) to be
associated with matters to which I am not entitled to indemnity under the
Agreement.
If any additional information is needed, my address and telephone
number are listed below:
Address:
_________________________
_________________________
_________________________
Telephone Number:
_________________________
Very truly yours,
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EMPLOYEE SOLUTIONS, INC.
NON-DIRECTOR OFFICER'S INDEMNIFICATION AGREEMENT
This Agreement, which shall be effective as of November 21,
1996, is by and between Employee Solutions, Inc., an Arizona corporation (the
"Company"), and Paul M. Gales, the undersigned officer of the Company (the
"Indemnitee").
RECITALS
WHEREAS, it is essential for the Company to be able to retain
and attract as officers the most capable persons available.
WHEREAS, Indemnitee is an executive officer of the Company.
WHEREAS, both the Company and Indemnitee recognize the risk
created by the increased risk of litigation and other claims being asserted
against officers of public companies in today's environment.
WHEREAS, effective January 1, 1996, the Arizona Business
Corporation Act ("ABCA") has been changed, and the Company and Indemnitee wish
to avail themselves of the revised provisions of the ABCA, and to specify
certain matters not specifically provided in the ABCA.
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, the Company wishes to provide in
this Agreement for the indemnification of, and the advancing of expenses to,
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of Indemnitee under the Company's directors' and
officers' liability insurance policies.
COVENANTS
THEREFORE, in consideration of the promises in this Agreement,
and intending to be legally bound hereby, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged, the parties agree
as follows:
1. Certain Definitions.
(a) Action: any threatened, pending or completed action, suit,
proceeding or alternate dispute resolution mechanism, or any inquiry, hearing or
investigation, whether conducted by the Company or any other party, that
Indemnitee in good faith believes might lead to the institution of any such
<PAGE>
action, suit, proceeding or alternate dispute resolution mechanism, whether
civil, criminal, administrative, investigative or other, and whether formal or
informal.
(b) Change in Control: shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding Voting
Securities, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the shareholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company (in one transaction or a series of transactions) of
all or substantially all the Company's assets.
(c) Derivative Action: an Action by or in the right of the
Company.
(d) Expenses: include attorneys' fees, court costs, deposition
costs, court reporter fees, travel and all other costs, expenses and obligations
actually paid to another or incurred in connection with investigating the facts
underlying the Action, preparing to defend and defending the Action or preparing
for and participating in the Action as a witness, or any of the foregoing
expenses incurred on appeal or in an action or other proceeding to enforce
Indemnitee's rights hereunder, or any other reasonable expenses incurred by
Indemnitee in participating in any Indemnifiable Action or Indemnifiable
Derivative Action.
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<PAGE>
(e) Indemnifiable Action or Indemnifiable Derivative Action:
any Action or Derivative Action arising out of or relating, directly or
indirectly, to the fact that Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or a subsidiary of the Company, or is or was
serving at the request of the Company as a director, officer, employee, trustee,
agent or fiduciary of another corporation, limited liability company,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
(f) Potential Change in Control: shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions which if consummated would constitute a Change in
Control; (iii) any person, other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company acting in such capacity
or a corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of stock of the
Company, who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases such person's
beneficial ownership of such securities by 5% or more over the percentage so
owned by such person on the date hereof; or (iv) the Board of Directors adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change in Control has occurred.
(g) Voting Securities: any securities of the Company which
vote generally in the election of directors.
2. No Pending Actions. Indemnitee represents to the Company that, to
Indemnitee's actual knowledge, (i) there is no Indemnifiable Action or
Indemnifiable Derivative Action involving Indemnitee as of the date of this
Agreement and (ii) no facts exist that may form the basis for any such Action
involving Indemnitee.
3. Indemnification For Actions Other Than Derivative Actions. If
Indemnitee was, is, or becomes a party to or a witness or other participant in,
or is threatened to be made a party to or witness or other participant in, an
Indemnifiable Action other than an Indemnifiable Derivative Action, the Company
shall, subject to the provisions of this Agreement, indemnify Indemnitee to the
fullest extent permitted by law against any and all Expenses, judgments, fines,
penalties, and amounts paid in settlement of such Action.
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4. Indemnification For Derivative Actions.
(a) Basic Indemnification. If Indemnitee was, is, or becomes a
party to or a witness or other participant in, or is threatened to be made a
party to or witness or other participant in an Indemnifiable Derivative Action,
the Company shall, subject to the provisions of this Agreement, indemnify
Indemnitee to the fullest extent permitted by law against any and all Expenses,
but not judgments, fines, or, except as set forth below, amounts paid in
settlement of such Derivative Action.
(b) Adjudication of Liability in Derivative Actions.
Notwithstanding Paragraph 4(a), no indemnification shall be made in respect of
any claim, issue, or matter as to which Indemnitee shall have been adjudged (by
final judicial determination from which there is no further right to appeal) to
be liable to the Company unless and only to the extent that the court in which
such Derivative Action was brought shall determine upon application by
Indemnitee that despite the adjudication of liability and in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnification which such court shall deem proper.
(c) Settlement of Derivative Actions. Notwithstanding
Paragraph 4(a), the court in which such Derivative Action was brought may
determine upon application of Indemnitee that, in view of all circumstances of
the case, indemnity for amounts paid in settlement is proper and may order
indemnity for the amounts so paid in settlement and for the Expenses actually
and reasonably paid in connection with such application, to the extent the court
deems proper.
5. Limits on Indemnification. Except as stated in Paragraph 6, there
shall be no indemnification pursuant to this Indemnification Agreement:
(a) to the extent that payment for the same claims or amounts
are actually made to the Indemnitee under a valid and collectible insurance
policy; provided, however, that if it should subsequently be determined that the
Indemnitee is not legally entitled to retain any such payment, the restriction
on indemnification pursuant to this subparagraph (a) shall no longer apply;
(b) to the extent that the Indemnitee is indemnified or
receives a recovery for the same claims or amounts otherwise than pursuant to
this Indemnification Agreement; provided, however, that if it should
subsequently be determined that the Indemnitee is not legally entitled to retain
any such recovery, the restriction on indemnification pursuant to this
subparagraph (b) shall no longer apply;
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<PAGE>
(c) on account of any violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and rules promulgated thereunder;
(d) on account of any violation of Section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any rules
promulgated thereunder, or similar state law, to the extent that such violation
is based on (i) the purchase or sale of a security by Indemnitee or a person
affiliated with Indemnitee while Indemnitee is in possession of material
nonpublic information about the Company, or (b) the communication of material
nonpublic information about the Company in connection with any transaction on or
through the facilities of a national securities exchange or from or through a
broker or dealer, other than as part of a securities offering by the Company;
(e) with respect to any transaction from which the Indemnitee
derived an improper personal benefit to which he or she is not legally entitled;
(f) for the return of any remuneration paid to the Indemnitee
that is held by any court in a final judgment to have been illegal or improper;
(g) to the extent that the Indemnitee's action or failure to
act was (i) not in good faith, or (ii) in the case of conduct Indemnitee's
official capacity with the Company, not in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Company, or, in
other cases, conduct was opposed to the Company's best interests, or (iii) with
respect to any criminal Action, with reasonable cause to believe his or her
conduct was unlawful; or
(h) if a final nonappealable decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
6. Partial and Mandatory Indemnity. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company of some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of an Action but not for the total amount, the Company shall
indemnify Indemnitee for the portion to which Indemnitee is entitled. To the
extent that Indemnitee has been successful on the merits or otherwise (including
dismissal with or without prejudice) in defense of any Indemnifiable Action or
Indemnifiable Derivative Action, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against Expenses actually and reasonably
incurred by him in connection therewith, except as stated in Paragraph 5(a) or
5(b).
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7. Notification of Indemnifiable Action or Indemnifiable Derivative
Action. Indemnitee shall promptly notify the Company of any Indemnifiable Action
or Indemnifiable Derivative Action promptly after receipt by Indemnitee of
notice of the commencement of such Indemnifiable Action or Indemnifiable
Derivative Action. With respect thereto:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, the Company jointly
with any other indemnifying party may assume the defense thereof, with counsel
reasonably satisfactory to Indemnitee to be chosen or approved by the Company.
After notice from the Company to Indemnitee of its election to so assume the
defense thereof, the Company will not be liable to Indemnitee for any legal or
other expenses subsequently incurred by Indemnitee in connection with the
defense thereof other than reasonable costs of investigation or participation in
such Action or Derivative Action (including travel expenses) or as otherwise
provided below. Indemnitee shall have the right to employ independent counsel in
such Action or Derivative Action; however, the fees and expenses of such counsel
incurred after notice from the Company of its assumption of the defense thereof
shall be at the expense of Indemnitee unless:
(i) the employment of independent counsel by
Indemnitee has been authorized by the Company;
(ii) counsel employed by the Company to represent the
Indemnitee shall have reasonably concluded that there may be a conflict
of interest in the conduct of the defense of such action that prevents
such counsel from representing Indemnitee; or
(iii) the Company shall not in fact have employed
counsel to assume the defense of such Action or Derivative Action on
behalf of Indemnitee.
The fees and expenses of independent counsel of Indemnitee in subparagraphs
7(b)(i), (ii) and (iii) shall be borne by the Company.
(c) If the Company has assumed the defense of the Indemnitee
pursuant to subparagraph (b) above, the Company shall not be liable to indemnify
Indemnitee under this Agreement for any amount paid in settlement of any Action
or Derivative Action effected without its written consent, the Company shall not
settle any Action or Derivative Action in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written consent, and
neither the Company nor Indemnitee will unreasonably withhold their consent to
any proposed settlement.
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8. Advance of Expenses; Failure to Pay Claim.
(a) Written Request. If so requested by Indemnitee in writing,
the Company shall (subject to the Expense Advance Rules hereinafter described)
advance to Indemnitee (an "Expense Advance") any and all Expenses incurred in
connection with the investigation and preparation of the Indemnitee's
participation in any Indemnifiable Action or Indemnifiable Derivative Action,
whether as a witness or a party, pursuant to this Agreement. The Company shall
comply with the Indemnitee's written request for an Expense Advance, and make
any necessary determination that the facts then known would not preclude
indemnification under the ABCA, within ten (10) business days of receipt of such
written request together with the reimbursement commitment referred to in
subparagraph (b) below. If the Company does not honor Indemnitee's request for
an Expense Advance, Indemnitee may bring an action in any court of competent
jurisdiction to enforce the right to an Expense Advance, the Company shall have
the burden of proof in such action to demonstrate that the Expense Advance is
not payable, and the Company shall reimburse Indemnity for all Expense thereof
unless the court denies indemnification.
(b) Reimbursement by Indemnitee. The obligation of the Company
to make an Expense Advance shall be subject to the condition that, if it is
ultimately determined (by final judicial determination from which there is no
further right to appeal) that there are matters to which Indemnitee is not
entitled to indemnity under this Agreement, the Company shall be entitled to be
reimbursed by Indemnitee for all such amounts. Prior to obtaining the initial
Expense Advance, Indemnitee must confirm such reimbursement obligation by
delivery to Company of a signed undertaking in the form of Exhibit A or in such
other form as Company may reasonably accept.
(c) Expense Advance Rules. Expenses in all cases must be
reasonable and comply with existing or future billing procedures of the Company
so that the Company can reasonably monitor and audit such Expenses. With respect
to attorneys' fees, the Company will give reasonable consideration to requests
for specific counsel and to requests for the grouping of individuals for joint
defense purposes. Any attorney representing more than one individual may be
requested to render separate statements to each individual or otherwise allocate
billings by individual.
(d) Failure to Pay Claim. If loss has been incurred and a
claim for indemnification under this Agreement is not paid by the Company within
ten (10) business days after a written claim has been received by the Company,
Indemnitee may at any time thereafter bring suit against the Company to recover
any unpaid amount of the claim and all Expenses incurred by Indemnitee to obtain
such court ordered indemnification.
-7-
<PAGE>
9. Burden of Proof. In connection with any determination as to whether
Indemnitee is entitled to be indemnified hereunder the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
10. No Presumption. For purposes of this Agreement, the termination of
any Action by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not payable under this Indemnification Agreement or
permitted by applicable law.
11. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall
be in addition to any other rights Indemnitee may have under the Company's
Articles of Incorporation or bylaws, or the ABCA or otherwise. To the extent
that a change in the ABCA (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's Articles of Incorporation, bylaws and this Agreement, it is the intent
of the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
12. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing Directors' and Officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company Director, Officer or Indemnitee. If Indemnitee incurs any Expenses in
tendering the defense of the Action to the insurance company providing the
Directors and Officers insurance, such Expenses shall be considered
indemnifiable Expenses.
13. Period of Limitations. No legal action shall be brought and no
cause of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
14. No Right To Continued Employment. Nothing contained in this
Indemnification Agreement is intended to, or shall, create any right to
continued employment by the Company.
15. Amendments and Waiver. No supplement, modification, or amendment of
this Agreement shall be binding unless executed in
-8-
<PAGE>
writing by both of the parties hereto; provided, however, that if any provision
of this Agreement is challenged as being unlawful, the parties agree that the
court in which such challenge is litigated may modify such provision so that it
is enforceable to the maximum extent permitted by law and may enforce the
Agreement as so modified. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
16. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
17. Binding Effect. Etc. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors, heirs, and assigns.
18. Termination by Company. This Agreement shall continue in full force
and effect, regardless of whether Indemnitee continues to serve as an officer or
director of the Company or any other enterprise at the Company's request, unless
terminated pursuant to this Paragraph. By giving written notice to Indemnitee at
his or her address according to Company records, the Company, prior to a
Potential Change of Control or Change of Control, may terminate its obligations
under this Indemnification Agreement as to any act or omission of Indemnitee
after such written notice is given. Any such termination of this Agreement shall
not terminate the Company's obligations hereunder with respect to actions which
occurred prior to such termination. Notice is deemed given when actually
received or two days after being sent by registered or certified mail, whichever
is earlier.
19. Severability. The provisions of this Agreement shall be severable
and, in the event that any of the provisions hereof (including any provision
within a single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, the remaining
provisions shall remain enforceable to the fullest extent permitted by law,
including the provisions that have been modified by a court pursuant to
Paragraph 15 hereof.
20. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Arizona applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
-9-
<PAGE>
21. Prior Agreements. This Agreement supersedes all prior
Indemnification Agreements between the Company and Indemnitee.
EMPLOYEE SOLUTIONS, INC.
By:_____________________________
Its:____________________________
________________________________
PAUL M. GALES
Address for notices: __________________________
__________________________
__________________________
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<PAGE>
EXHIBIT A
---------
______________________, 199_
Employee Solutions, Inc.
Attention: Chief Executive Officer
2929 East Camelback Road
Suite 220
Phoenix AZ 85016
Re: Indemnification Agreement Dated , 1996 (the "Agreement")
-----------------------------------------------------------------
Gentlemen:
I am the beneficiary of the above Agreement and am a defendant,
witness, or other participant in the following legal action:
___________________________________. A copy of the Complaint in this action is
attached for your information.
Pursuant to Paragraph 8 of the Agreement, I hereby request that
Employee Solutions, Inc. advance my Expenses as such term is used in the
Agreement, subject to the Expense Advance Rules, as such Rules are applied in
the Agreement. I hereby confirm that I will reimburse Employee Solutions, Inc.
for all the amounts advanced to me that are ultimately determined (by final
judicial determination from which there is no further right to appeal) to be
associated with matters to which I am not entitled to indemnity under the
Agreement.
If any additional information is needed, my address and telephone
number are listed below:
Address:
_________________________
_________________________
_________________________
Telephone Number:
_________________________
Very truly yours,
-11-
EMPLOYEE SOLUTIONS, INC.
DIRECTOR INDEMNIFICATION AGREEMENT
This Agreement, which shall be effective as of November 21,
1996, is by and between Employee Solutions, Inc., an Arizona corporation (the
"Company"), and Henry G. Walker, the undersigned director of the Company (the
"Indemnitee").
RECITALS
WHEREAS, it is essential for the Company to be able to retain
and attract as directors the most capable persons available.
WHEREAS, Indemnitee has become a director of the Company, and
was told that the Company would make indemnification arrangements in connection
with Indemnitee's acceptance of a director position.
WHEREAS, both the Company and Indemnitee recognize the risk
created by the increased risk of litigation and other claims being asserted
against directors of public companies in today's environment.
WHEREAS, effective January 1, 1996, the Arizona Business
Corporation Act ("ABCA") has been changed, and the Company and Indemnitee wish
to avail themselves of the revised provisions of the ABCA, and to specify
certain matters not specifically provided in the ABCA.
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to induce Indemnitee to become a
director and to enhance Indemnitee's service to the Company in an effective
manner, the Company wishes to provide in this Agreement for the indemnification
of, and the advancing of expenses to, Indemnitee to the fullest extent (whether
partial or complete) permitted by law and as set forth in this Agreement, and,
to the extent insurance is maintained, for the continued coverage of Indemnitee
under the Company's directors' and officers' liability insurance policies.
COVENANTS
THEREFORE, in consideration of the promises in this Agreement,
and intending to be legally bound hereby, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged, the parties agree
as follows:
1. Certain Definitions.
(a) Action: any threatened, pending or completed action, suit,
proceeding or alternate dispute resolution
<PAGE>
mechanism, or any inquiry, hearing or investigation, whether conducted by the
Company or any other party, that Indemnitee in good faith believes might lead to
the institution of any such action, suit, proceeding or alternate dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other, and whether formal or informal.
(b) Change in Control: shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding Voting
Securities, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the shareholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company (in one transaction or a series of transactions) of
all or substantially all the Company's assets.
(c) Derivative Action: an Action by or in the right of the
Company.
(d) Expenses: include attorneys' fees, court costs, deposition
costs, court reporter fees, travel and all other costs, expenses and obligations
actually paid to another or incurred in connection with investigating the facts
underlying the Action, preparing to defend and defending the Action or preparing
for and participating in the Action as a witness, or any of the foregoing
expenses incurred on appeal or in an action or other proceeding to enforce
Indemnitee's rights hereunder, or
-2-
<PAGE>
any other reasonable expenses incurred by Indemnitee in participating in any
Indemnifiable Action or Indemnifiable Derivative Action.
(e) Indemnifiable Action or Indemnifiable Derivative Action:
any Action or Derivative Action arising out of or relating, directly or
indirectly, to the fact that Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or a subsidiary of the Company, or is or was
serving at the request of the Company as a director, officer, employee, trustee,
agent or fiduciary of another corporation, limited liability company,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
(f) Potential Change in Control: shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions which if consummated would constitute a Change in
Control; (iii) any person, other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company acting in such capacity
or a corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of stock of the
Company, who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases such person's
beneficial ownership of such securities by 5% or more over the percentage so
owned by such person on the date hereof; or (iv) the Board of Directors adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change in Control has occurred.
(g) Voting Securities: any securities of the Company which
vote generally in the election of directors.
2. No Pending Actions. Indemnitee represents to the Company that, to
Indemnitee's actual knowledge, (i) there is no Indemnifiable Action or
Indemnifiable Derivative Action involving Indemnitee as of the date of this
Agreement and (ii) no facts exist that may form the basis for any such Action
involving Indemnitee.
3. Indemnification For Actions Other Than Derivative Actions. If
Indemnitee was, is, or becomes a party to or a witness or other participant in,
or is threatened to be made a party to or witness or other participant in, an
Indemnifiable Action other than an Indemnifiable Derivative Action, the Company
shall, subject to the provisions of this Agreement, indemnify Indemnitee to the
fullest extent permitted by law against any and
-3-
<PAGE>
all Expenses, judgments, fines, penalties, and amounts paid in settlement of
such Action.
4. Indemnification For Derivative Actions.
(a) Basic Indemnification. If Indemnitee was, is, or becomes a
party to or a witness or other participant in, or is threatened to be made a
party to or witness or other participant in an Indemnifiable Derivative Action,
the Company shall, subject to the provisions of this Agreement, indemnify
Indemnitee to the fullest extent permitted by law against any and all Expenses,
but not judgments, fines, or, except as set forth below, amounts paid in
settlement of such Derivative Action.
(b) Adjudication of Liability in Derivative Actions.
Notwithstanding Paragraph 4(a), no indemnification shall be made in respect of
any claim, issue, or matter as to which Indemnitee shall have been adjudged (by
final judicial determination from which there is no further right to appeal) to
be liable to the Company unless and only to the extent that the court in which
such Derivative Action was brought shall determine upon application by
Indemnitee that despite the adjudication of liability and in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnification which such court shall deem proper.
(c) Settlement of Derivative Actions. Notwithstanding
Paragraph 4(a), the court in which such Derivative Action was brought may
determine upon application of Indemnitee that, in view of all circumstances of
the case, indemnity for amounts paid in settlement is proper and may order
indemnity for the amounts so paid in settlement and for the Expenses actually
and reasonably paid in connection with such application, to the extent the court
deems proper.
5. Limits on Indemnification. Except as stated in Paragraph 6, there
shall be no indemnification pursuant to this Indemnification Agreement:
(a) to the extent that payment for the same claims or amounts
are actually made to the Indemnitee under a valid and collectible insurance
policy; provided, however, that if it should subsequently be determined that the
Indemnitee is not legally entitled to retain any such payment, the restriction
on indemnification pursuant to this subparagraph (a) shall no longer apply;
(b) to the extent that the Indemnitee is indemnified or
receives a recovery for the same claims or amounts otherwise than pursuant to
this Indemnification Agreement; provided, however, that if it should
subsequently be determined that the Indemnitee is not legally entitled to retain
any such recovery,
-4-
<PAGE>
the restriction on indemnification pursuant to this subparagraph (b) shall no
longer apply;
(c) on account of any violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and rules promulgated thereunder;
(d) on account of any violation of Section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any rules
promulgated thereunder, or similar state law, to the extent that such violation
is based on (i) the purchase or sale of a security by Indemnitee or a person
affiliated with Indemnitee while Indemnitee is in possession of material
nonpublic information about the Company, or (b) the communication of material
nonpublic information about the Company in connection with any transaction on or
through the facilities of a national securities exchange or from or through a
broker or dealer, other than as part of a securities offering by the Company;
(e) with respect to any transaction from which the Indemnitee
derived an improper personal benefit to which he or she is not legally entitled;
(f) for the return of any remuneration paid to the Indemnitee
that is held by any court in a final judgment to have been illegal or improper;
(g) to the extent that the Indemnitee's action or failure to
act was (i) not in good faith, or (ii) in the case of conduct Indemnitee's
official capacity with the Company, not in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Company, or, in
other cases, conduct was opposed to the Company's best interests, or (iii) with
respect to any criminal Action, with reasonable cause to believe his or her
conduct was unlawful; or
(h) if a final nonappealable decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
6. Partial and Mandatory Indemnity. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company of some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of an Action but not for the total amount, the Company shall
indemnify Indemnitee for the portion to which Indemnitee is entitled. To the
extent that Indemnitee has been successful on the merits or otherwise (including
dismissal with or without prejudice) in defense of any Indemnifiable Action or
Indemnifiable Derivative Action, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against Expenses actually and reasonably
incurred by
-5-
<PAGE>
him in connection therewith, except as stated in Paragraph 5(a) or 5(b).
7. Notification of Indemnifiable Action or Indemnifiable Derivative
Action. Indemnitee shall promptly notify the Company of any Indemnifiable Action
or Indemnifiable Derivative Action promptly after receipt by Indemnitee of
notice of the commencement of such Indemnifiable Action or Indemnifiable
Derivative Action. With respect thereto:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, the Company jointly
with any other indemnifying party may assume the defense thereof, with counsel
reasonably satisfactory to Indemnitee to be chosen or approved by the Company.
After notice from the Company to Indemnitee of its election to so assume the
defense thereof, the Company will not be liable to Indemnitee for any legal or
other expenses subsequently incurred by Indemnitee in connection with the
defense thereof other than reasonable costs of investigation or participation in
such Action or Derivative Action (including travel expenses) or as otherwise
provided below. Indemnitee shall have the right to employ independent counsel in
such Action or Derivative Action; however, the fees and expenses of such counsel
incurred after notice from the Company of its assumption of the defense thereof
shall be at the expense of Indemnitee unless:
(i) the employment of independent counsel by
Indemnitee has been authorized by the Company;
(ii) counsel employed by the Company to represent the
Indemnitee shall have reasonably concluded that there may be a conflict
of interest in the conduct of the defense of such action that prevents
such counsel from representing Indemnitee; or
(iii) the Company shall not in fact have employed
counsel to assume the defense of such Action or Derivative Action on
behalf of Indemnitee.
The fees and expenses of independent counsel of Indemnitee in subparagraphs
7(b)(i), (ii) and (iii) shall be borne by the Company.
(c) If the Company has assumed the defense of the Indemnitee
pursuant to subparagraph (b) above, the Company shall not be liable to indemnify
Indemnitee under this Agreement for any amount paid in settlement of any Action
or Derivative Action effected without its written consent, the Company shall not
settle any Action or Derivative Action in any manner which would impose any
penalty or limitation on Indemnitee without
-6-
<PAGE>
Indemnitee's written consent, and neither the Company nor Indemnitee will
unreasonably withhold their consent to any proposed settlement.
8. Advance of Expenses; Failure to Pay Claim.
(a) Written Request. If so requested by Indemnitee in writing,
the Company shall (subject to the Expense Advance Rules hereinafter described)
advance to Indemnitee (an "Expense Advance") any and all Expenses incurred in
connection with the investigation and preparation of the Indemnitee's
participation in any Indemnifiable Action or Indemnifiable Derivative Action,
whether as a witness or a party, pursuant to this Agreement. The Company shall
comply with the Indemnitee's written request for an Expense Advance, and make
any necessary determination that the facts then known would not preclude
indemnification under the ABCA, within ten (10) business days of receipt of such
written request together with the reimbursement commitment referred to in
subparagraph (b) below. If the Company does not honor Indemnitee's request for
an Expense Advance, Indemnitee may bring an action in any court of competent
jurisdiction to enforce the right to an Expense Advance, the Company shall have
the burden of proof in such action to demonstrate that the Expense Advance is
not payable, and the Company shall reimburse Indemnity for all Expense thereof
unless the court denies indemnification.
(b) Reimbursement by Indemnitee. The obligation of the Company
to make an Expense Advance shall be subject to the condition that, if it is
ultimately determined (by final judicial determination from which there is no
further right to appeal) that there are matters to which Indemnitee is not
entitled to indemnity under this Agreement, the Company shall be entitled to be
reimbursed by Indemnitee for all such amounts. Prior to obtaining the initial
Expense Advance, Indemnitee must confirm such reimbursement obligation by
delivery to Company of a signed undertaking in the form of Exhibit A or in such
other form as Company may reasonably accept.
(c) Expense Advance Rules. Expenses in all cases must be
reasonable and comply with existing or future billing procedures of the Company
so that the Company can reasonably monitor and audit such Expenses. With respect
to attorneys' fees, the Company will give reasonable consideration to requests
for specific counsel and to requests for the grouping of individuals for joint
defense purposes. Any attorney representing more than one individual may be
requested to render separate statements to each individual or otherwise allocate
billings by individual.
(d) Failure to Pay Claim. If loss has been incurred and a
claim for indemnification under this Agreement is not paid by the Company within
ten (10) business days after a written claim has been received by the Company,
Indemnitee may at any
-7-
<PAGE>
time thereafter bring suit against the Company to recover any unpaid amount of
the claim and all Expenses incurred by Indemnitee to obtain such court ordered
indemnification.
9. Burden of Proof. In connection with any determination as to whether
Indemnitee is entitled to be indemnified hereunder the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
10. No Presumption. For purposes of this Agreement, the termination of
any Action by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not payable under this Indemnification Agreement or
permitted by applicable law.
11. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall
be in addition to any other rights Indemnitee may have under the Company's
Articles of Incorporation or bylaws, or the ABCA or otherwise. To the extent
that a change in the ABCA (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's Articles of Incorporation, bylaws and this Agreement, it is the intent
of the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
12. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing Directors' and Officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company Director, Officer or Indemnitee. If Indemnitee incurs any Expenses in
tendering the defense of the Action to the insurance company providing the
Directors and Officers insurance, such Expenses shall be considered
indemnifiable Expenses.
13. Period of Limitations. No legal action shall be brought and no
cause of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
-8-
<PAGE>
14. No Right To Employment. Nothing contained in this Indemnification
Agreement is intended to, or shall, create any right to employment by the
Company.
15. Amendments and Waiver. No supplement, modification, or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto; provided, however, that if any provision of this Agreement is
challenged as being unlawful, the parties agree that the court in which such
challenge is litigated may modify such provision so that it is enforceable to
the maximum extent permitted by law and may enforce the Agreement as so
modified. No waiver of any of the provisions of this Agreement shall be deemed
or shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
16. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
17. Binding Effect. Etc. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors, heirs, and assigns.
18. Termination by Company. This Agreement shall continue in full force
and effect, regardless of whether Indemnitee continues to serve as a director of
the Company or any other enterprise at the Company's request, unless terminated
pursuant to this Paragraph. By giving written notice to Indemnitee at his or her
address according to Company records, the Company, prior to a Potential Change
of Control or Change of Control, may terminate its obligations under this
Indemnification Agreement as to any act or omission of Indemnitee after such
written notice is given. Any such termination of this Agreement shall not
terminate the Company's obligations hereunder with respect to actions which
occurred prior to such termination. Notice is deemed given when actually
received or two days after being sent by registered or certified mail, whichever
is earlier.
19. Severability. The provisions of this Agreement shall be severable
and, in the event that any of the provisions hereof (including any provision
within a single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, the remaining
provisions shall remain enforceable to the fullest extent permitted by law,
including the provisions that have been modified by a court pursuant to
Paragraph 15 hereof.
-9-
<PAGE>
20. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Arizona applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
21. Prior Agreements. This Agreement supersedes all prior
Indemnification Agreements between the Company and Indemnitee.
EMPLOYEE SOLUTIONS, INC.
By:_____________________________
Its:____________________________
- --------------------------------
HENRY G. WALKER
Address for notices: __________________________
__________________________
__________________________
-10-
<PAGE>
EXHIBIT A
---------
______________________, 199_
Employee Solutions, Inc.
Attention: Chief Executive Officer
2929 East Camelback Road
Suite 220
Phoenix AZ 85016
Re: Indemnification Agreement Dated , 1996 (the "Agreement")
-----------------------------------------------------------------
Gentlemen:
I am the beneficiary of the above Agreement and am a defendant,
witness, or other participant in the following legal action:
___________________________________. A copy of the Complaint in this action is
attached for your information.
Pursuant to Paragraph 8 of the Agreement, I hereby request that
Employee Solutions, Inc. advance my Expenses as such term is used in the
Agreement, subject to the Expense Advance Rules, as such Rules are applied in
the Agreement. I hereby confirm that I will reimburse Employee Solutions, Inc.
for all the amounts advanced to me that are ultimately determined (by final
judicial determination from which there is no further right to appeal) to be
associated with matters to which I am not entitled to indemnity under the
Agreement.
If any additional information is needed, my address and telephone
number are listed below:
Address:
- -------------------------
- -------------------------
- -------------------------
Telephone Number:
- -------------------------
Very truly yours,
-11-
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Camelback Insurance, Ltd., a Bermuda insurance company
ESI America, Inc., a Nevada corporation
ESI-Midwest, Inc., a Nevada corporation
ESI Risk Management Agency, Inc., an Arizona corporation
Employee Solutions of Alabama, Inc., an Alabama corporation
Employee Solutions of California, Inc., a Nevada corporation
Employee Solutions - East, Inc., a Georgia corporation
Employee Solutions - Midwest, Inc., a Michigan corporation
Employee Solutions of Texas, Inc., a Texas corporation
GCK Entertainment Services I, Inc. (d/b/a/ TEAM Services), a Delaware
corporation
Logistics Personnel Corporation, a Nevada corporation
Pokagon Office Services, Inc. (d/b/a Employee Solutions of Ohio, Inc.), a
Indiana corporation
Talent, Entertainment and Media Services, Inc. (d/b/a/ TEAM Services), a
Delaware corporation
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Report on Form 10-K for Employee Solutions, Inc. into
previously filed registration statements File Nos. 33-93822 and 333-1242.
Arthur Andersen LLP
Phoenix, Arizona
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATIO
EXTRACTED FROM THE COMPANY'S FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 10,980
<SECURITIES> 11,500
<RECEIVABLES> 34,839
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 65,651
<PP&E> 1,084
<DEPRECIATION> 0
<TOTAL-ASSETS> 125,969
<CURRENT-LIABILITIES> 35,202
<BONDS> 0
0
0
<COMMON> 30,145
<OTHER-SE> 16,362
<TOTAL-LIABILITY-AND-EQUITY> 125,969
<SALES> 0
<TOTAL-REVENUES> 439,016
<CGS> 0
<TOTAL-COSTS> 400,862
<OTHER-EXPENSES> 19,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,196
<INCOME-PRETAX> 18,407
<INCOME-TAX> 6,381
<INCOME-CONTINUING> 12,026
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,026
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
