U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] 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.)
6225 North 24th Street, 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 30,871,017 Common shares, no par value
were outstanding as of May 5, 1997.
<PAGE>
EMPLOYEE SOLUTIONS, INC.
FORM 10-Q
Quarterly Report for the Period Ended March 31, 1997
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INDEX
<TABLE>
<CAPTION>
Page
PART I. Financial Information Number
------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1997 and
December 31, 1996 2
Consolidated Statement of Operations for the
Quarters Ended March 31, 1997 and 1996 3
Consolidated Statement of Changes in Stockholders'
Equity for the Quarter ended March 31, 1997 4
Consolidated Statement of Cash Flows for the
Quarters Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 28
PART II. Other Information
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
</TABLE>
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1
<PAGE>
Item 1. Financial Statements
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands, except share data) 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,623 $ 10,980
Restricted cash and investments 13,500 11,500
Accounts receivable, net 43,642 34,839
Receivable from insurance companies 5,590 5,918
Prepaid expenses and deposits 2,509 1,258
Deferred income taxes 2,022 1,156
---------- ----------
Total current assets 79,886 65,651
Property and equipment, net 1,349 1,084
Deferred income taxes 539 539
Goodwill and other assets, net 61,388 58,695
---------- ----------
Total assets $ 143,162 $ 125,969
========== ==========
LIABILITIES
CURRENT LIABILITIES:
Bank overdraft $ 3,098 $ 2,477
Accrued salaries, wages and payroll taxes 27,748 17,586
Accounts payable 5,247 4,078
Accrued workers' compensation
and health insurance 9,367 6,927
Income taxes payable -- 720
Other accrued expenses 2,518 3,414
---------- ----------
Total current liabilities 47,978 35,202
---------- ----------
Deferred income taxes -- 111
---------- ----------
Long-term debt 45,300 42,800
---------- ----------
Other long-term liabilities 1,349 1,349
---------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A convertible preferred stock, nonvoting, no par value,
10,000,000 shares authorized, no shares in 1996 and 1995
issued and outstanding -- --
Common stock, no par value,
75,000,000 shares authorized, 30,878,768 shares
issued and outstanding March 31, 1997, 30,729,433
shares issued and outstanding December 31, 1996 31,487 30,145
Retained earnings 17,048 16,362
---------- ----------
Total stockholders' equity 48,535 46,507
---------- ----------
Total liabilities and stockholders' equity $ 143,162 $ 125,969
========== ==========
</TABLE>
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The accompanying notes are an integral part of these
consolidated balance sheets.
2
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
Quarter ended March 31,
------------------------------
(Dollars in thousands, except share data) 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 195,966 $ 73,934
----------- ----------
Cost of revenues:
Salaries and wages of worksite employees 156,662 57,718
Healthcare and workers' compensation 15,284 2,576
Payroll and employment taxes 13,752 5,971
----------- ----------
Cost of revenues 185,698 66,265
----------- ----------
Gross profit 10,268 7,669
Selling, general and administrative expenses 7,413 3,547
Depreciation and amortization 965 320
----------- ----------
Income from operations 1,890 3,802
Other income (expense):
Interest income 195 187
Interest expense (942) (3)
----------- ----------
Income before provision for income taxes 1,143 3,986
Income tax provision 457 1,634
----------- ----------
Net income $ 686 $ 2,352
=========== ==========
Net income per common and common equivalent share:
Primary $ .02 $ .07
=========== ===========
Fully diluted $ .02 $ .07
=========== ===========
Weighted average number of common and
common equivalent shares outstanding:
Primary 32,983,120 32,048,552
=========== ==========
Fully diluted 32,983,120 32,262,830
=========== ==========
</TABLE>
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The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the quarter ended March 31, 1997
-------------------------------------------------
Total
Preferred Common Retained Stockholders'
(Dollars in thousands, except share data) Stock Stock Earnings Equity
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 $ -- $ 30,145 $ 16,362 $ 46,507
Issuance of 149,335 shares of common stock in
connection with exercise of stock options 380 380
Tax benefit related to the exercise of stock options 962 962
Net income -- 686 686
--------- --------- -------- -------------
BALANCE, March 31, 1997 $ -- $ 31,487 $ 17,048 $ 48,535
========= ========= ======== =============
</TABLE>
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The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
Quarter ended March 31,
--------------------------
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 187,163 $ 69,952
Cash paid to suppliers and employees (181,506) (68,074)
Interest received 195 186
Interest paid (942) (2)
Income taxes paid, net of refunds (1,192) (2,271)
--------- ---------
Net cash provided by (used in) operating activities 3,718 (209)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (360) (325)
Business acquisitions (3,170) (632)
Cash invested in restricted cash and investments (2,000) 219
Issuance of notes receivable, and other net -- (88)
--------- ---------
Net cash used in investing activities (5,530) (826)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 2,500 --
Proceeds from issuance of common stock 380 6,768
Increase (decrease) in bank overdraft and other 575 (1,320)
--------- ---------
Net cash provided by financing activities 3,455 5,448
--------- ---------
Net increase in cash and cash equivalents 1,643 4,413
CASH AND CASH EQUIVALENTS, beginning of period 10,980 14,029
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 12,623 $ 18,442
========= =========
</TABLE>
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The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
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<TABLE>
<CAPTION>
Quarter ended March 31,
1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH (USED IN)
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 686 $ 2,352
--------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 965 320
Increase in accounts receivable, net (8,803) (4,011)
Decrease in insurance company receivable 328 --
Increase in prepaid expenses and deposits (1,251) (335)
Increase in deferred income tax assets (866) (26)
Increase in other assets (347) --
Increase in accrued salaries,
wages and payroll taxes 10,162 2,155
Increase in accrued workers' compensation
and health insurance 2,440 355
Decrease in other long term liabilities -- (102)
Increase (decrease) in accounts payable 1,169 (487)
Increase (decrease) in income taxes payable 242 (605)
(Decrease) increase in other accrued expenses (896) 181
Decrease in deferred income tax liabilities (111) (6)
--------- ---------
3,032 (2,561)
--------- ---------
Net cash provided by (used in) operating activities $ 3,718 $ (209)
========= =========
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the quarter ended March 31, 1997, $962,000 was derived as a tax benefit
for the exercise of stock options during the quarter.
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. In the opinion of management the consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary in order to make the consolidated financial statements
not misleading. Results of operations for the three month period ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
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
stand-alone risk management/workers' compensation services, particularly for
retrospectively rated policies. The actual results of these estimates may be
unknown for a period of years. Actual results could differ from those estimates.
7
<PAGE>
Net Income Per Common and Common Equivalent Share
The Company used the treasury stock method to compute net income per share. The
computation of adjusted net income and weighted average common and common
equivalent shares used in the calculation of income per common share is as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except share data)
Three months ended March 31,
-------------------------------------------------------------
1997 1996
------------------------- ---------------------------
Fully Fully
Primary Diluted Primary Diluted
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Weighted average of
common shares outstanding 30,877,101 30,877,101 29,936,830 29,936,830
Dilutive effect of options
and warrants outstanding 2,106,019 2,106,019 2,111,722 2,326,000
----------- ----------- ------------ -----------
Weighted average of common
and common equivalent
shares 32,983,120 32,983,120 32,048,552 32,262,830
=========== =========== ============ ===========
Net income $ 686 $ 686 $ 2,352 $ 2,352
Adjustments to net income -- -- (6) (6)
----------- ----------- ----------- -----------
Adjusted net income for
purposes of the income per
common share calculation $ 686 $ 686 $ 2,346 $ 2,346
=========== =========== ============ ===========
Net income per common and
common equivalent share $ 0.02 $ 0.02 $ 0.07 $ 0.07
=========== =========== ============ ===========
</TABLE>
- --------------------------------------------------------------------------------
(2) COMMON STOCK SPLITS:
On December 18, 1995, and June 26, 1996 the Board of Directors authorized
two-for-one common stock splits, effected in the form of 100% stock dividends,
effective on January 16, 1996 and July 26, 1996 respectively, to shareholders of
record at the close of business on January 2, 1996 and July 12, 1996. In this
report, all per share amounts and numbers of shares, including options and
warrants, have been restated to reflect these stock splits.
(3) ACQUISITIONS:
Acquisition of ETIC Corporation
On February 1, 1997, the Company completed the acquisition of the principal
assets of ETIC Corporation, d/b/a Employers Trust (ETIC). The purchase price was
$30,000 plus five times ETIC's total pre-tax income for the 12-month period
ending January 31, 1998. Of the purchase price, $855,000 was paid in cash at
closing. The final payment of the purchase price is due on or before April 30,
1998, and will be paid in cash. ETIC is a Cincinnati, Ohio base consisting
primarily of light industrial, transportation and construction companies, with
approximately 150 clients and 2,000 worksite employees.
8
<PAGE>
Acquisition of CMGR Companies
On February 17, 1997, the Company completed the acquisition of the principal
assets of CMGR, Inc., and Humasys (CMGR) for $3.85 million. Of the purchase
price $2.35 million was paid in cash at the closing. An interim payment of
$500,000 toward the purchase price is due six months after the closing. Final
payment is due on or before April 18, 1998 and is based upon the 1996 gross
profit of CMGR. CMGR is a New Jersey based PEO with a client base consisting
primarily of professional, service and light industrial companies, with
approximately 75 clients and 1,700 worksite employees.
(4) UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined financial data gives effect to the
combined historical results of operations of the Company and TEAM Services and
Leaseway Personnel Corp., which were acquired in 1996, for the periods ended
March 31, 1997 and 1996, and assumes 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. The pro forma
financial information is based on the purchase method of accounting and reflects
adjustments to eliminate nonrecurring general, administrative and other
expenses, to amortize the excess purchase price over the underlying value of net
assets acquired and to adjust income taxes for the pro forma adjustments.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except share data) For the Quarter ended March 31,
-----------------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Total revenues $ 195,966 $ 114,937
Net income 686 3,405
Net income per common and common
equivalent share
Primary .02 .11
Fully diluted .02 .11
Weighted average number of common and
common equivalent shares outstanding
Primary 32,983,120 32,048,552
Fully diluted 32,983,120 32,262,830
</TABLE>
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9
<PAGE>
(5) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), Earnings per Share. The
statement establishes standards for computing and presenting earnings per share
and requires dual presentation of basic and diluted earnings per share on the
face of the income statement. SFAS No. 128 is effective for financial statements
for periods ending after December 15, 1997. Adoption of SFAS No. 128 would have
the following effect on the March 31, 1997 and 1996 financial statements:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except share data) Quarter ended March 31,
-----------------------------------------
1997 1996
----- ------
<S> <C> <C>
Earnings per common share
Net income $ .02 $ .08
===== ======
Earnings per common share - assuming dilution
Net income $ .02 $ .07
===== ======
Quarter ended March 31,
------------------------------------------------------------------
1997 1996
------------------------------- ---------------------------------
Income Shares Per Share Income Shares Per Share
------ ---------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
Income available to
common stockholders $ 686 30,877,101 $ .02 $ 2,346 29,936,830 $ .08
Effect of Dilutive Securities
Common Stock Options -- 2,106,019 -- 2,111,722
------ ----------- -------- -----------
Diluted earnings per share $ 686 32,983,120 $ .02 $ 2,346 32,048,552 $ .07
====== =========== ===== ======== =========== ======
</TABLE>
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(6) CONTINGENCIES:
The Company has received a letter from the Arizona Department of Economic
Security indicating that the Company has been assigned a higher state
unemployment tax rate for calendar year 1994 than the Company believes it is
entitled to. In consultation with legal counsel the Company believes that based
on Arizona Revised Statutes it is entitled to the lower rate. If it was
ultimately determined that the higher rate applies, the Company would owe
$500,000 (before interest and the income tax effect) more than is reflected in
the Company's financial statements. As of March 31, 1997, the compounded
interest totaled approximately $155,000.
The Company received payroll tax penalty notices from the Internal Revenue
Service (IRS) and various states, relating to the acquired operations of Hazar
alleging certain late payment of payroll taxes. The penalties proposed to be
assessed against the Company 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 against it.
The Company, and certain of its present and former executive officers and
directors, have been named as defendants in several actions filed in 1997. While
the exact claims and allegations vary, they all allege violations by the Company
of Section 10(b) of the Securities Exchange Act, and Rule 10b-5 promulgated
thereunder, with respect to the accuracy of statements regarding Company
reserves and other disclosures made by the Company and certain directors and
officers. These suits were filed shortly after a significant drop in the trading
price of the Company's common stock in March 1997. Each of the actions 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
10
<PAGE>
of the action, including attorney's 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 in the
ordinary course of business. These lawsuits are not considered to have a
material impact on the Company.
The Company believes that it has meritorious defenses to the lawsuits facing it,
including those mentioned above, and intends to assert such defenses vigorously.
However, it is not possible to predict whether such defenses will be
successfully asserted in all cases, 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.
11
<PAGE>
ITEM 2. 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 and in the Company's Report on Form 10-K for
the year ended December 31, 1996. 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-Q 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 in this Management's Discussion
and Analysis (particularly in "Outlook - Issues and Risks" in "Item 1 --
Business" and "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations" on Form 10-K 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 clients' workers' compensation and benefit plan
experience, Company administrative resources required, the expected profit, and
other factors. These fees are generally expressed as a fixed percentage of the
client's gross salaries and wages except for certain costs, primarily employer's
health care contributions, which are billed to clients on an add-on basis.
Because the service fees are negotiated separately with each client and vary
according to circumstances, the Company's service fees, and therefore its gross
margin, will fluctuate based on the Company's client mix.
Revenues from stand-alone risk management/workers' compensation services consist
primarily of gross premiums charged to clients for such services. The Company
also receives fee income for certain other types of services, such as those in
connection with its driver leasing program (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
12
<PAGE>
unemployment rates are subject to change each year based on claims histories and
size of payments, and vary from state to state.
Workers' compensation costs, whether relating to PEO worksite employees or the
Company's stand-alone risk management/workers' compensation program, include the
costs of claims up to the retention limits relating to the Company's workers'
compensation program, administrative costs, premium taxes and excess reinsurance
premiums, and accidental death and dismemberment insurance which the Company
maintains to limit certain of its losses. In its arrangements with the Reliance
Group of Insurance Companies (Reliance) through the Company's wholly-owned
insurance subsidiary, and Legion Insurance Company (Legion), the Company retains
workers' compensation liabilities up to certain specified amounts. Accrued
workers' compensation claims liability is based upon estimates of reported and
unreported claims and the related claims and claims settlement expenses in an
amount equal to the retained portion of the expected total incurred claim. The
Company's accrued workers' compensation reserves primarily are based on
industry-wide data, and to a lesser extent, the Company's past claims experience
up to the retained limits. The liability recorded may be more or less than the
actual amount of the claims when they are submitted and paid. While the Company
believes that its reserves are adequate for future claims expense, there can be
no assurance that this will be the case. 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.
Health care and other employee benefits costs consist of medical and dental
insurance premiums, payments of and reserves for claims subject to deductibles
and the costs of vision care, disability, life insurance and other similar
benefit plans. The Company's health care benefit plans consist of a mixture of
fully-insured programs and partially self-insured programs with specific and, in
one program, aggregate stop-loss insurance. The Company recognizes a liability
for partially self-insured health insurance claims at the time a claim is
reported to the Company by the third party claims administrator, and also
provides for claims incurred, but not reported based on industry-wide data and
the Company's past claims experience. The liability recorded may be more or less
than the actual amount of ultimate claims. While the Company believes that its
reserves are adequate for future claims expense, there can be no assurance that
this will be the case. See "Outlook: Issues and Risks herein."
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 moved 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 in
future periods.
13
<PAGE>
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
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.
Quarterly Results of Operations -- March 31, 1997 Compared to March 31, 1996.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent
(Dollars in thousands) 1997 Change 1996
---------- -------- ----------
<S> <C> <C> <C>
Revenues $ 195,966 165% $ 73,934
Cost of revenues 185,698 180 66,265
Gross profit 10,268 34 7,669
Selling, general and administrative 7,413 109 3,547
Depreciation and amortization 965 202 320
Interest income 195 4 187
Interest expense 942 -- 3
Net income 686 (71) 2,352
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE>
Revenues
Revenues increased to $196.0 million for the quarter ended March 31, 1997 from
$73.9 million for the quarter ended March 31, 1996, a 165% increase. The growth
primarily is the result of several acquisitions and direct PEO sales and
marketing efforts. Acquisitions accounted for a significant increase in revenues
between the periods. In addition, the increase in revenues was partially due to
the addition of US Xpress, Inc. and affiliates as a PEO client which also
accounted for a significant portion of the quarter to quarter increase. Growth
was in part offset by factors such as attrition of clients, competitive
pressures in the PEO and workers' compensation industry and the effects of a
downturn in transportation business in certain areas of the country, thereby
reducing revenues of existing clients. The number of worksite employees
increased to approximately 40,800 covering 1,440 client companies at March 31,
1997 from approximately 13,300 covering 900 client companies at March 31, 1996.
In addition, the Company currently provides risk management/workers'
compensation services to approximately 13,400 employees covering 67 employers as
compared to approximately 17,000 employees covering 39 employers at the same
period last year. The decrease in the number of employees covered under the
Company's risk management/workers' compensation services was in part due to the
conversion of certain stand-alone clients to PEO clients via acquisition.
Revenues related to stand-alone risk management/workers' compensation services
were $3.5 million for the first quarter of 1997, which included nonrecurring
revenue of approximately $1.0 million related to stand alone workers'
compensation premiums that were under-billed for policies written in the
previous year, compared with revenues of $3.2 million for same period in 1996.
The Company began in late 1996 to experience the effects of competition and a
general weakening in the workers' compensation and employee benefits markets,
which slowed revenue growth. This trend has continued into 1997. Stand-alone
policies in place at March 31, 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
Cost of revenues increased 180%, to $185.7 million in the three months ended
March 31, 1997 from $66.3 million for the three months ended March 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 for the three months ended March 31, 1997 were
$4.0 million. The Company believes that the overall results of the Company's
risk management/workers' compensation program as measured against industry data
can be attributed to the Company's selectivity in new client acceptance, the
effective use of safety inspections and safety programs and its ability to
manage and close open claims coupled with stop losses of $250,000 and $350,000
per occurrence, the maintenance of accidental death and dismemberment insurance
through Chubb, and a 30-day cancellation capability on PEO business. Although
the Company believes its internal method of establishing reserves continues to
be appropriate, the Company commissioned an independent third party actuarial
review of the Company's workers' compensation reserves at year end 1996, as it
had for year end 1995. In the 1996 review, the actuary primarily relied on
industry-wide data, while taking into account to a lesser extent than in past
reviews 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 for the year ended December 31, 1996, and to use similar
methodologies at March 31, 1997. The Company also intends to use these
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.
15
<PAGE>
The following table provides an analysis of the Company's workers' compensation
reserves from its partially self-insured programs for the following periods:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands) Quarter ended Year ended
------------------------------
March 31, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Reserve - Beginning of period $ 5,154 $ 1,052
Losses 3,964 10,034
Payments (2,354) (5,932)
--------- ---------
Reserve - End of period $ 6,764 $ 5,154
========= =========
</TABLE>
- --------------------------------------------------------------------------------
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 following periods:
- --------------------------------------------------------------------------------
Incurred Claims by Calendar Period
<TABLE>
<CAPTION>
Approximate Approximate
Total Open Claims
Number of March 31,
Claims 1997
----------- -----------
Quarter ended
- ------------------
<S> <C> <C>
March 31, 1997 1,058 754
Year ended
- ------------------
December 31, 1996 3,372 1,112
December 31, 1995 1,035 102
December 31, 1994 100 4
------- -------
5,565 1,972
======= =======
</TABLE>
- --------------------------------------------------------------------------------
Gross profit
The Company's gross profit margin decreased from 10.4% in the three months ended
March 31, 1996 to 5.2% in the three months ended March 31, 1997. This decrease
primarily was attributable to the change in mix of the Company's stand-alone
risk management/workers' compensation program revenues relative to the revenues
derived from the Company's full-service PEO business, increased competition in
all areas of the Company's business, an extended downturn in generally higher
margin revenues derived from the transportation industry, and higher workers'
compensation claims costs, as discussed above. 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. Stand-alone risk
management/workers' compensation services revenue decreased from 4% of total
revenues for the first quarter of 1996 to 2% in the first quarter of 1997.
16
<PAGE>
The Company has increased the number of workers' compensation claims managers to
37 at March 31, 1997 from 15 at March 31, 1996. 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 average number of active
claims which each claims manager may handle is a maximum of approximately 50.
Based on industry data, the Company believes that this maximum is significantly
less than the industry average. See "Adequacy of Loss Reserves" and "Loss and
Claims Experience" in "Outlook: Issues and Risks" below.
Selling, general and administration
Selling, general and administrative expenses for the three months ended March
31, 1997 increased by approximately $3.9 million to $7.4 million, or 109%, from
$3.5 million for the three months ended March 31, 1996. Factors contributing to
the increase in selling, general and administrative expenses in 1997 over 1996
are the inclusion of the operations of various acquisitions, an increase from
120 corporate employees at March 31, 1996 to 220 at March 31, 1997, and the
expansion of the Company's office space. Included in the increase in costs from
acquisitions were expenses for TEAM Services and Leaseway, both acquired after
the first quarter of 1996 and which historically have maintained a higher ratio
of selling, general and administrative expense to gross profit than the Company.
These factors which caused increases in selling, general and administrative
expense were partially mitigated by improved systems utilization and economies
of scale achieved within the Company's operations. The Company's 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 increased in the three months ended March 31, 1997 compared
to 1996 due to the increase in revenues discussed. Selling, general and
administrative expenses are expected to continue to increase to meet the needs
of new business. The most extensive growth in selling, general and
administrative expenses has been in the finance and risk management departments.
The Company signed a seven year lease on new office space in Phoenix, Arizona
containing significantly more space at higher rates than its existing offices.
The annual rental increase is expected to be approximately $1 million beginning
in April 1997. The Company also expects that costs for professional services
will increase in 1997 as a result of litigation recently brought against the
Company; see "Outlook: Issues and Risks-Litigation below."
Depreciation and amortization
Depreciation and amortization represented depreciation of property and equipment
and amortization of organizational costs, customer lists and goodwill in the
three months ended March 31, 1997 and 1996. The increase was due primarily to
depreciation of new phone and computer systems and goodwill amortization
resulting from 1996 acquisitions, with Leaseway and McClary-Trapp being the most
significant. In addition, the Company acquired ETIC and CMGR in February of
1997. Goodwill amortization of these acquisitions was only recognized from the
date of acquisition.
Interest
Interest income increased to $195,000 for the three months ended March 31, 1997
from $187,000 for the same period in 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. Interest
expense increased to $942,000 for the three months ended March 31, 1997, from
$2,000 for the three months ended March 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 $43.5 million for the
three months ended March 31, 1997. Interest expense will continue in future
periods depending upon amounts borrowed under its revolving credit facility. See
"Liquidity and Capital Resources below."
17
<PAGE>
Effective tax rate
The Company's effective tax rate provides for federal, state and local income
taxes. The effective tax rate for the three months ended March 31, 1997 was 40%
as compared to 41% for the three months ended March 31, 1996. The tax rate used
in each quarterly reporting period is generally an estimate of the Company's
effective tax rate for the calendar year. The 1997 rate reflects the increased
operations of the Company's wholly-owned subsidiary, Camelback, which pays state
premium tax rather than state income tax. Although the Company believes that it
has structured its Camelback arrangements to qualify for such tax 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. The Company's
effective tax rate will vary from time to time depending primarily on the mix of
profits derived from Camelback and the Company's various other profit centers,
the magnitude of nondeductible items relative to overall profitability and other
factors. The Company's estimated effective tax rate for financial reporting
purposes for 1997 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.
1997 Outlook
Many factors may affect the Company's 1997 operations and results for the
remainder of 1997 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."
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
in the quarter ended March 31, 1997 are from financing activities and
operations.
Cash provided by operating activities was $3.7 million during the quarter ended
March 31, 1997 compared to cash used in operating activities of $.2 million
during the same period of 1996. 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 and the Company's stand-alone program adversely affected the
Company's operating cash flows as these operations extend credit terms generally
from 15 to 45 days as is customary in their respective markets segments. Stand
alone risk management/workers' compensation services are billed in accordance
with individual policies. The Company also extends credit terms for certain of
its stand alone risk management/workers' compensation clients by billing less
than the expected premium over the policy term, with the difference paid on a
deferred basis after the end of a policy year. In addition, accounts receivable
were increased because of the results of audits of stand-alone workers'
compensation policies which began in the first quarter of 1997. These audits
have indicated additional amounts due to the Company based upon changes during
the policy year, which are being billed to customers. The Company recognized
$1.0 million of such revenues in the first quarter of 1997, which relate to
prior periods. As the Company expands in these market segments or enters into
new market segments, or extends credit terms to additional clients, its working
capital
18
<PAGE>
requirements may increase. Included in other assets is a receivable of $2.9
million from a single customer as to which disputes have risen. Although the
Company believes the amount is collectible, the Company is considering its
alternatives, including litigation, for collection of the receivable.
Cash used in investing activities was $5.5 million and $.8 million in the three
months ended March 31, 1997 and 1996, respectively. For 1997 and 1996, capital
expenditures were $360,000 and $325,000, respectively. Capital expenditures in
1997 consisted primarily of personal computers and other computer equipment to
enhance the Company's ability to support ESI's increasing client and employee
base. In April 1997, the Company relocated its Phoenix operations to a new
facility. The leaseholds and improvements will be financed by the landlord as a
buildout allowance, and subsequently reflected in rental payments. Moving costs
and office furniture 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 expenditure
needs, management expects that 1997 capital expenditures will exceed those
incurred in prior periods to meet the needs of the Company's growing base of
worksite employees.
Cash provided by financing activities was $3.5 million for the three months
ended March 31, 1997 compared to cash provided by financing activities of $5.4
million for the same period in 1996. Cash flows from financing activities during
1997 resulted primarily from the Company's borrowing (see below) and the sale of
the Company's Common Stock upon exercise of options, offset by cash used to fund
bank overdrafts of acquired companies.
At March 31, 1997 and March 31, 1996, the Company had cash and cash equivalents
of $12.6 million and $18.4 million, respectively. Cash and cash equivalents are
generally invested in high investment grade instruments with maturities of less
than 90 days. Certain amounts of restricted cash and investments (see below) may
have maturities beyond 90 days but are highly liquid. The Company generally
maintains large cash balances to meet its daily payroll and payroll tax
obligations. The Company is implementing a nationwide cash management program to
minimize the requirement for cash on hand, though as the business continues to
grow, cash requirements to meet daily obligations will increase. The Company is
required through its fronting arrangements 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
regulatory requirements which may not reflect the Company's historical or
expected ultimate losses. Restricted cash and investments is classified as a
current asset as the Company settles and pays most workers' compensation claims
within one year from occurrence. The Company cannot access restricted cash and
investments without the agreement of Reliance. At March 31, 1997 $13.5 million
was on deposit at Camelback as restricted cash and investments.
At March 31, 1997 and December 31, 1996, the Company had working capital of
$31.9 million and $30.4 million, respectively.
19
<PAGE>
Assuming continued growth of the Company's full-service PEO business and
stand-alone risk management/workers' compensation services program, the Company
anticipates that it will be required under its arrangements with its insurers to
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. 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. (Camelhead). 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 it. 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 the three months ended March 31, 1997, the Company paid to
Reliance approximately $5.0 million of which $2.8 million was ceded to the trust
account at Camelback for payment of claims. For the same period the Company also
paid to Legion approximately $2.6 million of which $2.4 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 $4.9 million to fund its partially self-insured workers'
compensation programs in the quarter ended March 31, 1997. 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 $650,000 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 $45.3 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 31, 1997, the Company had borrowed approximately $45.3
million, and had outstanding $1.5 million in letters of credit, under the credit
facility; at that date, the Company's borrowing limit was approximately $54.5
million as a consequence of the combination of the overall line of credit and
borrowing covenants. At May 20, 1997, the Company had borrowed approximately
$50.3 million and had $2 million in letters of credit, under the credit
facility.
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 agreements to acquire ETIC and CMGR.
Since the Company's borrowing arrangements limit borrowings to two times
earnings before income tax, depreciation and amortization, the Company's
borrowing capacity would be affected if earnings in future quarters are below
the preceding year's quarters, as they were in the first quarter of 1997.
Limitations on borrowings (particularly if limits were to go below the Company's
current borrowing level) could negatively affect the Company's liquidity and
operations, depending upon cash needs at the time.
Subject to the foregoing, 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
20
<PAGE>
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. In the event of a reduction in the borrowing capacity under
the current credit arrangements, the Company would need to pursue alternative
borrowing strategies or seek equity financing.
Outlook: Issues and Risks
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. To accommodate growth, the Company relocated its
Phoenix operations to new offices in April 1997 and is considering centralizing
certain other operations, which moves may result in certain disruptions.
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. 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 workers' compensation
liability will not materially exceed its loss and loss adjustment
21
<PAGE>
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 primarily due to its selective evaluation
process, safety programs, active claims management and maintenance of its
accidental death and dismemberment policy. However, the Company may experience
adverse development on prior losses, and in any event 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 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,
22
<PAGE>
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 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 and several of its present and former executive officers and
directors have been named as defendants in several actions alleging violations
of securities laws with respect to the accuracy of certain statements regarding
Company reserves and other disclosures made by the Company and certain of its
directors and officers. These suits were filed shortly after a significant drop
in the trading price of 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 defend these actions vigorously. However, the cost of defending these actions
could have a material
23
<PAGE>
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 results in
increased employee related litigation and otherwise increases 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 is priced annually
and is due for renewal on June 1, 1997, and is subject to further annual
renewals and pricing decisions. The contract may also be cancelled by Reliance
under certain conditions. 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
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.
24
<PAGE>
The Company's standard forms of client service agreement establish the
contractual division of responsibilities between the Company and its clients for
various personnel management matters, including compliance with and liability
under various governmental regulations. However, because the Company acts as a
co-employer, and in some instances acts as sole employer, the Company may be
subject to liability for violations of these or other laws despite these
contractual provisions, 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, the Company
may be adversely affected if it is deemed to be making sales without a license
in jurisdictions where it is not licensed, or it ceases to maintain necessary
licenses upon the departure of the employee who holds certain of such licenses.
25
<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 long-term
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. 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 evaluate each acquisition candidate thoroughly 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 1,440 client companies and their
40,800 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
26
<PAGE>
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 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 has experienced particularly severe
volatility since 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.
27
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable
28
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As the Company has previously reported, the Company, and certain of its
executive officers, have been named as defendants in several securities actions
filed in 1997. While the exact claims and allegations vary, they all allege
violations by the Company of Section 10(b) of the Securities Exchange Act, and
Rule 10b-5 promulgated thereunder, with respect to the accuracy of statements
regarding Company reserves and other disclosures made by the Company and certain
directors and officers. These suits were filed shortly after a significant drop
in the trading price of the Company's Common Stock in March 1997. Each of the
actions 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. In addition to actions which were previously disclosed by the
Company in its Form 10-K filing, actions known by the Company to have been
subsequently filed are:
(a) Ronald P.A. and Sharon M. Gabardon, on behalf of themselves and all
others similarly situated, versus Employee Solutions, Inc., Harvey A.
Belfer, Marvin D. Brody, Roy Alan Flegenheimer, Edward L. Cain, Jr. and
Morris C. Aaron, United States District Court for the District of
Arizona, Case No. CIV 97-0676 PHX SMM.
(b) Kathryn Gallo versus Employee Solutions, Inc., Marvin D. Brody, Harvey
A. Belfer, Roy Alan Flegenheimer, Edward L. Cain, Jr. and Morris C.
Aaron, United States District Court for the District of Arizona, Case
No. CIV 97-0732 PHX SMM.
(c) Marian Cohen versus Employee Solutions, Inc., Marvin D. Brody, Jane Doe
Brody, Morris C. Aaron and Jane Doe Aaron, United States District Court
for the District of Arizona, Case No. CIV 97-0812 PHX PGR.
(d) Ronald E. Khoury, Sr., on behalf of himself and all others similarly
situated, versus Employee Solutions, Inc., Harvey A. Belfer, Marvin D.
Brody, Roy Alan Flegenheimer, Edward L. Cain, Jr. and Morris C. Aaron,
United States District Court for the District of Arizona, Case No. CIV
97-0910 PHX RGS.
(e) Rebecca S. Pentel and Irwin M. Pentel, on behalf of themselves and all
others similarly situated, versus Employee Solutions, Inc., Harvey A.
Belfer, Marvin D. Brody, Roy Alan Flegenheimer, Edward L. Cain, Jr. and
Morris C. Aaron, United States District Court for the District of
Arizona, Case No. CIV 97-1056 PHX ROS.
29
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit
Number Description
------ -----------------------------------------------------
3(ii) Amended and Restated Bylaws, as amended through April
30, 1997
10.1 Reinsurance Agreement effective as of May 1, 1995
(signed on April 4, 1997) between Reliance National
Indemnity Company and Reliance Insurance Company, and
Camelback Insurance Ltd., including Addendum Number
One thereto*
10.2 Letter Agreement dated March 27, 1997 (and signed
March 30, 1997) between the Company and Edward L.
Cain, Jr.
10.3 Letter Agreement dated March 27, 1997 (and signed
March 31, 1997) between the Company and Professional
Employers Resource Corporation
27 Financial Data Schedule
* Confidential treatment has been requested for certain portions of this
document.
(b) Reports on Form 8-K.
--------------------
The Company filed the following Reports on Form 8-K during the quarter
ended March 31, 1997:
Report dated March 14, 1997, reporting the estimated range of the
Company's earnings for the quarter ended December 31, 1996.
Report dated March 17, 1997, reporting the Company's earnings for the
quarter and year ended December 31, 1996.
30
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
EMPLOYEE SOLUTIONS, INC.
Date: May 20, 1997 /S/ Marvin D. Brody
---------------------------
Chief Executive Officer
/S/ Morris C. Aaron
---------------------------
Chief Financial Officer
/S/ John V. Prince
---------------------------
Chief Accounting Officer
31
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
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<PAGE>
approved by a majority of the whole Board of Directors, or at the request in
writing of 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.
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<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
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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
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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.
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(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.
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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.
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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
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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.
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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
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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.
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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.
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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
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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,
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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
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<PAGE>
(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,
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<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
such sum as it may direct as indemnity against any claim that may be made
against the
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<PAGE>
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 seventy nor less than ten days prior to the date of
such meeting nor more than seventy 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.
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<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.
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Exhibit 10.1
3/31/97 10-Q
[[Note: Employee Solutions, Inc. has requested confidential treatment for
certain portions of this document. The portions for which confidential treatment
has been requested, and which are redacted herein, are designated by "****"
marks herein.]]
REINSURANCE AGREEMENT
---------------------
This Reinsurance Agreement effective May 1, 1995, between Reliance
National Indemnity Company and Reliance Insurance Company, insurance
corporations with business offices at 77 Water Street, New York, New York (the
"Company") and Camelback Insurance Ltd., an insurance corporation with its
principal business office at c/o American International, Ltd., 29 Richmond Road,
P.O. Box HM 152, Hamilton, Bermuda HM AX (the "Reinsurer")
In consideration of the payment of the reinsurance premium, and subject
to the terms, conditions and limits of liability set forth below, the Reinsurer
does hereby reinsure the Company in respect of the Company's Policies.
ARTICLE I. DEFINITIONS
The following terms shall have these meanings:
A. "Policy" or "Policies" - Policies of insurance and any extension or
renewals including endorsements written through Alexander & Alexander
of Arizona, Inc. and ESI Risk Management Agency, Inc. under Producer
Code Numbers 80581 and 82344 respectively, and issued on behalf of the
Company to Employee Solutions, Inc., first named insured, and as
described in Schedule I to this Agreement.
B. "Incurred Losses" - All Paid Losses, plus reserves for unpaid Losses
both reported and unreported attributable to Policies and as
established by the Company.
C. "Paid Losses" - Payments for claims under the Policies, including
any Deductible Amounts made by the Company, and not reimbursed by the
Insured;
D. "Allocated Loss Adjustment Expenses" - Expenses that the Company, or
any claims administrator, under the Company's accounting practices,
directly allocates to a particular claim which shall include expenses
paid by the Company in connection with the Policies, whether or not
related to Paid Losses, and any other expenses paid by the Company in
connection with the administration of claims arising under the
Policies, not
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<PAGE>
including Unallocated Loss Adjustment Expenses. These Allocated Loss
Adjustment Expenses may include: attorney's fees, court costs and
related costs such as filing fees; the costs of medical examinations,
expert medical or other review or testimony, laboratory services,
x-rays, autopsies; and the costs for stenographic services, witnesses,
summonses and copies of documents. Allocated Loss Adjustment Expenses
shall also include expenses incurred in connection with determining
questions of the construction of Policies, their validity, and
proceedings to determine the rights, duties or obligations if any of
any Insureds or parties to the Policies. Allocated Loss Adjustment
Expenses do not include Unallocated Loss Adjustment Expenses.
E. "Unallocated Loss Adjustment Expenses" - Expenses which are not
directly allocated to a particular claim and shall include the expenses
of the Company's employees or of a claims administrator including their
salaries and traveling expenses, and the Company's overhead.
F. "Return Premiums" - Amounts payable to Insureds under Policies as
return of unearned premiums on canceled or amended policies,
adjustments arising out of premium audits or as required by law or
rating plans, or as dividends.
G. Terms defined or given special meanings within Policies have the
same meanings in this Agreement as those given to them in the Policies.
H. Other terms or phrases may be given special meanings within this
Agreement.
ARTICLE II. COVERAGE
The Reinsurer is liable to the Company under this Agreement for the
following:
A. Workers' Compensation
---------------------
1. Up to and including the first $250,000 of Incurred Losses
covered under Part One - Workers' Compensation Insurance of
Policies described as Workers' Compensation in Schedule I
arising out of any accident involving one or more employees of
an Insured; plus all Allocated Loss Adjustment Expenses
attributable to such Losses.
2. Up to and including the first $250,000 of Incurred Losses
covered under Part One - Workers' Compensation Insurance of
Policies described as Workers' Compensation in Schedule I
arising out of occupational disease affecting any one employee
of the Insured; plus all
2
<PAGE>
Allocated Loss Adjustment Expenses attributable to such
Losses.
B. Workers' Compensation/Employer's Liability
------------------------------------------
1. Up to and including the first $250,000 of Incurred Losses
covered under Part Two - Employer's Liability Insurance of
Policies described as Workers' Compensation in Schedule I
arising out of bodily injury by accident or occurrence; plus
all Allocated Loss Adjustment Expenses attributable to such
Losses; and
2. Up to and including the first $250,000 of Incurred Losses
covered under Part Two - Employer's Liability Insurance of
Policies described as Workers' Compensation in Schedule I
arising out of bodily injury by disease; plus all Allocated
Loss Adjustment Expenses attributable
to such Losses.
C. For all costs and expenses incurred by the Company in connection
with seeking recovery as salvage or subrogation for Paid Losses subject
to reinsurance under this Article.
D. For Unallocated Loss Adjustment Expenses, in accordance with
Schedule II attached to this Agreement.
E. For 100% of Paid Losses in excess of Policy limits, but otherwise
within the terms and conditions of the Policy arising as the result of
an action against the Company to recover damages, which an Insured
under the Policy is legally obligated to pay to a third party, alleging
negligence or bad faith in rejecting a settlement within the Policy
limits, or in discharging its duty to defend an Insured under the
Policy including prosecuting any appeals; plus all Allocated Loss
Adjustment Expenses attributable to such Losses.
F. For 100% of any punitive, exemplary, compensatory or consequential
damages, but not including amounts payable under II.E, payable by the
Company as the result of an action against the Company alleging
negligence or bad faith in the handling of any claim made under a
Policy as a result of a direct act by the Reinsurer; plus Allocated
Loss Adjustment Expenses attributable to such Losses.
ARTICLE III. CLAIMS
A. The Company or its authorized representatives shall adjust, settle
or compromise any and all claims arising under the Policies and shall
further commence, continue, defend, or withdraw from actions, suits or
proceedings under the Policies, and generally do all things relating to
claims thereunder that it deems necessary or expedient. Any
3
<PAGE>
authorized representative shall follow the Company's claims processing
guidelines. While the Reinsurer is not required to investigate or
defend claims or suits under the Policies, it may associate, at its own
expense, with the Company and its authorized representatives in the
defense of any claim, suit or proceeding involving this reinsurance.
Except as otherwise specifically provided for in this Agreement, it is
the intent of this Agreement that the Reinsurer's liability shall, in
all respect, follow the fortunes of the Company under the Policies. All
adjustments, settlements and compromises by the Company and its
authorized representatives of claims involving Policies, when made by
the Company or its authorized representatives, shall be unconditionally
binding on the Reinsurer.
B. All records pertaining to this Agreement and claims arising under
the Policies shall be owned by the Company. The Company will, at the
request of the Reinsurer, furnish the Reinsurer a copy of any of the
Policies and all endorsements and shall make available for inspection
and place at the disposal of the Reinsurer at reasonable times any of
its records or claims subject to reinsurance under this Agreement.
C. The Company will pay or credit the Reinsurer up to the amount of the
Reinsurer's interest for amounts attributable to salvage, reimbursement
obtained or recovery made by the Company relating to any of the
Policies, including recovery for any Deductible Amounts as set forth in
the Policies which were paid by the Company, after deducting the direct
cost (excluding Unallocated Loss Adjustment Expenses) of obtaining such
salvage or reimbursement or making such recovery, and after the Company
has been reimbursed up to the amount of any Paid Losses for which the
Reinsurer is not liable under Article II.
ARTICLE IV. PAID LOSS DEPOSIT FUND
A. The Reinsurer will provide funds for the Company to establish and
maintain in its own name a Paid Loss Deposit Fund, for payment of the
Reinsurer's liabilities under Article II of this Agreement. The
initially required minimum level of the Paid Loss Deposit Fund shall be
$****. The Company may at its option adjust the required level of the
Paid Loss Deposit Fund quarterly. The adjusted level of the Paid Loss
Deposit Fund shall not be greater than 100% of the amount of the total
Paid Losses including Allocated Loss Adjustment Expenses paid for the
preceding quarter.
B. The Reinsurer shall, upon receipt of a written request by the
Company or a designated claims administrator forward by wire transfer
within three (3) business days funds to the
4
<PAGE>
Company sufficient to maintain the Paid Loss Deposit Fund balance at
the minimum level required in Section A above.
C. In the event the Company is required to make a payment for Paid
Losses including Allocated Loss Adjustment Expenses on any one claim in
the amount of $25,000, or greater, the Reinsurer shall, notwithstanding
the availability of funds in the Paid Loss Deposit Fund, immediately
upon receipt of notice forward by wire transfer funds for the full
amount of the payments.
D. The Company may increase the required level of the Paid Loss Deposit
Fund each time the Reinsurer fails to make any payment to the Company
within the time required by this Agreement. No one individual increase
will increase the required level to more than twice that required
before the increase.
ARTICLE V. REINSURANCE PREMIUM
A. The reinsurance premium shall be the monies actually received and
recorded by the Company as premium for the Policies less Return
Premiums minus Ceding Commission for the Company:
1. For Workers' Compensation Policies:
a. Hazar
-----
1. Deposit Premium of $**** flat for Company
expenses, including excess loss premium and fees
for Boards and Bureaus.
2. Deposit Premium of $**** adjustable based on
actual Standard Premium at a factor of ****%
(estimated Standard Premium of $****) for:
a. premium taxes; and
b. liabilities for assessments and pools.
b. ESI Corporate Program
---------------------
1. Company expenses of $**** flat; Excess Loss
Premium, limited loss control services required
by state law; additionally, premium for taxes,
fees for boards and bureaus, liability for
assessments and pools and residual market loads
shall be adjustable based on audited Standard
Premium.
5
<PAGE>
c. "Stand Alone" Captive Program
-----------------------------
1. Deposit Premium shall be based on ****%
(Profit and Administration charge of ****%,
Excess Loss Premium Factor of ****%, Boards and
Bureaus charge of ****%) of the estimated
Standard Premium for Company expenses, excess
loss premium, and fees for boards and bureaus.
2. Premium taxes and residual market loads shall
be based on estimated policy premium multiplied
by the applicable state factors.
B. Within fifteen (15) days after the end of each calendar quarter, the
Company will send the Reinsurer a Reconciliation Statement including:
a. Premiums received by the Company under the Policies;
b. Return Premiums;
c. Premiums payable to the Reinsurer;
d. Payments made by the Reinsurer;
e. Paid Losses;
f. Allocated Loss Adjustment Expenses;
g. Unallocated Loss Adjustment Expenses;
h. Amounts required to fund the Paid Loss Deposit Fund;
i. Federal Insurance Excise Tax or other tax on
Reinsurance Premium paid by the Company;
j. Any other amounts paid or recovered by the Company
subject to this Agreement;
k. Reconciliation Balance;
l. Claims reported; and
m. Such other information and in such form and detail as
shall be mutually agreed upon in writing by the
Company and the Reinsurer, or that may be required by
regulatory authorities with jurisdiction over either
party.
C. If the result of any such reconciliation is that the Reinsurer owes
money to the Company, the Reinsurer will within fifteen (15) days after
receipt of the Reconciliation Statement pay the amount due.
D. If the result of any such reconciliation is that the Company owes
money to the Reinsurer, the Company will pay the amount due as set
forth in the Reconciliation Statement.
E. All amounts due the Reinsurer or the Company under this Agreement or
any other agreement between the parties shall be subject to the right
of offset.
ARTICLE VI. COLLATERAL TRUST
6
<PAGE>
A. The Reinsurer shall execute a Trust Agreement and establish a trust
account for the benefit of the Company as security for the Reinsurer's
obligations under this Agreement. The bank must be approved by the
Company. The Trust Agreement shall be in a form acceptable to the
Company.
B. The Reinsurer's obligations being secured shall include:
1. Losses and Allocated Loss Adjustment Expenses, for which
the Reinsurer is liable under Article II paid by the Company,
but not recovered from Reinsurer;
2. Company's reserves for Losses reported and Allocated Loss
Adjustment Expenses on such Losses for which the Reinsurer is
liable under Article II;
3. Company's reserves for Losses incurred but not reported for
which the Reinsurer is liable under Article II;
4. The Reinsurer's liabilities under Articles II.E and II.F.
5. Return premiums paid by the Company, but not recovered from
the Reinsurer;
6. Company's reserves for unearned premiums;
7. Maintaining the level of the Paid Loss Deposit Fund in
Article IV;
All without diminution because of the insolvency of the Company or the
Reinsurer.
C. The Reinsurer shall deposit assets with the Trustee only in cash.
All assets held in the trust account must as appropriate include
executed assignments, endorsements in blank, or have title transferred
to the Trustee so that the Trustee may, upon the direction of the
Company, negotiate the trust account assets without further consent,
authorization or signature required.
D. The Company may, notwithstanding any other provisions to the
contrary contained in this Agreement, withdraw assets from the trust to
be used and applied by the Company or its successors in interest
without diminution because of the Company's insolvency only for the
following purposes:
1. to reimburse the Company for the Reinsurer's share of
Return Premiums.
7
<PAGE>
2. to reimburse the Company for the Reinsurer's share of Paid
Losses.
3. to fund an account with the Company in an amount at least
equal to the deduction, for reinsurance ceded, from the
Company's liabilities for Policies ceded under this Agreement.
Such amount shall include, but not be limited to, amounts for
policy reserves, claims and losses incurred, and unearned
premium reserves; and
4. to pay any other amounts the Company claims are due under
this Agreement.
E. The Company may require the Reinsurer to provide additional
collateral before the end of any calendar year by giving at least sixty
(60) days notice to the Reinsurer of the amount of additional
collateral that will be required. Such Collateral shall comply with all
the requirements of this Article and the Reinsurance Trust Agreement.
F. The Reinsurer shall deliver any Collateral to the Company at:
RELIANCE NATIONAL RISK SPECIALISTS
77 Water Street
New York, New York 10005
(Attn: Financial Department)
G. If the Reinsurer fails to provide the Company with any additional or
substitute collateral, the Company shall have the right to draw upon
the full amount of any existing Letter of Credit or other collateral
and to apply such funds to secure the obligations of the Reinsurer
hereunder.
ARTICLE VII. TAXES
A. The Company is responsible for the payment of all taxes on premiums
received under the Policies.
B. The Reinsurer is responsible for the payment of all taxes on
reinsurance premiums hereunder, and shall reimburse the Company for any
taxes it may pay on such premiums including any Federal Insurance
Excise Tax (FIET).
ARTICLE VIII. ARBITRATION
A. Submission to Arbitration. As a condition precedent to any right of
action hereunder, any dispute arising out of this Agreement shall be
submitted to the decision of a board of arbitration composed of two
arbitrators and an umpire meeting at the Company's offices in New York
unless otherwise mutually agreed.
8
<PAGE>
B. Notice. The notice requesting arbitration shall state in particulars
all principal issues to be resolved and shall set a date for the
hearing, which date shall be no sooner than 90 days and no later that
120 days from the date that the notice requesting arbitration is
mailed.
C. Discovery. Each party may obtain discovery from the other through
written interrogatories and through requests for documentation, or may
depose witnesses upon notice to the other. Any objections to production
of documents or to the scope of discovery shall be submitted to the
umpire for resolution. The umpire may schedule a conference at which
the parties may present oral arguments and submit written briefs with
respect to the production of documents or the scope of discovery. The
umpire shall render a decision within two business days of the
conference. The decision shall be binding on the parties.
D. Arbitration Board Membership. The members of the board of
arbitration shall be active or retired and disinterested officials of
insurance companies or lawyers. Each party shall appoint its own
arbitrator and the two arbitrators shall choose a third arbitrator as
umpire before the date set for the hearing. The umpire shall be a
lawyer. If a party fails to appoint its arbitrator within 30 days after
having received a written request from the other, the other shall
appoint the second arbitrator. If the two arbitrators fail to agree
upon the appointment of the umpire within 30 days after their
appointment, each of them shall name three, of whom the other shall
decline two and the selection of the umpire from the remaining two
nominees shall be made by drawing lots. The umpire shall promptly
notify all parties to the arbitration of his selection.
E. Submission of Briefs. The patties shall submit their initial briefs
within 20 days from appointment of the umpire. Each may submit reply
briefs within 10 days after filing the initial briefs.
F. Arbitration Award. The board shall make an award with regard to the
custom and usage of the insurance business which shall be in writing
and shall state the factual and legal basis for the award. The board
may award interest but may not award punitive, exemplary or similar
damages arising out of or in connection with a breach of this
Agreement. The award shall be based upon a hearing in which evidence
may be introduced without following strict rules of evidence but in
which cross examination and rebuttal shall be allowed. At its own
election or at the request of the board, either party may submit a
post-hearing brief for consideration of the board within 20 days of the
close of the hearing. The board shall make its award within 30 days
following the close of the
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<PAGE>
hearing or the submission of post-hearing briefs, whichever is longer,
unless the parties consent to an extension. A decision by the majority
of the members of the board shall become the award of the board and
shall be final and binding upon all parties to the proceeding. Either
party may apply to the United States District Court for the District of
New York or to a State Court of competent jurisdiction for an order
confirming the award or to enforce any decision by the umpire with
respect to discovery. A judgement of such Court shall thereupon be
entered on the award. If such an order is issued, the attorneys' fees
of the party so applying and court costs will be paid by the party
against whom confirmation is sought.
G. Arbitration Expense. Each party shall bear the expense of its own
arbitrator and shall jointly and equally bear with the other party the
expense of the umpire. The remaining costs of the arbitration
proceedings or any other costs relating to the arbitration may be
allocated by the board.
H. Survival. This Article shall survive the termination of this
Agreement.
ARTICLE IX. TERMINATION
A. This Agreement may be terminated in whole or in part by the Company
by giving ninety (90) days prior written notice to the Reinsurer. The
Reinsurer shall have the right to terminate this Agreement by giving
prior written notice to the Company which shall be not less than sixty
(60) days more than the longest period required for notice of
cancellation under the Policies or the laws and regulations of any
jurisdiction in which policies are issued or delivered.
B. The Reinsurer shall be entitled to credit for a pro-rata portion of
the reinsurance premium to which it would have been entitled had this
Agreement not been terminated.
ARTICLE X. SURVIVAL OF OBLIGATIONS
A. Reinsurer recognizes that the Company's obligations which accrue
during the term of the Policies will survive the termination of those
Policies, and that Reinsurer's obligations under this Agreement will
survive the termination of those Policies and this Agreement.
B. If this Agreement terminates, the Reinsurer's obligations and
responsibilities under this Agreement will continue with respect to
Losses on Policies issued or renewed prior to the effective date of
termination of this Agreement.
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<PAGE>
C. Any Policy required to be renewed under any state law, or regulation
or order shall be deemed renewed prior to the termination of this
Agreement whether or not renewed prior to the date of termination.
D. The Company and Reinsurer agree that they will cooperate in the
handling of all such outstanding business existing on the effective
date of termination until such business has expired either by
cancellation or by the terms of the Policies, and all regulatory
requirements are met.
ARTICLE XI. INTEREST AND COLLECTION COSTS
A. Reinsurer will reimburse the Company for Company's attorneys' fees
and court costs incurred in attempting to collect amounts, including
interest, which are due the Company under this Agreement hut not paid
within the time requited by this Agreement.
B. Either party will pay to the other interest at the monthly rate of
one and one-half percent (1.5%) on any amount that is not paid within
the time required by this Agreement. Interest shall accrue from the
time any payment is payable under this Agreement.
ARTICLE XII. ERRORS AND OMISSIONS
Inadvertent delays (other than in payments due), errors or omissions
made by the Company or the Reinsurer in connection with this Agreement
or any transaction hereunder shall not relieve the other party from any
liability which would have attached, had such delay, error or omission
not occurred, provided that such error or omission is rectified as soon
as possible after discovery.
ARTICLE XIII. INSOLVENCY
A. The Reinsurer hereby agrees that, as to all reinsurance made, ceded,
renewed or otherwise becoming effective hereunder, all amounts payable
under this Agreement shall be paid by the Reinsurer on the basis of the
liability of the Company under the Policies, without diminution because
of the insolvency of the Company, directly to the Company or to its
liquidator, receiver or other statutory successor.
B. It is further agreed and understood that in the event of insolvency
of the Company, the liquidator or receiver or statutory successor of
the Company shall give written notice to the Reinsurer of the pendency
of any claim against the insolvent Company under any of the Policies
within a reasonable time after such claim is filed in the insolvency
proceeding; and that during the pendency of any such claim the
11
<PAGE>
Reinsurer may investigate such claim and interpose, at its own expense,
in the proceeding where any such claim is to be adjudicated any defense
or defenses which it may deem available to the Company or its
liquidator or receiver or statutory successor. Any expense thus
incurred by the Reinsurer shall be chargeable subject to court approval
against the insolvent Company as part of the expense of liquidation to
the extent of a proportionate share of the benefit which may accrue to
the Company solely as a result of the defense undertaken by the
Reinsurer as the assuming insurer.
C. It is further agreed and understood that as to all reinsurance made,
ceded, renewed or otherwise becoming effective hereunder, in the event
of insolvency of the Company all amounts payable under this Agreement
shall be paid by the Reinsurer to the named Insured under the Policies
when the Reinsurer with the consent of the Named Insureds under the
Policies has assumed the obligations of the Company under any of the
Policies as direct obligations of the Reinsurer to the payees under any
such Policy and in substitution for the obligations of the Company to
such payees.
ARTICLE XIV. MISCELLANEOUS
A. This Agreement shall be governed by and construed according to the
laws of the State of New York.
B. This Agreement may not be assigned by the Reinsurer unless the
written approval of the Company is first obtained.
C. Any notices, requests or other communications hereunder will be in
writing and will be deemed to have been received when deposited in the
United States mail with proper postage fees prepaid, addressed as
follows:
1. If to the Reinsurer, then to:
Camelback Insurance Ltd.
c/o American International Ltd.
29 Richmond Road, P.O. Box HM 152
Hamilton, Bermuda HM AX
(Attn: Mr. John R. Weale)
2. If to Company, then to:
RELIANCE NATIONAL RISK SPECIALISTS
77 Water Street
New York, New York 10005
(Attn: Mr. Anthony Chismar, Risk Management)
3. If to the Insured, then to:
12
<PAGE>
Employee Solutions, Inc.
6225 North 24th Street
Phoenix, AZ 85016
D. Except for a termination in accordance with the provisions of
Article IX.A, this Agreement may not be released, discharged, changed
or modified except by an instrument in writing signed by a duly
authorized representative of both of the parties.
IN WITNESS WHEREOF, the parties hereto, by their respective duly
authorized persons, intending to be legally bound have signed this Agreement.
REINSURER: COMPANY:
Camelback Insurance, Ltd. Reliance National Indemnity
Company and Reliance Insurance
Company
By: /s/ Marvin Brody By: /s/
----------------------------------- --------------------------------
Title: CEO, Chairman, Pres Title: First Vice President
-------------------------------- -----------------------------
Date: 4/4/97 Date: March 24, 1997
--------------------------------- ------------------------------
Witness: Witness:
------------------------------ ---------------------------
13
<PAGE>
SCHEDULE I
to the Reinsurance Agreement
between
Reliance National Indemnity Company
Reliance Insurance Company
(the "Company")
and
Camelback Insurance Ltd.
(the "Reinsurer")
Effective: May 1, 1995
----------------------
POLICY #
- --------
NWA1744400-00 through NWA1744500-00
NWA1754307-00 through NWA1754607-00
NWA1754206-00 through NWA1754306-00
NWA1754900-00 through NWA1755500-00
NWA2000100-00 through NWA2000200-00
NWA1279600-00 through NWA1280100-00
NWA0118958-00 - Effective 11/7/94 - 6/l/95
All Policies issued by the Company's agent shall be deemed included in this
Schedule and subject to this Agreement.
14
<PAGE>
ADDENDUM NUMBER ONE
TO
REINSURANCE AGREEMENT
WHEREAS, a Reinsurance Agreement effective May 1, 1995, was entered
into by and between Reliance National Indemnity Company and Reliance Insurance
Company (collectively and individually referred to as "Company") and Camelback
Insurance Ltd. ("Reinsurer");
WHEREAS, the parties wish to amend the terms of the Reinsurance
Agreement;
NOW THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS:
1. The parties ratify and confirm the Reinsurance Agreement except as
provided herein.
2. Effective May 1, 1996, Schedule I shall be amended to add the
following Policies:
POLICY NUMBERS
--------------
NWA1280101-00 through NWA1280150-00
3. For Policies effective on or after May 1, 1996, Article V.A. -
Reinsurance Premium shall be amended as follows:
A. The reinsurance premium shall be the monies actually
received and recorded by the Company as premium for the
Policies less Return Premiums minus Ceding Commission for the
Company:
1. For Workers' Compensation Policies:
a. ESI Corporate Program
---------------------
1. Deposit Premium of $**** for
Company expenses, including excess loss
premium and fees for Boards and Bureaus at a
factor of ****% (estimated Standard Premium
of $****).
2. Deposit Premium of $****
adjustable based on actual Standard Premium
at a Multiplier of **** (estimated Standard
Premium of $****) for:
a. premium taxes; and
15
<PAGE>
b. liabilities for assessments
and pools.
b. "Stand Alone" Captive Program
-----------------------------
1. Profit and Administration charge
of ****% to $15,000,000 annual
premium, ****% from $15,000,000 to
$30,000,000 and ****% from
$30,000,000 to $50,000,000).
2. Premium taxes and residual market
loads shall be based on estimated
policy premium multiplied by the
applicable state factors.
IN WITNESS WHEREOF, the parties intending to be legally bound have
executed this Addendum as of the date set forth below.
REINSURER: COMPANY:
Camelback Insurance, Ltd. RNRS on behalf of Reliance
National Indemnity Company and
Reliance Insurance Company
By: /s/ Marvin Brody By: /s/
------------------------ ----------------------------------
Title: CEO, Chairman, Pres Title: First Vice President
--------------------- -------------------------------
Date: 4/4/97 Date: March 24, 1997
---------------------- --------------------------------
Witness: Witness:
------------------- -----------------------------
16
March 27, 1997
Mr. Edward L. Cain, Jr.
Employee Solutions-East, Inc.
Two Ravinia Drive, Suite 1470
Atlanta, GA 30346
RE. Professional Employers Resource Corporation, an
Indiana corporation ("PERC")
Dear Ed:
This letter is to confirm our understanding and agreement regarding the
financial consequences of certain activities which you have undertaken,
primarily through PERC, a company owned by you, Wayne G. Wickard, and others,
with respect to providing or brokering workers' compensation and related
services other than with or through Employee Solutions, Inc. and its affiliated
companies (collectively, "ESI").
Background
----------
As of January 1996, ESI had in place an unwritten policy whereby its
captive workers' compensation insurance company, Camelback Insurance Limited
("Camelback"), would not underwrite stand-alone workers' compensation insurance
risks with manual premiums under $50,000 per year, nor would cotton gin industry
risks be underwritten.
ESI and its subsidiary, Camelback, have now modified their policy
regarding the types of stand-alone workers' compensation risks which will be
underwritten and it has now been decided that ESI will evaluate, and may
underwrite, the under $50,000 manual premium cases, as well as cotton gin
industry risks.
In light of your relationship with ESI as an officer and director, and
your further relationship with Employee
<PAGE>
Edward L. Cain, Jr.
March 27, 1997
Page 2
Solutions-East, Inc. ("ESI-East"), one of ESI's subsidiaries, as an employee and
as the President thereof, you and ESI have agreed as follows:
1. You will voluntarily, immediately resign as an officer and director
of PERC. You have represented and warranted to ESI and ESI-East that you are not
a PERC employee.
2. You will divest yourself of your interest in PERC no later than
December 31, 1997. Except as otherwise provided in this Agreement, however, ESI
shall not have any claim against your share of the 1997 PERC profits or any 1997
PERC revenues or the proceeds from your sale of your interest in PERC.
3. ESI agrees to release you from any liability with respect to your
ownership of an interest in PERC or other PERC activities as of March 27, 1997
including, but not necessarily limited to, PERC's participation in stand-alone
workers' compensation business activities, in exchange for a total payment from
PERC to ESI in the amount of $816,550, of which $543,550 has already been paid.
The $273,000 balance owed to ESI will be paid, with interest (at the rate of 6%
per annum from January 1, 1997), no later than December 31, 1997. In the event
that any of the activities described in this paragraph 3 are construed as a
breach or violation of any provision of your Employment Agreement with ESI-East,
ESI and ESI-East hereby waive any such breach or violation and release you from
any and all claims and damages, it any, with respect thereto.
4. The $816,550 amount referred to in paragraph 3 above shall include
all overhead utilization by PERC with respect to ESI or ESI-East resources
through December 31, 1996 and all other amounts owed by PERC to ESI or ESI-East
as of March 27, 1997, including, but not limited to, any overpayments of
commissions with respect to ERX. PERC will, nevertheless, reimburse ESI and
ESI-East a reasonable, mutually agreed-upon amount, to be determined by the
parties, for overhead utilization through March 27, 1997; provided, however,
that it is nevertheless acknowledged that the overhead reimbursement shall be
less than the comparable amount for 1996 because PERC's 1997 business activity
has been materially lower than 1996's business activity; provided further that
there shall be no PERC utilization of ESI or ESI-East
<PAGE>
Edward L. Cain, Jr.
March 27, 1997
Page 3
resources after March 27, 1997 in any respect whatsoever.
5. As long as either you or Wayne G. Wickard own any interest in PERC,
whether directly or indirectly, PERC agrees that it will give ESI Risk
Management Agency, Inc., (another one of ESI's Agency, Inc.) and ESI Risk
Management Agency, Inc. shall in fact have at all such times a right of first
refusal with respect to all of PERC's stand-alone workers' compensation
business. All such business must be submitted to ESI Management Agency, Inc. for
approval or rejection and, if the business is rejected, then, and only then, may
PERC underwrite any such business or otherwise. accept such business. In all
other respects, however, PERC may compete with ESI, Camelback and/or ESI Risk
Management Agency, Inc., in the workers' compensation stand-alone business.
6. As part of this arrangement, ESI agrees to indemnify you
and to hold you harmless with respect to any lawsuits brought against you by any
ESI shareholder or other party, but only to the extent that such matters allege
(a) a breach of your Employment Agreement with ESI-East, (b) a breach of your
fiduciary duty as an ESI or ESI-East officer, director or employee, (c) a
diversion of corporate opportunity from ESI or ESI-East, or (d) any similar
breach of duty or obligation owed to ESI or ESI-East; provided, however, that
the alleged breach or diversion of corporate opportunity is predicated upon your
pre-March 27, 1997 relationship with PERC as a shareholder, officer or director
or because of your ownership or sale of PERC stock during the period from March
28, 1997 through December 31, 1997. The indemnity shall not, however, apply to
liability which you may have with respect to PERC operations not involving
allegations of the sort described in clauses (a), (b), (c) or (d) of this
paragraph 6.
7. Notwithstanding anything contained in your Employment
Agreement to the contrary, the covenants and provisions contained in this letter
agreement shall be controlling and the Employment Agreement shall be deemed
amended accordingly.
To confirm our understanding in these arrangements, please execute this
letter where indicated below.
<PAGE>
Edward L. Cain, Jr.
March 27, 1997
Page 4
Please note that, as this transaction involves a member of ESI's Board
of Directors and an ESI officer, ESI's obligations hereunder must be subject to
the approval of its Board of Directors. I am signing below, however, to confirm
to you that I, as Chief Executive Officer of ESI, am in agreement with the
foregoing and will recommend to the ESI Board of Directors, at the next meeting
of the Board, that they approve of the same.
Very truly yours,
EMPLOYEE SOLUTIONS, INC.
/s/ Marvin Brody
-------------------------
Marvin D. Brody
Chief Executive Officer
The foregoing has been reviewed by, and is confirmed and agreed to by
the undersigned, Edward L. Cain, Jr., 30 day of March, 1997.
Edward Cain, Jr.
-------------------
Edward L. Cain, Jr.
March 27, 1997
Edward L. Cain, Jr., President
Wayne G. Wickard, Secretary-Treasurer
PROFESSIONAL EMPLOYERS RESOURCE CORPORATION
RE: Professional Employers Resource Corporation, an
Indiana Corporation ("PERC")
Dear Ed and Wayne:
This letter is to confirm our understanding and agreement regarding the
financial consequences of certain activities PERC, a company owned by you, Wayne
G. Wickard and others, with respect to providing or brokering workers'
compensation and related services other than with or through Employee Solutions,
Inc. and its affiliated companies (collectively, "ESI").
Background
- ----------
As of January 1996, ESI had in place an unwritten policy whereby its
captive workers' compensation insurance company, Camelback Insurance Limited
("Camelback"), would not underwrite stand-alone workers' compensation insurance
risks with manual premiums under $50,000 per year, nor would cotton gin industry
risks be underwritten.
ESI its subsidiary, Camelback, have now modified their policy regarding
the types of stand-alone workers' compensation risks which will be underwritten
and it has now been decided that ESI will evaluate, and may underwrite, the
under $50,000 manual premium cases, as well as cotton gin industry risks.
In light of your relationship with ESI as an officer and director, PERC
and ESI have agreed as follows:
1. ESI agrees to release PERC from any liability with respect to PERC's
operations as of March 27, 1997 including, but not necessarily limited to,
PERC's participation in activities in exchange for a total payment from PERC to
ESI in the amount of $816,550, of which $543,55O has already been paid with
interest (at the rate of 6% per annum from January 1, 1997), no later than
December 31, 1997.
<PAGE>
Edward L. Cain, Jr.
Wayne Wickard
March 27, 1997
Page 2
2. The $816,550 amount referred to in pararagh 1 above shall include
all overhead utilization by PERC with respect to ESI or ESI-East resources
through December 31, 1996 and all other amounts owed by PERC to ESI or ESI-East
as of March 27, 1997, including. but not limited to, any overpayments of
commissions with respect to ERX. PERC will, nevertheless, reimburse ESI or
ESI-East a reasonable, mutually agreed-upon amount, to he determined by the
parties, for overhead utilization through March 27, 1997; provided, however,
that it is nevertheless acknowledged that the overhead reimbursement shall be
less than the comparable amount for 1996 because PERC's 1997 business activity
has been materially lower than 1996's business activity; provided, further, that
there shall be no PERC utilization of ESI or ESI-East resources after March 27,
1997 in any respect whatsoever.
3. As long as either you or Wayne G. Wickard own any interest in PERC,
whether directly or indirectly, PERC agrees that it will give ESI Risk
Management Agency, Inc.,(another one of ESI's subsidiary), and ESI Risk
Management Agency, Inc. shall in fact have at all such times of a right of first
refusal with respect to all of workers' compensation business. All such business
must be submitted to ESI Risk Management Agency, Inc. for approval or rejection
and, if the business is rejected, then, and only then, may PERC underwrite any
such business or otherwise accept such business. In all other respects, however,
PERC may compete with ESI, Camelback, Camelback and/or ESI Risk Management
Agency, Inc., in the workers' compensation stand-alone business.
4. As part of this arrangement, ESI agrees to indemnify PERC and to
hold PERC harmless with respect to any lawsuits brought against PERC by any ESI
shareholder or other party, but only to the extent that such matters allege (a)
a breach of your fiduciary duty as an officer or director of ESI, (b) a
diversion of corporate opportunity from ESI, or (c) any similar breach of duty
or obligation owed to ESI or ESI-East; provided, however, that the alleged
breach or diversion of corporate opportunity is predicated upon your pre-March
27, 1997 relationship with PERC as a PERC shareholder, officer or director. The
indemnification shall not, however, apply to liability which you may have with
respect to PERC operations not involving allegations of the sort described in
clauses (a), (b) or (c) of this paragraph 4.
To confirm our understanding in these arrangements, please execute this
letter where indicated below.
Please note that, as this transaction involves you, a member of ESI's
Board of Directors and an ESI officer, ESI's obligations hereunder must be
subject to the approval of its Board of Directors. I am signing below, however,
to confirm to you that I, as Chief Executive Officer of ESI, am in agreement
with the foregoing and will recommend to the ESI Board of Directors,
<PAGE>
Edward L. Cain, Jr.
Wayne Wickard
March 27, 1997
Page 3
at their next meeting, that they approve of the same.
Very truly yours,
EMPLOYEE SOLUTIONS, INC.
/s/Marvin Brody
------------------------
Marvin D. Brody
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMPANY'S FORM
10-Q FOR THE PERIOD ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 12,623
<SECURITIES> 13,500
<RECEIVABLES> 49,232
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 79,886
<PP&E> 1,349
<DEPRECIATION> 0
<TOTAL-ASSETS> 143,162
<CURRENT-LIABILITIES> 47,978
<BONDS> 0
0
0
<COMMON> 31,487
<OTHER-SE> 17,048
<TOTAL-LIABILITY-AND-EQUITY> 143,162
<SALES> 0
<TOTAL-REVENUES> 195,966
<CGS> 0
<TOTAL-COSTS> 185,698
<OTHER-EXPENSES> 8,378
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 942
<INCOME-PRETAX> 1,143
<INCOME-TAX> 457
<INCOME-CONTINUING> 686
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 686
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
