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 September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number: 000-22600
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
Rights to Purchase Shares of Series A Junior Participating Preferred 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:
31,794,595 Common shares, no par value were outstanding as of October 30, 1998.
<PAGE>
EMPLOYEE SOLUTIONS, INC.
FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
INDEX
Page
PART I. Financial Information Number
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 2
Consolidated Statements of Operations for the
Quarters and Nine Months Ended September 30, 1998 and 1997 3
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1998 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosure about Market Risk 31
PART II. Other Information
Item 1. Legal Proceedings 32
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
(In thousands of dollars, except share data) 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,964 $ 40,110
Investments and marketable securities 19,416 --
Restricted cash and investments -- 19,000
Accounts receivable, net 40,877 57,467
Receivables from insurance companies 7,724 7,070
Prepaid expenses and deposits 5,656 4,562
Income taxes receivable 5,040 4,080
Deferred income taxes 4,812 4,138
------------- -------------
Total current assets 99,489 136,427
Property and equipment, net 4,744 3,159
Deferred income taxes 811 485
Goodwill and other assets, net 64,955 67,146
------------- -------------
Total assets $ 169,999 $ 207,217
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts $ 2,420 $ --
Accrued salaries, wages and payroll taxes 27,824 43,263
Accounts payable 4,808 4,363
Accrued workers' compensation and healthcare 8,152 24,586
Other accrued expenses 10,919 5,886
------------- -------------
Total current liabilities 54,123 78,098
Deferred income taxes 890 517
------------- -------------
Long-term debt 85,000 85,000
------------- -------------
Other long-term liabilities 1,211 1,213
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A convertible preferred stock, nonvoting, no par value, 10,000,000
shares authorized, no shares issued and outstanding -- --
Common stock, no par value, 75,000,000 shares authorized, 31,794,595
shares issued and outstanding September 30, 1998, and 31,683,120 shares
issued and outstanding December 31, 1997 34,688 34,420
Retained (deficit) earnings (5,929) 7,866
Unrealized gain on investment securities 16 103
Total stockholders' equity 28,775 42,389
------------- -------------
Total liabilities and stockholders' equity $ 169,999 $ 207,217
============= =============
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Quarter ended September 30, Nine months ended September 30,
-------------------------------- --------------------------------
(In thousands of dollars, except share and per share data) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Revenues $ 231,636 $ 233,093 $ 706,965 $ 655,117
-------------- -------------- -------------- --------------
Cost of revenues:
Salaries and wages of worksite employees 193,768 191,035 587,509 529,568
Healthcare and workers' compensation 13,961 16,263 43,867 47,372
Payroll and employment taxes 14,937 15,260 48,682 45,489
-------------- -------------- -------------- --------------
Cost of revenues 222,666 222,558 680,058 622,429
-------------- -------------- -------------- --------------
Gross profit 8,970 10,535 26,907 32,688
Selling, general and administrative expenses 11,208 8,201 31,319 24,113
Depreciation and amortization 1,756 1,055 4,586 3,103
Restructuring expense 1,400 -- 1,400 --
-------------- -------------- -------------- --------------
Income (loss) from operations (5,394) 1,279 (10,398) 5,472
Other income (expense):
Interest income 386 298 1,532 745
Interest expense (2,163) (1,097) (6,435) (3,163)
Other 3 4 8 (53)
-------------- -------------- -------------- --------------
Income (loss) before provision for income taxes (7,168) 484 (15,293) 3,001
Income tax provision (benefit) -- 253 (1,498) 1,260
-------------- -------------- -------------- --------------
Net income (loss) $ (7,168) $ 231 $ (13,795) $ 1,741
============== ============== ============== ==============
Net income (loss) per common and
common equivalent share:
Basic $ (.23) $ .01 $ (.43) $ .05
Diluted $ (.23) $ .01 $ (.43) $ .05
Weighted average number of common and
common equivalent shares outstanding:
Basic 31,792,787 31,394,532 31,753,815 31,026,938
============== ============== ============== ==============
Diluted 31,792,787 32,513,699 31,753,815 33,229,898
============== ============== ============== ==============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Retained Unrealized Total
(In thousands of dollars, Preferred Common (deficit) Gain on Stockholders'
except share data) Stock Stock Earnings Investments Equity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 $ -- $ 34,420 $ 7,866 $ 103 $ 42,389
Issuance of 111,475 shares of common
stock in connection with exercise of
common stock options -- 199 -- -- 199
Tax benefit related to the exercise of
stock options -- 69 -- -- 69
Change in unrealized net gains,
net of applicable taxes -- -- -- (87) (87)
Net loss -- -- (13,795) -- (13,795)
--------- -------- --------- ----------- -------------
BALANCE, SEPTEMBER 30, 1998 $ -- $ 34,688 $ (5,929) $ 16 $ 28,775
========= ======== ========= =========== =============
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Nine months ended September 30,
--------------------------------
(In thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 723,555 $ 634,776
Cash paid to suppliers and employees (724,995) (620,458)
Cash paid in loss portfolio transfer (19,950) --
Interest received 1,532 745
Interest paid (4,163) (3,216)
Income taxes paid, net 1,831 (2,711)
------------ ------------
Net cash (used in) provided by operating activities (22,190) 9,136
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,405) (1,520)
Business acquisitions (900) (4,672)
Deferred cost disbursements (633) --
Change in investments and marketable securities (19,416) --
Change in restricted cash and investments 19,000 (4,500)
------------ ------------
Net cash used in investing activities (4,354) (10,692)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 5,200
Payment of deferred loan costs (221) --
Proceeds from issuance of common stock 199 414
Increase in bank overdraft and other 2,420 580
------------ ------------
Net cash provided by financing activities 2,398 6,194
------------ ------------
Net (decrease) increase in cash and cash equivalents (24,146) 4,638
CASH AND CASH EQUIVALENTS, beginning of period 40,110 10,980
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 15,964 $ 15,618
============ ============
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Nine months ended September 30,
--------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ (13,795) $ 1,741
------------ ------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization 4,586 3,103
Loss on sale of fixed assets -- 58
Decrease (increase) in accounts receivable, net 16,590 (18,494)
Increase in insurance company receivables (654) (1,847)
Increase in prepaid expenses and deposits (1,094) (2,592)
Increase in deferred income taxes, net (627) (1,919)
Decrease in other assets 161 2,563
(Decrease) increase in accrued salaries,
wages and payroll taxes (15,439) 18,044
(Decrease) increase in accrued workers'
compensation and health insurance (16,434) 6,756
Increase in accounts payable, other accrued expenses
and other long term liabilities 5,476 1,255
Change in income taxes payable/receivable (960) 468
------------ ------------
(8,395) 7,395
------------ ------------
Net cash (used in) provided by operating activities $ (22,190) $ 9,136
============ ============
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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 healthcare programs,
and other products and services provided directly to worksite employees. At
September 30, 1998, ESI serviced approximately 2,040 client companies with
approximately 42,600 worksite employees in 47 states.
The Company conducts its business on a national scale across many industries and
is not concentrated to any material extent within a single local market or
industry, although the transportation industry, at approximately 27%, represents
the largest concentration of clients.
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 quarter and nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. 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, 1997.
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.
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 and medical reserves and revenue recognized
for retrospectively rated insurance policies. The actual results of these
estimates may be unknown for a period of years. Actual results could differ from
those estimates.
STATEMENT OF COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130 (SFAS
No. 130), "Reporting Comprehensive Income," January 1, 1998. As of September 30,
1998, the effect of SFAS No. 130 is not material.
7
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AND INVESTMENTS AND MARKETABLE SECURITIES
Cash and cash equivalents consist of cash and highly liquid investments with
original maturities of three months or less. All cash equivalents are invested
in high quality investment grade instruments, such as commercial paper, at
September 30, 1998 and December 31, 1997. In January 1998, the Company
implemented an investment program to invest excess cash proceeds from its
October 1997 senior note offering. Proceeds have been invested in liquid
investment grade instruments, such as commercial paper and government securities
with maturities primarily ranging from 90 days up to one year. Both cash and
cash equivalents and investments and marketable securities are reflected in the
financial statements and are stated at fair market value. Substantially all cash
and cash equivalents are not insured at September 30, 1998.
LOSS PORTFOLIO TRANSFER
On April 22, 1998, the Company completed a risk transfer of all of its pre-1998
workers' compensation claims liability to a third party insurer, rated AAA by
Standard & Poor's, effected through a Loss Portfolio Transfer (LPT) valued as of
February 28, 1998. In exchange for a premium of $19.9 million (paid primarily
from restricted cash and investments), the Company acquired reinsurance of $35
million to insure its pre-1998 workers' compensation losses. Based upon the
advice of its outside actuaries, the Company believes that the risk that
pre-1998 liability could exceed the $35 million aggregate limit is extremely
remote, although there can be no assurance. The LPT provides for profit sharing
opportunities with the Company based on ultimate paid claims, though there can
be no assurance whether or when a profit will be realized. No charge to earnings
was recorded in connection with this transaction in 1998 or is expected in
future periods, although a use of cash from operations has been recorded in the
second quarter of 1998.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share." The
earnings per share amounts for quarter and nine months ended September 30, 1997
have been restated to conform to the 1998 presentation as required by SFAS No.
128. The computation of adjusted net income and weighted average common and
common equivalent shares used in the calculation of net income per common share
is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Quarter ended September 30,
------------------------------------------------------------
1998 1997
(In thousands of dollars, except share and ---------------------------- ----------------------------
per share data) Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average of
common shares outstanding 31,792,787 31,792,787 31,394,532 31,394,532
Dilutive effect of options
and warrants outstanding -- -- -- 1,119,167
------------ ------------ ------------ ------------
Weighted average of
common and common
equivalent shares 31,792,787 31,792,787 31,394,532 32,513,699
============ ============ ============ ============
Net income (loss) $ (7,168) $ (7,168) $ 231 $ 231
Adjustments to net income -- -- -- (20)
------------ ------------ ------------ ------------
Adjusted net income (loss) for
purposes of the income per
common share calculation $ (7,168) $ (7,168) $ 231 $ 211
============ ============ ============ ============
Net income (loss) per common and
common equivalent share $ (0.23) $ (0.23) $ 0.01 $ 0.01
============ ============ ============ ============
- ----------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------------------------------
1998 1997
(In thousands of dollars, except share and ---------------------------- ---------------------------
per share data) Basic Diluted Basic Diluted
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average of
common shares outstanding 31,753,815 31,753,815 31,026,938 31,026,938
Dilutive effect of options
and warrants outstanding -- -- -- 2,202,960
------------ ------------ ------------ ------------
Weighted average of
common and common
equivalent shares 31,753,815 31,753,815 31,026,938 33,229,898
============ ============ ============ ============
Net income (loss) $ (13,795) $ (13,795) $ 1,741 $ 1,741
Adjustments to net income -- -- -- (53)
------------ ------------ ------------ ------------
Adjusted net income (loss) for
purposes of the income per
common share calculation $ (13,795) $ (13,795) $ 1,741 $ 1,688
============ ============ ============ ============
Net income (loss) per common and
common equivalent share $ (0.43) $ (0.43) $ 0.05 $ 0.05
============ ============ ============ ============
- -------------------------------------------------------------------------------------------------------
</TABLE>
The calculation of weighted average common and common equivalent shares for
purposes of calculating the September 30, 1998 diluted earnings per share,
excludes approximately 1,315,696 weighted average shares of options, warrants,
and contingently issuable shares computed under the treasury stock method, as
their effects would be anti-dilutive.
(2) LONG-TERM DEBT:
NOTE OFFERING
On October 21, 1997, the Company issued $85 million of 10% Senior Notes due 2004
(the Notes) in an Offering (the Offering) exempt from registration under the
Securities Act of 1933 as amended (Securities Act). Interest under the Notes is
payable semi-annually commencing April 15, 1998, and the Notes are not callable
until October 2001 subject to the terms of the Indenture under which the Notes
were issued. In April 1998, the Company completed an exchange offer for these
notes which was registered under the Securities Act. The Notes contain certain
covenants which, among other things, limit the Company's ability to incur any
future indebtedness.
The Notes are general unsecured obligations of the Company and are
unconditionally guaranteed on a joint and several basis by certain of the
Company's wholly-owned current and future subsidiaries. The Company's
wholly-owned insurance subsidiary, which is a non-guarantor subsidiary, is
subject to certain statutory and contractual restrictions which limit its
ability to pay dividends or make loans to the Company or other subsidiaries. The
financial statements presented below include the separate or combined financial
position as of September 30, 1998 and December 31, 1997; the results of
operations for the quarters and nine months ended September 30, 1998 and
September 30, 1997 and the statements of cash flows for the nine months ended
September 30, 1998 and September 30, 1997, of Employee Solutions, Inc. (Parent),
the guarantor subsidiaries (Guarantors) and the subsidiaries which are not
guarantors (Non-guarantors).
9
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------
September 30, 1998
-------------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,557 $ 5,128 $ 5,279 $ -- $ 15,964
Investments and marketable securities 19,303 -- 113 -- 19,416
Restricted cash and investments -- -- -- -- --
Accounts receivable, net 11,522 27,851 1,504 -- 40,877
Receivables from insurance companies -- -- 7,724 -- 7,724
Prepaid expenses and deposits 3,836 1,755 65 -- 5,656
Income taxes receivable 5,040 -- -- -- 5,040
Deferred income taxes 4,812 -- -- -- 4,812
Due from affiliates 8,419 1,938 (6,583) (3,774) --
--------- ---------- ---------- ----------- ------------
Total current assets 58,489 36,672 8,102 (3,774) 99,489
Property and equipment, net 4,346 379 19 -- 4,744
Deferred income taxes 811 -- -- -- 811
Goodwill and other assets, net 32,079 32,588 288 -- 64,955
Investment in subsidiaries 52,764 -- -- (52,764) --
--------- ---------- ---------- ----------- ------------
Total assets $ 148,489 $ 69,639 $ 8,409 $ (56,538) $ 169,999
========= ========== ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts $ -- $ 2,420 $ -- $ -- $ 2,420
Accrued salaries, wages and payroll taxes 8,353 18,578 893 -- 27,824
Accounts payable 769 1,256 2,783 -- 4,808
Accrued workers' compensation
and healthcare 1,710 1,729 4,713 -- 8,152
Income taxes payable -- -- -- -- --
Other accrued expenses 7,337 1,541 2,041 -- 10,919
Due to affiliates 15,655 1,804 (13,685) (3,774) --
--------- ---------- ---------- ----------- ------------
Total current liabilities 33,824 27,328 (3,255) (3,774) 54,123
--------- ---------- ---------- ----------- ------------
Deferred income taxes 890 -- -- -- 890
--------- ---------- ---------- ----------- ------------
Long-term debt 85,000 -- -- -- 85,000
--------- ---------- ---------- ----------- ------------
Other long-term liabilities -- 1,211 -- -- 1,211
--------- ---------- ---------- ----------- ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A convertible preferred stock -- -- -- -- --
Common stock, no par value 34,688 2,622 771 (3,393) 34,688
Additional paid in capital -- 26,342 50 (26,392) --
Retained earnings (5,929) 12,136 10,843 (22,979) (5,929)
Unrealized gain on
investment securities 16 -- -- -- 16
--------- ---------- ---------- ----------- ------------
Total stockholders' equity 28,775 41,100 11,664 (52,764) 28,775
--------- ---------- ---------- ----------- ------------
Total liabilities and stockholders' equity $ 148,489 $ 69,639 $ 8,409 $ (56,538) $ 169,999
========= ========== ========== =========== ============
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------
December 30, 1998
-----------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,692 $ 11,848 $ 5,570 $ -- $ 40,110
Restricted cash and
investments -- -- 19,000 -- 19,000
Accounts receivable, net 20,822 34,360 2,285 -- 57,467
Receivables from insurance
companies -- 5,430 1,640 -- 7,070
Prepaid expenses and deposits 2,822 1,465 275 -- 4,562
Income taxes receivable 4,080 -- -- -- 4,080
Deferred income taxes 4,138 -- -- -- 4,138
Due from affiliates 30,346 (1,122) 12,855 (42,079) --
-------- ---------- ---------- ----------- ------------
Total current assets 84,900 51,981 41,625 (42,079) 136,427
Property and equipment, net 2,857 276 26 -- 3,159
Deferred income taxes 485 -- -- -- 485
Goodwill and other assets, net 32,105 34,625 416 -- 67,146
Investment in subsidiaries 46,477 -- -- (46,477) --
-------- ---------- ---------- ----------- ------------
Total assets $166,824 $ 86,882 $ 42,067 $ (88,556) $ 207,217
======== ========== ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts $ -- $ -- $ -- $ -- $ --
Accrued salaries, wages and
payroll taxes 20,253 21,422 1,588 -- 43,263
Accounts payable 1,082 2,318 963 -- 4,363
Accrued workers' compensation
and healthcare 1,612 2,211 20,763 -- 24,586
Other accrued expenses 2,612 2,541 733 -- 5,886
Due to affiliates 13,359 22,243 6,477 (42,079) --
-------- ---------- ---------- ----------- ------------
Total current liabilities 38,918 50,735 30,524 (42,079) 78,098
-------- ---------- ---------- ----------- ------------
Deferred income taxes 517 -- -- -- 517
-------- ---------- ---------- ----------- ------------
Long-term debt 85,000 -- -- -- 85,000
-------- ---------- ---------- ----------- ------------
Other long-term liabilities -- 1,213 -- -- 1,213
-------- ---------- ---------- ----------- ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A convertible preferred stock -- -- -- -- --
Common stock, no par value 34,420 2,622 771 (3,393) 34,420
Additional paid in capital -- 26,342 50 (26,392) --
Retained earnings 7,866 5,970 10,722 (16,692) 7,866
Unrealized gain on
investment securities 103 -- -- -- 103
-------- ---------- ---------- ----------- ------------
Total stockholders' equity 42,389 34,934 11,543 (46,477) 42,389
-------- ---------- ---------- ----------- ------------
Total liabilities and stockholders' equity $166,824 $ 86,882 $ 42,067 $ (88,556) $ 207,217
======== ========== ========== =========== ============
- --------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
For the Quarter Ended September 30, 1998
--------------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 65,197 $ 157,531 $ 9,149 $ (241) $ 231,636
--------- ---------- ---------- ----------- ------------
Cost of revenues:
Salaries and wages of
worksite employees 54,916 131,456 7,396 -- 193,768
Healthcare and workers'
compensation 1,254 11,013 1,694 -- 13,961
Payroll and employment taxes 4823 9,523 591 -- 14,937
--------- ---------- ---------- ----------- ------------
Cost of revenues 60,993 151,992 9,681 -- 222,666
--------- ---------- ---------- ----------- ------------
Gross profit 4,204 5,539 (532) (241) 8,970
Selling, general and
administrative expenses 7,044 3,414 750 -- 11,208
Intercompany selling, general
and administrative expense 214 (1) 28 (241) --
Depreciation and amortization 1,343 406 7 -- 1,756
Restructuring expense 1,400 -- -- -- 1,400
--------- ---------- ---------- ----------- ------------
Income (loss) from operations (5,797) 1,720 (1,317) -- (5,394)
Other income (expense):
Interest income 289 86 11 -- 386
Interest expense and other (2,239) 4 75 -- (2,160)
--------- ---------- ---------- ----------- ------------
Income (loss) before provision
for income taxes (7,747) 1,810 (1,231) -- (7,168)
Income tax provision (benefit) 776 (258) (518) -- --
--------- ---------- ---------- ----------- ------------
(8,523) 2,068 (713) -- (7,168)
Income from wholly-owned
subsidiaries 1,355 -- -- (1,355) --
--------- ---------- ---------- ----------- ------------
Net income (loss) $ (7,168) $ 2,068 $ (713) $ (1,355) $ (7,168)
========= ========== ========== =========== ============
- -----------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
For the Quarter Ended September 30, 1997
--------------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 106,926 $ 109,485 $ 12,766 $ 3,916 $ 233,093
--------- ---------- ---------- ----------- ------------
Cost of revenues:
Salaries and wages of
worksite employees 105,142 93,818 9,374 (17,299) 191,035
Healthcare and workers'
compensation (13,382) 1,664 5,517 22,464 16,263
Payroll and employment taxes 8,285 6,217 758 -- 15,260
--------- ---------- ---------- ----------- ------------
Cost of revenues 100,045 101,699 15,649 5,165 222,558
--------- ---------- ---------- ----------- ------------
Gross profit 6,881 7,786 (2,883) (1,249) 10,535
Selling, general and
administrative expenses 5,698 2,391 112 -- 8,201
Intercompany selling, general
and administrative expense 404 804 41 (1,249) --
Depreciation and amortization 677 370 8 -- 1,055
--------- ---------- ---------- ----------- ------------
Income (loss) from operations 102 4,221 (3,044) -- 1,279
Other income (expense):
Interest income 9 70 219 -- 298
Interest expense and other (1,160) (52) 119 -- (1,093)
--------- ---------- ---------- ----------- ------------
Income (loss) before provision
for income taxes (1,049) 4,239 (2,706) -- 484
Income tax provision (benefit) (645) 1,827 (929) -- 253
--------- ---------- ---------- ----------- ------------
(404) 2,412 (1,777) -- 231
Income from wholly-owned
subsidiaries 635 -- -- (635) --
--------- ---------- ---------- ----------- ------------
Net income (loss) $ 231 $ 2,412 $ (1,777) $ (635) $ 231
========= ========== ========== =========== ============
- -----------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1998
-------------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 217,627 $ 463,259 $ 27,693 $ (1,614) $ 706,965
--------- ---------- ---------- ----------- ------------
Cost of revenues:
Salaries and wages of
worksite employees 180,906 383,371 23,232 -- 587,509
Healthcare and workers'
compensation 9,240 32,421 2,206 -- 43,867
Payroll and employment taxes 16,795 29,796 2,091 -- 48,682
--------- ---------- ---------- ----------- ------------
Cost of revenues 206,941 445,588 27,529 -- 680,058
--------- ---------- ---------- ----------- ------------
Gross profit 10,686 17,671 164 (1,614) 26,907
Selling, general and
administrative expenses 21,493 8,966 860 -- 31,319
Intercompany selling, general
and administrative expense 704 820 90 (1,614) --
Depreciation and amortization 3,384 1,182 20 -- 4,586
Restructuring expense 1,400 -- -- -- 1,400
--------- ---------- ---------- ----------- ------------
Income (loss) from operations (16,295) 6,703 (806) -- (10,398)
Other income (expense):
Interest income 866 129 537 -- 1,532
Interest expense and other (6,656) 3 226 -- (6,427)
--------- ---------- ---------- ----------- ------------
Income (loss) before provision
for income taxes (22,085) 6,835 (43) -- (15,293)
Income tax provision (benefit) (2,003) 669 (164) -- (1,498)
--------- ---------- ---------- ----------- ------------
(20,082) 6,166 121 -- (13,795)
Income from wholly-owned
subsidiaries 6,287 -- -- (6,287) --
--------- ---------- ---------- ----------- ------------
Net income (loss) $ (13,795) $ 6,166 $ 121 $ (6,287) $ (13,795)
========= ========== ========== =========== ============
- ----------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1997
------------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 332,596 $ 289,561 $ 54,069 $ (21,109) $ 655,117
--------- ---------- ---------- ----------- ------------
Cost of revenues:
Salaries and wages of
worksite employees 286,717 232,798 27,352 (17,299) 529,568
Healthcare and workers'
compensation 10,308 20,093 16,971 -- 47,372
Payroll and employment taxes 24,234 18,926 2,329 -- 45,489
--------- ---------- ---------- ----------- ------------
Cost of revenues 321,259 271,817 46,652 (17,299) 622,429
--------- ---------- ---------- ----------- ------------
Gross profit 11,337 17,744 7,417 (3,810) 32,688
Selling, general and
administrative expenses 16,507 7,293 313 -- 24,113
Intercompany selling, general
and administrative expense 1,038 2,641 131 (3,810) --
Depreciation and amortization 1,743 1,336 24 -- 3,103
--------- ---------- ---------- ----------- ------------
Income (loss) from operations (7,951) 6,474 6,949 -- 5,472
Other income (expense):
Interest income 26 79 640 -- 745
Interest expense and other (3,336) 1 119 -- (3,216)
--------- ---------- ---------- ----------- ------------
Income (loss) before provision
for income taxes (11,261) 6,554 7,708 -- 3,001
Income tax provision (benefit) (4,730) 2,753 3,237 -- 1,260
--------- ---------- ---------- ----------- ------------
(6,531) 3,801 4,471 -- 1,741
Income from wholly-owned
subsidiaries 8,272 -- -- (8,272) --
--------- ---------- ---------- ----------- ------------
Net income (loss) $ 1,741 $ 3,801 $ 4,471 $ (8,272) $ 1,741
========= ========== ========== =========== ============
- ---------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1998
-------------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income (loss) $(13,795) $ 6,166 $ 121 $ (6,287) $ (13,795)
-------- ---------- ---------- ----------- ------------
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization 3,384 1,182 20 -- 4,586
Decrease in accounts receivable, net 9,300 6,509 781 -- 16,590
Decrease (increase) decrease in insurance
company receivable -- 5,430 (6,084) -- (654)
(Increase) decrease in prepaid
expenses and deposits (1,014) (290) 210 -- (1,094)
Increase in deferred income taxes, net (627) -- -- -- (627)
(Increase) decrease in other assets (2,370) 2,381 150 -- 161
Increase (decrease) from inter-
company transactions 19,032 (24,582) (737) 6,287 --
Decrease in accrued salaries,
wages, and payroll taxes (11,900) (2,844) (695) -- (15,439)
Increase (decrease) in accrued workers'
compensation and health insurance 98 (482) (16,050) -- (16,434)
Increase (decrease) in accounts payable 4,412 (2,064) 3,128 -- 5,476
Change in income taxes payable/receivable (960) -- -- -- (960)
-------- ---------- ---------- ----------- ------------
19,355 (14,760) (19,277) 6,287 (8,395)
-------- ---------- ---------- ----------- ------------
Net cash provided by (used in)
operating activities 5,560 (8,594) (19,156) -- (22,190)
-------- ---------- ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,203) (202) -- -- (2,405)
Business acquisitions (534) (344) (22) -- (900)
Deferred cost disbursements (633) -- -- -- (633)
Change in investments
and marketable securities (19,303) -- 18,887 -- (416)
-------- ---------- ---------- ----------- ------------
Net cash (used in) provided by
investing activities (22,673) (546) 18,865 -- (4,354)
-------- ---------- ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 199 -- -- -- 199
Increase in bank overdraft -- 2,420 -- -- 2,420
Payment of deferred
loan costs (221) -- -- -- (221)
-------- ---------- ---------- ----------- ------------
Net cash (used in) provided by
financing activities (22) 2,420 -- -- 2,398
-------- ---------- ---------- ----------- ------------
Net decrease in cash and cash
equivalents (17,135) (6,720) (291) -- (24,146)
CASH AND CASH EQUIVALENTS,
beginning of period 22,692 11,848 5,570 -- 40,110
-------- ---------- ---------- ----------- ------------
CASH AND CASH EQUIVALENTS,
end of period $ 5,557 $ 5,128 $ 5,279 $ -- $ 15,964
======== ========== ========== =========== ============
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1997
-------------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO
NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES:
Net income (loss) $ 1,741 $ 3,801 $ 4,471 $ (8,272) $ 1,741
-------- ---------- ---------- ----------- ------------
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
(USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization 1,743 1,336 24 -- 3,103
Increase in accounts receivable, net (5,455) (11,379) (1,660) -- (18,494)
(Increase) decrease in insurance
company receivable -- (2,293) 446 -- (1,847)
Increase in prepaid expenses and deposits (1,291) (1,105) (196) -- (2,592)
Increase in deferred
income tax asset, net (1,995) -- -- -- (1,995)
(Increase) decrease in other assets (2,042) 4,828 (165) -- 2,621
Increase (decrease) from inter-
company transactions (2,893) (4,297) (1,082) 8,272 --
Increase in accrued salaries,
wages, and payroll taxes 6,251 10,902 891 -- 18,044
Increase (decrease) in accrued workers'
compensation and health insurance 1,661 (609) 5,704 -- 6,756
Increase in pension payable -- (136) -- -- (136)
(Decrease) increase in accounts payable 131 540 (319) -- 352
Increase (decrease) in income taxes payable 544 -- -- -- 544
Increase in other accrued expenses (18) 1,041 16 -- 1,039
-------- ---------- ---------- ----------- ------------
(3,364) (1,172) 3,659 8,272 7,395
-------- ---------- ---------- ----------- ------------
Net cash (used in) provided by
operating activities (1,623) 2,629 8,130 -- 9,136
-------- ---------- ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,467) (53) -- -- (1,520)
Business acquisitions (3,944) (675) (53) -- (4,672)
Change in restricted cash
and investments -- -- (4,500) -- (4,500)
-------- ---------- ---------- ----------- ------------
Net cash used in investing
activities (5,411) (728) (4,553) -- (10,692)
-------- ---------- ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 5,200 -- -- -- 5,200
Proceeds from issuance of common stock 414 -- -- -- 414
Decrease in bank overdraft and other (188) 768 -- -- 580
-------- ---------- ---------- ----------- ------------
Net cash provided by
financing activities 5,426 768 -- -- 6,194
-------- ---------- ---------- ----------- ------------
Net (decrease) increase in cash and cash
equivalents (1,608) 2,669 3,577 -- 4,638
CASH AND CASH EQUIVALENTS,
beginning of period 2,435 6,747 1,798 -- 10,980
-------- ---------- ---------- ----------- ------------
CASH AND CASH EQUIVALENTS,
end of period $ 827 $ 9,416 $ 5,375 $ -- $ 15,618
======== ========== ========== =========== ============
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
(3) RESTRUCTURING CHARGE:
On August 11, 1998, the Company announced a restructuring and cost-reduction
plan primarily involving the closing of remote payroll processing centers and
other offices and various other expense reduction strategies. As a result, the
Company incurred a restructuring charge in the third quarter of 1998 of $1.4
million, consisting primarily of severance and lease cancellation costs. During
the quarter, the Company transitioned operations located in Indiana and
Massachusetts with the intention of closing these offices in the fourth quarter
of 1998. Where offices are being closed or consolidated, the Company intends to
maintain an active sales and customer service presence to meet the local needs
of customers and to support internal growth. Included in the $1.4 million
restructuring charge were $900,000 of severance and other employee termination
costs related to the termination of approximately 60 individuals. The remaining
portion relates to lease commitments and termination penalties associated with
the closure of seven offices. Through the end of the third quarter ended
September 30, 1998, approximately $615,000 had been charged against the
restructuring liability.
(4) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. The statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet at its fair value. SFAS No. 133 is effective for financial
statements for periods ending after June 15, 1998. Adoption of SFAS No. 133
would have an immaterial effect on the September 30, 1998 and 1997 financial
statements.
(5) CONTINGENCIES:
As previously reported, the Company and certain of its present and former
directors and executive officers have been named as defendants in ten actions
filed between March 1997 and May 1997. While the exact claims and allegations
vary, they all allege violations by the Company of Section 10(b) of the Exchange
Act, and Rule 10b-5 promulgated thereunder, with respect to the accuracy of
statements regarding Company reserves and other disclosures made by the Company
and certain directors and officers. These suits were filed after a significant
drop in the trading price of the Company's Common Stock in March 1997. The suits
have been consolidated before the U.S. District Court in Phoenix, Arizona, and a
Consolidated Amended Complaint (Complaint) was filed on April 7, 1998. The
Complaint has been provisionally certified a class action on behalf of
purchasers of Company securities from November 14, 1995 through March 13, 1997,
inclusive. The Complaint seeks the award of compensatory damages in an amount to
be determined at trial, including interest thereon, and costs of the action,
including attorneys' fees. On August 11, 1998 the court denied the Company's
motion to dismiss the Complaint. Trial has been set in the action for January
19, 1999. The Company believes that the Complaint is without merit and it
intends to defend the consolidated action vigorously. However, the ultimate
resolution of the consolidated actions could have a material adverse effect on
the Company's results of operations and financial condition.
The State of Ohio recently issued a preliminary assessment of $2.57 million
(plus penalty) relating to sales taxes potentially applicable to certain types
of services. While the Company believes that no tax ultimately will be payable
based on the preliminary assessment, there can be no assurance that this will be
the case.
From time to time, the Company is named as a defendant in lawsuits in the
ordinary course of business. These lawsuits are not expected to have a material
impact on the Company's financial position or results of operations.
The Company believes that it has meritorious defenses to the lawsuits facing it,
including those mentioned above, and intends to assert such defenses vigorously.
However, it is not possible to predict whether such defenses will be
successfully asserted in all cases. The Company would be required to record an
expense and liability as to any matter if, at any time in the future, it became
probable that the Company would not prevail in such matter.
18
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
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, 1997. 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 addition to those
discussed in "Item 1 - Business" and "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations" of the Company's
Report on Form 10-K for the year ended December 31, 1997, as well as those
factors discussed elsewhere herein or in any document incorporated herein by
reference.
RESULTS OF OPERATIONS -- OVERVIEW
On August 11, 1998, the Company announced a restructuring and cost-reduction
plan primarily involving the closing of remote payroll processing centers and
other offices and various other expense reduction strategies. Where offices are
being closed or consolidated, the Company will maintain an active sales and
customer service presence to meet the local needs of customers and to support
internal growth. Back office functions will be consolidated at the Company's
Phoenix, Arizona headquarters to take advantage of recent investments in systems
upgrades. The Company announced a restructuring charge in the third quarter of
1998 of $1.4 million, consisting primarily of severance and lease cancellation
costs.
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, expected profit, and
other factors. These are generally expressed as a fixed percentage of the
client's gross salaries and wages except for certain costs, primarily employer's
healthcare 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.
COSTS OF REVENUES
The Company's 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 may be responsible for payment of these costs even if not reimbursed
by its clients.
Employment related taxes consist of the employer's portion of payroll taxes
required under FICA, which includes Social Security and Medicare; and federal
and state unemployment taxes. The federal tax rates are defined by the
appropriate federal regulations. State unemployment rates are subject to change
each year based on, among other matters, claims histories and vary from state to
state.
In periods from and after January 1, 1998, workers' compensation liabilities are
fully insured under a guaranteed cost policy, subject to limited exceptions
described below. Accordingly, workers' compensation expense primarily includes
19
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
premiums paid to the Company's third party insurance carriers for workers'
compensation insurance. Workers' compensation expense during 1998 also includes
the cost of a defined portfolio of stand-alone policies in place at December 31,
1997 which policies expire at various dates during 1998 and as to which the
Company retains liability of $250,000 per occurrence plus the types of fees
described below; and costs under the Company's self-insurance program in Ohio,
where the Company retains liability of $50,000 per occurrence with an aggregate
liability limitation.
Prior to January 1, 1998, 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 and accidental death and dismemberment
insurance premiums. 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 liability recorded may be more or less than the actual
amount of the claims when they are submitted and paid. Changes in the liability
are charged or credited to operations as the estimates are revised.
Administrative costs include fees paid to the Company's insurers 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 and accidental death and dismemberment relate to premium
payments to the Company's insurers for the retention of risks above specified
limits.
Healthcare 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 healthcare 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 for healthcare and workers' compensation claims are adequate for future
claims payments, 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 personnel expenses, other general
and administrative expenses, and sales and marketing expenses. Personnel
expenses include compensation, fringe benefits and other personnel expenses
related to the Company's internal employees. Other general and administrative
expenses include rent, office supplies and expenses, legal and accounting fees,
bad debt expenses, insurance and other operating expenses. Sales and marketing
expenses include commissions and salaries to sales personnel and related
expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization consists primarily of the amortization of goodwill
and deferred financing costs and the depreciation of property and equipment. The
Company amortizes goodwill and deferred financing 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.
ACQUISITIONS
Period-to-period comparisons may be substantially affected by the Company's
acquisition of other companies providing PEO services. The Company has accounted
for its acquisitions using the "purchase" method of accounting, whereby the
results of such acquired companies are reflected in the Company's financial
statements prospectively from the date of acquisition. 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.
Further, during the transition period after an acquisition the Company may act
to implement pricing changes where appropriate and to eliminate client
relationships which do not meet the Company's risk or profitability profiles.
Acquisition activity historically has increased the Company's workers'
compensation expense, primarily by accelerating the Company's overall growth
rate and accelerating its exposure in specific higher-risk segments, such as
transportation. The Company also seeks to eliminate certain general and
administrative costs of acquired companies although such results may not be
achieved.
Company PEO acquisitions which have affected recent periods have included the
following: ETIC Corporation d/b/a Employers Trust (ETIC) in February 1997; CMGR
Inc. and Humasys, Inc. (collectively, "CMGR") in February 1997; and four related
PEO companies referred to as "Employee Resources Corporation" (collectively,
"ERC") in September 1997. In addition, in September 1997, the Company acquired
Phoenix Capital Management, Inc. (PCM), a PEO service provider.
20
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
OPERATING RESULTS
Margin comparisons are affected by the relative mix of stand-alone risk
management/workers' compensation services, full PEO services, TEAM Services
(TEAM) services, and transportation services acquired in the Leaseway
acquisition (LPC) in any particular period. Stand-alone risk management/workers'
compensation services and LPC historically have had higher margins compared with
full PEO services while TEAM tends to have lower margins.
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. Also, fourth quarter revenues are
typically increased by year-end bonuses and distributions paid to worksite
employees, historically resulting in little to no revenue growth from fourth to
first quarter (excluding acquisitions). In addition, the Company's first quarter
revenues tend to be adversely affected by decreased activity by various of its
transportation clients due to seasonal factors.
RESULTS OF OPERATIONS--
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Quarter Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
Percent Percent
(In thousands of dollars) 1998 Change 1997 1998 Change 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 231,636 (1)% $233,093 $ 706,965 8% $ 655,117
Cost of revenues 222,666 -- 222,558 680,058 9 622,429
Gross profit 8,970 (15) 10,535 26,907 (18) 32,688
Selling, general and administrative 11,208 37 8,201 31,319 30 24,113
Depreciation and amortization 1,756 66 1,055 4,586 48 3,103
Restructuring expense 1,400 -- -- 1,400 -- --
Interest income 386 30 298 1,532 106 745
Interest expense 2,163 97 1,097 6,435 103 3,163
Net income (loss) (7,168) -- 231 (13,795) -- 1,741
- -------------------------------------------------------------------------------------------------------------
</TABLE>
REVENUES
Revenues decreased to $231.6 million for the quarter ended September 30, 1998
from $233.1 million for the quarter ended September 30, 1997, a decrease of 1%.
For the nine months ended September 30, 1998, revenue was $707.0 million
compared to $655.1 million for the nine months ended September 30, 1997, an
increase of 8%. Growth from internal sales and acquisitions was in part offset
by factors such as attrition of clients and competitive pressures in the PEO and
workers' compensation industries. Further, the Company transitioned its sales
operations from Atlanta to Phoenix during the first quarter of 1998 which has
had an impact on internal sales. In connection with the transition, the Company
is upgrading its sales training, sales reporting methodologies and sales related
technological tools. While the Company expects that these steps will improve
internally generated sales in the long run, there can be no assurance that this
will be the case. The Company has terminated its subscriber service agreement
with US Xpress Enterprises, Inc. (US Xpress) effective August 19, 1998. US
Xpress accounted for 20% of revenues in the third quarter of 1977 compared to
11% in the third quarter of 1998. For the nine months ended September 30, 1998,
US Xpress had a negative contribution to gross profit. The number of worksite
employees decreased to approximately 42,600 covering approximately 2,040 client
companies at September 30, 1998 from approximately 46,500 covering 1,679 client
companies at September 30, 1997. The decrease reflects the termination of US
Xpress offset by internal growth.
Revenues related to stand-alone risk management/workers' compensation services
were $690,000 for the third quarter and $2.3 million for the nine months ended
September 30, 1998 compared with revenues of $3.0 million and $10.2 million for
the third quarter and nine months ended September 30, 1997, respectively. The
decline in stand-alone revenues is attributable primarily to a change in
business strategy, as the Company is not marketing new stand-alone policies in
1998. This change is the result of a determination to emphasize other PEO
marketing strategies and because of the decreased profit opportunities resulting
from increased price competition in the overall workers' compensation market.
The Company's stand-alone policies will all expire by December 31, 1998,
effectively eliminating additional revenues from this program.
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
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COST OF REVENUES
The cost of revenues was $222.7 million in the quarter ended September 30, 1998
which was unchanged from the $222.6 million for the quarter ended September 30,
1997. For the nine month period ended September 30, 1998, the cost of revenues
was $680.1 million an increase of 9% over the $622.4 million for the nine month
period ended September 30, 1997. This increase is primarily due to the increase
in the Company's business as described above. The cost of revenues was adversely
affected in the nine months ended September 30, 1998 as a result of healthcare
costs incurred under the US Xpress contract.
Workers' compensation expense for the quarter and nine month periods ended
September 30, 1998 compared favorably to the same periods in 1997. Expenses
during 1998 are determined on a guaranteed cost basis to the Company (with
certain exceptions), as compared to a partially self-insured basis in 1997.
GROSS PROFIT
The Company's gross profit margin decreased to 3.8% in the quarter ended
September 30, 1998 from 4.5% in the quarter ended September 30, 1997. For the
nine month period ended September 30, 1998, the gross profit margin was 3.8%
compared to 5.0% for the same period in 1997. This decrease was attributable to
several factors including the impact of repricing existing clients due to
competitive factors and the relative mix of business. The proportion of gross
profit related to TEAM Services revenues, which have lower margins, increased in
the periods ended September 30, 1998 relative to the same periods in 1997. The
gross profit margin in 1998 has benefited from a reduction of the Company's
effective state unemployment insurance tax rate and the guaranteed cost workers'
compensation program. The Company generally earned a higher gross profit margin
on revenues derived from its stand-alone risk management/workers' compensation
services than on revenues derived from the Company's full-service PEO business,
as PEO revenues generally include significant (and substantially offsetting)
revenue and expense items for payroll and payroll-related costs for the worksite
employees. Accordingly, gross margin has been negatively impacted by the
increase in PEO revenues relative to stand-alone revenues.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the quarter ended September 30,
1998 increased by approximately $3.0 million to $11.2 million, or 37%, from $8.2
million for the quarter ended September 30, 1997. Included in the quarter ended
September 30, 1998 were significant charges not expected to recur in future
periods, as described below. For the nine month periods ended September 30, 1998
and 1997, respectively, selling, general and administrative expenses were $31.3
million and $24.1 million, a 30% increase. In the nine months ended September
30, 1998, the Company incurred non-recurring professional fees of approximately
$400,000 primarily related to operational and strategic initiatives and
approximately $372,000 of duplicative salary expense in the third quarter of
1988 related to the implementation of the operational initiatives. In addition,
during 1998 the Company has written down approximately $3.5 million in accounts
receivable relating to recent collection difficulties associated with the
discontinuation of the Company's stand-alone workers' compensation program of
which $1.9 million occurred in the third quarter. Further, certain receivables
primarily related to former sales and marketing operations in Atlanta totaling
approximately $1.0 million were reserved for in the second quarter. The
receivables are non-customer related and include investments in sales personnel
and strategic sales partners in the form of loans or commission advances.
Commission expense increased in the current quarter due to the increase in
revenues discussed above and an increase in commissionable business. In
addition, in the second quarter the Company also incurred approximately $200,000
in professional fees associated with the terminated SES acquisition effort. On
August 11, 1998, the Company announced a restructuring and cost-reduction plan
that includes initiatives intended to significantly reduce selling, general and
administrative costs. See below discussion of RESTRUCTURING EXPENSE AND
COST-REDUCTION PLAN. There can be no assurance that such initiatives can be
implemented successfully and without certain disruptions in client service.
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization represents depreciation of property and equipment
and amortization of organizational costs, customer lists and goodwill. For the
quarter ended September 30, 1998, depreciation and amortization expense totaled
$1.8 million compared to $1.1 million for the quarter ended September 30, 1997.
Total depreciation and amortization expense for the nine months ended September
30, 1998 was $4.6 compared to $3.1 million for the nine month period ended
September 30, 1997. The increase was due primarily to goodwill amortization
resulting from acquisitions in 1997, depreciation of communication and computer
systems and the installation of a new fully-integrated accounting system in
1998. Goodwill amortization of these acquisitions was recognized from the date
of acquisition. See "Liquidity and Capital Resources" below regarding the
Company's issuance of $85 million in 10% Senior Notes due 2004, in particular as
to the approximately $3.3 million in offering expenses which will be amortized
over the term of the Notes.
RESTRUCTURING EXPENSE AND COST-REDUCTION PLAN
On August 11, 1998, the Company announced a restructuring and cost-reduction
plan primarily involving the closing of remote payroll processing centers and
other offices and various other expense reduction strategies. Back office
functions will be consolidated at the Company's Phoenix, Arizona headquarters to
take advantage of recent investments in systems upgrades. The Company incurred a
restructuring charge in the third quarter of 1998 of $1.4 million, consisting
primarily of severance and lease cancellation costs. During the quarter, the
Company transitioned operations located in Indiana and Massachusetts with the
intention of closing these offices in the fourth quarter of 1998. Where offices
are being closed or consolidated, the Company intends to maintain an active
sales and customer service presence to meet the local needs of customers and to
support internal growth.
INTEREST
Interest expense for the quarter ended September 30, 1998 totaled $2.2 million
compared to $1.1 million for the quarter ended September 30, 1997. For the nine
month period ended September 30, 1998, interest expense totaled $6.4 million
compared to $3.1 million for the nine months ended September 30, 1997. The
increase in interest expense is primarily due to increased borrowings including
the Company's issuance of $85 million in 10% Senior Notes due 2004. For the
quarter ended September 30, 1998 interest income totaled $386,000 compared to
$298,000 for the quarter ended September 30, 1997. Interest income totaled $1.5
million for the nine months ended September 30, 1998 compared to $745,000 for
the same period ended September 30, 1997. The increase in interest income is
primarily due to interest earned on cash held at the corporate level including
excess proceeds from the note offering, and restricted cash and investments held
for the future payment of workers' compensation claims at the Company's wholly
owned insurance subsidiary, Camelback. Interest income decreased commencing in
the second quarter of 1998 as a result of the LPT which reduced restricted cash
and investments by approximately $19.9 million in April 1998.
EFFECTIVE TAX RATE
The Company's effective tax rate provides for federal, state and local income
taxes. For the nine months ended September 30, 1998, the Company recognized an
effective tax rate benefit of 10% compared to a provision of 42% for the nine
months ended September 30, 1997. The Company's effective tax rate will vary from
time to time depending primarily on the mix of profits derived from the
Company's various 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 1998 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 under a Company sponsored program.
As of September 30, 1998, the Company has incurred all of the losses that may be
carried back to generate federal income tax refunds. Accordingly, any
subsequently generated losses will be available for carry forward benefit only.
Losses which will be realized through carry-forward only have generally not been
tax benefited in the accompanying financial statements. Accordingly, the
effective tax rate benefit through September 30, 1998 is only 10% as discussed
above.
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
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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 source of cash in
the quarter ended September 30, 1998 was from operating activities. See also
SUBSTANTIAL LEVERAGE below.
Cash used by operating activities was $22.2 million for the nine months ended
September 30, 1998 compared to cash provided by operating activities of $9.1
million for the nine months ended September 30, 1997. Excluding the effects of
the loss portfolio transfer and interest paid on the senior notes, cash flow
from operations was $1.9 million for the nine months ended September 30, 1998.
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 Company's TEAM Services and LPC operations
extend credit terms generally from 7 to 45 days as is customary in their
respective market segments. Stand-alone risk management/workers' compensation
services are billed in accordance with individual policies. The Company also
extends credit terms for certain of its stand-alone risk management/workers'
compensation clients by billing less than the expected premium over the policy
term, with the difference paid on a deferred basis after the end of a policy
year. If the Company expands in these market segments or enters into new market
segments, or extends credit terms to additional clients, its working capital
requirements may increase. Included in other assets is a receivable of
approximately $2.9 million from a single stand-alone client as to which disputes
have risen. The Company has initiated litigation against the former client
seeking, among other remedies, collection of the receivable. While the Company
believes that it will prevail in the litigation, there can be no assurance that
this will be the case and an adverse outcome could result in the write-off of
all or a substantial portion of the unreserved balance of the receivable.
Cash used in investing activities was $4.3 million and $10.7 million in the nine
months ended September 30, 1998 and 1997, respectively. Included in investing
activities is $19.4 million of cash representing the Company's investment in
marketable securities until such funds are needed. The Company expects to use
certain of the net proceeds from the Note Offering (see below) to finance future
acquisitions. Future acquisitions are expected to be a significant use of cash.
See "Outlook: Issues and Risks-Management of Rapid Growth." In addition, the
Company is in arbitration with the seller of the assets acquired from ETIC. The
seller has claimed that it is entitled to approximately $3.0 million though the
Company believes a materially lesser amount is due. For the nine months ended
September 30, 1998 and 1997, capital expenditures were $2.4 million and $1.5
million, respectively. Capital expenditures in 1998 consisted primarily of
computer equipment to enhance the Company's ability to support the Company's
increased client base and the centralization of payroll processing and
accounting systems. During 1998, 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 1998
capital expenditures will continue in order to meet the needs of the Company's
base of worksite employees.
Cash provided in financing activities was $2.3 million for the nine months ended
September 30, 1998 compared to cash provided by financing activities of $6.1
million for the same period in 1997. Cash flows from financing activities during
1997 resulted primarily from the Company's borrowings.
At September 30, 1998 and December 31, 1997, the Company had cash and cash
equivalents of $15.9 million and $40.1 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. In April, 1998 the Company completed an LPT which resulted in a one
time payment of $19.9 million funded primarily from restricted cash and
investments (see below).
On April 22, 1998, the Company completed a risk transfer of all of its pre-1998
workers' compensation claims liability to a third party insurer rated AAA by
Standard & Poor's, effected through an LPT valued as of February 28, 1998. In
exchange for a premium of $19.9 million (paid primarily from restricted cash and
investments), the Company acquired reinsurance of $35 million to insure its
pre-1998 workers compensation losses. Based upon the advice of its outside
actuaries, the Company believes that the risk that pre-1998 liability could
exceed the $35 million aggregate limit is extremely remote, although there can
be no assurance. The LPT provides for profit sharing opportunities with the
Company based on ultimate paid claims, though there can be no assurance whether
or when a profit will be realized. No charge to earnings was recorded in
connection with this transaction in 1998 or is expected in future periods,
although a use of cash has been recorded in the second quarter of 1998.
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
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Under Bermuda law, Camelback must maintain statutory capital and surplus in an
amount based primarily on premium volume. Bermuda law also regulates the
circumstances under which Camelback may transfer funds to its parent company,
whether via loan, dividend or otherwise. Primarily due to the transition to a
guaranteed cost workers' compensation program effective January 1, 1998 and the
LPT completed in April 1998, these provisions of Bermuda law do not materially
impact the Company.
The Company is engaged in negotiations with the principal carrier under its
pre-1998 workers' compensation program concerning various issues associated with
closing out such program. During the course of the negotiations, the carrier has
taken the position that amounts are due from the Company to the carrier. While
the negotiations are in a preliminary phase and the Company believes that no
such amounts are due, there can be no assurance as to the outcome of such
negotiations.
At September 30, 1998 and December 31, 1997, the Company had working capital of
$45.4 million and $58.3 million, respectively.
NOTE OFFERING
On October 21, 1997, the Company issued $85 million of Notes in an Offering (the
Offering) effected as an exempt offering under the Securities Act of 1933 as
amended (Securities Act). Interest under the Notes is payable semi-annually
commencing April 15, 1998, and the Notes are not callable until October 2001
subject to the terms of the Note Agreement. The Company incurred expenses
related to the Offering of approximately $3.3 million and will amortize such
costs over the life of the Notes. In April 1998, the Company completed an
exchange offer for these notes which was registered under the Securities Act.
The indenture under which the Notes were issued includes certain restrictions on
use of cash, and other expenditures, by the Company including limitations on
dividends, repurchases of Company shares and the incurrence of new indebtedness.
In connection with the Offering, the Company entered into an amended and
restated credit facility (the "Amended Credit Facility") which provided for a
revolving line of credit of $20.0 million, including letters of credit drawn
thereunder. In August 1998 the Company canceled the facility. There was no
outstanding balance on the revolving line of credit when it was canceled, and
it had not been drawn on by the Company during its existence.
OUTLOOK: ISSUES AND RISKS
The following issues and risks, among others (including those discussed
elsewhere herein), should also be considered in evaluating the Company's
outlook.
RESTRUCTURING AND COST-REDUCTION PLAN
On August 11, 1998, the Company announced a restructuring and cost-reduction
plan primarily involving the closing of remote payroll processing centers and
other offices and various other expense reduction strategies. Back office
functions will be consolidated at the Company's Phoenix, Arizona headquarters to
take advantage of recent investments in systems upgrades. The Company incurred a
restructuring charge in the third quarter of 1998 of $1.4 million, consisting
primarily of severance and lease cancellation costs. During the quarter, the
Company transitioned operations located in Indiana and Massachusetts with the
intention of closing these offices in the fourth quarter of 1998. Where offices
are being closed or consolidated, the Company intends to maintain an active
sales and customer service presence to meet the local needs of customers and to
support internal growth. While the Company believes that the plan will result in
long-term improvements in its operational and customer service capabilities (in
addition to significant operating expense reductions), there can be no assurance
that the plan will not result in client attrition due to short-term disruptions
in client service or that the recently-implemented systems upgrades will perform
as intended.
MANAGEMENT OF RAPID GROWTH
The Company's success depends, in part, upon its ability to achieve growth and
manage this growth effectively. Since its formation, the Company has experienced
rapid growth which has challenged the Company's management, personnel, resources
and systems. As part of its business strategy, the Company intends to pursue
continued growth through its sales and marketing capabilities, acquisitions and
marketing alliances. Although the Company has expanded its management,
personnel, resources and systems to manage future growth and to assimilate
acquired operations, there can be no assurance that the Company will be able to
maintain or accelerate its growth in the future or manage this growth
effectively. Failure to do so could materially adversely affect the Company's
business and financial performance. To accommodate growth, the Company is
centralizing certain operations, which may result in temporary disruptions in
operations. The Company also is in the process of upgrading, or has recently
upgraded, certain of its systems, including upgrades to key systems in areas
such as accounting, payroll and workers' compensation. There can be no assurance
that these systems upgrades can be implemented successfully.
The Company has grown substantially in recent years through the acquisition of
other PEO and similar companies. There can be no assurance that the Company will
be able to find further attractive acquisition candidates at reasonable
25
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
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prices or, if it does, that other potential acquirers will not compete
successfully with the Company for these candidates. Any significant increase in
the number of companies competing with the Company to acquire PEOs would likely
increase the cost of acquisitions and thereby limit the Company's ability to
grow profitably through acquisitions. In addition, although the Company attempts
to evaluate each acquisition candidate thoroughly prior to an acquisition, there
can also be no assurance that, once acquired, the Company will be able to
achieve acceptable levels of revenues, profitability or productivity from the
acquired company.
ADEQUACY OF LOSS RESERVES; LOSS AND CLAIMS EXPERIENCE
The Company obtained fully-insured guaranteed cost workers' compensation
coverage effective January 1, 1998, thereby eliminating, with certain
exceptions, the Company's risk retention on workers' compensation claims arising
after that date. The Company retained risk up to $250,000 per occurrence with
respect to a defined portfolio of stand-alone policies which were in place at
December 31, 1997, which policies expire at various dates during 1998. The
Company also retained risk up to $50,000 per occurrence for claims under Ohio's
monopolistic workers' compensation structure, with an aggregate liability
limitation. The Company believes that the transition to a guaranteed cost
program and LPT transaction will reduce the uncertainty associated with the
quarterly calculation of workers' compensation costs while providing a premium
cost structure for 1998 which compares favorably with historical costs. The
availability of coverage and premium costs in future years are subject to change
(including possible material upward adjustment of premium costs) based on loss
experience and competitive conditions in the overall workers' compensation
market.
The Company's reserves for losses and loss adjustment expenses under the Ohio
and stand-alone programs referred to in the preceding paragraph 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 circumstances that are highly variable and difficult to predict. This
uncertainty is compounded in the Company's case by its rapid growth and limited
experience. For these reasons, there can be no assurance that the Company's
ultimate liability will not materially exceed its loss and loss adjustment
expense reserves. If the Company's reserves prove to be inadequate, the Company
will be required to increase reserves or corresponding loss payments with a
corresponding reduction, which may be material, to the Company's operating
results in the period in which the deficiency is identified.
State unemployment taxes are, in part, determined by the Company's unemployment
claims experience. Medical claims experience also greatly impacts the Company's
health insurance rates and claims cost from year to year, and directly impacts
the Company under its self insured medical program. Should the Company
experience a large increase in claims activity for unemployment, workers'
compensation and/or healthcare, 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 PEOs with lower
claims rates that may offer lower rates to clients.
TAX TREATMENT
The attractiveness to clients of a full-service PEO arrangement depends in part
upon the tax treatment of payments for particular services and products under
the Code (for example, the opportunity of employees to pay for certain benefits
under a cafeteria plan using pre-tax dollars). The Internal Revenue Service
(IRS) has formed a Market Segment Study Group to examine whether PEOs, such as
the Company, are for certain employee benefit and tax purposes the "employers"
of worksite employees under the Code. The Company cannot predict either the
timing or the nature of any final decision that may be reached by the IRS with
respect to the Market Segment Study Group or the ultimate outcome of any such
decision, nor can the Company predict whether the Treasury Department will issue
a policy statement with respect to its position on these issues or, if issued,
whether such statement would be favorable or unfavorable to the Company. If the
IRS were to determine that the Company is not an "employer" under certain
provisions of the Code, it could materially adversely affect the Company in
several ways. With respect to benefit plans, the tax qualified status of the
Company's 401(k) plans could be revoked, and the Company's cafeteria and medical
reimbursement plans may lose their favorable tax status. If an adverse IRS
determination were applied retroactively to disqualify benefit plans, employees'
vested account balances under 401(k) plans would become taxable, an
administrative employer such as the Company would lose its tax deductions to the
extent its matching contributions were not vested, a 401(k) plan's trust could
become a taxable trust and the administrative employer could be subject to
liability with respect to its failure to withhold applicable taxes and with
respect to certain contributions and trust earnings. In such event, the Company
also would face the risk of client dissatisfaction and potential litigation by
clients or worksite employees.
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
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As the employer of record for many client companies and their worksite
employees, the Company must account for and remit payroll, unemployment and
other employment-related taxes to numerous federal, state and local tax, labor
and unemployment authorities, and is subject to substantial penalties for
failure to do so. From time to time, the Company has received notices or
challenges which may adversely affect its tax rates and payments. For example,
the State of Ohio recently issued a preliminary assessment of $2.57 million
(plus penalty) relating to sales taxes potentially applicable to certain types
of services. The Company is in the process of providing the State with
additional information which, the Company believes, demonstrates that the
assessment is in error. While the Company believes that no tax ultimately will
be payable based on the preliminary assessment, there can be no assurance that
this will be the case. In light of the IRS Market Segment Study Group and the
general uncertainty in this area, certain proposed legislation has been drafted
to clarify the employer status of PEOs in the context of the Code and benefit
plans. However, there can be no assurance that such legislation will be proposed
and adopted or in what form it would be adopted. Even if it were adopted, the
Company may need to change aspects of its operations or programs to comply with
any requirements which may ultimately be adopted. In particular, the Company may
need to retain increased sole or shared control over worksite employees if the
legislation is passed in its current form.
CREDIT RISKS
As the employer of record for its worksite employees, the Company may be
contractually 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. Limited extended payment terms are offered in certain cases subject to
local competitive conditions. 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 has
structured 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.
Collection rates from these clients continue to be lower than expected, due in
part to the Company's non-renewal of the affected policies as part of the
overall de-emphasis of its stand-alone program. 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.
SECURITIES LITIGATION
As previously reported, the Company and certain of its present and former
directors and executive officers have been named as defendants in ten actions
filed between March 1997 and May 1997. While the exact claims and allegations
vary, they all allege violations by the Company of Section 10(b) of the Exchange
Act, and Rule 10b-5 promulgated thereunder, with respect to the accuracy of
statements regarding Company reserves and other disclosures made by the Company
and certain directors and officers. These suits were filed after a significant
drop in the trading price of the Company's Common Stock in March 1997. The suits
have been consolidated before the U.S. District Court in Phoenix, Arizona, and a
Consolidated Amended Complaint (Complaint) was filed on April 7, 1998. The
Complaint has been provisionally certified a class action on behalf of
purchasers of Company securities from November 14, 1995 through March 13, 1997,
inclusive. The Complaint seeks the award of compensatory damages in an amount to
be determined at trial, including interest thereon, and costs of the action,
including attorneys' fees. On August 11, 1998 the court denied the Company's
motion to dismiss the Complaint. Trial has been set in the action for January
19, 1999. The Company believes that the Complaint is without merit and it
intends to defend the consolidated action vigorously. However, the ultimate
resolution of the consolidated actions could have a material adverse effect on
the Company's results of operations and financial condition.
CLIENT RELATIONSHIPS
The Company's subscriber agreements with its clients generally may be canceled
upon 30 days written notice of termination by either party, except where
different arrangements are required by applicable law. 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. See RESTRUCTURING EXPENSE AND
COST-
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
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REDUCTION PLAN. 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 the Company's
clients in the transportation industry has increased. Increased concentration in
a single industry could make the Company 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 through LPC, in which the Company acts as
sole employer, which may increase risk to the Company as a result of the direct
nature of the employment relationship.
SUBSTANTIAL LEVERAGE
The Company has incurred significant debt primarily in connection with its
expansion through acquisitions and its October 1997 issuance of the Senior
Notes. As of September 30, 1998 and December 31, 1997, the Company had
outstanding senior indebtedness of approximately $85 million and stockholders'
equity of approximately $28.8 million and $42.4 million, respectively.
The Company's ability to make scheduled principal payments in respect of, or to
pay the interest or liquidated damages, if any, on, or to refinance, any of its
indebtedness (including the Notes) will depend on its future performance, which,
to a certain extent, is subject to general economic, financial, competitive,
regulatory and other factors beyond its control. Based upon the Company's
current level of operations, management believes that cash flow from operations
and other available cash will be adequate to meet the Company's anticipated
future requirements for working capital expenditures, scheduled lease payments
and scheduled payments of interest on its indebtedness, including the Notes, for
the foreseeable future. The Company may, however, need to refinance all or a
portion of the principal of the Notes at or prior to maturity. There can be no
assurance that the Company's business will generate sufficient cash flow from
operations, that anticipated growth will occur or that funds will be available
from other sources or otherwise in an amount sufficient to enable the Company to
service or refinance its indebtedness, including the Notes, or make anticipated
capital expenditures and lease payments. In addition, there can be no assurance
that the Company will be able to effect any such refinancing on commercially
reasonable terms. Also, the Company is facing several matters in litigation or
arbitration as discussed elsewhere herein, as well as litigation incidental to
its business. The Company's liquidity position could be materially adversely
affected depending on the outcome of these matters. See "Liquidity and Capital
Resources." The Company recently canceled the Amended Credit Facility, which
had been another source of liquidity.
The degree to which the Company is leveraged could have important consequences,
including, but not limited to, the following: (i) a substantial portion of the
Company's cash flow from operations will be dedicated to debt service and will
not be available for other purposes; (ii) the Company's ability to obtain
additional financing in the future could be limited; and (iii) the Notes
indenture contains financial and restrictive covenants that limit the ability of
the Company to, among other things, borrow additional funds. Failure by the
Company to comply with such covenants could result in an event of default which,
if not cured or waived, could have a material adverse effect on the Company's
business and financial performance.
UNCERTAINTY OF EXTENT OF PEO'S LIABILITY; GOVERNMENT REGULATION OF PEOS
Employers are regulated by numerous federal and state laws relating to labor,
tax and employment matters. Generally, these laws prohibit race, age, sex,
disability and religious discrimination, mandate safety regulations in the
workplace, set minimum wage rates and regulate employee benefits. Because many
of these laws were enacted prior to the development of non-traditional
employment relationships, such as PEO services, many of these laws do not
specifically address the obligations and responsibilities of non-traditional
"co-employers" such as the Company, and there are many legal uncertainties about
employee relationships created by PEOs, such as the extent of the PEO's
liability for violations of employment and discrimination laws. The Company may
be subject to liability for violations of these or other laws even if it does
not participate in such violations. As a result, interpretive issues concerning
the definition of the term "employer" in various federal laws have arisen
pertaining to the employment relationship. Unfavorable resolution of these
issues could have a material adverse effect on the Company's results of
operations or financial condition. The Company's standard forms of client
service agreement establish the contractual division of responsibilities between
the Company and its clients for various personnel management matters, including
compliance with and liability under various governmental regulations. However,
because the Company acts as a co-employer, and in some instances acts as sole
employer (such as in the driver leasing program), the Company may be subject to
liability for violations of these or other laws despite these contractual
provisions, even if it does not participate in such violations. The
circumstances in which the Company acts as sole employer may expose the Company
to increased risk of such liabilities for an employee's actions. The Company has
been sued in tort actions alleging responsibility for employee actions (which it
considers to be incidental to its business). Although it believes it has
meritorious defenses,
28
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
and maintains insurance (and requires its clients to maintain insurance)
covering certain of such liabilities, there can be no assurances that the
Company will not be found to be liable for damages in any such suit, or that
such liability would not have a material adverse effect on the Company. In
addition, the Company believes that a portion of its clients may not be
maintaining the insurance coverage required under their service agreements with
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, various states have passed
laws that have licensing or registration requirements and 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 has
utilized Camelback, a wholly-owned insurance company subsidiary. Insurance
companies such as Camelback are subject to the insurance laws and regulations of
the jurisdictions in which they are chartered; such laws and regulations
generally are designed to protect the interests of policyholders rather than the
interests of shareholders such as the Company. In general, insurance regulatory
authorities have broad administrative authority over insurers domiciled in their
respective jurisdictions, including authority over insurers' capital and surplus
levels, dividend payments, financial disclosure, reserve requirements,
investment parameters and premium rates. The jurisdictions also limit the
ability of an insurer to transfer or loan statutory capital or surplus to its
affiliates. The regulation of Camelback could materially adversely affect the
Company's operations and results.
COMPETITION
The market for many of the services provided by the Company is highly
fragmented, with over 2,300 PEOs currently competing in the United States. Many
of these PEOs have limited operations with relatively few worksite employees,
but the Company believes that several are larger than or comparable to the
Company in size. The Company also competes with non-PEO companies, whose
offerings overlap with some of the Company's services, including payroll
processing firms, insurance companies, temporary personnel companies and human
resource consulting firms. In addition, as the PEO industry becomes better
established, the Company expects that competition will continue to increase as
existing PEO firms consolidate into fewer and better competitors and
well-organized new entrants with potentially greater resources than the Company,
including some of the non-PEO companies described above, continue to enter the
PEO market.
YEAR 2000 COMPLIANCE
Many computer programs process transactions based on using two digits for the
year of the transaction rather than a full four year digits (e.g. "98" for
1998). Systems that process Year 2000 transactions with the year "00" may
encounter significant processing inaccuracies or inoperability. Management has
determined that, like most other companies, it will be required to modify or
replace portions of its software so that its information systems will be able to
properly utilize dates subsequent to December 31, 1999.
STATE OF READINESS
The Company began developing its plan to address Year 2000 in 1997. The plan
includes hardware, software, electronic equipment and building systems, and
evaluates risk associated with vendor readiness. The plan includes (1)
inventorying Year 2000 items; (2) assigning priorities to identified items; (3)
assessing Year 2000 compliance of material items (whether internal or third
party-related); (4) repairing or replacing material items determined not to be
Year 2000 compliant; (5) testing material items; and (6) assessing contingency
plans.
At September 30, 1998, the inventory, priority assessment and internal
compliance assessment phases are substantially completed except for elements of
the operations of the Company's TEAM and LPC subsidiaries. The Company intends
to substantially complete those phases for such subsidiaries by the first
quarter of 1999. Prioritization of items is assigned based on the level of
disruption to Company operations and client service that would result from
29
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
noncompliance. While Year 2000 issues present significant risks for the Company
due to the nature of its business, no significant noncompliance issues were
identified during these phases, though there can be no assurance that such
issues will not be identified in the future.
The repair and replacement phase of the Company's plan has been implemented
primarily through various systems upgrades that have been conducted in the
ordinary course of business, which upgrades primarily were implemented to meet
the Company's needs in view of its rapid growth and independently of Year 2000
considerations. A limited amount of software has been purchased primarily for
Year 2000 compliance purposes.
The Company has commenced the testing phase of its Year 2000 plan. The Company
intends to test its systems for accuracy through the use of test data on a wide
variety of the Company's normal operating transactions under various date
conditions. The Company believes that these tests can be completed in sufficient
time to permit required modifications, if any, to be made on a timely basis.
The Company believes that it does not have material risks associated with Year
2000 issues for non-information technology systems due to the nature of its
operations.
The Company has also assessed its third party relationships and has identified a
list of vendors that it considers most significant to its operations. These
vendors primarily include third party hardware and software vendors, financial
institutions, third party administrators and benefit providers. The Company
already has obtained compliance statements from certain vendors, and has
commenced the process of requesting written information from the remainder of
these vendors regarding their Year 2000 plans and state of readiness. Upon
completion of the third-party evaluation and the testing of its internal
systems, the Company intends to test significant data interfaces with third
party vendors to verify their compliant status.
COSTS TO ADDRESS YEAR 2000 ISSUE
The Company has not incurred and does not expect to incur significant costs
related to Year 2000 issues other than the time of internal personnel to
complete the Company's Year 2000 plans. As referred to above, the Company has
expended significant resources to upgrade various systems in the ordinary course
of its business, which upgrades were implemented primarily to meet the Company's
needs in view of its rapid growth and independently of Year 2000 considerations.
A limited amount of software has been purchased primarily for Year 2000
compliance purposes.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES; CONTINGENCY PLANNING
The Company presently believes that the Year 2000 issues will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, repair or replacement, and
testing are not effected timely with respect to Year 2000 problems that are
identified, there can be no assurance that the Year 2000 issues will not
materially adversely impact the Company's results of operations or materially
adversely affect the Company's relationships with customers, vendors or others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities will not have a material adverse impact on the Company's systems or
results of operations. Among the problems which might occur without appropriate
planning and testing are: the inability to transmit direct deposit payroll
through banking systems to deposit funds into worksite employees' bank accounts;
the inability to collect funds electronically in payment of the Company's
service fees; the failure to properly calculate payroll information; the
untimely transmission of benefits enrollment or claims data to and from benefit
providers; and the inability to deliver payroll checks to employees due to
failure in transportation or courier systems.
The Company has begun, but not yet completed, an analysis of the operational
problems and costs (including loss of revenues) that would be reasonably likely
to result from the failure by the Company and key third parties to complete
efforts necessary to achieve Year 2000 compliance on a timely basis. A
contingency plan has not yet been finalized for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning mid-1999.
The costs of the Company's Year 2000 efforts and the dates on which the Company
believes it will complete such efforts are based upon management's best
estimates, which were derived using numerous assumptions regarding future
events, including the continued availability of certain resources, third-party
compliance, and other factors. There can be no assurance that these estimates
will prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that could cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in Year 2000 issues, the ability of the Company and third
parties (including vendors, customers and, in particular, federal, state and
local governments) to identify, assess, replace or repair and test
30
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
all relevant items (including embedded technology), the ability of third parties
to communicate compliance issues to the Company on a timely basis, unforeseen
expenses, and similar uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not yet required by Company.
31
<PAGE>
EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SECURITIES CLASS ACTIONS
As previously reported, the Company and certain of its present and former
directors and executive officers have been named as defendants in ten actions
filed between March 1997 and May 1997. While the exact claims and allegations
vary, they all allege violations by the Company of Section 10(b) of the Exchange
Act, and Rule 10b-5 promulgated thereunder, with respect to the accuracy of
statements regarding Company reserves and other disclosures made by the Company
and certain directors and officers. These suits were filed after a significant
drop in the trading price of the Company's Common Stock in March 1997. The suits
have been consolidated before the U.S. District Court in Phoenix, Arizona, and a
Consolidated Amended Complaint (Complaint) was filed on April 7, 1998. The
Complaint has been provisionally certified a class action on behalf of
purchasers of Company securities from November 14, 1995 through March 13, 1997,
inclusive. The Complaint seeks the award of compensatory damages in an amount to
be determined at trial, including interest thereon, and costs of the action,
including attorneys' fees. On August 11, 1998 the court denied the Company's
motion to dismiss the Complaint. Trial has been set in the action for January
19, 1999. The Company believes that the Complaint is without merit and it
intends to defend the consolidated action vigorously. However, the ultimate
resolution of the consolidated actions could have a material adverse effect on
the Company's results of operations and financial condition.
An arbitration proceeding has been commenced between the Company and the sellers
of assets acquired from Employers Trust in February 1997 with respect to
determining the extent to which the Company owes additional purchase price under
the asset purchase agreement. The sellers are seeking approximately $3 million.
The Company believes its liability will be less than that sought by the sellers.
Any additional purchase price determined to be due will be amortized over a
15-year period.
An arbitration notice has been filed by US Xpress Enterprises, Inc. (US Xpress)
with respect to certain issues arising in connection with PEO service agreement
between the parties which was terminated by the Company. US Xpress also
initiated litigation in the United States District Court for the Eastern
District of Tennessee with respect to the same issues. US Xpress also has filed
for a preliminary injunction requiring the Company to deposit estimated damages
of approximately $3 million with the Court pending the outcome of the
proceedings. The Company believes the proceedings initiated by US Xpress are
without merit and intends to defend the proceedings vigorously, including the
pursuit of counterclaims for misrepresentation.
From time to time, the Company is named as a defendant in lawsuits in the
ordinary course of business. These lawsuits are not expected to have a material
adverse effect on the Company's financial position or results of operations.
32
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
Number Description
10.1* Employment agreement dated as of May 11, 1998 between
Registrant and James E. Gorman
10.2* Indemnification Agreement between Registrant and
James E. Gorman dated as of May 11, 1998
10.3* Memorandum of Understanding dated as of August 6,
1998 between Registrant and Marvin D. Brody
10.4* Severance, Release, and Cooperation Agreement dated
as of September 11, 1998 between Registrant and
Morris C. Aaron
10.5* Employee Solution, Inc. 1995 Stock Option Plan, as
amended through June 2, 1998
27 Financial Data Schedule
* Designates management or compensatory agreements
(b) REPORTS ON FORM 8-K.
Not applicable
33
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EMPLOYEE SOLUTIONS, INC. SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
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: November 16, 1998 /s/ James E. Gorman
----------------------------
James E. Gorman
Chief Executive Officer
/s/ John V. Prince
----------------------------
John V. Prince
Chief Accounting Officer
34
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made effective as of
this 11th day of May, 1998 by and between EMPLOYEE SOLUTIONS, INC., an Arizona
corporation (the "Company"), and JAMES E. GORMAN ("Employee").
RECITALS
A. The Company wishes to employ Employee, and Employee wishes to be
employed by the Company.
B. The parties wish to set forth in this Agreement the terms and
conditions of such employment.
AGREEMENTS
In consideration of the mutual promises and covenants set forth herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. EMPLOYMENT. Subject to the terms and conditions of this
Agreement, the Company employs Employee to serve in an executive capacity and
Employee accepts such employment and agrees to dedicate all of his business time
and effort to Company business and perform such reasonable responsibilities and
duties as may be assigned to him from time to time by the Company's Board of
Directors (the "Board"). Employee's title shall be Chief Executive Officer and
President, with responsibility for the overall operations of the Company and its
subsidiaries and such other executive responsibilities as may be assigned from
time to time by, and subject to the direction of, the Board or the Chairman of
the Board.
2. TERM. The employment of Employee by the Company pursuant to
this Agreement shall commence on the date hereof and continue through May 10,
2001 or until terminated as provided elsewhere herein.
3. COMPENSATION.
a. SALARY. The initial monthly base salary payable to
Employee shall be $20,834, which base salary shall be reviewed at least annually
in accordance with the Company's policies and practices regarding periodic
review and adjustment of executive compensation. Employee's base salary shall
not be reduced during the term hereof without Employee's written consent.
b. INCENTIVE PLAN. The Company may establish and
implement an incentive compensation system which will provide additional
incentive payments to Employee based upon his performance and the performance of
the Company. Employee shall be guaranteed an incentive payment of $100,000 for
the first year of employment, subject to continued employment in good standing
on the date of payment.
<PAGE>
4. FRINGE BENEFITS. In addition to the options for shares of
the Company's Common Stock available to Employee under the same terms as those
available to Company employees, and any other employee benefit plans generally
available to Company employees, the Company shall include Employee (and
Employee's dependents) in any group medical insurance plan maintained for the
employees of the Company at the Company's expense. The manner of implementation
of such benefits with respect to such items as procedures and amounts is
discretionary with the Company but shall be commensurate with Employee's
executive status and shall include medical, dental and hospital coverage for
Employee and Employee's dependents who are eligible under the applicable plans.
The Company shall also pay Employee $5,000 per year (payable at the beginning of
each year of employment) for individual purchase by Employee of supplemental
insurance products or for use in such other manner as Employee sees fit.
5. VACATION. Employee shall be entitled to vacation with pay
in keeping with Employee's established vacation practices, but in no event less
than four weeks per calendar year. In addition, Employee shall be entitled to
such holidays as the Company may approve for its executive personnel.
6. EXPENSE REIMBURSEMENT. In addition to the compensation and
benefits provided above, the Company shall pay all reasonable expenses of
Employee incurred in connection with the performance of Employee's duties and
responsibilities to the Company pursuant to this Agreement, upon submission of
appropriate vouchers and supporting documentation in accordance with the
Company's usual and ordinary practices, provided that such expenses are
reasonable and necessary business expenses of the Company. The Company shall pay
Employee's reasonable cellular telephone expenses that are related to Company
business. The Company further shall pay Employee a $500 per month allowance for
automobile expense (provided that such amount may be used by Employee in such
manner as Employee sees fit).
7. TERMINATION. This Agreement may be terminated in the manner
provided below:
a. FOR CAUSE. The Company may terminate Employee's
employment by the Company, for cause, upon written notice to the Employee
stating the facts constituting such cause, provided that Employee shall have 20
days following such notice to cure any conduct or act, if curable, alleged to
provide grounds for termination for cause hereunder. In the event of termination
for cause, the Company shall be obligated to pay the Employee only the base
salary due him through the date of termination. Cause shall include willful and
persistent failure to abide by instructions or policies from or set by the Board
of Directors, wilful and persistent failure to attend to material duties or
obligations imposed under this Agreement, or commission of a felony or serious
misdemeanor offense or pleading guilty or NOLO CONTENDERE to same.
b. DISABILITY. If Employee experiences a permanent
disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986,
as amended), the Company shall have the
2
<PAGE>
right to terminate this Agreement without further obligation hereunder except
for any bonus amount payable in accordance with the next sentence and any
amounts payable pursuant to disability plans generally applicable to executive
employees. Within 90 days after the end of the fiscal year in which termination
pursuant to this Section 7.c occurs, so long as Employee is in full compliance
with this Agreement, Employee shall be entitled to receive an incentive
compensation payment (calculated and payable in the manner referred to in
Section 3.b), if any, based upon the Company's financial performance for such
fiscal year, which shall be prorated to the extent that Employee's employment
during such fiscal year was for a period of less than the full year.
c. DEATH. If Employee dies, this Agreement shall
terminate immediately, and Employee's legal representative shall be entitled to
receive the base salary due to Employee through the 60th day from the date on
which his death shall have occurred and any other death benefits generally
applicable to executive employees. In addition, Employee's legal representative
shall be entitled to receive, at the end of the first quarter of the year
following the fiscal year in which such death shall have occurred, an incentive
compensation payment (calculated and payable in the manner referred to in
Section 3.b), if any, based upon the Company's financial performance for such
fiscal year, which shall be prorated to the extent that Employee's employment
during such fiscal year was for a period of less than the full year.
8. CHANGE IN CONTROL.
a. SEVERANCE BENEFITS. If Employee's employment with
the Company terminates within 12 months after a Change in Control (as defined in
Section 8.b below), Employee shall be entitled to the severance benefits
provided in Section 8.d unless such termination is in accordance with Section
7.a, 7.b or 7.c above, in which case such other section shall apply.
b. "CHANGE IN CONTROL" shall be deemed to have
occurred if, within 12 months after the date of any "Hostile Proposal" (as such
term is defined in Section 8.e hereof),
(i) a "person" (as such term is used in Paragraphs 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended [the "Exchange Act"])
that has made a Hostile Proposal becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of the Company
representing more than 50% of the total voting power represented by the
Company's then outstanding Voting Securities;
(ii) the stockholders of the Company approve a merger or
consolidation of the Company with any person that has made a Hostile Proposal
(other than a merger or consolidation which would result in the Voting
Securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into Voting
Securities of the surviving entity) 50% or more of the total voting power
represented by the Voting Securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation); or
(iii) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of (in one transaction or a
3
<PAGE>
series of transactions) all or substantially all the Company's assets to any
person that has made a Hostile Proposal.
c. "VOTING SECURITIES" shall mean any securities of
the Company which vote generally in the election of directors.
d. AMOUNT OF BENEFIT. If Employee is entitled to
severance benefits under Section 8.a, such benefit shall be a lump-sum payment
equal to the difference between $5 million and the "aggregate profit" on Company
stock options which have been exercised by Employee at any time prior to the
Change in Control or which are exercisable or become exercisable in connection
with the Change in Control. "Aggregate profit" for purposes of this paragraph
shall mean the difference between the exercise price of the options and the
market price of the Company's Common Stock on the date of the Change in Control
(determined by the closing price on the principal exchange on which the Common
Stock is then traded).
e. "HOSTILE PROPOSAL" shall mean any of the following
which occurs without the prior concurrence, approval or consent of the Board of
Directors or a duly designated committee thereof (with the terms "person" and
"beneficial owner" in this Section 8.e defined as in Section 8.b above):
(i) the public announcement (whether by press release, filing
with or notice to a government agency, or any other means) by a person of any
plan, proposal or specific intention to (A) become the beneficial owner of 15%
or more of the Voting Securities, (B) effect or cause to be effected a merger or
consolidation of the Company (other than a merger or consolidation which would
result in the Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into Voting Securities of the surviving entity) 50% or more of the
total voting power represented by the Voting Securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation); or
(C) effect or cause to be effected a complete liquidation of the Company or the
sale or disposition by the Company of (in one transaction or a series of
transactions) all or substantially all the Company's assets;
(ii) a person becomes the beneficial owner of 15% or more of
the Voting Securities; or
(iii) the receipt by the Company of a plan or proposal to
effect a transaction or series of transactions which would fall within subpart
8.e(i) above which, or which is accompanied by a communication which, states,
implies or threatens that material actions will be taken to pursue the
transaction or series of transactions without the cooperation or participation
of the Company if the proposal is not accepted in substantially the form
presented.
9. RETURN OF THE COMPANY'S MATERIALS. Upon the termination of
this Agreement, Employee shall promptly return to the Company all files, credit
cards, keys, instruments, equipment, and other materials owned or provided by
the Company.
4
<PAGE>
10. INSURANCE. The Company shall use commercially reasonable
efforts to carry director's and officer's professional liability insurance
coverage for Employee while in the performance of Employee's duties hereunder in
an amount of at least $10,000,000.
11. NONDELEGABILITY OF EMPLOYEE'S RIGHTS AND COMPANY
ASSIGNMENT RIGHTS. The obligations, rights and benefits of Employee hereunder
are personal and may not be delegated, assigned, or transferred in any manner
whatsoever, nor are such obligations, rights or benefits subject to involuntary
alienation, assignment or transfer. The Company may transfer its obligations
hereunder to a subsidiary, affiliate or successor.
12. NOTICES. All notices, demands and communications required
by this Agreement shall be in writing and shall be deemed to have been given for
all purposes when sent to the respective addresses set forth below, (i) upon
personal delivery, (ii) one day after being sent, when sent by overnight courier
service to and from locations within the continental United States, (iii) three
days after posting when sent by registered, certified, or regular United States
mail, with postage prepaid and return receipt requested, or (iv) on the date of
transmission when sent by confirmed facsimile.
If to the Company: Employee Solutions, Inc.
6225 North 24th Street
Phoenix, Arizona 85016
Attn: Legal Department
If to Employee: James E. Gorman
c/o Employee Solutions, Inc.
6225 North 24th Street
Phoenix, Arizona 85016
(Or when sent to such other address as any party shall specify by written notice
so given.)
13. ENTIRE AGREEMENT. This Agreement, together with the
Indemnification Agreement, the noncompete and confidentiality agreement, and the
stock option grant letter, each dated as of May 11, 1998 (the "Other
Agreements") constitutes the final written expression of all of the agreements
between the parties, and is a complete and exclusive statement of those terms.
It supersedes all understandings and negotiations concerning the matters
specified herein (including all prior written employment agreements and
arrangements, if any), except as provided in the Other Agreements. Any
representations, promises, warranties or statements made by either party that
differ in any way from the terms of this written Agreement or the Other
Agreements shall be given no force or effect. Except as provided in the Other
Agreements, the parties specifically represent, each to the other, that there
are no additional or supplemental agreements between them related in any way to
the matters herein contained unless specifically included or referred to herein.
No addition to or modification of any provision of this Agreement shall be
binding upon any party unless made in writing and signed by all parties.
5
<PAGE>
14. WAIVER. The waiver by either party of the breach of any
covenant or provision in this Agreement shall not operate or be construed as a
waiver of any subsequent breach by either party.
15. INVALIDITY OF ANY PROVISION. The provision of this
Agreement are severable, it being the intention of the parties hereto that
should any provisions hereof be invalid or unenforceable, such invalidity or
unenforceability of any provision shall not affect the remaining provisions
hereof, but the same shall remain in full force and effect as if such invalid or
unenforceable provisions were omitted.
16. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Arizona exclusive
of the conflict of law provisions thereof. The parties agree that in the event
of litigation, venue shall lie exclusively in Maricopa County, Arizona.
17. HEADINGS; CONSTRUCTION. Headings in this Agreement are for
informational purposes only and shall not be used to construe the intent of this
Agreement. The language in all parts of this Agreement shall in all cases be
construed as a whole according to its fair meaning and not strictly for nor
against any party.
18. COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be
executed simultaneously in any number of counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same
agreement. Delivery by any party of a facsimile signature to the other parties
to this Agreement shall constitute effective delivery by said party of an
original counterpart signature to this Agreement.
19. BINDING EFFECT; BENEFITS. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, successors, executors, administrators and assigns. Notwithstanding
anything contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
20. BINDING EFFECT ON MARITAL COMMUNITY. Employee represents
and warrants to the Company that he has the power to bind his marital community
(if any) to all terms and provisions of this agreement by his execution hereof.
6
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement and caused the same to be duly delivered on its behalf as
of the date first above written.
EMPLOYEE SOLUTIONS, INC.,
an Arizona corporation
By: /s/ Quentin P. Smith
---------------------------
Its: Chairman of the Board
-------------------------
"COMPANY"
/s/ James E. Gorman
------------------------------
James E. Gorman
"EMPLOYEE"
7
EMPLOYEE SOLUTIONS, INC.
OFFICER/DIRECTOR INDEMNIFICATION AGREEMENT
This Agreement, which shall be effective as of May 11, 1998,
is by and between Employee Solutions, Inc., an Arizona corporation (the
"Company"), and the undersigned executive officer and director of the Company
(the "Indemnitee").
RECITALS
WHEREAS, it is essential for the Company to be able to retain
and attract as executive officers and directors the most capable persons
available.
WHEREAS, Indemnitee is an executive officer and director of
the Company.
WHEREAS, both the Company and Indemnitee recognize the risk
created by the increased risk of litigation and other claims being asserted
against executive officers and directors of public companies in today's
environment.
WHEREAS, effective January 1, 1996, the Arizona Business
Corporation Act ("ABCA") has been changed, and the Company and Indemnitee wish
to avail themselves of the revised provisions of the ABCA, and to specify
certain matters not specifically provided in the ABCA.
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's service
to the Company in an effective manner, the Company wishes to provide in this
Agreement for the indemnification of, and the advancing of expenses to,
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of Indemnitee under the Company's directors' and
officers' liability insurance policies.
COVENANTS
THEREFORE, in consideration of the promises in this Agreement,
and intending to be legally bound hereby, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged, the parties agree
as follows:
1. CERTAIN DEFINITIONS.
(a) ACTION: any threatened, pending or completed action, suit,
proceeding or alternate dispute resolution mechanism, or any inquiry, hearing or
investigation, whether conducted by the Company or any other party, that
Indemnitee in good faith believes might lead to the institution of any such
action, suit, proceeding or alternate dispute resolution mechanism, whether
civil, criminal, administrative, investigative or other, and whether formal or
informal.
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(b) CHANGE IN CONTROL: shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding Voting
Securities, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the shareholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company (in one transaction or a series of transactions) of
all or substantially all the Company's assets.
(c) DERIVATIVE ACTION: an Action by or in the right of the
Company.
(d) EXPENSES: include attorneys' fees, court costs, deposition
costs, court reporter fees, travel and all other costs, expenses and obligations
actually paid to another or incurred in connection with investigating the facts
underlying the Action, preparing to defend and defending the Action or preparing
for and participating in the Action as a witness, or any of the foregoing
expenses incurred on appeal or in an action or other proceeding to enforce
Indemnitee's rights hereunder, or any other reasonable expenses incurred by
Indemnitee in participating in any Indemnifiable Action or Indemnifiable
Derivative Action.
(e) INDEMNIFIABLE ACTION OR INDEMNIFIABLE DERIVATIVE ACTION:
any Action or Derivative Action arising out of or relating, directly or
indirectly, to the fact that Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or a subsidiary of the Company, or is or was
serving at the request of the Company as a director, officer, employee, trustee,
agent or fiduciary of another corporation, limited liability company,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
(f) POTENTIAL CHANGE IN CONTROL: shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions which if consummated would
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constitute a Change in Control; (iii) any person, other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company
acting in such capacity or a corporation owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company, who is or becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 10% or more of
the combined voting power of the Company's then outstanding Voting Securities,
increases such person's beneficial ownership of such securities by 5% or more
over the percentage so owned by such person on the date hereof; or (iv) the
Board of Directors adopts a resolution to the effect that, for purposes of this
Agreement, a Potential Change in Control has occurred.
(g) VOTING SECURITIES: any securities of the Company which
vote generally in the election of directors.
2. NO PENDING ACTIONS. Indemnitee represents to the Company that, to
Indemnitee's actual knowledge, (i) there is no Indemnifiable Action or
Indemnifiable Derivative Action involving Indemnitee as of the date of this
Agreement and (ii) no facts exist that may form the basis for any such Action
involving Indemnitee.
3. INDEMNIFICATION FOR ACTIONS OTHER THAN DERIVATIVE ACTIONS. If
Indemnitee was, is, or becomes a party to or a witness or other participant in,
or is threatened to be made a party to or witness or other participant in, an
Indemnifiable Action other than an Indemnifiable Derivative Action, the Company
shall, subject to the provisions of this Agreement, indemnify Indemnitee to the
fullest extent permitted by law against any and all Expenses, judgments, fines,
penalties, and amounts paid in settlement of such Action.
4. INDEMNIFICATION FOR DERIVATIVE ACTIONS.
(a) BASIC INDEMNIFICATION. If Indemnitee was, is, or becomes a
party to or a witness or other participant in, or is threatened to be made a
party to or witness or other participant in an Indemnifiable Derivative Action,
the Company shall, subject to the provisions of this Agreement, indemnify
Indemnitee to the fullest extent permitted by law against any and all Expenses,
but not judgments, fines, or, except as set forth below, amounts paid in
settlement of such Derivative Action.
(b) ADJUDICATION OF LIABILITY IN DERIVATIVE ACTIONS.
Notwithstanding Paragraph 4(a), no indemnification shall be made in respect of
any claim, issue, or matter as to which Indemnitee shall have been adjudged (by
final judicial determination from which there is no further right to appeal) to
be liable to the Company unless and only to the extent that the court in which
such Derivative Action was brought shall determine upon application by
Indemnitee that despite the adjudication of liability and in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnification which such court shall deem proper.
(c) SETTLEMENT OF DERIVATIVE ACTIONS. Notwithstanding
Paragraph 4(a), the court in which such Derivative Action was brought may
determine upon application of Indemnitee that, in view of all circumstances of
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the case, indemnity for amounts paid in settlement is proper and may order
indemnity for the amounts so paid in settlement and for the Expenses actually
and reasonably paid in connection with such application, to the extent the court
deems proper.
5. LIMITS ON INDEMNIFICATION. Except as stated in Paragraph 6, there
shall be no indemnification pursuant to this Indemnification Agreement:
(a) to the extent that payment for the same claims or amounts
are actually made to the Indemnitee under a valid and collectible insurance
policy; provided, however, that if it should subsequently be determined that the
Indemnitee is not legally entitled to retain any such payment, the restriction
on indemnification pursuant to this subparagraph (a) shall no longer apply;
(b) to the extent that the Indemnitee is indemnified or
receives a recovery for the same claims or amounts otherwise than pursuant to
this Indemnification Agreement; provided, however, that if it should
subsequently be determined that the Indemnitee is not legally entitled to retain
any such recovery, the restriction on indemnification pursuant to this
subparagraph (b) shall no longer apply;
(c) on account of any violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and rules promulgated thereunder;
(d) on account of any violation of Section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any rules
promulgated thereunder, or similar state law, to the extent that such violation
is based on (i) the purchase or sale of a security by Indemnitee or a person
affiliated with Indemnitee while Indemnitee is in possession of material
nonpublic information about the Company, or (b) the communication of material
nonpublic information about the Company in connection with any transaction on or
through the facilities of a national securities exchange or from or through a
broker or dealer, other than as part of a securities offering by the Company;
(e) with respect to any transaction from which the Indemnitee
derived an improper personal benefit to which he or she is not legally entitled;
(f) for the return of any remuneration paid to the Indemnitee
that is held by any court in a final judgment to have been illegal or improper;
(g) to the extent that the Indemnitee's action or failure to
act was (i) not in good faith, or (ii) in the case of conduct Indemnitee's
official capacity with the Company, not in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Company, or, in
other cases, conduct was opposed to the Company's best interests, or (iii) with
respect to any criminal Action, with reasonable cause to believe his or her
conduct was unlawful; or
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(h) if a final nonappealable decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
6. PARTIAL AND MANDATORY INDEMNITY. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company of some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of an Action but not for the total amount, the Company shall
indemnify Indemnitee for the portion to which Indemnitee is entitled. To the
extent that Indemnitee has been successful on the merits or otherwise (including
dismissal with or without prejudice) in defense of any Indemnifiable Action or
Indemnifiable Derivative Action, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against Expenses actually and reasonably
incurred by him in connection therewith, except as stated in Paragraph 5(a) or
5(b).
7. NOTIFICATION OF INDEMNIFIABLE ACTION OR INDEMNIFIABLE DERIVATIVE
ACTION. Indemnitee shall promptly notify the Company of any Indemnifiable Action
or Indemnifiable Derivative Action promptly after receipt by Indemnitee of
notice of the commencement of such Indemnifiable Action or Indemnifiable
Derivative Action. With respect thereto:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, the Company jointly
with any other indemnifying party may assume the defense thereof, with counsel
reasonably satisfactory to Indemnitee to be chosen or approved by the Company.
After notice from the Company to Indemnitee of its election to so assume the
defense thereof, the Company will not be liable to Indemnitee for any legal or
other expenses subsequently incurred by Indemnitee in connection with the
defense thereof other than reasonable costs of investigation or participation in
such Action or Derivative Action (including travel expenses) or as otherwise
provided below. Indemnitee shall have the right to employ independent counsel in
such Action or Derivative Action; however, the fees and expenses of such counsel
incurred after notice from the Company of its assumption of the defense thereof
shall be at the expense of Indemnitee unless:
(i) the employment of independent counsel by
Indemnitee has been authorized by the Company;
(ii) counsel employed by the Company to represent the
Indemnitee shall have reasonably concluded that there may be a conflict
of interest in the conduct of the defense of such action that prevents
such counsel from representing Indemnitee; or
(iii) the Company shall not in fact have employed
counsel to assume the defense of such Action or Derivative Action on
behalf of Indemnitee.
The fees and expenses of independent counsel of Indemnitee in subparagraphs
7(b)(i), (ii) and (iii) shall be borne by the Company.
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(c) If the Company has assumed the defense of the Indemnitee
pursuant to subparagraph (b) above, the Company shall not be liable to indemnify
Indemnitee under this Agreement for any amount paid in settlement of any Action
or Derivative Action effected without its written consent, the Company shall not
settle any Action or Derivative Action in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written consent, and
neither the Company nor Indemnitee will unreasonably withhold their consent to
any proposed settlement.
8. ADVANCE OF EXPENSES; FAILURE TO PAY CLAIM.
(a) WRITTEN REQUEST. If so requested by Indemnitee in writing,
the Company shall (subject to the Expense Advance Rules hereinafter described)
advance to Indemnitee (an "Expense Advance") any and all Expenses incurred in
connection with the investigation and preparation of the Indemnitee's
participation in any Indemnifiable Action or Indemnifiable Derivative Action,
whether as a witness or a party, pursuant to this Agreement. The Company shall
comply with the Indemnitee's written request for an Expense Advance, and make
any necessary determination that the facts then known would not preclude
indemnification under the ABCA, within ten (10) business days of receipt of such
written request together with the reimbursement commitment referred to in
subparagraph (b) below. If the Company does not honor Indemnitee's request for
an Expense Advance, Indemnitee may bring an action in any court of competent
jurisdiction to enforce the right to an Expense Advance, the Company shall have
the burden of proof in such action to demonstrate that the Expense Advance is
not payable, and the Company shall reimburse Indemnity for all Expense thereof
unless the court denies indemnification.
(b) REIMBURSEMENT BY INDEMNITEE. The obligation of the Company
to make an Expense Advance shall be subject to the condition that, if it is
ultimately determined (by final judicial determination from which there is no
further right to appeal) that there are matters to which Indemnitee is not
entitled to indemnity under this Agreement, the Company shall be entitled to be
reimbursed by Indemnitee for all such amounts. Prior to obtaining the initial
Expense Advance, Indemnitee must confirm such reimbursement obligation by
delivery to Company of a signed undertaking in the form of Exhibit A or in such
other form as Company may reasonably accept.
(c) EXPENSE ADVANCE RULES. Expenses in all cases must be
reasonable and comply with existing or future billing procedures of the Company
so that the Company can reasonably monitor and audit such Expenses. With respect
to attorneys' fees, the Company will give reasonable consideration to requests
for specific counsel and to requests for the grouping of individuals for joint
defense purposes. Any attorney representing more than one individual may be
requested to render separate statements to each individual or otherwise allocate
billings by individual.
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<PAGE>
(d) FAILURE TO PAY CLAIM. If loss has been incurred and a
claim for indemnification under this Agreement is not paid by the Company within
ten (10) business days after a written claim has been received by the Company,
Indemnitee may at any time thereafter bring suit against the Company to recover
any unpaid amount of the claim and all Expenses incurred by Indemnitee to obtain
such court ordered indemnification.
9. BURDEN OF PROOF. In connection with any determination as to whether
Indemnitee is entitled to be indemnified hereunder the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
10. NO PRESUMPTION. For purposes of this Agreement, the termination of
any Action by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of NOLO CONTENDERE, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not payable under this Indemnification Agreement or
permitted by applicable law.
11. NONEXCLUSIVITY, ETC. The rights of the Indemnitee hereunder shall
be in addition to any other rights Indemnitee may have under the Company's
Articles of Incorporation or bylaws, or the ABCA or otherwise. To the extent
that a change in the ABCA (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's Articles of Incorporation, bylaws and this Agreement, it is the intent
of the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
12. LIABILITY INSURANCE. To the extent the Company maintains an
insurance policy or policies providing Directors' and Officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company Director, Officer or Indemnitee. If Indemnitee incurs any Expenses in
tendering the defense of the Action to the insurance company providing the
Directors and Officers insurance, such Expenses shall be considered
indemnifiable Expenses.
13. PERIOD OF LIMITATIONS. No legal action shall be brought and no
cause of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; PROVIDED, HOWEVER, that if any shorter
period of limitations is otherwise applicable to any such cause of action such
shorter period shall govern.
14. NO RIGHT TO EMPLOYMENT. Nothing contained in this Indemnification
Agreement is intended to, or shall, create any right to employment by the
Company.
15. AMENDMENTS AND WAIVER. No supplement, modification, or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto; provided, however, that if any provision of this Agreement is
challenged as being unlawful, the parties agree that the court in which such
challenge is litigated may modify such provision so that it is enforceable to
the maximum extent permitted by law and may enforce the Agreement as so
modified. No waiver of any of the provisions of this Agreement shall be deemed
or shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
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16. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
17. BINDING EFFECT. ETC. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors, heirs, and assigns.
18. TERMINATION BY COMPANY. This Agreement shall continue in full force
and effect, regardless of whether Indemnitee continues to serve as a director of
the Company or any other enterprise at the Company's request, unless terminated
pursuant to this Paragraph. By giving written notice to Indemnitee at his or her
address according to Company records, the Company, prior to a Potential Change
of Control or Change of Control, may terminate its obligations under this
Indemnification Agreement as to any act or omission of Indemnitee after such
written notice is given. Any such termination of this Agreement shall not
terminate the Company's obligations hereunder with respect to actions which
occurred prior to such termination. Notice is deemed given when actually
received or two days after being sent by registered or certified mail, whichever
is earlier.
19. SEVERABILITY. The provisions of this Agreement shall be severable
and, in the event that any of the provisions hereof (including any provision
within a single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, the remaining
provisions shall remain enforceable to the fullest extent permitted by law,
including the provisions that have been modified by a court pursuant to
Paragraph 15 hereof.
20. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Arizona applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
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21. PRIOR AGREEMENTS. This Agreement supersedes all prior
Indemnification Agreements between the Company and Indemnitee.
EMPLOYEE SOLUTIONS, INC.
By: /s/ Quentin P. Smith
-----------------------------
Its: Chairman of the Board
----------------------------
/s/ James E. Gorman
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Signature of Indemnitee
James E. Gorman
- --------------------------------
Print Name
Address for notices: 6225 N. 24th
-------------------------
Phoenix, AZ 85016
-------------------------
-------------------------
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EXHIBIT A
______________________, 199_
Employee Solutions, Inc.
Attention: Chief Executive Officer
6225 N. 24th Street
Phoenix, AZ 85016
RE: INDEMNIFICATION AGREEMENT DATED , 199_ (THE "AGREEMENT")
Gentlemen:
I am the beneficiary of the above Agreement and am a defendant,
witness, or other participant in the following legal action:
___________________________________. A copy of the Complaint in this action is
attached for your information.
Pursuant to Paragraph 8 of the Agreement, I hereby request that
Employee Solutions, Inc. advance my Expenses as such term is used in the
Agreement, subject to the Expense Advance Rules, as such Rules are applied in
the Agreement. I hereby confirm that I will reimburse Employee Solutions, Inc.
for all the amounts advanced to me that are ultimately determined (by final
judicial determination from which there is no further right to appeal) to be
associated with matters to which I am not entitled to indemnity under the
Agreement.
If any additional information is needed, my address and telephone
number are listed below:
Address:
- -------------------------
- -------------------------
- -------------------------
Telephone Number:
- -------------------------
Very truly yours,
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MEMORANDUM OF UNDERSTANDING
1. RESIGNATION. You, Marvin D. Brody, confirm your resignation as
Chairman of the Board, Chief Executive Officer and an employee of Employee
Solutions, Inc. ("ESI") (as well as any position as an officer, director or
employee which you held with any of ESI's subsidiaries) effective August 6,
1998.
2. SEVERANCE PAYMENT. Within two business days after all parties have
signed this agreement, ESI will provide to you a one-time payment equal to your
current annual base salary minus applicable withholdings.
3. CONSULTING SERVICES. Subject to the terms and conditions herein, you
agree to provide consulting services to ESI for a two-year period. Such services
shall include without limitation assistance with matters in litigation or
arbitration. You agree to travel as reasonably requested from time to time by
ESI in performance of such services. Compensation for such services shall be
furnished at the rate of $16,375 per month, with the first payment (with respect
to the month of August 1998) to be made within two business days after all
parties have signed this Agreement. The payment for the month of September 1998
and subsequent months through July 2000 will be due and payable at the end of
each month. No separate compensation will be provided for your service as a
director of ESI.
4. INDEPENDENT CONTRACTOR STATUS. You are retained by ESI only for the
purposes and to the extent set forth in this Agreement, and your relationship to
ESI during the period of service hereunder is solely that of an independent
contractor. You shall not be considered under the provisions of this Agreement
or otherwise as having an employee status or being entitled to participate in
any plans, arrangements or distributions by ESI pertaining to or in connection
with any benefits for ESI's regular employees. In conducting your duties
hereunder, you shall retain sole discretion and judgment in the manner and means
of carrying out said duties, provided, however, that you shall act reasonably
and exercise due care in carrying out said duties and shall comply with all
general ESI policies with respect thereto. In addition, you shall have no
authority to bind ESI by any promise or representation, unless specifically
authorized to do so. No contract, agreement or other obligation in the name or
on the account of ESI shall be valid or binding unless first signed by an
authorized executive officer of ESI.
5. RESPONSIBILITY FOR TAXES. You shall be responsible for the payment
of all unemployment taxes and costs, federal and state taxes, together with any
penalties and interest thereon, as well as social security contributions,
unemployment insurance and workers' compensation and insurance costs, which may
be due and payable with respect to the amounts received by you hereunder.
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6. PROOF OF TAX PAYMENTS. You shall, upon request from ESI, provide ESI
with information, documentation and other proof satisfactory to ESI establishing
that you are timely reporting and timely paying your taxes in a manner
consistent with the independent contractor status provided for herein and
otherwise fully and timely complying with your tax-paying and tax-reporting
obligations.
7. RESPONSIBILITY FOR EXPENSES. Except as provided in Sections 10 and
11 herein, ESI shall not be liable to you for any expenses incurred by you in
performing your services, duties, responsibilities and obligations hereunder,
nor shall ESI be liable to you for any office overhead or other overhead
expenses which may be incurred by you as a result of this Agreement.
8. CANCELLATION OF OPTIONS. All of your current options are cancelled
effective August 6, 1998.
9. COBRA AVAILABILITY. COBRA coverage shall be available for you and
your family members at your own expense in accordance with ESI's customary
procedures.
10. EXPENSE REIMBURSEMENT. ESI will reimburse your reasonable business
expenses incurred in accordance with company policy in connection with providing
consulting services.
11. OFFICE ALLOWANCE. You will be responsible for your own office
space, provided that ESI will provide $1,250 per month through September 1999 to
defray office expense. You will vacate your current office no later than
September 30, 1998. You may have use of another office designated by ESI in the
south portion of ESI's premises through no later than December 31, 1998.
12 NON-DISCLOSURE. You shall not discuss, with any ESI employee or any
other person, any non-public information relating to ESI without the prior
written authorization of ESI's Chief Executive Officer or Chairman. The
foregoing shall not apply to communications made (i) in your role as a director;
(ii) in the course of performing consulting services requested by ESI's Chief
Executive Officer or Chairman, to persons specifically identified by ESI's Chief
Executive Officer or Chairman; or (iii) testimony in a judicial or
administrative proceeding. You agree that you will refer all inquiries
concerning ESI to the appropriate designated officer(s) of ESI.
13. PROPRIETARY AND CONFIDENTIAL INFORMATION.
(a) RESTRICTIVE COVENANTS. You acknowledge that, in your
capacity as an independent contractor hereunder, you will occupy a position of
trust and confidence, and that you will develop and have much information about
ESI and its operations that is confidential or not generally known in the
community. You agree that all such information (herein, "Confidential
Information") is proprietary or confidential or constitutes trade secrets and is
the sole property of ESI. You agree to keep confidential, and (except in the
ordinary performance of your duties as a consultant or as a director as set
forth in Section 12 above) will not reproduce, copy or disclose to
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any other person or firm, any such Confidential Information, or any other
Confidential Information, consisting of any documents or information relating to
the methods, clients, accounts, systems, programs, procedures, correspondence or
records of ESI or any other documents used or owned by ESI, nor will you advise,
discuss with or in any way assist any other person or firm in obtaining or
learning about any of the items described in this paragraph. Accordingly, you
agree that during the term of this Agreement, and afterwards, you will not
disclose, permit or encourage anyone to disclose any such information, nor will
you utilize any such information, either alone or with others, outside the scope
of Section 12 above. Upon the termination or expiration of the consulting
relationship between the parties, for any reason whatsoever, the originals and
all copies of all Confidential Information shall be immediately delivered and
returned to ESI, without any notice or demand on ESI's part being required.
(b) REMEDIES. It is agreed that the restrictions contained in
this Section 13 are reasonable, but it is recognized that damages in the event
of the breach of any of the restrictions will be difficult or impossible to
ascertain; and, therefore, you agree that, in addition to and without limiting
any other right or remedy ESI may have, ESI shall have the right to an
injunction against you issued by a court of competent jurisdiction enjoining any
such breach. It is further specifically acknowledged and agreed by the parties
that, in the event of any breach of this Section 13, then, at its sole option,
ESI shall have no further obligations under this Agreement, including, but not
limited to, the obligation to make any further payments which might otherwise be
required hereunder.
14. NON-COMPETITION.
(a) RESTRICTIVE COVENANTS. You agree that, during the term of
the payments to be made under Section 3 and for a period of two years
thereafter, you shall not engage, directly or indirectly, whether on your own
account or as a shareholder (other than as a less than one percent (1%)
shareholder of a publicly-held company), partner, joint venturer, employee,
consultant, advisor, and/or agent, of any person, firm, corporation, or other
entity, in any or all of the following activities within any State or Territory
of the United States of America (collectively, the "Restricted States") or
elsewhere, as noted:
(1) Enter into or engage in the PEO business or
training persons in connection with any such business in any manner whatsoever
in any one or more of the Restricted States or provide consulting services,
mergers and acquisitions services or any other services to any PEO businesses or
PEOs;
(2) Use any customer lists or solicit customers,
joint venturers, contractors, agents, employees, suppliers, or business
patronage, of ESI for the purpose of, or which results in, competition with ESI
concerning the PEO business or any other business in which ESI is currently
engaged, regardless of where located;
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(3) Solicit the engagement or employment of any ESI
officers, directors, employees, independent contractors or any other party or
person being paid by ESI; or
(4) Promote or assist, financially or otherwise, any
person, firm, association, corporation, or other entity engaged as a PEO or
engaged in the PEO business in any one or more of the Restricted States.
(b) REMEDIES. It is agreed that the restrictions contained in
this Paragraph 14 are reasonable, but it is recognized that damages in the event
of the breach of any of the restrictions will be difficult or impossible to
ascertain; and, therefore, you have agreed that, in addition to and without
limiting any other right or remedy which it may have, ESI shall have the right
to an injunction against you, in ESI's discretion, issued by a court of
competent jurisdiction enjoining any such breach. It is further specifically
acknowledged and agreed by the parties that, in the event of any breach of this
Section 14, then, at its sole option, ESI shall have no further obligations
under this Agreement, including, but not limited to, the obligation to make any
further payments which might otherwise be required hereunder.
(c) ACKNOWLEDGMENTS. You also agree, acknowledge, covenant,
represent and warrant as follows:
(1) That you have read and fully understand the
foregoing restrictions and that you have had the opportunity to consult with
competent legal counsel regarding the uses and enforceability of restrictive
covenants in the Restricted States;
(2) That you are aware that there may be defenses to
the enforceability of the foregoing restrictive covenants, based on time or
territory considerations, and that they knowingly, consciously, intentionally
and entirely voluntarily, irrevocably waive any and all such defenses and will
not assert the same in any action or other proceeding brought by ESI for the
purpose of enforcing the restrictive covenants or in any other action or
proceeding involving you, on the one hand, and ESI, on the other hand; and
(3) That you are fully and completely aware that, and
further understand that, the foregoing restrictive covenants are an essential
part of the consideration for ESI entering into this Agreement and that ESI is
entering into this Agreement in full reliance on these acknowledgments,
covenants, representations and warranties.
(d) ADDITIONAL AGREEMENTS. In the event that the period of
time and/or territory described above are nevertheless held to be in any respect
an unreasonable restriction (after giving due consideration to the provisions of
Paragraph 14(c) above), then it is agreed that the court so holding may reduce
the territory to which the restriction pertains or the period of time in which
it operates or may reduce both such territory and such period, to the minimum
extent necessary to render such provision enforceable.
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<PAGE>
15. RELEASE. You hereby fully and forever release and discharge ESI and
its parents, affiliates and subsidiaries, including all predecessors and
successors, assigns, officers, directors, trustees, executives, agents and
attorneys, past and present (collectively, the "Released Parties") from any and
all claims, demands, liens, agreements, contracts, covenants, actions, suits,
causes of action, obligations, controversies, debts, costs, expenses, damages,
judgments, orders and liabilities, of whatever kind or nature, direct or
indirect, in law, equity or otherwise, whether known or unknown, arising out of
your employment by ESI or the termination thereof, including, but not limited
to, any claims for relief or causes of action under federal, state or local
statute, ordinance or regulation regarding discrimination in employment and any
claims, demands or actions based upon alleged wrongful or retaliatory discharge
or breach of contract under any state or federal law. The foregoing release does
not extend to (i) claims solely to enforce ESI's obligations under this
Agreement; or (ii) claims solely to enforce the Indemnification Agreement
between ESI and you dated November 21, 1996, or claims for indemnification under
any applicable law of ESI's Articles of Incorporation or Bylaws.
16. NON-DISPARAGEMENT. ESI (meaning, solely for this purpose, ESI's
directors and executive officers and other individuals authorized to make
official communications on ESI's behalf) will not disparage you or your
performance or otherwise take any action which could reasonably be expected to
adversely affect your personal or professional reputation. Similarly, you will
not disparage ESI or any of its directors, officers, agents or employees or
otherwise take any action which could reasonably be expected to adversely affect
the personal or professional reputation of ESI or any of its directors,
officers, agents or employees.
17. COVENANT NOT TO SUE. You agree never to join in or commence any
claim, action, suit or proceeding, in law or in equity, or before any
administrative agency, or to incite, encourage, or participate in any such
claim, action, suit or proceeding against ESI in any way pertaining to or
arising out of your employment or termination of employment with ESI, except to
enforce the terms of this agreement.
18. TENDER-BACK. Should you attempt to challenge the enforceability of
this Agreement or any provision herein, or attempt to initiate any legal
proceedings, including but not limited to administrative agency or court
proceedings arising out of or related to your employment or termination of
employment with ESI, you shall initially tender to ESI, by certified check
delivered to counsel for ESI, the full amount of cash consideration paid to you
hereunder, plus interest at the legal rate from the date of your execution of
this Agreement, and shall invite ESI to cancel this Agreement. If ESI accepts
the offer to cancel the Agreement, this Agreement shall be canceled. If ESI does
not accept this offer to cancel, ESI shall so notify you and shall place the
amount tendered by you in an interest-bearing account pending a determination of
the enforceability of this Agreement. If the Agreement is determined to be
enforceable, 100% of the amount of the account shall be repaid to you; if this
Agreement is not determined to be enforceable, the amount in the account shall
be retained by ESI or its designee. This Section 18 shall not be applicable to
actions brought by you to enforce ESI's obligations hereunder.
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<PAGE>
19. GOVERNING LAW; VENUE. This Agreement shall be governed in all
respects by the laws of the State of Arizona, and exclusive venue for any
controversy or claim arising out of, or relating to, this Agreement, or its
breach, shall lie in Phoenix, Maricopa County, Arizona.
20. EXPENSES IN CONNECTION WITH AGREEMENT. Each party shall be
responsible for its own fees and expenses (including legal fees) in connection
with this Agreement.
EMPLOYEE SOLUTIONS, INC.
/s/ Marvin D. Brody /s/ James E. Gorman
- ------------------------- ---------------------------
Marvin D. Brody By: James E. Gorman, CEO/President
September __, 1998 September __, 1998
6
SEVERANCE, RELEASE AND COOPERATION AGREEMENT
THIS AGREEMENT, made as of the 11th day of September, 1998, is entered
into by and between MORRIS C. AARON (hereafter "Executive") and EMPLOYEE
SOLUTIONS, INC., (hereafter "Employer") and arises out of the cessation of
Executive's employment with Employer. In consideration of the material promises
contained herein, the parties agree as follows:
1. COMPENSATION AND BENEFITS. Employer agrees to pay or provide, or
arrange for the payment or provision of the following:
a. BALANCE OF SALARY. Employer will continue to pay Executive
salary, at a monthly rate of $15,416.67 through September 11, 1998 (the
"Termination Date") in accordance with Employer's normal payroll practices.
b. LUMP SUM PAYMENT. Upon execution of this Agreement by all
parties, Employer will pay Executive a single cash lump sum severance payment of
$115,625.00 (less legally required withholdings).
c. MONTHLY PAYMENTS. Executive will also be entitled to
severance payments of an additional $115,625.00, payable in six (6) equal
monthly installments of $19,270.83 (less legally required withholdings) payable
the first pay date of each month commencing October 1998 in accordance with
Employer's payroll practices. Notwithstanding the foregoing, if a U.S. States
District Court approves a settlement of the case captioned IN RE EMPLOYEE
SOLUTIONS SECURITIES LITIGATION, CIV-97-545-PHX-RGS (OMP) (the "class action"),
prior to the payment of all installments under this PARAGRAPH 1C, Executive's
entitlement to all remaining installments will accelerate and the sum of those
remaining installments will be immediately paid to Executive in a single payment
(less legally required withholdings).
d. FRINGE BENEFITS. Employer shall continue coverage of
Executive and Executive's dependents under its medical and dental plans at its
expense for the lesser of 24 months or until Executive secures other employment
where group medical coverage is available (unless continuation of coverage under
such plans is not feasible, in which event Employer shall provide substantially
similar benefits).
e. ACCRUED BUT UNUSED VACATION. Upon execution of this
Agreement, Employer will pay Executive an amount in cash attributable to
Executive's accrued vacation days which remain unused as of the date hereof.
Such amount (subject to withholding for applicable federal, state and local
taxes) will be equal to $7,115.38.
f. REIMBURSEMENT OF BUSINESS EXPENSES. Employer will reimburse
Executive for business expenses incurred by Executive in the course of his
employment with Employer prior to the date hereof and submitted to Employer in
accordance with Employer's policies and practices regarding expense
reimbursements.
<PAGE>
g. EXPENSES. Each party shall be responsible for its own fees
and expenses (including legal fees) in connection with this Agreement.
If Executive dies prior to receiving all amounts payable hereunder, all
remaining amounts will be paid to Executive's spouse or, if she is not then
living, to his estate.
2. RESIGNATION.
a. This Agreement will reflect Executive's resignation as
Employer's Chief Financial Officer and Treasurer, and any office or position
with any of Employer's subsidiaries, effective as of September 11, 1998.
Employer will take with all reasonable speed those actions necessary so that
obligations of Employer (including, without limitation, paychecks issued by
Employer with respect to its own employees or on behalf of any third party) no
longer list Executive as a signatory. The Employment Agreement dated March 19,
1997 between Employer and Executive is hereby terminated for all purposes.
Executive's employment with Employer shall terminate automatically on the first
pay date of March 1999.
b. Following the execution of this Agreement by all parties,
Employer will issue the press release attached hereto as EXHIBIT A disclosing
Executive's resignation. Following the issuance of such press release, neither
party will disclose to any third party any information relating to Executive's
resignation other than the information contained in such press release and the
fact that Executive was offered an alternative position with Employer prior to
entering into this Agreement, or such additional information as may otherwise be
required by law.
c. Following Executive's resignation, Executive will have
reasonable access to his former office to remove personal items, including
decorations, personal papers and his Rolodex, provided that Employer may retain
a copy of the Rolodex information.
d. Employer shall direct employees assigned to answer
telephones to advise callers who ask for Executive that Executive has resigned
and to provide callers who wish to speak with Executive other than with respect
to Employer's business with Executive's home telephone number (or such other
number as Executive may specify).
e. Employer further agrees that it will maintain Executive's
personnel records and personnel information in confidence and will not release
any information other than Executive's dates of employment by the Employer and
job title to any person without the express written consent of Executive, except
as required by law.
f. Employer (meaning, solely for this purpose, Employer's
directors and executive officers and other individuals authorized to make
official communications on Employer's behalf) will not disparage Executive or
Executive's performance or otherwise take any action which could reasonably be
expected to adversely affect Executive's personal or professional reputation.
Similarly, Executive will not disparage Employer or any of its
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<PAGE>
directors, officers, agents or employees or otherwise take any action which
could reasonably be expected to adversely affect the personal or professional
reputation of Employer or any of its directors, officers, agents or employees.
The parties acknowledge that significant damages will be caused by a breach of
the foregoing but will be difficult to quantify, and agree that a party injured
by any such breach shall receive liquidated damages from the other party in an
amount equal to one month of Executive's current base salary for each violation
of this paragraph. In the case of a breach by Executive, such damages may be
offset against any payment remaining due from Employer hereunder.
3. STOCK OPTIONS. Executive's current stock options, as evidenced in
Employer's minutes, shall remain outstanding pursuant to their terms for 90 days
past the date of termination of employment set forth in Section 2.a. Options
which are exercisable on the date of termination shall remain exercisable during
such 90-day period.
4. RELEASE. Executive hereby fully and forever releases and discharges
Employer and its parents, affiliates and subsidiaries, including all
predecessors and successors, assigns, officers, directors, trustees, Executives,
agents and attorneys, past and present (collectively, the "Released Parties")
from any and all claims, demands, liens, agreements, contracts, covenants,
actions, suits, causes of action, obligations, controversies, debts, costs,
expenses, damages, judgments, orders and liabilities, of whatever kind or
nature, direct or indirect, in law, equity or otherwise, whether known or
unknown, arising out of Executive's employment by Employer or the termination
thereof, including, but not limited to, any claims for relief or causes of
action under federal, state or local statute, ordinance or regulation regarding
discrimination in employment and any claims, demands or actions based upon
alleged wrongful or retaliatory discharge or breach of contract under any state
or federal law. The foregoing release does not extend to (i) claims solely to
enforce Employer's obligations under this Agreement; or (ii) claims solely to
enforce the Non-Director Officer's Indemnification Agreement between Employer
and Executive dated November 21, 1996, or claims for indemnification under any
applicable law of Employer's Articles of Incorporation or By-laws (collectively
with the Non- Director Officer's Indemnification Agreement, the "Indemnification
Agreements").
5. [RESERVED.]
6. COOPERATION AGREEMENT. Executive further agrees that he will
cooperate fully with Employer and its counsel with respect to any matter
(including litigation, investigations, or governmental proceedings) which
relates to matters with which Executive was involved during the term of
employment with Employer. Executive will be available to perform such services
to the extent requested by Employer, including on a full-time basis as needed,
for six weeks after the date hereof. Thereafter, Executive will be available to
perform such services to the extent reasonably requested by Employer for up to
an average of 15 hours per month through Employer's first regularly scheduled
pay date of March 1999, at such times and places as are mutually agreeable to
the parties, and provided that Employer will cooperate with Executive in
scheduling such services to minimize disruption of any new employment
relationship which
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<PAGE>
Executive may have commenced. Subject to the foregoing sentence, Executive shall
render such cooperation in a timely manner on reasonable notice from Employer,
and agrees to travel as reasonably requested by Employer in connection with
performing such services. Employer will reimburse Executive's reasonable
out-of-pocket expenses incurred in connection with providing such services in
accordance with Employer's policies as in effect from time to time.
7. RETURN OF EMPLOYER PROPERTY. On or prior to the Termination Date,
Executive will return to Employer all documents, files (including copies
thereof) and other Employer property, including laptop computer and accessories,
keys and corby chips; PROVIDED, HOWEVER, that office equipment purchased by
Employer for Executive's use (including a desktop computer, fax machine,
cellular telephone and related software (to the extent in compliance with
applicable licenses) and accessories) will become property of Executive and need
not be returned to Employer.
8. EXECUTIVE'S ACKNOWLEDGMENT. Executive has fully reviewed the terms
of this Agreement, acknowledges that he understands the terms of this Agreement
and states that he is entering into this Agreement knowingly and voluntarily.
9. EXECUTIVE'S SUCCESSORS. This Agreement will be binding upon and
inure to the benefit of the parties hereto, their representatives, agents and
assigns, and as to Executive, his spouse, heirs, legatees, administrators and
personal representatives.
10. ENTIRE AGREEMENT OF THE PARTIES. This Agreement, together with the
Indemnification Agreements, constitutes the exclusive and complete agreement
between the parties hereto relating to the subject matter hereof. No amendment
of this Agreement will be binding unless in writing and signed by the parties.
11. SEVERABILITY. The provisions of this Agreement are severable. If
any provision or the scope of any provision is found to be unenforceable or is
modified by a court of competent jurisdiction, the other provisions or the
affected provisions as so modified shall remain fully valid and enforceable.
12. GOVERNING LAW. This Agreement shall be governed by the law of the
Arizona, without regard to the application of the principles of conflicts of
laws. Exclusive venue for any dispute or disagreement with respect to this
Agreement shall lie in Maricopa County, Arizona.
13. CONFIDENTIALITY AND NONCOMPETE AGREEMENT. Executive shall sign and
be bound by a confidentiality and non-compete agreement in Employer's current
standard form (attached as Exhibit B).
14. COMMUNICATIONS. Executive shall not discuss, with any ESI employee
or any other person, any matter relating to Employer or its subsidiaries,
affiliates, officers,
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<PAGE>
directors, employees or agents without the prior written authorization of
Employer's Chief Executive Officer. The foregoing shall not apply to (i)
communications to persons other than Employer's employees and independent
contractors consisting solely of information publicly available through
Employer's Securities and Exchange Commission filings or press releases; (ii)
communications in the course of services being provided hereunder to persons
with a need to receive such communications to perform the specific business
functions with respect to which Executive has been requested to provide
services; (iii) factual communications to prospective employers concerning
Executive's duties and responsibilities with Employer to the extent necessary in
connection with job interviews; or (iv) testimony in a judicial or
administrative proceeding. The parties acknowledge that significant damages will
be caused by a breach of the foregoing but will be difficult to quantify, and
agree that Employer shall receive liquidated damages equal to one month of
Executive's current base salary for each violation of this paragraph, which
damages may be offset against any payment remaining due from Employer hereunder.
15. TENDER BACK. Should Executive attempt to challenge the
enforceability of this Agreement or any provision herein, or attempt to initiate
any legal proceedings, including but not limited to administrative agency or
court proceedings arising out of or related to Executive's employment or
termination of employment with Employer, Executive shall initially tender to
Employer, by certified check delivered to counsel for Employer, the full amount
of cash consideration paid to him hereunder, plus interest at the legal rate
from the date of Executive's execution of this Agreement, and shall invite
Employer to cancel this Agreement. If Employer accepts the offer to cancel the
Agreement, this Agreement shall be canceled. If Employer does not accept this
offer to cancel, Employer shall so notify Executive and shall place the amount
tendered by Executive in an interest-bearing account pending a determination of
the enforceability of this Agreement. If the Agreement is determined to be
enforceable, 100% of the amount of the account shall be repaid to Executive; if
this Agreement is not determined to be enforceable, the amount in the account
shall be retained by Employer or its designee. This Section 15 shall not be
applicable to actions brought by Executive to enforce Employer's obligations
hereunder.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the undersigned acknowledge that they have executed
this instrument as their free and voluntary act, for the uses and purposes set
forth herein on the dates set forth below.
EMPLOYEE SOLUTIONS, INC.
By: /s/ Paul M. Gales
-----------------------------
Title: Senior Vice President and
General Counsel
-----------------------------
Date: September 11, 1998
-----------------------------
MORRIS C. AARON
By: /s/ MORRIS C. AARON
-----------------------------
Date: September 11, 1998
-----------------------------
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<PAGE>
EMPLOYEE SOLUTIONS ANNOUNCES RESIGNATION OF CHIEF FINANCIAL OFFICER
PHOENIX, ARIZONA -- SEPTEMBER 11, 1998 -- Employee Solutions, Inc.
(Nasdaq: ESOL), today announced that Morris C. Aaron has resigned as the
company's Chief Financial Officer and Treasurer. The company indicated that it
anticipates that a successor will be designated shortly.
Employee Solutions, Inc. is a leading professional employer
organization, providing employers throughout the United States with
comprehensive employee payroll, human resources and benefits outsourcing
services. ESI's integrated outsourcing services include payroll processing and
reporting, human resource administration, employment regulatory compliance, risk
management/workers' insurance services, retirement and health care programs, as
well as non- employment related products and services provided directly to
worksite employees. [add website reference]
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EMPLOYEE SOLUTIONS, INC.
1995 STOCK OPTION PLAN,
AS AMENDED BY SHAREHOLDER ACTION
ON JUNE 26, 1996 AND JULY 9, 1997
AND BY BOARD OF DIRECTORS ACTION
ON JANUARY 25, 1998
AND AS AMENDED BY SHAREHOLDER ACTION
ON JUNE 2, 1998
1. Purpose
The purposes of the 1995 Stock Option Plan ("Plan") of Employee Solutions, Inc.,
an Arizona corporation, are to attract and retain the best available employees
and directors of Employee Solutions, Inc. or any parent or subsidiary or
affiliate of Employee Solutions, Inc. which now exists or hereafter is organized
or acquired by or acquires Employee Solutions, Inc. (collectively or
individually as the context requires the "Company") as well as appropriate third
parties who can provide valuable services to the Company, to provide additional
incentive to such persons and to promote the success of the business of the
Company. This Plan is intended to comply with Rule 16b-3 under Section 16 of the
Securities Exchange Act of 1934, as amended or any successor rule ("Rule
16b-3"), and the Plan shall be construed, interpreted and administered to comply
with Rule 16b-3.
2. Definitions
(a) "Affiliate" means any corporation, partnership, joint venture or
other entity, domestic or foreign, in which the Company, either directly
or through another affiliate or affiliates, has a 50% or more ownership
interest.
(b) "Affiliated Group" means the group consisting of the Company and any
entity that is an "affiliate," a "parent" or a "subsidiary" of the
Company.
(c) "Board" means the Board of Directors of the Company.
(d) "Committee" means the Compensation or Stock Option Committee of the
Board (as designated by the Board), if such a committee has been
appointed.
(e) "Code" means the United States Internal Revenue Code of 1986, as
amended.
(f) "Incentive Stock Options" means options intended to qualify as
incentive stock options under Section 422 of the Code, or any successor
provision.
<PAGE>
(g) "ISO Group" means the group consisting of the Company and any
corporation that is a "parent" or a "subsidiary" of the Company.
(h) "Nonemployee Director" shall have the meaning assigned in Section
4(a)(ii) hereof.
(i) "Nonqualified Stock Options" means options that are not intended to
qualify for favorable income tax treatment under Sections 421 through 424
of the Code.
(j) "Parent" means a corporation that is a "parent" of the Company within
the meaning of Code Section 424(e).
(k) "Section 16" means Section 16 of the Securities Exchange Act of 1934,
as amended.
(l) "Subsidiary" means a corporation that is a "subsidiary" of the
Company within the meaning of Code Section 424(f).
3. Incentive and Nonqualified Stock Options
Two types of options (referred to herein as "options," without
distinction between such two types) may be granted under the Plan:
Incentive Stock Options and Nonqualified Stock Options.
4. Eligibility and Administration
(a) Eligibility. The following individuals shall be eligible to receive
grants pursuant to the Plan as follows:
(i) Any employee (including any officer or director who is an
employee) of the Company or any ISO Group member shall be eligible
to receive either Incentive Stock Options or Nonqualified Stock
Options under the Plan. An employee may receive more than one
option under the Plan.
(ii) Any director who is not an employee of the Company or any
Affiliated Group member (a "Nonemployee Director") shall be
eligible to receive only Nonqualified Stock Options in the manner
provided in paragraph 12 hereof.
(iii) Any other individual whose participation the Board or the
Committee determines is in the best interests of the Company shall
be eligible to receive Nonqualified Stock Options.
(b) Administration. The Plan may be administered by the Board or by a
Committee appointed by the Board which is constituted so to permit the
Plan to comply under Rule 16b-3.
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<PAGE>
The Company shall indemnify and hold harmless each director and Committee member
for any action or determination made in good faith with respect to the Plan or
any option. Determinations by the Committee or the Board shall be final and
conclusive upon all parties.
5. Shares Subject to Options
The stock available for grant of options under the Plan shall be shares
of the Company's authorized but unissued or reacquired voting common
stock. The aggregate number of shares that may be issued pursuant to
exercise of options granted under the Plan shall be 4,370,000 shares. No
individual shall be granted options for more than 250,000 shares in any
calendar year. If any outstanding option grant under the Plan for any
reason expires or is terminated, the shares of common stock allocable to
the unexercised portion of the option grant shall again be available for
options under the Plan as if no options had been granted with respect to
such shares.
6. Terms and Condition of Options
Option grants under the Plan shall be evidenced by agreements in such
form and containing such provisions as are consistent with the Plan as
the Board or the Committee shall from time to time approve. Each
agreement shall specify whether the option(s) granted thereby are
Incentive Stock Options or Nonqualified Stock Options. Such agreements
may incorporate all or any of the terms hereof by reference and shall
comply with and be subject to the following terms and conditions:
(a) Shares Granted. Each option grant agreement shall specify the
number of Incentive Stock Options and/or Nonqualified Stock
Options being granted; one option shall be deemed granted for each
share of stock. In addition, each option grant agreement shall
specify the exercisability and/or vesting schedule of such
options, if any.
(b) Purchase Price. The purchase price for a share subject to (i) a
Nonqualified Stock Option may be any amount determined in good
faith by the Committee, and (ii) an Incentive Stock Option shall
not be less than 100% of the fair market value of the share on the
date the option is granted, provided, however, the option price of
an Incentive Stock Option shall not be less than 110% of the fair
market value of such share on the date the option is granted to an
individual then owning (after the application of the family and
other attribution rules of Section 424(d) or any successor rule of
the Code) more than 10% of the total combined voting power of all
classes of stock of the Company or any ISO Group member. For
purposes of the Plan, "fair market value" at any date shall be (i)
the reported closing price of such stock on the New York Stock
Exchange or other established stock exchange or Nasdaq National
Market on such date, or if no sale of such stock shall
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<PAGE>
have been made on that date, on the preceding date on which there
was such a sale, (ii) if such stock is not then listed on an
exchange or the Nasdaq National Market, the last trade price per
share for such stock in the over-the-counter market as quoted on
Nasdaq or the pink sheets or successor publication of the National
Quotation Bureau on such date, or (iii) if such stock is not then
listed or quoted as referenced above, an amount determined in good
faith by the Board or the Committee.
(c) Termination. Unless otherwise provided herein or in a specific
option grant agreement which may provide for accelerated vesting
and/or longer or shorter periods of exercisability, no option
shall be exercisable after the expiration of the earliest of
(i) in the case of an Incentive Stock Option:
(1) 10 years from the date the option is granted, or
five years from the date the option is granted
to an individual owning (after the application
of the family and other attribution rules of
Section 424(d) of the Code) at the time such
option was granted, more than 10% of the total
combined voting power of all classes of stock of
the Company or any ISO Group member,
(2) three months after the date the optionee ceases
to perform services for the Company or any ISO
Group member, if such cessation is for any
reason other than death, disability (within the
meaning of Code Section 22(e)(3)), or cause,
(3) one year after the date the optionee ceases to
perform services for the Company or any ISO
Group member, if such cessation is by reason of
death or disability (within the meaning of Code
Section 22(e)(3)), or
(4) the date the optionee ceases to perform services
for the Company or any ISO Group member, if such
cessation is for cause, as determined by the
Board or the Committee in its sole discretion;
(ii) in the case of a Nonqualified Stock Option;
(1) 10 years from the date the option is granted,
(2) two years after the date the optionee ceases to
perform services for the Company or any
Affiliated Group member, if such cessation is
for any reason other than death, permanent
disability, retirement or cause,
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<PAGE>
(3) three years after the date the optionee ceases
to perform services for the Company or any
Affiliated Group member, if such cessation is by
reason of death, permanent disability or
retirement, or
(4) the date the optionee ceases to perform services
for the Company or any Affiliated Group member,
if such cessation is for cause, as determined by
the Board or the Committee in its sole
discretion; provided, that, unless otherwise
provided in a specific option grant agreement,
an option shall only be exercisable for the
periods above following the date an optionee
ceases to perform services to the extent the
option was exercisable on the date of such
cessation.
(d) Method of Payment. The purchase price for any share purchased
pursuant to the exercise of an option granted under the Plan shall
be paid in full upon exercise of the option by any of the
following methods, (i) by cash, (ii) by check, or (iii) to the
extent permitted under the particular grant agreement, by
transferring to the Company shares of stock of the Company at
their fair market value as of the date of exercise of the option
as determined in accordance with paragraph 6(b), provided that the
optionee held the shares of stock for at least six months.
Notwithstanding the foregoing, the Company may arrange for or
cooperate in permitting broker- assisted cashless exercise
procedures. The Company may also extend and maintain, or arrange
for the extension and maintenance of, credit to an optionee to
finance the optionee's purchase of shares pursuant to the exercise
of options, on such terms as may be approved by the Board or the
Committee, subject to applicable regulations of the Federal
Reserve Board and any other applicable laws or regulations in
effect at the time such credit is extended.
(e) Exercise. Except for options which have been transferred pursuant
to paragraph 6(f), no option shall be exercisable during the
lifetime of an optionee by any person other than the optionee, his
or her guardian or legal representative. The Board or the
Committee shall have the power to set the time or times within
which each option shall be exercisable and to accelerate the time
or times of exercise; provided, however, except as provided in
paragraph 12, no options may be exercised prior to the later of
the expiration of six months from the date of grant thereof or
shareholder approval, unless otherwise provided by the Board or
Committee. To the extent that an optionee has the right to
exercise one or more options and purchase shares pursuant thereto,
the option(s) may be exercised from time to time by written notice
to the Company stating the number of shares being purchased and
accompanied by payment in full of the purchase price for such
shares. Any certificate for shares of outstanding stock used to
pay the
5
<PAGE>
purchase price shall be accompanied by a stock power duly endorsed
in blank by the registered owner of the certificate (with the
signature thereon guaranteed). If the certificate tendered by the
optionee in such payment covers more shares than are required for
such payment, the certificate shall also be accompanied by
instructions from the optionee to the Company's transfer agent
with respect to the disposition of the balance of the shares
covered thereby.
(f) Nontransferability. No option shall be transferable by an optionee
otherwise than by will or the laws of descent and distribution,
provided that the Committee in its discretion may grant options
that are transferable, without payment of consideration, to
immediate family members of the optionee or to trusts or
partnerships for such family members; the Committee may also amend
outstanding options to provide for such transferability.
(g) ISO $100,000 Limit. If required by applicable tax rules regarding
a particular grant, to the extent that the aggregate fair market
value (determined as of the date an Incentive Stock Option is
granted) of the shares with respect to which an Incentive Stock
Option grant under this Plan (when aggregated, if appropriate,
with shares subject to other Incentive Stock Option grants made
before said grant under this Plan or another plan maintained by
the Company or any ISO Group member) is exercisable for the first
time by an optionee during any calendar year exceeds $100,000 (or
such other limit as is prescribed by the Code), such option grant
shall be treated as a grant of Nonqualified Stock Options pursuant
to Code Section 422(d).
(h) Investment Representation. Unless the shares of stock covered by
the Plan have been registered with the Securities and Exchange
Commission pursuant to Section 5 of the Securities Act of 1933, as
amended, each optionee by accepting an option grant represents and
agrees, for himself or herself and his or her transferees by will
or the laws of descent and distribution, that all shares of stock
purchased upon the exercise of the option grant will be acquired
for investment and not for resale or distribution. Upon such
exercise of any portion of any option grant, the person entitled
to exercise the same shall upon request of the Company furnish
evidence satisfactory to the Company (including a written and
signed representation) to the effect that the shares of stock are
being acquired in good faith for investment and not for resale or
distribution. Furthermore, the Company may if it deems appropriate
affix a legend to certificates representing shares of stock
purchased upon exercise of options indicating that such shares
have not been registered with the Securities and Exchange
Commission and may so notify its transfer agent.
(i) Rights of Optionee. An optionee or transferee holding an option
grant shall have no rights as a shareholder of the Company with
respect to any shares covered by any option
6
<PAGE>
grant until the date one or more of the options granted thereunder
have been properly exercised and the purchase price for such
shares has been paid in full. No adjustment shall be made for
dividends (ordinary or extraordinary, whether cash, securities or
other property) or distributions or other rights for which the
record date is prior to the date such share certificate is issued,
except as provided for in paragraph 6(k). Nothing in the Plan or
in any option grant agreement shall confer upon any optionee any
right to continue performing services for the Company or any
Affiliated Group member, or interfere in any way with any right of
the Company or any Affiliated Group member to terminate the
optionee's services at any time.
(j) Fractional Shares. The Company shall not be required to issue
fractional shares upon the exercise of an option. The value of any
fractional share subject to an option grant shall be paid in cash
in connection with an exercise that results in all full shares
subject to the grant having been exercised.
(k) Reorganizations, Etc. Subject to paragraph 9 hereof, if the
outstanding shares of stock of the class then subject to this Plan
are increased or decreased, or are changed into or exchanged for a
different number or kind of shares or securities, as a result of
one or more reorganizations, stock splits, reverse stock splits,
stock dividends, spin-offs, other distributions of assets to
shareholders, appropriate adjustments shall be made in the number
and/or type of shares or securities for which options may
thereafter be granted under this Plan and for which options then
outstanding under this Plan may thereafter be exercised. Any such
adjustments in outstanding options shall be made without changing
the aggregate exercise price applicable to the unexercised
portions of such options.
(l) Option Modification. Subject to the terms and conditions and
within the limitations of the Plan, the Board or the Committee may
modify, extend or renew outstanding options granted under the
Plan, accept the surrender of outstanding options (to the extent
not theretofore exercised), reduce the exercise price of
outstanding options, or authorize the granting of new options in
substitution therefor (to the extent not theretofore exercised).
Notwithstanding the foregoing, no modification of an option
(either directly or through modification of the Plan) shall,
without the consent of the optionee, alter or impair any rights of
the optionee under the option.
(m) Grants to Foreign Optionees. The Board or the Committee in order
to fulfill the Plan purposes and without amending the Plan may
modify grants to participants who are foreign nationals or
performing services for the Company
7
<PAGE>
or an Affiliated Group member outside the United States to
recognize differences in local law, tax policy or custom.
(n) Other Terms. Each option grant agreement may contain such other
terms, provisions and conditions not inconsistent with the Plan as
may be determined by the Board or the Committee, such as without
limitation discretionary performance standards, tax withholding
provisions, or other forfeiture provisions regarding competition
and confidential information.
7. Termination or Amendment of the Plan
The Board may at any time terminate or amend the Plan; provided, that
shareholder approval shall be obtained of any action for which
shareholder approval is required in order to comply with Rule 16b-3, the
Code or other applicable laws or regulatory requirements within such time
periods prescribed.
8. Shareholder Approval and Term of the Plan
The Plan shall be effective as of April 6, 1995, the date as of which it
was adopted by the Board, subject to ratification by the shareholders of
the Company within (each of) the time period(s) prescribed under Rule
16b-3, the Code, and any other applicable laws or regulatory
requirements, and shall continue thereafter until terminated by the
Board. Unless sooner terminated by the Board, in its sole discretion, the
Plan will expire on April 6, 2005 solely with respect to the granting of
Incentive Stock Options or such later date as may be permitted by the
Code for Incentive Stock Options, provided that options outstanding upon
termination or expiration of the Plan shall remain in effect until they
have been exercised or have expired or been forfeited.
9. Merger, Consolidation or Reorganization
In the event of a merger, consolidation or reorganization with another
corporation in which the Company is not the surviving corporation, the
Board, the Committee (subject to the approval of the Board) or the board
of directors of any corporation assuming the obligations of the Company
hereunder shall take action regarding each outstanding and unexercised
option pursuant to either clause (a) or (b) below:
(a) Appropriate provision may be made for the protection of such
option by the substitution on an equitable basis of appropriate
shares of the surviving corporation, provided that the excess of
the aggregate fair market value (as defined in paragraph 6(b)) of
the shares subject to such option immediately before such
substitution over the exercise price thereof is not more than the
excess of the aggregate fair market value of the substituted
shares made subject to option immediately after such substitution
over the exercise price thereof; or
8
<PAGE>
(b) Appropriate provision may be made for the cancellation of such
option. In such event, the Company, or the corporation assuming
the obligations of the Company hereunder, shall pay the optionee
an amount of cash (less normal withholding taxes) equal to the
excess of the highest fair market value (as defined in paragraph
6(b)) per share of the Common Stock during the 60-day period
immediately preceding the merger, consolidation or reorganization
over the option exercise price, multiplied by the number of shares
subject to such options (whether or not then exercisable).
10. Dissolution or Liquidation
Anything contained herein to the contrary notwithstanding, on the
effective date of any dissolution or liquidation of the Company, the
holder of each then outstanding option (whether or not then exercisable)
shall receive the cash amount described in paragraph 9(b) hereof and such
option shall be cancelled.
11. Withholding Taxes
(a) General Rule. Pursuant to applicable federal and state laws, the
Company is or may be required to collect withholding taxes upon
the exercise of an option. The Company may require, as a condition
to the exercise of an option or the issuance of a stock
certificate, that the optionee concurrently pay to the Company
(either in cash or, at the request of optionee but in the
discretion of the Board or the Committee and subject to such rules
and regulations as the Board or the Committee may adopt from time
to time, in shares of Common Stock of the Company) the entire
amount or a portion of any taxes which the Company is required to
withhold by reason of such exercise, in such amount as the
Committee or the Board in its discretion may determine.
(b) Withholding from Shares to be Issued. In lieu of part or all of
any such payment, the optionee may elect, subject to such rules
and regulations as the Board or the Committee may adopt from time
to time, or the Company may require that the Company withhold from
the shares to be issued that number of shares having a fair market
value (as defined in paragraph 6(b)) equal to the amount which the
Company is required to withhold.
(c) Special Rule for Insiders. Any such request or election (to
satisfy a withholding obligation using shares) by an individual
who is subject to the provisions of Section 16 shall be made in
accordance with the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
12. Automatic Grants to Certain Directors
9
<PAGE>
(a) Grant. Except in the case of an initial election of a Nonemployee
Director (which shall be governed by subsection (c) hereof) each
person who is elected as a Nonemployee Director at any Annual
Meeting of Shareholders automatically shall be granted, effective
as of the date of such Annual Meeting, options to acquire 2,500
shares of the Company's Common Stock for each year of the term to
which such Nonemployee Director is elected. Options granted
pursuant to this paragraph 12 shall become exercisable at the rate
of 2,500 shares of the Company's Common Stock upon the date of
each Annual Meeting following the date of grant, provided that the
Nonemployee Director has served as such throughout the preceding
year. Notwithstanding anything herein to the contrary, any person
who is a Nonemployee Director as of April 30, 1996 shall not be
entitled to receive any grant under this paragraph 12 until the
2000 Annual Meeting of Shareholders.
(b) Certain Option Terms. Options granted pursuant to this paragraph
12 shall have a 10-year term from the date of grant, provided that
any option held by a Nonemployee Director who is removed from the
Board for cause shall expire on the date of such removal. The
exercise price of all options granted pursuant to this paragraph
12 shall be the fair market value of the Company's Common Stock on
the date of grant.
(c) Initial Election to Board of Directors. Any person who initially
becomes a Nonemployee Director, whether at an Annual Meeting of
Shareholders or at any time other than on the date of an Annual
Meeting, shall automatically be granted options exercisable for
10,000 shares of Common Stock for the first year (including a
partial year in the case of an election between Annual Meeting),
and for an additional 2,500 shares of Common Stock for each
additional year of the term to which such Nonemployee Director is
elected. Options for one third of such shares shall vest on each
of the first three anniversary dates of the initial election to
the Board. Other terms of such option shall be as set forth
elsewhere in this paragraph 12.
(d) Stock Splits. Notwithstanding anything in the Plan to the
contrary, the number of options to be granted pursuant to
paragraphs 12(a) and 12(c) shall not be adjusted for forward stock
splits or similar occurrences which are effected during the year
ending December 31, 1996, provided that options granted pursuant
to paragraphs 12(a) or 12(c) prior to the effective date of any
such occurrence shall be subject to adjustment in the same manner
as other options granted pursuant to the Plan.
(e) Limitation on Amendment. This paragraph 12 shall not be amended
more than once every six months other than to comport with changes
in the Code, the Employee Retirement Income Security Act, or the
rules thereunder.
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDED SEPTEMBER 30, 1998 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 15,964
<SECURITIES> 19,416
<RECEIVABLES> 48,601
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 99,489
<PP&E> 4,744
<DEPRECIATION> 0
<TOTAL-ASSETS> 169,999
<CURRENT-LIABILITIES> 54,123
<BONDS> 0
0
0
<COMMON> 34,688
<OTHER-SE> (5,929)
<TOTAL-LIABILITY-AND-EQUITY> 169,999
<SALES> 0
<TOTAL-REVENUES> 706,965
<CGS> 0
<TOTAL-COSTS> 680,058
<OTHER-EXPENSES> 37,305
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,435
<INCOME-PRETAX> (15,293)
<INCOME-TAX> (1,498)
<INCOME-CONTINUING> (13,795)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,795)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
