<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or 240.14a-12
</TABLE>
Employee Solutions, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rule 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
[EMPLOYEE SOLUTIONS INC. LOGO]
6225 NORTH 24TH STREET
PHOENIX, ARIZONA 85016
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JULY 9, 1997
------------------------
TO THE SHAREHOLDERS:
The Annual Meeting of Shareholders of Employee Solutions, Inc., an Arizona
corporation (the
"Company"), will be held on Wednesday, July 9, 1997 at 9:00 a.m. local time, at
The Scottsdale Plaza Resort, 7200 North Scottsdale Road, Scottsdale, Arizona for
the following purposes:
(1) To elect six directors to serve for the next year or until their
successors are elected;
(2) To consider and act upon a proposal to amend the Company's 1995
Option Plan to limit the number of shares of Common Stock for which any
individual may receive an option in a year to 250,000 shares; and
(3) To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on May 5, 1997 are
entitled to notice of and to vote at the Annual Meeting.
All shareholders are cordially invited to attend the Annual Meeting in
person.
By order of the Board of Directors
[Roy Flegenheimer Signature]
ROY FLEGENHEIMER
Secretary
Phoenix, Arizona
June 4, 1997
IMPORTANT: IT IS IMPORTANT THAT YOUR SHAREHOLDINGS BE REPRESENTED AT THIS
MEETING. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE TO
ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF MAILED IN
THE UNITED STATES.
<PAGE> 3
[EMPLOYEE SOLUTIONS, INC. LOGO]
6225 NORTH 24TH STREET
PHOENIX, ARIZONA 85016
------------------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
JULY 9, 1997
------------------------
SOLICITATION, EXECUTION AND REVOCATION OF PROXIES
Proxies in the accompanying form are solicited on behalf, and at the
direction, of the Board of Directors of Employee Solutions, Inc. (the
"Company"). All shares represented by properly executed proxies, unless such
proxies have previously been revoked, will be voted in accordance with the
direction on the proxies. If no direction is indicated, the shares will be voted
in favor of the proposals to be acted upon at the Annual Meeting. The Board of
Directors is not aware of any other matter which may come before the meeting. If
any other matters are properly presented at the meeting for action, including a
question of adjourning the meeting from time to time, the persons named in the
proxies and acting thereunder will have discretion to vote on such matters in
accordance with their best judgment.
When stock is in the name of more than one person, the proxy is valid if
signed by any of such persons unless the Company receives written notice to the
contrary. If the shareholder is a corporation, the proxy should be signed in the
name of such corporation by an executive or other authorized officer. If signed
as attorney, executor, administrator, trustee, guardian or in any other
representative capacity, the signer's full title should be given and, if not
previously furnished, a certificate or other evidence of appointment should be
furnished.
This Proxy Statement and the form of proxy which is enclosed are being
mailed to the Company's shareholders commencing on or about June 9, 1997.
A shareholder executing and returning a proxy has the power to revoke it at
any time before it is voted. A shareholder who wishes to revoke a proxy can do
so by executing a later-dated proxy relating to the same shares and delivering
it to the Secretary of the Company prior to the vote at the Annual Meeting, by
written notice of revocation received by the Secretary prior to the vote at the
Annual Meeting or by appearing in person at the Annual Meeting, filing a written
notice of revocation and voting in person the shares to which the proxy relates.
In addition to the use of the mails, proxies may be solicited by personal
interview, telephone and telegram by the directors, officers and regular
employees of the Company. Such persons will receive no additional compensation
for such services. Arrangements will also be made with certain brokerage firms
and certain other custodians, nominees and fiduciaries for the forwarding of
solicitation materials to the beneficial owners of Common Stock held of record
by such persons, and such brokers, custodians, nominees and fiduciaries will be
reimbursed for their reasonable out-of-pocket expenses incurred in connection
therewith. It is not anticipated that any other persons will be engaged to
solicit proxies. However, the Company may seek services of an outside proxy
solicitor in the event such services become necessary. All expenses incurred in
connection with this solicitation will be borne by the Company.
The mailing address of the principal corporate office of the Company is
6225 North 24th Street, Phoenix, Arizona 85016.
<PAGE> 4
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on May 5, 1997 (the
"Record Date") will be entitled to vote at the meeting. On the Record Date,
there were issued and outstanding 30,871,017 shares of Common Stock. Each holder
of Common Stock is entitled to one vote, exercisable in person or by proxy, for
each share of the Company's Common Stock held of record on the Record Date. The
presence of a majority of the shares of Common Stock entitled to vote, in person
or by proxy, is required to constitute a quorum for the conduct of business at
the Annual Meeting. The affirmative vote of a majority of such quorum is
required with respect to the approval of Proposal 2 set forth herein.
Each shareholder present, either in person or by proxy, will have
cumulative voting rights with respect to the election of directors. Under
cumulative voting, each shareholder is entitled to as many votes as is equal to
the number of shares of Common Stock of the Company held by the shareholder on
the Record Date multiplied by the number of directors to be elected, and such
votes may be cast for any single nominee or divided among two or more nominees.
The six nominees, or such fewer number of nominees as may stand for election,
receiving the highest number of votes will be elected to the Board of Directors.
There are no conditions precedent to the exercise of cumulative voting rights.
Unless otherwise instructed in any proxy, the persons named in the form of proxy
which accompanies this Proxy Statement (the "Proxy Holders") will vote the
proxies received by them for the Company's six nominees set forth in "Election
of Directors" below. If additional persons are nominated for election as
directors, the Proxy Holders intend, unless otherwise instructed in any proxy,
to vote all proxies received by them in such manner in accordance with
cumulative voting as will assure the election of as many of the Company's
nominees as possible, and, in such event, the specific nominees for whom votes
will be cast will be determined by the Proxy Holders. If authority to vote for
any nominee of the Company is withheld in any proxy, the Proxy Holders intend,
unless otherwise instructed in such proxy, to vote the shares represented by
such proxy, in their discretion, cumulatively for one or more of the other
nominees of the Company.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the inspectors of election appointed for the meeting and will determine whether
or not a quorum is present. The inspectors of election will include abstentions
and broker non-votes in the determination of the number of shares present for
quorum purposes. Abstentions are counted in tabulations of the votes cast on
proposals presented to shareholders, whereas broker non-votes are not counted
for purposes of determining whether a proposal has been approved.
All share and per-share information in this Proxy Statement has been
adjusted to reflect two-for-one stock splits effected in the form of 100% stock
dividends effective January 16, 1996 and July 26, 1996.
2
<PAGE> 5
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock at May 5, 1997 with respect to (i) each
person who beneficially owns more than 5% of the Company's outstanding Common
Stock including such person's address, (ii) each director of the Company and
each person nominated to become a director at the Annual Meeting, (iii) each of
the executive officers listed in the Summary Compensation Table below and (iv)
all directors and executive officers of the Company as a group. On May 5, 1997,
there were issued and outstanding 30,871,017 shares of Common Stock, each
entitled to vote at the Annual Meeting.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
-----------------------
NUMBER PERCENT
--------- -------
<S> <C> <C>
Harvey A. Belfer(2)............................................ 1,830,480 5.9%
6225 N. 24th Street
Phoenix, Arizona 85016
Marvin D. Brody(3)............................................. 2,709,088 8.8%
6225 N. 24th Street
Phoenix, Arizona 85016
Edward L. Cain, Jr. ........................................... 656,370 2.1%
Jeffery A. Colby(4)............................................ 26,694 *
Roy A. Flegenheimer(5)......................................... 349,999 1.1%
Robert L. Mueller(2)........................................... 80,000 *
Henry G. Walker................................................ 0 *
All executive officers and directors
as a group (10 persons)(6)................................... 5,702,630 18.5%
American Century Companies, Inc.(7)............................ 2,656,400 8.6%
4500 Main Street
Kansas City, MO 64111
Putnam Investments, Inc.(8).................................... 1,822,107 5.9%
One Post Office Square
Boston, MA 02109
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and generally includes voting or
investment power with respect to securities. In accordance with SEC rules,
shares which may be acquired upon conversion or exercise of stock options,
warrants or convertible securities which are currently exercisable or which
become exercisable within 60 days are deemed beneficially owned by the
optionee. Except as indicated by footnote, and subject to community property
laws where applicable, the persons or entities named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(2) Voting and investment power shared with spouse.
(3) Includes 2,309,088 shares held by a limited partnership of which Mr. Brody
and his spouse are the general partners and Mr. Brody, his spouse and adult
children are the limited partners. Also, includes 400,000 shares of Common
Stock held by an entity wholly-owned by Mr. Brody's spouse, as to which Mr.
Brody disclaims beneficial ownership.
(4) Includes 26,666 shares which Mr. Colby has the right to acquire upon the
exercise of stock options.
(5) Includes 331,999 shares which Mr. Flegenheimer has the right to acquire upon
the exercise of stock options.
(6) In addition to the options referred to in the above notes, includes 49,999
shares which other executive officers have the right to acquire upon the
exercise of stock options.
3
<PAGE> 6
(7) Information derived from a report on Schedule 13G dated February 5, 1997
filed by American Century Companies, Inc. ("ACC"), American Century
Investment Management, Inc. ("ACIM"), American Century Mutual Funds, Inc.
("ACMF") and James E. Stowers, Jr. ("Mr. Stowers"), reporting sole voting
and dispositive power as to 2,656,400 shares of Company Common Stock at
December 31, 1996. The report states that ACIM, a registered investment
advisor and wholly-owned subsidiary of ACC, manages investments of six
investment companies, including ACMF, and the assets of other institutional
investor accounts. At December 31, 1996, ACMF owned 2,600,000 of the shares
of Common Stock that were the subject of the report. ACC, as a result of its
control of ACIM, and Mr. Stowers, as a result of his control of ACC, are
also deemed to beneficially own all such shares deemed to be beneficially
owned by ACIM; however, Mr. Stowers, ACC and ACIM all disclaimed beneficial
ownership of the reported shares.
(8) Information derived from a report on Schedule 13G dated January 27, 1997
filed by Putnam Investments, Inc. ("PI"), Putnam Investment Management, Inc.
("PIM"), the Putnam Advisory, Inc. ("PAC") and Marsh & McLennan Companies,
Inc. ("MMC"), reporting beneficial ownership of an aggregate of 1,822,107
shares of Company common stock at December 31, 1996. The report states that
PIM, the investment advisor to the Putnam family of mutual funds, had shared
dispositive power as to 1,715,307 shares of Common Stock and that PAC,
investment advisor to Putnam institutional clients, had shared dispositive
power as to 106,800 shares of Common Stock, with shared voting power as to
60,100 of such shares. PIM and PAC are wholly-owned subsidiaries of PI,
which in turn is a wholly-owned subsidiary of MMC. Although PI reports
beneficial ownership of the shares held by PIM and PAC, MMC does not. PI and
MMC both disclaim beneficial ownership of the reported shares.
In 1996, the Company paid Marsh & McLennan, Incorporated, an affiliate of
MMC, approximately $150,000 for consulting and related services.
PROPOSAL 1 --
ELECTION OF DIRECTORS
Six directors are to be elected at the Annual Meeting. Unless otherwise
instructed, the Proxy Holders will vote the Proxies received by them for the
Company's nominees, Harvey A. Belfer, Marvin D. Brody, Edward L. Cain, Jr.,
Jeffery A. Colby, Robert L. Mueller, and Henry G. Walker. Each director will
hold office until the next annual meeting of shareholders and thereafter until
his successor is elected and has qualified. Cumulative voting is permitted under
Arizona law in the election of directors. The number of directors may be
increased to a maximum of nine.
If any nominee of the Company is unable or declines to serve as a director
at the time of the Annual Meeting, the proxies will be voted for any nominee who
shall be designated by the present Board of Directors to fill the vacancy. It is
not expected that any nominee will be unable or will decline to serve as a
director.
The names of the directors and certain information about them are set forth
below.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION WITH COMPANY SINCE
- --------------------------------------- --- --------------------------------------- --------
<S> <C> <C> <C>
Marvin D. Brody........................ 54 Chairman of the Board, President, Chief
Executive Officer and Director 1991
Harvey A. Belfer....................... 59 Director 1991
Edward L. Cain, Jr..................... 37 Executive Vice President -- Sales and
Marketing; Director 1995
Jeffery A. Colby....................... 43 Director; President of TEAM Services 1995
Robert L. Mueller...................... 69 Director 1995
Henry G. Walker........................ 50 Director 1996
</TABLE>
4
<PAGE> 7
Marvin D. Brody co-founded the Company in 1991. He has been a Director of
the Company since its inception, became the Company's Chief Executive Officer in
November 1994 and has served as President since June 1996. Prior to becoming the
Company's Chief Executive Officer, Mr. Brody was engaged in the private practice
of law since 1973. He graduated from John Marshall Law School with a Juris
Doctorate degree in 1969. Mr. Brody served as an outside director of Prime
Financial Partners M.L.P. since 1987 and has resigned effective April 23, 1996.
Harvey A. Belfer co-founded the Company in 1991 and has been a Director
since the Company's inception. He was also the Company's Chief Executive Officer
from its founding until November 1994 and its President from its founding until
June 1996. From 1984 until 1991, Mr. Belfer was an executive officer of Contract
Personnel Systems, Inc. and Corporate Personnel Services, Inc., both PEOs.
Edward L. Cain, Jr. has been a Director of the Company since July 1995 and
Executive Vice President -- Sales and Marketing since April 1997. He was
previously the Company's Vice President of Sales since April 1995. Mr. Cain has
been President of Employee Solutions -- East, Inc. ("ESEI"), a subsidiary of the
Company, since June 1994. See "Certain Transactions" under "Compensation
Committee Interlocks and Insider Participation." From 1990 until June 1994 he
was the Director of Sales and Marketing for Personal Benefits Group, an
Atlanta-based company that brokered PEO services. From 1987 to 1990, he was a
sales agent in CIGNA's individual financial service division in Springfield,
Massachusetts and later in Grand Rapids, Michigan.
Jeffery A. Colby has been a Director of the Company since November 1995.
Mr. Colby founded TEAM Services, L.P., a PEO in the music and advertising
industries, in 1992 and has been its Chief Executive Officer since 1994 and
President since January 1996. TEAM Services was acquired by the Company in 1996;
see "Certain Transactions" under "Compensation Committee Interlocks and Insider
Participation." Since December 1986, Mr. Colby has served as President of
Colbyco, Inc., a Chicago-based company which provides consulting, audit and
freight bill payment services for the transportation industry. From 1975 to
1986, Mr. Colby was a principal at the Chicago-based law firm of Fox & Grove.
Robert L. Mueller has been a Director of the Company since February 1995.
Mr. Mueller has been an independent consultant since 1993. From 1987 to 1993, he
was the President, Chief Operating Officer and a Director of Proler
International Corp., a steel recycler in Houston, Texas.
Henry G. Walker became a Director of the Company in November 1996. Mr.
Walker became President and Chief Executive Officer of Sisters of Providence
Health System, Seattle, in 1997. Previously, Mr. Walker was President and CEO of
HealthPartners of Arizona, Inc., a statewide managed care company, from 1996 to
1997, and President of Health Partners of Southern Arizona from 1992 to 1995.
COMPLIANCE WITH SECTION 16(A) REPORTING REQUIREMENTS
Under the securities laws of the United States, the Company's directors,
its executive officers, and persons holding more than 10% of the Company's
Common Stock are required to report their initial ownership of the Company's
Common Stock and any subsequent changes in that ownership to the Securities and
Exchange Commission (the "Commission"). Specific due dates for these reports
have been established and the Company is required to disclose any failure to
file by these dates. All of these filing requirements were satisfied during the
year ended December 31, 1996, except that Mr. Brody did not file on a timely
basis two reports relating to a series of transactions resulting from a single
sell order of his spouse. Because the transactions were effected over a number
of days at various prices, the transactions were reported as 22 separate line
items. The filings have been brought current by Mr. Brody. In making these
disclosures, the Company has relied solely on written representations of its
directors and executive officers and copies of the reports that they have filed
with the Commission.
5
<PAGE> 8
BOARD MEETINGS AND COMMITTEES
The Board of Directors held eight Directors' meetings during the fiscal
year ended December 31, 1996. No director attended fewer than 75% of the
aggregate of all meetings of the Board of Directors and any committee on which
such director served during the period of such service.
The Company's Audit Committee, which was formed in November, 1995, consists
of Messrs. Walker (Chair), Belfer and Mueller. The Audit Committee held one
meeting during 1996. The Company's Audit Committee reviews the Company's
financial reporting, relationships with its independent auditors, and other
matters affecting the financial statements of the Company.
The Company's Compensation Committee, which was formed in April 1996 and
commenced functioning in June 1996, consists of Messrs. Mueller (Chair) and
Belfer. The Compensation Committee acted by unanimous written consent on eight
occasions during 1996. The Compensation Committee reviews executive compensation
and stock option awards under the Company's stock option plans.
The Company does not have a nominating committee. Nominations of persons to
be directors and other functions of such committees are considered by the full
Board of Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, with respect to the years ended December
31, 1996, 1995 and 1994, compensation awarded to, earned by or paid to (i) the
Company's Chief Executive Officer and (ii) the other executive officers who were
serving as executive officers at December 31, 1996 and whose total salary and
bonus exceeded $100,000 in 1996.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
-------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($) (#)(1) ($)
- --------------------------------- ---- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Marvin D. Brody.................. 1996 $ 276,246 (3) -- $5,333(4)
Chairman, Chief Executive
Officer, 1995 165,992 $ 20,493(5) -- 5,244(4)
President(2) 1994 -- 10,394(5) -- 4,366(4)
Roy A. Flegenheimer.............. 1996 177,400 (3) 70,000 5,401(4)
Chief Operating Officer 1995 151,699 (3) 360,000(6) 5,508(4)
1994 138,846 (3) 160,000(6) 4,663(4)
</TABLE>
- ---------------
(1) Consist entirely of stock options; no stock appreciation rights ("SARs")
were granted or are outstanding.
(2) Compensated as Chief Executive Officer since January 1995; became President
in June 1996.
(3) Less than 10% of the total of annual salary.
(4) Term life and health insurance premiums.
(5) Automobile lease.
(6) Includes options to purchase 160,000 shares of Common Stock issued in
February 1994 which were canceled in April 1995 and simultaneously replaced
by options to acquire the same number of shares.
6
<PAGE> 9
OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)
The following table sets forth information about stock option grants during
the last fiscal year to the executive officers named in the Summary Compensation
Table receiving grants during such period. Mr. Brody did not receive option
grants.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
--------------------------- ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTION/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(2)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION -------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ------------------------------ ------------ ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Roy A. Flegenheimer........... 70,000 7.1% $ 14.50 6/25/01 $280,426 $619,688
</TABLE>
- ---------------
(1) Consist entirely of stock options and do not include SARs.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% or 10% compounded
annually from the date the respective options were granted to their
expiration date and are not presented to forecast possible future
appreciation, if any, in the price of the Common Stock. The potential
realizable value of the foregoing options is calculated by assuming that the
market price of the underlying security appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated
price. Based upon the $7.375 closing price of the Common Stock on May 5,
1997, on that date these options had no realizable value.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUE TABLE(1)
The following table sets forth information with respect to the executive
officers named in the Summary Compensation Table concerning option exercises
during the last fiscal year and the number and value of options outstanding at
the end of the last fiscal year. Mr. Brody did not exercise options in 1996 or
have options outstanding at year end.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END(#) FY-END ($)(2)
SHARES ACQUIRED VALUE REALIZED --------------------------- ---------------------------
NAME ON EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Roy A. Flegenheimer... 38,000 $315,300 288,666 203,334 $ 5,310,449 $ 2,772,071
</TABLE>
- ---------------
(1) No SARs are outstanding.
(2) Based on the last trade of the Company's Common Stock on the NASDAQ National
Market on December 31, 1996 at $20.50 per share. Based upon the $7.375
closing price of the Common Stock on May 5, 1997, on that date the value of
Mr. Flegenheimer's exercisable and unexercisable options was $1,521,708 and
$602,063, respectively.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
Roy A. Flegenheimer entered into an employment agreement with the Company
on April 21, 1993, which employment agreement has subsequently been amended to
revise Mr. Flegenheimer's compensation. The third amendment to Mr.
Flegenheimer's employment agreement became effective on October 1, 1995. The
third amendment set Mr. Flegenheimer's salary for the period from February 8,
1995 to September 30, 1995 at $98,808, from October 1, 1995 to February 7, 1996
at $60,577, from February 8, 1996 to February 7, 1997 at $175,000, and from
February 8, 1997 to February 7, 1998 at $185,000. Mr. Flegenheimer's agreement
also provided for the grant of certain stock options in 1993 and 1994. Mr.
Flegenheimer's employment agreement ends February 7, 1998, unless earlier
terminated.
Mr. Flegenheimer entered into a new employment agreement with the Company
on March 19, 1997, which terminated and replaced his previous employment
agreement. Under his new agreement,
7
<PAGE> 10
Mr. Flegenheimer earns a salary of $185,000, which will be reviewed annually by
the Company's Compensation Committee. The agreement also provides that if Mr.
Flegenheimer terminates his employment with the Company for any reason other
than for cause, by his disability, or by his death, within 12 months from events
which constitute a "change of control" (as defined in the agreement), Mr.
Flegenheimer will receive a lump sum equal to 2.99 times a base amount as well
as a continuation of his medical coverage and other benefits to which he, as a
terminated employee, was entitled at the time immediately prior to the change of
control. Mr. Flegenheimer's agreement extends indefinitely, but is terminable by
either the Company or Mr. Flegenheimer with stated notice. The Company has
entered into substantially similar employee agreements with two other executive
officers not named in the compensation table.
The Company's 1995 Option Plan provides that in the event of a merger,
consolidation or reorganization with another corporation in which the Company is
not the surviving corporation (an "Acquisition"), appropriate provision shall be
made with respect to outstanding and unexercised options to either (a)
substitute on an equitable basis appropriate shares of the surviving corporation
for such options or (b) cancel such options upon payment of the fair market
value of such options to the respective holders. The Company's 1993 Option Plan
provides that in the event of an Acquisition, appropriate provision shall be
made with respect to outstanding and unexercised options to either (a)
substitute on an equitable basis appropriate shares of the surviving corporation
for such options or (b) accelerate the vesting and permit the exercise of all
such options prior to such Acquisition.
COMPENSATION OF DIRECTORS
The Company's directors who do not receive a salary or commissions from the
Company receive $500 per each meeting attended, plus reimbursement for
reasonable out-of-pocket expenses incurred in attending Board of Directors'
meetings. Nonemployee directors of the Company are eligible for the grant of
stock options pursuant to the 1993 Option Plan, and are eligible under certain
circumstances for option grants under a formula grant provision of the 1995
Option Plan. Under the provisions of the 1995 Option Plan in effect prior to
June 1996, every nonemployee director of the Company was automatically granted
options to acquire 80,000 shares of the Company's Common Stock upon becoming a
director, and subsequently was automatically granted an additional 80,000
options at the fifth annual meeting of shareholders following the initial grant
if such director was still a nonemployee director of the Company at that time.
In June 1996, the 1995 Option Plan was altered to provide for annual grants of
options for 2,500 shares of Common Stock upon election or at the date of the
annual meeting (or other day of election) for each non-employee director for ten
year terms; provided, however, that directors elected prior to June 1996 are not
eligible to receive such options until the year 2000 annual meeting of
shareholders.
In 1995, Robert L. Mueller and Jeffery A. Colby, both at that time
nonemployee directors, were each granted options for 80,000 shares of Common
Stock, with an exercise price equal to the fair market value of the Common Stock
on the date of grant. Mr. Mueller's options were immediately exercisable, and
Mr. Colby's options vest in equal installments on the first three anniversaries
of the date of grant. Mr. Walker was granted an option for 2,500 shares of
Common Stock, with an exercise price equal to the $21.25 market value of the
Common Stock on the date of grant, upon his election to the Board in November
1996; his options vest in equal installments on the first three anniversaries of
grant.
Harvey A. Belfer entered into a five-year employment agreement with the
Company effective January 1, 1993. Mr. Belfer also agreed not to engage in
certain activities that compete with the Company until two years after the
termination of the employment agreement. Mr. Belfer retired as President
effective June 26, 1996, at which time his employment agreement was terminated.
The Board of Directors replaced Mr. Belfer's employment agreement with a
five-year consulting agreement which provides for compensation of $35,000 per
year and contains non-competition provisions; $20,417 was paid to Mr. Belfer in
1996 under this agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors performed the functions of a compensation committee
from January until April 1996. During that time, the members of the Board of
Directors were Messrs. Belfer, Brody, Mueller, Cain and Colby. In addition to
being directors of the Company, Mr. Brody is the Company's Chairman and Chief
8
<PAGE> 11
Executive Officer, and became President in June 1996, Mr. Belfer was the
President of the Company until June 1996 and Edward Cain is the Company's Vice
President of Sales and the President of a subsidiary. As the result of an
acquisition, Mr. Colby became the employee of a subsidiary of the Company in
June 1996.
On April 30, 1996, the Board appointed a Compensation Committee which was
then comprised of Robert Mueller and Jeffery Colby, both of whom were then
outside directors. The Compensation Committee commenced functioning on June 26,
1996. As indicated above and in "Certain Transactions" below, Mr. Colby became a
Company employee in June 1996. Effective August 1, 1996, Harvey Belfer replaced
Mr. Colby on the Compensation Committee.
Certain of the members of the Board of Directors have engaged in certain
relationships and related transactions with the Company which in the case of
Messrs. Belfer, Cain and Colby are described immediately below in "Certain
Transactions" and in the case of Mr. Belfer are described immediately above in
"Compensation of Directors."
CERTAIN TRANSACTIONS
ESEI Acquisition/Cain Employment Agreement
Effective June 1994, the Company entered into an agreement with Mr. Cain,
an officer of the Company since that time and a Director of the Company since
July 1995, to conduct business in the Southeastern United States pursuant to a
joint venture operating under the name of Employee Solutions -- East, Inc.
("ESEI"). ESEI was 99% owned by Mr. Cain, and 1% owned by the Company. At that
time, the Company received an option to acquire Mr. Cain's interest in ESEI
commencing June 1995 at a price equal to three times certain annualized fees.
The initial term of the venture was one year and was to be automatically
extended for an additional two-year period unless the Company exercised its
option to purchase ESEI, during which period the Company provided certain
support services and financial support to ESEI. In 1994, Mr. Cain received
warrants to acquire 400,000 shares of the Company's Common Stock at an exercise
price of $2.13 per share which were to expire through November 10, 2004, and
were exercisable in five years or sooner if certain events occur. In April 1995,
such warrants were replaced with stock options granted under the 1995 Plan and
exercisable at the same price.
Effective January 1, 1996, the Company acquired the remaining 99% equity
interest in ESEI from Mr. Cain pursuant to its option. The base purchase price
consisted of 648,000 unregistered shares of Common Stock. Mr. Cain received
piggyback registration rights as to these shares during the period July 1
through December 31, 1996 and one demand registration right exercisable during
1997. In July 1996, the Company filed a registration statement registering such
shares for resale by Mr. Cain.
Mr. Cain was required to sign a promissory note in connection with the ESEI
acquisition in the principal amount of $385,624 payable, together with interest
at 8% per annum, on December 31, 1996 to reimburse the Company for certain
expenses incurred by ESEI. Such amounts have been repaid to the Company.
ESEI had entered into a five-year employment agreement beginning June 23,
1994 with Mr. Cain under which he served as ESEI's president and received cash
commissions, reimbursement of certain expenses and certain other compensation.
The Company guaranteed payment and performance of ESEI's obligations under the
employment agreement with Mr. Cain. Mr. Cain entered into an Amended and
Restated Employment Agreement with the Company effective January 1, 1996. The
agreement provides for compensation in the form of commissions based upon
administrative fees collected from the Company's PEO business and contains
non-competition provisions which include certain exceptions during the term of
the employment agreement and thereafter. The term of Mr. Cain's employment
agreement ends June 23, 1999, unless earlier terminated.
Other Cain Arrangements
Under their noncompetition arrangements with the Company, Mr. Cain and
another person are permitted to sell certain PEO services which have been
declined by the Company, do not otherwise meet Company standards or do not meet
certain other conditions. Mr. Cain is required to pay the Company 50% of all
commissions and similar compensations which he receives for such brokerage. The
amount paid in 1996 was
9
<PAGE> 12
approximately $24,975. In addition, Professional Employer Resources Corporation
("Perc"), a company jointly owned by those individuals, has an arrangement with
the Company under which it receives commissions for the referral of new business
to the Company; a Company subsidiary performs certain administrative services on
behalf of Perc.
In 1996, the Company paid Perc $352,648 in aggregate commissions for the
referral of business (net of an adjustment described below). Perc also conducted
a number of activities in 1996 which were ultimately agreed among Mr. Cain, the
other individual and the Company that, although they were conducted in good
faith, may have been beyond the scope of activities which the individuals were
permitted to conduct. Perc has reimbursed the Company $543,550, constituting its
1996 estimated earnings resulting from these activities. In addition, Perc has
agreed to pay the Company $273,000 (plus 6% interest from January 1, 1997) not
later than December 31, 1997; that amount represents $157,000 in payment for
administrative services performed for Perc by a Company subsidiary in 1996 and
$116,000 representing an overpayment by the Company to Perc resulting from a
determination that commissions were not due with respect to a transaction. Mr.
Cain has agreed with the Company to divest his interest in Perc prior to the end
of 1997.
In certain instances, if it is determined upon review of year end
information that commissions have been overpaid during the course of the year,
persons who received those commissions payments are required to repay them to
the Company. During 1996, the Company overpaid commissions of up to $123,000 to
Mr. Cain, in addition to the adjustment for Perc referred to above. Mr. Cain and
the Company have agreed to reconcile final 1996 commissions and complete
repayments by the end of 1997.
TEAM Services Acquisition/Colby Employment Agreement
On June 22, 1996, the Company acquired all the outstanding capital stock of
GCK Entertainment Service I, Inc. and Talent Entertainment and Media Services,
Inc. ("TEAM Services"), a Burbank, California based company specializing in
leasing commercial talent, musicians, and recording engineers to the music and
advertising segments of the entertainment industry. In connection with the
acquisition, the Company assumed net liabilities of approximately $825,000. The
total purchase price will be four times total TEAM Services' pre-tax income for
the 12-month period ending June 30, 1999. The purchase price will be paid in the
form of net assumed liabilities and unregistered Common Stock. Any unregistered
shares of Common Stock which may be issued would be entitled to certain
piggy-back and demand registration rights. There is no stated maximum
consideration payable in the transaction. In connection with the acquisition,
the TEAM Services itself paid $41,000 of expenses properly allocable to the
former TEAM Services shareholders, which the director and other shareholders
have agreed to repay at December 31, 1996.
Mr. Colby, a member of the Company's Board of Directors since November
1995, was a shareholder of TEAM Services, and served as Chief Executive Officer
of TEAM Services since 1993. In connection with the TEAM Services acquisition,
Mr. Colby entered into a three-year employment agreement with the Company
pursuant to which he will continue to act as TEAM Services' President and will
provide, among other services, certain marketing services. Mr. Colby will be
compensated by means of a base salary of $75,000 per year, plus commissions
equivalent to those of Company regional sales vice presidents, but not less than
$60,000.
Other
Mr. Belfer is part owner of M.D. Labs, Inc. ("MD"), a company which
utilizes the Company's employee leasing services. The Company billed MD $632,891
for employee leasing services during 1996.
COMPENSATION COMMITTEE AND BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
Until April 1996, the Board of Directors performed the functions of a
compensation committee. The Board of Directors, with Mr. Brody abstaining,
decided on all aspects of the compensation for the Chief Executive Officer. The
Compensation Committee was formed in April 1996, and first met in June 1996, and
is responsible for:
(1) reviewing and approving the annual salary, bonus and other
benefits, direct and indirect, including perquisites and personal benefits,
to be paid or awarded to key executives;
10
<PAGE> 13
(2) reviewing and approving new compensation and stock plans and
changes to existing plans; and
(3) administering the incentive compensation plans, stock option and
other stock-based plans and other employee benefit plans of the Company and
its subsidiaries or establishing committees to perform such functions.
Prior to April 1996, the Company had a Stock Option Committee which was
comprised of Messrs. Belfer and Brody; it was responsible for administering the
incentive compensation plans, stock option and other stock-based plans to the
Stock Option Committee. The Compensation Committee also replaced the Stock
Option Committee in 1996.
In light of the foregoing, this Report has been prepared by all of the
members of the Board of Directors in 1996 prior to April 1996, which also
includes all persons serving on the Compensation Committee and Stock Option
Committee members during 1996.
COMPENSATION PHILOSOPHY
The general philosophy of the Company's executive compensation program is
to offer key executives compensation that is competitive in the marketplace yet
also based on the Company's performance and the employee's individual
contribution and performance. The Company's executive compensation policies are
intended to motivate and reward executives for long-term strategic management
and the enhancement of shareholder value through cash payments (salary) and
equity incentives (in the form of stock options). The executive compensation
objectives of the Company are to attract and retain highly qualified managers
through competitive salary and benefit programs, encourage extraordinary effort
on the part of management through well-designed incentive opportunities and
contribute to the short- and long-term interests of the Company's shareholders.
The Company's executive compensation program consists of two key elements,
an annual component (salary) and a long-term component (stock options). The
Company's policies with respect to each of these elements, as well as the basis
for determining the compensation of Mr. Brody, are described below.
SALARY
Salaries for executive officers are determined by evaluating several
factors, including the executive's individual performance, experience and level
of responsibility, as well as compensation data for executives with comparable
responsibilities in the Company. The Company did not utilize an independent
consulting firm in formulating compensation decisions. Executive officer
salaries for fiscal 1996 were set by the Board of Directors on a case by case
basis, frequently through the use of employment agreements. The Company's
Executive Vice President -- Sales and Marketing is compensated by commissions
and does not receive a salary. The Company believes this arrangement provides
incentives appropriate for such position.
The Chief Executive Officer's salary for fiscal 1996 was set by the Board
of Directors, with Mr. Brody abstaining. Several factors were considered in
determining the Chief Executive Officer's salary, primarily including Mr.
Brody's equity ownership position in the Company, his individual performance,
experience and level of responsibility, the increasing revenues and
profitability of the Company during 1995, the growth of the Company via
acquisitions in 1995, the expected continuation of expansion by acquisitions in
1996, the increases in Mr. Brody's duties as a result of Mr. Belfer's expected
retirement as president in June 1996 and the Company's financial situation. The
Board of Directors did not utilize any particular mathematical formula or other
specific objective standards in determining Mr. Brody's current salary.
The Company did not award cash bonuses to its executive officers in 1996.
However, in 1997 the Company intends to consider the use of cash bonuses as an
additional method of linking an executive officer's compensation to individual
and/or Company performance.
STOCK OPTIONS
Stock-based compensation is viewed as a critical incentive component of the
Company's overall executive compensation program because it directly ties an
executive's compensation to the value realized by the Company's shareholders and
because it permits the Company to recruit and retain top talent. Grants of stock
11
<PAGE> 14
options are made under two plans, each of which has been approved by the
Company's shareholders. With respect to the option grants made to employees and
executive officers of the Company, the existing number of options held by each
proposed optionee is considered, with a goal of increasing the equity incentive
of the optionees.
In April 1993, the Company's Board of Directors adopted and the Company's
shareholders approved the 1993 Employee Incentive Stock Option Plan (the "1993
Option Plan") under which incentive stock options and nonqualified stock options
may be granted to executive officers, other key employees, nonemployee directors
and others whose participation is deemed to be in the Company's best interest.
During fiscal 1996, options to purchase a total of 2,000 shares of the Company's
Common Stock were granted under the 1993 Option Plan to the Company's employees.
No such stock options were granted to the Company's executive officers named in
the Summary Compensation Table herein.
In April 1995, the Company's Board of Directors adopted the 1995 Stock
Option Plan (the "1995 Option Plan"), which was approved by the Company's
shareholders in July 1995 and amended in 1996, with shareholder approval to
increase the number of shares and make other changes. (See Proposal 2 below
regarding a proposed further amendment of the 1995 Option Plan.) Under the 1995
Option Plan, incentive stock options and nonqualified stock options may be
granted to executive officers, other key employees, nonemployee directors and
others whose participation is deemed to be in the Company's best interest.
During fiscal 1996, options to purchase a total of 980,579 shares of the
Company's Common Stock were granted under the 1995 Option Plan to the Company's
employees, of which 70,000 were granted to the executive officers named in the
Summary Compensation Table herein.
Because of his significant ownership interest in the Company, no stock
options have been granted to the Company's Chief Executive Officer. The
Compensation Committee may consider the award of options to Mr. Brody in the
future depending on the nature of his overall compensation arrangements.
OTHER COMPENSATION
In addition to salaries and stock options, the Company provides
compensation in the form of automobile, telephone expenses and term life and
health insurance premiums to its Chief Executive Officer and certain of its
executive officers.
SECTION 162(M)
Section 162(m) of the Internal Revenue Code limits, to one million dollars,
the deductibility by a publicly held corporation of compensation paid in a
taxable year to the Chief Executive Officer and any other executive officer
whose compensation is required to be reported in the Summary Compensation Table.
Qualified performance-based compensation will not be subject to the deduction
limit if certain conditions are met, including a condition that the performance
goals under which the compensation is paid must be established by a committee
comprised solely of two or more "outside directors." The Board of Directors, and
the Stock Option Committee as comprised prior to June 1996, did not satisfy that
requirement. It is possible that executive compensation could exceed the Section
162(m) deductibility limit in certain cases, subject to the timing of exercises
of stock options and the market prices of the Company's Common Stock at the time
of such exercises.
Respectfully submitted,
HARVEY A. BELFER
MARVIN D. BRODY
EDWARD L. CAIN, JR.
JEFFERY A. COLBY
ROBERT L. MUELLER
12
<PAGE> 15
SHAREHOLDER RETURN COMPARISON
Set forth below is a graph comparing the percentage change in the
cumulative total shareholder return on the Company's Common Stock with the
cumulative total return of the Standard & Poor's 500 Stock Index and a Peer
Group (as defined below) for the period commencing August 12, 1993 (the date on
which trading in the Company's Common Stock commenced) and ending December 31,
1996. Shareholder returns are calculated based on the closing price of the
Company's Common Stock on the relevant dates for each measurement period. The
graph assumes that $100 was invested on August 12, 1993 in Company Common Stock,
in the Standard & Poor's 500 Stock Index and the Peer Group and that, as to such
indices, dividends were reinvested. The Company has not, since its inception,
paid any dividends on the Common Stock.
The peer group used for this chart consists of AccuStaff Incorporated,
Automatic Data Processing, Inc., Barrett Business Services, Inc., Career
Horizons, Inc., Digital Solutions, Inc. and Paychex Inc. (the "Peer Group").
Although the Company does not consider the companies in the Peer Group to be
direct competitors operating in exactly the same line of business as the
Company, management believes that there are no other comparable companies whose
shares were publicly traded during all relevant periods, and many analysts of
the Company view the temporary services and payroll processing businesses to be
most comparable to the employee leasing business. Accordingly, the Company has
selected a Peer Group composed of companies engaged in such businesses.
Historical stock price performance shown on the graph is not necessarily
indicative of future price performance.
<TABLE>
<CAPTION>
Measurement Period Employee
(Fiscal Year Covered) Solutions S&P Peer Group
<S> <C> <C> <C>
12-Aug-93 100.00 100.00 100.00
1993 150.00 105.39 113.14
1994 145.00 106.78 122.89
1995 680.00 146.90 170.54
1996 1640.00 180.64 212.32
</TABLE>
13
<PAGE> 16
PROPOSAL 2 --
APPROVAL OF AN AMENDMENT OF THE EMPLOYEE SOLUTIONS, INC.
1995 STOCK OPTION PLAN TO LIMIT ANNUAL INDIVIDUAL GRANTS
The Employee Solutions, Inc. 1995 Option Plan was adopted by the Board of
Directors on April 6, 1995 and was approved by the Company's shareholders on
July 12, 1995. It was amended, to increase the number of shares subject to
option and make certain other changes, by the Board of Directors on April 30,
1996, and the amendments were approved by Company shareholders on June 26, 1996.
Stock options play a key role in the Company's ability to recruit, reward and
retain executives and key employees. The Company believes that equity based
incentive programs help insure a tight link between the interests of its
shareholders and employees and enhance the Company's ability to continue
recruiting and retaining top talent.
The Board of Directors proposes amendment to the 1995 Option Plan to limit
the number of shares of Company Common Stock which may be subject to an option
granted to any individual in any calendar year to 250,000 shares. The purpose of
this amendment is to comply with provision of Section 162(m) of the Internal
Revenue Code which provides that, except in the case of specified compensation
tied to performance, a public company is denied a tax deduction for compensation
to any individual executive officer over $1 million in any calendar year. One of
the conditions for that exemption is an annual limit on benefits which may be
received by an executive officer; Internal Revenue Service regulations require
that adoption of such a limit may be subject to shareholder vote.
Because of the composition of the Board of Directors in the past, the
Company has generally not had a Compensation Committee which met the
"independence" standards required by Section 162(m). Because the Company now
believes it will be in a position in the future to meet those standards, it
wishes to take this action to preserve the deductibility of compensation
attributable to future option grants.
The 250,000 share annual limit per individual (which is subject to
adjustment of the case of future stock dividends, splits or similar
recapitalizations) was chosen to provide a sufficiently large number of shares
to appropriately incent an outstanding individual to accept or retain an
executive officer position if that were to be in the Company's and the
shareholders' best interests, yet also provide an upper limit qualifying for
Section 162(m) standards. The Company and the Board of Directors have no current
plans with respect to any such offer, and currently anticipate that individual
option grants will be well below that level except in extraordinary
circumstances.
In the event the proposal is not approved by shareholders, the 1995 Option
Plan will continue but the Company may not have the benefit of certain tax
deductions in the future. Therefore, the Board of Directors unanimously
recommends a vote for the proposal.
TEXT OF AMENDMENT
If the proposal is approved by shareholders, the 1995 Option Plan would be
amended by adding the following sentence to Section 5 of the Plan:
No individual shall be granted options for more than 250,000 shares in any
calendar year.
SUMMARY OF 1995 OPTION PLAN
The summary of the 1995 Option Plan included in this Proxy Statement is
qualified in its entirety by the specific language of the 1995 Option Plan.
Copies of the 1995 Option Plan are available to any shareholder upon request
addressed to Investor Relations Department, Employee Solutions, Inc., 6225 North
24th Street, Phoenix, Arizona 85016.
Purposes. The purposes of the 1995 Option Plan are to attract and retain
the best available employees, directors and third parties who can provide
valuable services to the Company or any parent, subsidiary or affiliate, to
provide additional incentive to such persons, and to promote the success of the
Company's business.
14
<PAGE> 17
Administration and Share Reserve. A total of 3,500,000 shares of the
Company's Common Stock are authorized for issuance under the 1995 Option Plan.
As of May 5, 1997, 270,327 shares have been issued upon exercise of stock
options and a total of 2,583,249 shares were subject to outstanding options
granted under the 1995 Option Plan, leaving 646,424 shares remaining for future
option grant.
The 1995 Option Plan is administered by the Board of Directors or by a
committee of directors appointed by the Board and constituted so as to permit
the 1995 Option Plan to comply with the "disinterested administration"
provisions under Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of
1934. The administering body is referred to herein as the "Committee." The
Committee determines those persons to whom stock options will be granted, the
terms of such grants and the number of shares subject to options. The 1995
Option Plan provides for the grant of options which qualify as "incentive stock
options" (sometimes referred to herein as "ISOs") under Section 422 of the
Internal Revenue Code (the "Code") and nonstatutory stock options which do not
specifically qualify for favorable income tax treatment under the Code
(sometimes referred to herein as "NSOs").
Eligibility. Any employee of the Company or any parent, subsidiary or
affiliate is eligible to receive options under the 1995 Option Plan, provided
that incentive stock options may only be granted to employees of the Company or
any parent or subsidiary of the Company. Nonstatutory options may also be
granted to other persons who are not officers, directors or employees, but whose
participation is deemed to be in the Company's best interests. As of May 5,
1997, approximately 220 employees (including seven executive officers and
directors) and two nonemployee directors were eligible to participate in the
1995 Option Plan.
Nonemployee directors automatically receive nonqualified options to acquire
2,500 shares of the Company's Common Stock upon their initial election and, at
each subsequent annual meeting of shareholders. Options granted pursuant to the
automatic grant provision have a 10-year term and vest in equal installments on
each of the first three anniversaries of the date of grant subject to continued
board service. (Prior to 1996, the 1995 Stock Option Plan provided for a grant
of options for 80,000 shares upon becoming a director, and an additional 80,000
shares on the fifth anniversary thereof.)
Stock Option Programs. Certain employees of ESEI, ESI Risk Management
Agency ("RMA") and ESI America, wholly-owned subsidiaries of the Company, are
eligible to receive grants of stock options under the 1995 Stock Option Plan
pursuant to stock option programs. Pursuant to the ESEI stock option program,
regional vice presidents of ESEI are eligible to receive stock options based on
their production, subject to conditions with respect to the level of ESEI's
ongoing Professional Employer Organization ("PEO") business. Stock options
granted to the regional vice presidents under the ESEI stock option program vest
based on years of continuous service as a regional vice president. Pursuant to
the RMA stock option program, the National Marketing Director of RMA is eligible
to receive stock options based on volume of workers' compensation premium. Stock
options granted to the National Marketing Director under the RMA stock option
program are exercisable for five years after the date of issue. The ESI and RMA
programs are terminable at the discretion of the Board of Directors. Two former
officers of ESI America are entitled to receive options at the end of each of
the three years of their employment agreements (which commenced effective
October 2, 1995), subject to achievement of profitability targets. All options
granted under these programs will have an exercise price not less than the fair
market value of the Company's Common Stock on the date of grant. No options were
granted under these programs in fiscal 1996.
Stock Subject to the 1995 Option Plan. The aggregate number of shares
which may be issued pursuant to the exercise of options granted under the 1995
Option Plan currently is subject to adjustments in certain circumstances,
including reorganizations, stock splits, reverse stock splits, stock dividends,
spin-offs and other distributions of assets to shareholders. If any outstanding
option grant under the 1995 Option Plan for any reason expires or is terminated,
the shares of Common Stock allocable to the unexercised portion of the option
grant shall again be available for options under the 1995 Option Plan as if no
options had been granted with respect to such shares.
Terms and Conditions of Options. Stock options granted under the 1995
Option Plan may have a maximum term of 10 years (five years in the case of
incentive stock options granted to a holder of more than 10% of the Company's
stock). The per-share exercise price of incentive stock options may not be less
than the
15
<PAGE> 18
fair market value of the Common Stock (110% of the fair market value in the case
of a holder of more than 10% of the Company's stock) on the date of grant. The
exercise price of nonstatutory stock options may be any amount as determined by
the Committee in its discretion. The aggregate fair market value of shares with
respect to which incentive stock options are exercisable for the first time,
during any calendar year by any holder of incentive stock options, cannot exceed
$100,000, with the fair market value of such shares determined as of the time
the incentive stock options for such shares were granted. Options are not
transferable except that the Committee in its discretion may grant options that
are transferable to immediate family members of the optionee or to trusts or
partnerships for such family members. Options can be exercised only while an
optionee is providing services for the Company or any parent, subsidiary or
affiliate, except that an option may be exercised within certain periods of time
after termination of employment other than for cause and in the event of
retirement, death or permanent disability.
Payment of the exercise price may be made in cash, or, if permitted by the
grant, by transferring to the Company shares of the Company's Common Stock at
fair market value on the date of exercise, provided that the optionee held the
shares for at least six months. At the discretion of the Committee, the Company
may extend credit to finance option exercises. Subject to certain limitations,
the Committee may modify, extend or renew outstanding options, reduce the
exercise price of options, accept the surrender of outstanding options and grant
new options in substitution. If this proposal is adopted by shareholders, no
individual may be granted options for more than 250,000 shares in any calendar
year. That amount is subject to adjustment in the case of future stock splits,
stock dividends, recapitalizations and similar changes. Each option may have
additional terms and conditions consistent with the 1995 Option Plan as
determined by the Committee.
Accelerating Events. Unless otherwise provided in the grant letter, in the
event of a merger, consolidation or reorganization with another corporation in
which the Company is not the surviving organization, shares subject to
outstanding options may be substituted with shares from the surviving
corporation, or options may be canceled and the optionee paid the excess of fair
market value over the exercise price multiplied by the number of shares subject
to options. Upon dissolution or liquidation of the Company, the optionee shall
receive a cash payment computed in the manner described in the preceding
sentence.
Termination or Amendment of the 1995 Option Plan. The 1995 Option Plan
provides that the Board may at any time terminate or amend the 1995 Option Plan
without shareholder approval except where doing so would result in
non-compliance with Rule 16b-3, the Code, or other applicable laws or
regulations. The provisions for automatic grants to nonemployee directors can
not be amended more than once every six months other than to comport with
changes in applicable law or regulations. Unless sooner terminated by the Board
or by the purchase of all stock subject to the 1995 Option Plan, the 1995 Option
Plan will expire in April 2005.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the Company's understanding of the
principal Federal income tax consequences of grants or awards made under the
1995 Option Plan based upon the applicable provisions of the Code in effect on
the date hereof.
Nonqualified Stock Options ("NSO"). An optionee will not recognize taxable
income at the time an NSO is granted. Upon exercise of an NSO, an optionee will
recognize compensation income in an amount equal to the difference between the
exercise price and the fair market value of the shares at the date of exercise.
The amount of such difference will be a deductible expense to the Company for
tax purposes. On a subsequent sale or exchange of shares acquired pursuant to
the exercise of an NSO, the optionee will recognize a taxable gain or loss,
measured by the difference between the amount realized on the disposition and
the tax basis of such shares. The tax basis will, in general, be the amount paid
for the shares plus the amount treated as compensation income at the time the
shares were acquired pursuant to the exercise of the option.
When the NSO exercise price is paid in stock, the exercise is treated as:
(a) a tax-free exchange of the shares of stock (without recognizing any taxable
gain with respect thereto) for a like number of new shares (with such new shares
having the same basis and holding period as the old); and (b) an issuance of a
number of additional shares having a fair market value equal to the "spread"
between the exercise price and the fair
16
<PAGE> 19
market value of the shares for which the NSO is exercised. The optionee's basis
in the additional shares will equal the fair market value of the shares on the
date of exercise and the holding period for such shares will begin on the date
the optionee acquires them. This mode of payment does not affect the ordinary
income tax liability incurred upon exercise of the NSO described above.
Incentive Stock Options ("ISO"). An optionee will not recognize taxable
income at the time an ISO is granted. Further, an optionee will not recognize
taxable income upon exercise of an ISO if the optionee complies with two
separate holding periods: shares acquired upon exercise of an ISO must be held
for at least two years after the date of grant and for at least one year after
the date of exercise. The difference between the exercise price and the fair
market value of the stock at the date of exercise is, however, an alternative
minimum tax preference item. When the shares of stock received pursuant to the
exercise of an ISO are sold or otherwise disposed of in a taxable transaction
and the optionee has complied with the appropriate holding periods, the optionee
will recognize a capital gain or loss, measured by the difference between the
exercise price and the amount realized.
Ordinarily, an employer granting ISOs will not be allowed any business
expense deduction with respect to stock issued upon exercise of an ISO. However,
if all the requirements for an ISO are met except for the holding period rules
set forth above, the optionee will be required, at the time of the disposition
of the stock, to treat the lesser of the gain realized or the difference between
the exercise price and the fair market value of the stock at the date of
exercise as ordinary income and the excess, if any, as capital gain. The Company
will be allowed a corresponding business expense deduction to the extent of the
amount of the optionee's ordinary income.
VALUATION
As of May 5, 1997, the last trade price for the Company's Common Stock, as
reported by the NASDAQ National Market, was $7.375 per share.
OPTION GRANTS
As of May 5, 1997, the following persons, or groups of persons, have been
granted the indicated number of options under the 1995 Option Plan:
<TABLE>
<CAPTION>
INDIVIDUAL/ GROUP POSITION NUMBER
- ------------------------- ------------------------------------------------------- ----------
<S> <C> <C>
Marvin D. Brody.......... Chairman, President and CEO and Director 0
Roy A. Flegenheimer...... Chief Operating Officer 370,000
Edward L. Cain, Jr. ..... Executive Vice President -- Sales and Marketing,
Director 400,000
Harvey A. Belfer......... Director 0
Jeffery A. Colby......... Director and President of TEAM Services 80,000
Robert L. Mueller........ Director 80,000
Henry G. Walker.......... Director 2,500
All executive officers as a group (six persons).................................... 1,090,000
All directors who are not executive officers, as a group (four persons)............ 162,500
All non-executive officer and non-director employees as a group(1)................. 1,601,076
</TABLE>
- ---------------
(1) Excludes options which terminated without exercise.
As of the date of this proxy statement, there has been no determination by
the Committee with respect to future awards under the 1995 Option Plan. The
table of option grants under "Executive Compensation -- Option/SAR Grants in the
Last Fiscal Year" provides information with respect to the grant of options
under the 1995 Option Plan during the last fiscal year to the executive officers
named in the Summary Compensation Table. For information regarding the options
granted to the non-executive officer directors during the past fiscal year, see
"Executive Compensation -- Compensation of Directors."
17
<PAGE> 20
RECOMMENDATION
The Board of Directors unanimously recommends that the shareholders vote
FOR approval of this proposal to amend the Employee Solutions, Inc. 1995 Option
Plan to limit annual individual grants.
INDEPENDENT AUDITORS
The Board of Directors has appointed Arthur Andersen LLP as independent
auditors to audit the financial statements of the Company for the fiscal year
ending December 31, 1997. It is the Company's policy not to recommend to the
security holders an independent auditor for election, approval or ratification.
Arthur Andersen LLP's representatives are expected to be present at the Annual
Meeting with the opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions. Arthur Andersen
LLP has audited the Company's financial statements since November 30, 1994.
OTHER MATTERS
The Company knows of no other matters to be submitted at the Annual
Meeting. If any other matter properly comes before the Annual Meeting, it is the
intention of the persons named in the enclosed proxy card to vote the shares
they represent as the Board of Directors may recommend.
SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company which are intended to be presented
by such shareholders at the Company's Annual Meeting for the fiscal year ending
December 31, 1997 must be received by the Company no later than February 9, 1998
in order that they may be considered for inclusion in the proxy statement and
form of proxy relating to that meeting. Additionally, if a shareholder wishes to
present to the Company an item for consideration as an agenda item for a special
meeting, the shareholder must give reasonable notice to the Secretary and give a
brief description of the business desired to be discussed.
THE BOARD OF DIRECTORS
June 4, 1997
18
<PAGE> 21
EMPLOYEE SOLUTIONS, INC.
6225 NORTH 24TH STREET
PHOENIX, ARIZONA 85016
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Marvin D. Brody and Roy A. Flegenheimer as
lawful agent and Proxy, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated below, all the
shares of common stock of Employee Solutions, Inc. held of record by the
undersigned on May 5, 1997, at the Annual Meeting of Shareholders to be held on
July 9, 1997 or any adjournment thereof. The undersigned acknowledges receipt
of the proxy statement dated June 4, 1997.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE NOMINEES IN PROPOSAL 1 AND FOR PROPOSAL 2.
SEE REVERSE
SIDE
<PAGE> 22
/X/ PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE
<TABLE>
<S> <C> <C> <C>
FOR the nominees listed WITHHOLD AUTHORITY
to the right (except as to vote for all nominees
marked to the contrary below listed to the right
1. ELECTION OF / / / / NOMINEES:
DIRECTORS Harvey A. Belfer, Marvin D. Brody,
Edward L. Cain, Jr., Jeffrey A. Colby,
Robert L. Mueller, Henry G. Walker
</TABLE>
INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name on the following line.
- ----------------------------------------------------------------------------
This proxy also grants to the proxy holders the discretionary power to vote
the proxy for a substitute nominee in the event any nominee becomes
unavailable, to vote the shares represented cumulatively for one or more,
but less than all, of the nominees named above if additional persons are
nominated for election as directors, and to vote such shares cumulatively for
one or more of the nominees named above other than those (if any) for whom
authority to vote is withheld.
<TABLE>
<S> <C> <C> <C>
2. PROPOSAL TO APPROVE AN AMENDMENT OF FOR AGAINST ABSTAIN
THE COMPANY'S 1995 OPTION PLAN TO LIMIT / / / / / /
THE NUMBER OF SHARES OF COMMON STOCK
FOR WHICH ANY INDIVIDUAL MAY RECEIVE AN
OPTION IN A YEAR TO 250,000 SHARES.
</TABLE>
The Board of Directors unanimously recommends that the shareholders vote FOR
approval of this proposal.
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment thereof.
Signature(s)___________________________________________ Dated: __________, 1997
Please sign exactly as name appears above. When shares are held by more than
one owner, all should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by president or authorized officer. If a
partnership, please sign in partnership name by authorized person. (Be sure to
date this Proxy)
