U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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:
31,765,795 Common shares, no par value were outstanding as of May 13, 1998.
<PAGE>
EMPLOYEE SOLUTIONS, INC.
FORM 10-Q
Quarterly Report for the Period Ended March 31, 1998
- --------------------------------------------------------------------------------
INDEX
<TABLE>
<CAPTION>
Page
PART I. Financial Information Number
------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997 2
Consolidated Statements of Operations for the
Quarters Ended March 31, 1998 and 1997 3
Consolidated Statement of Changes in Stockholders'
Equity for the Quarter Ended March 31, 1998 4
Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 3. Quantitative and Qualitative Disclosure About Market Risk 29
PART II. Other Information
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
Item 1. Financial Statements
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
March 31, December 31,
(In thousands of dollars, except share data) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,446 $ 40,110
Investments and marketable securities 30,937 --
Restricted cash and investments 19,000 19,000
Accounts receivable, net 50,480 57,467
Receivables from insurance companies 6,968 7,070
Prepaid expenses and deposits 6,585 4,562
Income taxes receivable 4,080 4,080
Deferred income taxes 4,112 4,138
-------- --------
Total current assets 133,608 136,427
Property and equipment, net 4,176 3,159
Deferred income taxes 485 485
Goodwill and other assets, net 66,534 67,146
-------- --------
Total assets $204,803 $207,217
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued salaries, wages and payroll taxes $ 45,003 $ 43,263
Accounts payable 4,614 4,363
Accrued workers' compensation and health insurance 19,585 24,586
Other accrued expenses 7,235 5,886
-------- --------
Total current liabilities 76,437 78,098
-------- --------
Deferred income taxes 591 517
-------- --------
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, 31,739,795
shares issued and outstanding March 31, 1998, and 31,683,120 shares
issued and outstanding December 31, 1997 34,600 34,420
Retained earnings 6,961 7,866
Unrealized gain on investment securities 3 103
-------- --------
Total stockholders' equity 41,564 42,389
-------- --------
Total liabilities and stockholders' equity $204,803 $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 March 31,
-----------------------
(In thousands of dollars, except share and per share data) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 220,930 $ 195,966
------------ ------------
Cost of revenues:
Salaries and wages of worksite employees 180,684 156,662
Healthcare and workers' compensation 14,267 15,284
Payroll and employment taxes 16,513 13,752
------------ ------------
Cost of revenues 211,464 185,698
------------ ------------
Gross profit 9,466 10,268
Selling, general and administrative expenses 7,771 7,413
Depreciation and amortization 1,286 965
------------ ------------
Income from operations 409 1,890
Other income (expense):
Interest income 770 195
Interest expense (2,120) (942)
Other 3 --
------------ ------------
Income (loss) before provision for income taxes (938) 1,143
Income tax provision (benefit) (33) 457
------------ ------------
Net income (loss) $ (905) $ 686
============ ============
Net income (loss) per common and common equivalent share:
Basic $ (.03) $ .02
Diluted $ (.03) $ .02
Weighted average number of common and common equivalent shares outstanding:
Basic 31,701,036 30,877,101
============ ============
Diluted 31,701,036 32,983,120
============ ============
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
3
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Unrealized Total
(In thousands of dollars, Preferred Common Retained 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 56,675 shares of common
stock in connection with exercise of
common stock options -- 117 -- -- 117
Tax benefit related to the exercise of
stock options -- 63 -- -- 63
Change in unrealized net gains,
net of applicable taxes -- -- -- (100) (100)
Net loss -- -- (905) -- (905)
---------- -------- -------- -------- --------
BALANCE, March 31, 1998 $ -- $ 34,600 $ 6,961 $ 3 $ 41,564
========== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
4
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Quarter ended March 31,
(In thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 227,917 $ 187,163
Cash paid to suppliers and employees (225,161) (181,506)
Interest received 770 195
Interest paid -- (942)
Income taxes received (paid), net of refunds 133 (1,192)
---------- ----------
Net cash provided by operating activities 3,659 3,718
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,203) (360)
Business acquisitions (123) (3,170)
Investments and marketable securities (30,937) --
Cash invested in restricted cash and investments -- (2,000)
---------- ----------
Net cash used in investing activities (32,263) (5,530)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 2,500
Payment of deferred loan costs (177) --
Proceeds from issuance of common stock 117 380
Decrease in bank overdraft and other -- 575
---------- ----------
Net cash (used by) provided by financing activities (60) 3,455
---------- ----------
Net (decrease) increase in cash and cash equivalents (28,664) 1,643
CASH AND CASH EQUIVALENTS, beginning of period 40,110 10,980
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 11,446 $ 12,623
========== ==========
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
5
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Quarter ended March 31,
-----------------------
1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (905) $ 686
---------- ----------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation and amortization 1,286 965
Decrease (increase) in accounts receivable, net 6,987 (8,803)
Decrease in insurance company receivables 102 328
Increase in prepaid expenses and deposits (2,023) (1,251)
Decrease (increase) in deferred income taxes, net 100 (977)
Increase in other assets (225) (347)
Increase in accrued salaries,
wages and payroll taxes 1,740 10,162
Increase in accrued workers' compensation
and health insurance (5,001) 2,440
Increase in interest payable 2,120 --
Decrease in other long-term liabilities (2) --
Increase in accounts payable 251 1,169
Increase in income taxes payable/receivable -- 242
Decrease in other accrued expenses (771) (896)
---------- ----------
4,564 3,032
---------- ----------
Net cash provided by operating activities $ 3,659 $ 3,718
========== ==========
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
6
<PAGE>
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
March 31, 1998, ESI serviced approximately 1,800 client companies with
approximately 46,400 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 31%, represents
the largest concentration of clients, including one client that generated
approximately 20% of total revenues and 4% of gross profit in the first quarter
of 1998.
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 ended March 31, 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 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 March 31,
1998, the effect of SFAS No. 130 is not material.
7
<PAGE>
Employee Solutions, Inc. March 31, 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 March
31, 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, including restricted cash and investments, are not insured at March
31, 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 ended March 31, 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>
Three months ended March 31,
----------------------------------------------------------
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 31,701,036 31,701,036 30,877,101 30,877,101
Dilutive effect of options
and warrants outstanding -- -- -- 2,106,019
----------- ----------- ---------- -----------
Weighted average of
common and common
equivalent shares 31,701,036 31,701,036 30,877,101 32,983,120
=========== =========== ========== ===========
Net income (loss) $ (905) $ (905) $ 686 $ 686
Adjustments to net income -- -- -- (13)
----------- ----------- ---------- -----------
Adjusted net income for
purposes of the income per
common share calculation $ (905) $ (905) $ 686 $ 673
=========== =========== ========== ===========
Net income per common and
common equivalent share $ (0.03) $ (0.03) $ 0.02 $ 0.02
============= ========== ========== ===========
</TABLE>
- --------------------------------------------------------------------------------
The calculation of weighted average common and common equivalent shares for
purposes of calculating the March 31, 1998 diluted earnings per share, excludes
approximately 986,600 weighted average shares of options, warrants, and
contingently issuable shares computed under the treasury stock method, as their
effects would be anti-dilutive.
8
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
(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. The Company filed a registration statement under the Securities
Act, relating to an exchange offer for these Notes, which was declared effective
in April 1998. The Notes contain certain covenants, which 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 March 31, 1998 and December 31, 1997, and the results of
operations and cash flows for each of the quarters ended March 31, 1998 and
March 31, 1997, of Employee Solutions, Inc. (Parent), the guarantor subsidiaries
(Guarantors) and the subsidiaries which are not guarantors (Non-guarantors).
9
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Balance Sheets
For the Quarter Ended March 31, 1998
-----------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,334 $ 2,681 $ 3,431 $ -- $ 11,446
Investments and marketable securities 20,170 8,838 1,929 -- 30,937
Restricted cash and investments -- -- 19,000 -- 19,000
Accounts receivable, net 12,542 36,391 1,547 -- 50,480
Receivable from insurance companies -- 5,303 1,665 -- 6,968
Prepaid expenses and deposits 4,657 1,886 42 -- 6,585
Income taxes receivable 4,080 -- -- -- 4,080
Deferred income taxes 4,112 -- -- -- 4,112
Due from affiliates 23,075 (10,973) 9,071 (21,173) --
--------- ----------- ---------- ----------- ------------
Total current assets 73,970 44,126 36,685 (21,173) 133,608
Property and equipment, net 3,822 330 24 -- 4,176
Deferred income taxes 485 -- -- -- 485
Goodwill and other assets, net 32,101 34,050 383 -- 66,534
Investment in subsidiaries 50,574 -- -- (50,574) --
--------- ----------- ---------- ----------- ------------
Total assets $ 160,952 $ 78,506 $ 37,092 $ (71,747) $ 204,803
========= =========== ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ -- $ -- $ -- $ -- $ --
Accrued salaries, wages and payroll taxes 17,307 26,726 970 -- 45,003
Accounts payable (66) 2,836 1,844 -- 4,614
Accrued workers' compensation
and benefits -- 840 18,745 -- 19,585
Income tax payable 2 (2) -- -- --
Other accrued expenses 3,196 4,019 20 -- 7,235
Due to affiliates 13,358 4,732 3,083 (21,173) --
--------- ----------- ---------- ----------- ------------
Total current liabilities 33,797 39,151 24,662 (21,173) 76,437
--------- ----------- ---------- ----------- ------------
Deferred income taxes 591 -- -- -- 591
--------- ----------- ---------- ----------- ------------
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 34,600 2,622 771 (3,393) 34,600
Additional paid in capital -- 26,342 50 (26,392) --
Retained earnings 6,961 9,180 11,609 (20,789) 6,961
Unrealized gain on
investment securities 3 -- -- -- 3
--------- ----------- ---------- ----------- ------------
Total stockholders' equity 41,564 38,144 12,430 (50,574) 41,564
--------- ----------- ---------- ----------- ------------
Total liabilities and stockholders' equity $ 160,952 $ 78,506 $ 37,092 $ (71,747) $ 204,803
========= ========== ========== =========== ============
- --------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance Sheets
- --------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1997
-----------------------------------------------------------------
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
Receivable 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 overdraft $ -- $ -- $ -- $ -- $ --
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 benefits 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. March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statements of Operations
- ----------------------------------------------------------------------------------------------------------
For the Quarter Ended March 31, 1998
------------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 69,667 $ 142,939 $ 9,422 $ (1,098) $ 220,930
---------- ----------- ---------- ----------- ------------
Cost of revenues:
Salaries and wages of
worksite employees 56,379 117,229 7,076 -- 180,684
Healthcare and workers'
compensation 3,655 9,975 637 -- 14,267
Payroll and employment taxes 6,046 9,715 752 -- 16,513
---------- ----------- ---------- ----------- ------------
Cost of revenues 66,080 136,919 8,465 -- 211,464
---------- ----------- ---------- ----------- ------------
Gross profit 3,587 6,020 957 (1,098) 9,466
Selling, general and
administrative expenses 6,111 1,581 79 -- 7,771
Intercompany selling, general
and administrative expense 311 754 33 (1,098) --
Depreciation and amortization 902 380 4 -- 1,286
---------- ----------- ---------- ----------- ------------
Income (loss) from operations (3,737) 3,305 841 -- 409
Other income (expense):
Interest income 357 20 393 -- 770
Interest expense and other (2,194) 2 75 -- (2,117)
---------- ----------- ---------- ----------- ------------
Income (loss) before provision
for income taxes (5,574) 3,327 1,309 -- (938)
Income tax provision (benefit) (572) 117 422 -- (33)
--------- ----------- ---------- ----------- ------------
(5,002) 3,210 887 -- (905)
Income from wholly-owned
subsidiaries 4,097 -- -- (4,097) --
---------- ----------- ---------- ----------- ------------
Net income (loss) $ (905) $ 3,210 $ 887 $ (4,097) $ (905)
========== =========== ========== =========== ============
- ----------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statements of Operations
- -------------------------------------------------------------------------------------------------------
For the Quarter Ended March 31, 1997
------------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 100,446 $ 85,454 $ 19,170 $ (9,104) $ 195,966
---------- ----------- ---------- ---------- -----------
Cost of revenues:
Salaries and wages of
worksite employees 90,853 66,882 6,730 (7,803) 156,662
Healthcare and workers'
compensation 2,967 5,435 6,882 -- 15,284
Payroll and employment taxes 7,957 5,162 633 -- 13,752
---------- ----------- ---------- ---------- -----------
Cost of revenues 101,777 77,479 14,245 (7,803) 185,698
---------- ----------- ---------- ---------- -----------
Gross profit (1,331) 7,975 4,925 (1,301) 10,268
Selling, general and
administrative expenses 5,290 2,019 104 -- 7,413
Intercompany selling, general
and administrative expense 355 903 43 (1,301) --
Depreciation and amortization 490 468 7 -- 965
---------- ----------- ---------- ---------- -----------
Income (loss) from operations (7,466) 4,585 4,771 -- 1,890
Other income (expense):
Interest income 9 28 158 -- 195
Interest expense and other (970) (2) 30 -- (942)
---------- ----------- ---------- ---------- ----------
Income (loss) before provision
for income taxes (8,427) 4,611 4,959 -- 1,143
Income tax provision (benefit) (3,104) 1,844 1,717 -- 457
--------- ----------- ---------- ---------- -----------
(5,323) 2,767 3,242 -- 686
Income from wholly-owned
subsidiaries 6,009 -- -- (6,009) --
---------- ----------- ---------- ---------- -----------
Net income (loss) $ 686 $ 2,767 $ 3,242 $ (6,009) $ 686
========== =========== ========== ========== ===========
- -------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------
For the Quarter Ended March 31, 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) $ (905) $ 3,210 $ 887 $ (4,097) $ (905)
---------- ----------- ---------- ----------- ------------
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization 902 380 4 -- 1,286
Decrease (increase) in accounts
receivable, net 8,280 (2,031) 738 -- 6,987
Decrease (increase) decrease in insurance
company receivable -- 127 (25) -- 102
(Increase) decrease in prepaid
expenses and deposits (1,835) (421) 233 -- (2,023)
Decrease in deferred income taxes, net 100 -- -- -- 100
(Increase) decrease in other assets (502) 222 55 -- (225)
Increase (decrease) from inter-
company transactions 3,168 (7,653) 388 4,097 --
(Decrease) increase in accrued salaries,
wages, and payroll taxes (2,946) 5,304 (618) -- 1,740
Decrease in accrued workers'
compensation and health insurance (1,612) (1,371) (2,018) -- (5,001)
Increase in interest payable 2,120 -- -- -- 2,120
Increase in other long-term liabilities -- (2) -- -- (2)
Increase (decrease) in accounts payable (1,148) 518 881 -- 251
(Decrease) increase in other
accrued expenses (1,536) 1,478 (713) -- (771)
---------- ----------- ---------- ----------- ------------
4,991 (3,449) (1,075) 4,097 4,564
---------- ----------- ---------- ----------- ------------
Net cash provided by (used in)
operating activities 4,086 (239) (188) -- 3,659
---------- ----------- ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,113) (90) -- -- (1,203)
Business acquisitions (101) -- (22) -- (123)
Cash invested in investments
and marketable securities (20,170) (8,838) (1,929) -- (30,937)
---------- ----------- ---------- ----------- ------------
Net cash used in investing
activities (21,384) (8,928) (1,951) -- (32,263)
---------- ----------- ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 117 -- -- -- 117
Payment of deferred loan costs (177) -- -- -- (177)
---------- ----------- ---------- ----------- ------------
Net cash financing activities (60) -- -- -- (60)
---------- ----------- ---------- ----------- ------------
Net decrease in cash and cash
equivalents (17,358) (9,167) (2,139) -- (28,664)
CASH AND CASH EQUIVALENTS,
beginning of period 22,692 11,848 5,570 -- 40,110
---------- ----------- ---------- ----------- ------------
CASH AND CASH EQUIVALENTS,
end of period $ 5,334 $ 2,681 $ 3,431 $ -- $ 11,446
========== =========== ========== =========== ============
- ----------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statements of Cash Flows
- -------------------------------------------------------------------------------------------------------------
For the Quarter Ended March 31, 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) $ 686 $ 2,767 $ 3,242 $ (6,009) $ 686
-------- -------- -------- -------- --------
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
(USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization 490 468 7 -- 965
Increase in accounts receivable, net (5,270) (178) (3,355) -- (8,803)
(Increase) decrease in insurance
company receivable -- (2,433) 2,761 -- 328
Increase in prepaid expenses and deposits (859) (225) (167) -- (1,251)
Increase in deferred
income tax asset, net (977) -- -- -- (977)
(Increase) decrease in other assets (386) 26 13 -- (347)
Increase (decrease) from inter-
company transactions 974 (5,933) (1,050) 6,009 --
Increase in accrued salaries,
wages, and payroll taxes 4,646 5,045 471 -- 10,162
Increase (decrease) in accrued workers'
compensation and health insurance 826 83 1,531 -- 2,440
(Decrease) increase in accounts payable 1,577 (972) 564 -- 1,169
Increase (decrease) in income taxes payable. 356 (114) -- -- 242
(Decrease) increase in other accrued expenses (2,277) 1,337 44 -- (896)
-------- -------- -------- -------- --------
(900) (2,896) 819 6,009 3,032
-------- -------- -------- -------- --------
Net cash (used in) provided by
operating activities (214) (129) 4,061 -- 3,718
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (258) (102) -- -- (360)
Business acquisitions (2,988) (129) (53) -- (3,170)
Cash invested in restricted cash
and investments -- -- (2,000) -- (2,000)
-------- -------- -------- -------- --------
Net cash used in investing
activities (3,246) (231) (2,053) -- (5,530)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 2,500 -- -- -- 2,500
Proceeds from issuance of common stock 380 -- -- -- 380
Decrease in bank overdraft and other -- 575 -- -- 575
-------- -------- -------- -------- --------
Net cash provided by
financing activities 2,880 575 -- -- 3,455
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents (580) 215 2,008 -- 1,643
CASH AND CASH EQUIVALENTS,
beginning of period 2,435 6,747 1,798 -- 10,980
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 1,855 $ 6,962 $ 3,806 $ -- $ 12,623
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
(3) SHAREHOLDER RIGHTS PLAN:
On February 9, 1998, the Company's Board of Directors adopted a shareholder
rights plan. Initially, the rights are attached to the Company's common stock
and are not exercisable. They become detached from the common stock and become
immediately exercisable after any person or group becomes the beneficial owner
of 15 percent or more of the Company's common stock or 10 days after any person
or group announces a tender or exchange offer that would result in that same
beneficial ownership level, subject to certain exceptions.
If a buyer becomes a 15 percent owner in the Company, all rights holders, except
the buyer and certain related persons, will be entitled to purchase Series A
Junior Participating Preferred Stock in the Company at a price discounted from
the then market price. In addition, if the Company is acquired in a merger after
such an acquisition, all rights holders, except the buyer and certain related
persons, will also be entitled to purchase stock in the buyer at a discount in
accordance with the plan.
The distribution of rights was made to common stockholders of record on February
20, 1998, and shares of common stock issued after that date also carry rights
until they become detached from the common stock. The rights will expire on
February 19, 2008. The Company may redeem the rights for $0.001 each at any time
before a buyer acquires a 15 percent position in the Company, and under certain
other circumstances.
(4) 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 seeks certification of a class consisting of purchasers of securities
of the Company 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
attorney's fees. 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 Company was named as a defendant in an action filed by Ladenburg Thalmann &
Co., Inc. in the U.S. District Court, Southern District of New York, in May 1997
alleging breach of contract under certain stock warrants. The plaintiff seeks
damages of at least $2.5 million. The Company believes the action is without
merit and intends to defend the case vigorously.
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.
16
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
(5) SUBSEQUENT EVENT - 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 will be recorded in the second quarter of
1998.
17
<PAGE>
Employee Solutions, Inc. March 31, 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
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 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
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
18
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
$250,000 per occurrence plus the types of fees described below; and costs under
the Company's self-insurance program in Ohio, with respect to which the Company
retains liability of $50,000 per occurrence with an aggregate liability
limitation based on a percentage of the Ohio manual premium.
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 to sales personnel and related expenses.
Depreciation and Amortization
Depreciation and amortization consists primarily of the amortization of
goodwill, acquisition costs from the Company's prior acquisitions and deferred
financing costs. The Company amortizes goodwill, acquisition costs 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 are substantially affected by the Company's recent
substantial growth through acquisition of other companies providing PEO
services. The Company has accounted for its acquisitions using the "purchase"
method of accounting, 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.
19
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
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.
The Company has announced a proposed merger with Simplified Employment Services
Corporation (SES). SES is a Michigan-based PEO, with approximately 22,000
worksite employees at December 31, 1997, primarily in the Midwest. The letter of
intent signed by the Company and SES provides for a purchase price payable in
the form of 5.1 million shares of the Company's Common Stock and $5 million in
cash. The Company also will assume liabilities of up to $22.5 million. Cash
consideration will be increased (to a maximum of an additional $7.5 million) by
the amount, if any, that the assumed liabilities are less than $22.5 million.
The transaction would be accounted for using the purchase method of accounting.
Because of the relative sizes of the entities, the transaction may have a
substantial effect upon the Company and its financial results, capital
requirements, and condition going forward. Although the SES acquisition is
expected to be consummated in the third quarter of 1998, it remains subject to
execution of a definitive agreement and other conditions, and there can be no
assurance of completion.
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 tend to have higher or 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. Since the Company's revenues for an
individual client are generally earned and collected at a relatively constant
rate throughout each year, payment of such unemployment tax obligations
positively impacts the Company's working capital and results of operations as
the year progresses. 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.
<TABLE>
<CAPTION>
Results of Operations--Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997
- -------------------------------------------------------------------------------------------------------
Percent
(In thousands of dollars) 1998 Change 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 220,930 13% $ 195,966
Cost of revenues 211,464 14 185,698
Gross profit 9,466 (8) 10,268
Selling, general and administrative 7,771 5 7,413
Depreciation and amortization 1,286 33 965
Interest income 770 295 195
Interest expense 2,120 125 942
Net income (loss) (905) (232) 686
- -------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
Revenues
Revenues increased to $220.9 million for the quarter ended March 31, 1998 from
$196.0 million for the quarter ended March 31, 1997, an increase of 13%. 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 has transitioned its sales
operations from Atlanta to Phoenix during the first quarter of 1998 which has
had a short-term impact on internal sales. During the transition period, 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 number of worksite employees increased to
approximately 46,400 covering approximately 1,800 client companies at March 31,
1998 from approximately 40,800 covering 1,440 client companies at March 31,
1997.
Revenues related to stand-alone risk management/workers' compensation services
were $1.2 million for the quarter ended March 31, 1998 compared with revenues of
$3.5 million for the first quarter of 1997. The decline in stand-alone revenues
is attributable primarily to a change in business strategy, as the Company will
not actively market its stand-alone program 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.
Cost of revenues
Cost of revenues increased 14% to $211.5 million in the quarter ended March 31,
1998 from $185.7 million for the quarter ended March 31, 1997. This increase is
primarily due to the increase in the Company's business as described above.
The following table provides an analysis of the Company's workers' compensation
reserves associated with its partially self-insured programs for the periods
presented. Losses during 1996 and 1997 include all self-insured workers'
compensation programs. Losses for the quarter ended March 31, 1998 reflect the
Company's self-insurance program in Ohio and losses under the Company's
remaining stand-alone cases, which are the only programs under which the Company
retains workers' compensation risk in 1998. The table does not reflect the
effects of the April 1998 loss portfolio transfer.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Quarter ended Year ended Year ended
March 31, December 31, December 31,
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve - Beginning of period $ 21,518 $ 5,154 $ 1,052
Losses 1,726 30,407 10,034
Payments (4,366) (14,043) (5,932)
------------ -------- -----------
Reserve - End of period $ 18,878 $ 21,518 $ 5,154
============= ======== ===========
End of Period
Worksite employees 46,400 45,200 30,000
Stand-alone employees 6,620 11,100 13,500
------------ -------- -----------
Total employees 53,020 56,300 43,500
============ ======== ===========
- --------------------------------------------------------------------------------------------------------
</TABLE>
Gross profit
The Company's gross profit margin decreased from 5.2% in the quarter ended March
31, 1997 to 4.3% in the quarter ended March 31, 1998. This decrease was
attributable to several factors including the impact of repricing existing
clients due to competitive factors and lower margins on new business. The
proportion of gross profit related to TEAM Services revenues, which have lower
margins, increased in the period ended March 31, 1998 relative to the same
period in 1997. Gross profit margin in the first quarter of 1998 benefited by a
reduction of the Company's effective state unemployment insurance tax rate and
the guaranteed cost workers' compensation program. The Company generally also
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
21
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
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 March 31,
1998 increased by approximately $358,000 to $7.8 million, or 5%, from $7.4
million for the quarter ended March 31, 1997. Selling, general and
administrative expenses in 1998 and 1997 include the operations of various
acquisitions, the increase in corporate employees, the Company's relocation to
new office space in April of 1997, bad debt expense and professional services.
These factors which caused increases in selling, general and administrative
expense were partially mitigated by improved systems utilization and economies
of scale achieved within the Company's operations. The Company's insurance costs
have increased due primarily to the Company's growth. Commission expenses
increased in the quarter ended March 31, 1998 compared to the same period in
1997 due to the increase in revenues discussed above and an increase in
commissionable business. Selling, general and administrative expenses are
expected to continue to increase to meet the needs of new business, though the
Company has initiated efforts to improve efficiencies. The Company anticipates
that it will incur costs in connection with the expansion of its sales force and
the addition of account executives during 1998.
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 March 31, 1998, depreciation and amortization expense totaled $1.3
million compared to $1.0 million for the quarter ended March 31, 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, which cost approximately
$1.4 million and will be depreciated over three years. 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.
Interest
Interest expense for the quarter ended March 31, 1998 totaled $2.1 million
compared to $900,000 for the quarter ended March 31, 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 March 31, 1998 interest income totaled $770,000 compared to $195,000 for
the quarter ended March 31, 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 is expected to decrease in
future periods as a result of the LPT.
Effective tax rate
The Company's effective tax rate provides for federal, state and local income
taxes. For the quarter ended March 31, 1998, the Company recognized an effective
tax rate benefit of 3.5% compared to a provision of 40% for the quarter ended
March 31, 1997. The Company's effective tax rate generally reflects the
operations of its wholly-owned subsidiary, Camelback, which pays state premium
tax rather than state income tax, although the impact of Camelback's results on
state income tax during the first quarter of 1998 is not material. Although the
Company believes that it has structured its Camelback arrangements to qualify
for such tax treatment, any disallowance of this tax treatment could materially
affect the Company's results of operations. 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.
22
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
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 March 31, 1998 was from operating activities.
Cash provided by operating activities was $3.6 million and $3.7 million during
the quarters ended March 31, 1998 and 1997. 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 15
to 45 days as is customary in their respective market segments. Stand-alone risk
management/workers' compensation services are billed in accordance with
individual policies. The Company also extends credit terms for certain of its
stand-alone risk management/workers' compensation clients by billing less than
the expected premium over the policy term, with the difference paid on a
deferred basis after the end of a policy year. 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
receivable.
Cash used in investing activities was $32.3 million and $5.5 million in the
three months ended March 31, 1998 and 1997, respectively. Included in investing
activities is $30.9 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, cash
purchase price payments are due in the second quarter of 1998 for two 1997
acquisitions. The amounts of the payments are based on the terms of the
applicable purchase agreements and have not yet been determined, although they
are not expected to be material. For the quarter ended March 31, 1998 and 1997,
capital expenditures were $1.2 million and $.4 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 used in financing activities was $60,000 for the three months ended March
31, 1998 compared to cash provided by financing activities of $3.5 million for
the same period in 1997. Cash flows from financing activities during 1997
resulted primarily from the Company's borrowings.
At March 31, 1998 and December 31, 1997, the Company had cash and cash
equivalents of $11.4 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. The Company is required through its fronting arrangements with
Reliance to maintain restricted cash and investments to secure the future
payment of workers' compensation losses primarily arising under its pre-1998
program. Such restricted cash and investments have been calculated based on
estimates of ultimate losses under its workers' compensation program. For this
purpose, ultimate losses are actuarially determined by the fronting carriers
utilizing industry-wide data and regulatory requirements which may not reflect
the Company's historical or expected ultimate losses. Restricted cash and
investments are classified as a current asset as the Company settles and pays
most workers' compensation claims within one year from occurrence. The Company
cannot access restricted cash and investments without the agreement of Reliance.
At March 31, 1998, $19 million was on deposit at Camelback as restricted cash
and investments.
23
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
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 will be recorded in the second quarter of
1998.
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.
At March 31, 1998 and December 31, 1997, the Company had working capital of
$57.2 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). Approximately $50 million of the net proceeds of the
Offering were used to repay certain indebtedness, and the remaining balance will
be used for additional capital expenditures and general corporate purposes.
Interest under the Notes is payable semi-annually commencing April 15, 1998, and
the Notes are not callable until October 2001 subject to the terms of the Note
Agreement. The Company incurred expenses related to the Offering of
approximately $3.3 million and will amortize such costs over the life of the
Notes. The Company filed a registration statement under the Securities Act,
relating to an exchange offer for these Notes, which was declared effective in
April 1998. 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.
Amended Credit Facility
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. The Amended Credit Facility includes various borrowing rate options
including borrowing rates at the prime rate or 175 basis points over London
Interbank Offered Rate (LIBOR). The Company will pay a commitment fee of 25
basis points on the unused portion of the line and letter of credit fees of 75
to 175 basis points per annum. The Amended Credit Facility will mature on August
1, 1999. The principal loan covenants in the Amended Credit Facility are as
follows: current ratio of at least 1.3 to 1; minimum net worth of at least $45
million as of June 30, 1997, adjusted by 75% of net income and other factors
each and every fiscal year thereafter; senior debt to earnings before income
taxes, interest expense and depreciation and amortization (EBITDA), as defined
therein for the preceding four fiscal quarters of not more than 2.0 to 1 as of
the end of each calendar year and maximum debt to EBITDA as reduced by a portion
of available cash of 4.0 to 1. The Amended Credit Facility includes certain
other customary covenants and is secured by substantially all of the Company's
assets. As a result of 1997 and the first quarter of 1998 performance, the
Company is not in compliance with certain financial covenants under the Amended
Credit Facility, and may not borrow under the Amended Credit Facility unless it
returns to compliance or is able to agree with the bank to the new covenants, as
to which there can be no assurance. Because of the Company's current cash
status, the Company does not believe that the current unavailability of the
Amended Credit Facility will materially affect its liquidity, although there can
be no assurance this will remain the case if cash needs significantly increase
in the future.
24
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
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.
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. If consummated as expected, the announced acquisition of
SES, would be the largest acquisition to date in terms of both number of
worksite employees and consideration paid, would significantly add to management
responsibilities. 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 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 (including SES) 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.
A portion of the Company's historical growth is attributable to its risk
management/workers' compensation services program. The risks associated with
rapid growth in this area include the potential for inadequate underwriting due
to a lack of experience with new geographic markets and industries served, a
shortage of experienced and trained personnel, and the need for sophisticated
operating systems to help manage these risks. The Company recently converted its
risk management information system to a new operating system to support this
growth; there can be no assurance that this conversion will ultimately prove to
be successful, or that other future changes in systems or procedures will be
successfully completed. Any failure to manage growth in the risk
management/workers' compensation program could have a material adverse effect on
the Company's business and financial performance. The pricing of the Company's
guaranteed cost and Ohio reinsurance policies in place as of January 1, 1998 are
subject to annual negotiation, and the above factors could materially increase
the Company's costs under such policies.
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 limited
exceptions, the Company's risk retention on workers' compensation claims arising
after that date. The coverage was obtained through Stirling Cooke Risk
Management Services, Inc. under a three-year arrangement, with pricing subject
to annual review. The Company will retain 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 will retain risk up to $50,000 per occurrence for claims under
Ohio's monopolistic workers' compensation structure, with an aggregate liability
limitation based on a percentage of Ohio manual premium. 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.
25
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
The Company's reserves for losses and loss adjustment expenses under its
pre-1998 workers' compensation program and 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. The Company has an
arrangement with its largest client under which the Company remains responsible
for medical claims above an agreed limit. In the first quarter of 1998, the
Company incurred a liability of $400,000 relating to 1997 claims under this
arrangement. While the Company does not believe that it will incur material
liabilities under this arrangement, there can be no assurance that this will be
the case.
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.
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
26
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
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.
Following the completion of the Company's first series of policy audits, the
Company determined in late 1997 that collection rates from these clients would
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.
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 seeks certification of a class consisting of purchasers of securities
of the Company 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
attorney's fees. 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. While the Company
believes that it has experienced favorable client retention in the past, there
can be no assurance that those relationships will continue or that historical
rates of retention will continue to be achieved. The short-term nature of most
customer agreements means that clients could terminate a substantial portion of
the Company's business upon short notice.
Through recent acquisitions and internal growth, the percentage of the Company's
clients in the transportation industry has increased. While the Company has
targeted this industry, which it believes could benefit from Company services
and expertise, increased concentration in a single industry could make the
Company 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.
27
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
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 March 31, 1998 and December 31, 1997, the Company had outstanding
senior indebtedness of approximately $85 million and stockholders' equity of
approximately $41.6 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. Due to financial covenant violations, the Company is
currently not able to borrow under the Amended Credit Facility, which had been
another source of liquidity. The Company may, however, need to refinance all or
a portion of the principal of the Notes at or prior to maturity. There can be no
assurance that the Company's business will generate sufficient cash flow from
operations, that anticipated growth will occur or that future borrowings will be
available under the Amended Credit Facility or otherwise in an amount sufficient
to enable the Company to service or refinance its indebtedness, including the
Notes, or make anticipated capital expenditures and lease payments. In addition,
there can be no assurance that the Company will be able to effect any such
refinancing on commercially reasonable terms. See "Liquidity and Capital
Resources."
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 and the Amended Credit Facility contain 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, and maintains insurance (and requires its clients to
maintain insurance) covering certain of such liabilities, there can be no
assurances that the Company will not be found to be liable for damages in any
such suit, or that such liability would not have a material adverse effect on
the Company. Although the client generally is required to indemnify the Company
for any liability attributable to the conduct of the client or employee, the
Company may not be able to collect on such a contractual indemnification claim
and thus may be responsible for satisfying such liabilities. In addition,
28
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
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 significant portions of its software so that its information systems
will be able to properly utilize dates subsequent to December 31, 1999. The Year
2000 issue will be addressed through either the modification of existing
software or conversion to new software. However, if such transition is not
completed on a timely basis, the Year 2000 issue could have a material impact on
the Company's operations.
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. Based on developments to date,
the Company expects that the plan will be completed in a timely fashion and that
Year 2000 issues will not have a material effect on the Company's results of
operations. The Company's expectation in this regard is based upon numerous
assumptions of future events including the availability of certain resources,
third party modifications and other factors, and there can be no assurance that
the Company's current expectations will be met.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not yet required by Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
29
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
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 seeks certification of a class consisting of purchasers of securities
of the Company 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
attorney's fees. 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.
Other
There are many legal uncertainties about employee relationships created by PEOs,
such as the extent of the PEO's liability for violations of employment and
discrimination laws. The Company may be subject to liability for violations of
these or other laws even if it does not participate in such violations. The
Company's standard form of client service agreement establish the contractual
division of responsibilities between the Company and its clients for various
personnel management matters, including compliance with and liability under
various governmental regulations. However, because the Company acts as a
co-employer, and in some instances acts as sole employer, the Company may be
subject to liability for violations of these or other laws despite these
contractual provisions and even if it does not participate in such violations.
The circumstances in which the Company acts as sole employer may expose the
Company to increased risk of such liabilities for an employees' actions. The
Company has been sued in actions alleging responsibility for employee actions
(which it considers to be incidental to its business). Although it believes it
has meritorious defenses, and maintains insurance (and requires its clients to
maintain insurance) covering certain of such liabilities, there can be no
assurances that the Company will not be found to be liable for damages in any
such suit, or that such liability would not have a materially adverse effect on
the Company. Although the client generally is required to indemnify the Company
for any liability attributable to the conduct of the client, the Company may not
be able to collect on such a contractual indemnification claim and thus may be
responsible for satisfying such liabilities. In addition, employees of the
client may be deemed to be agents of the Company, subjecting the Company to
liability for the actions of such employees.
30
<PAGE>
Employee Solutions, Inc. March 31, 1998
- --------------------------------------------------------------------------------
Item 2. Changes in Securities
On February 9, 1998, the Company's Board of Directors adopted a shareholders
rights plan. Initially, the rights are attached to the Company's common stock
and are not exercisable. They become detached from the common stock and become
immediately exercisable after any person or group becomes the beneficial owner
of 15 percent or more of the Company's common stock or 10 days after any person
or group announces a tender or exchange offer that would result in that same
beneficial ownership level, subject to certain exceptions.
If a buyer becomes a 15 percent owner in the Company, all rights holders, except
the buyer and certain related persons, will be entitled to purchase Series A
Junior Participating Preferred Stock in the Company at a price discounted from
the then market price. In addition, if the Company is acquired in a merger after
such an acquisition, all rights holders, except the buyer and certain related
persons, will also be entitled to purchase stock in the buyer at a discount in
accordance with the plan.
The distribution of rights was made to common stockholders of record on February
20, 1998, and shares of common stock issued after that date also carry rights
until they become detached from the common stock. The rights will expire on
February 19, 2008. The Company may redeem the rights for $0.001 each at any time
before a buyer acquires a 15 percent position in the Company, and under certain
other circumstances.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit
Number Description
------ -----------------------------------------------------
10.1* Employment Agreement dated April 16, 1998 between
Registrant and Mark J. Gambill
10.2* Second Amended and Restated Employment Agreement and
Amendment to Option Agreement dated as of April 7,
1998 by and among ESI, ESI-EAST, as employer, and
Edward L. Cain, as Employee.
10.3* Indemnification Agreements between the Registrant
and: Mark J. Gambill (incorporated by reference to
form of agreement included as exhibit 10.17.4 to the
Company's December 31, 1997 10-K.)
10.4 Asset Purchase, Joint Venture Termination and Mutual
Release Agreement dated as of April 7, 1998 between
ESI, ESI-EAST, Edward L. Cain and the Edward L.
Cain Agency, Inc.
10.5 Reinsurance Binder for Loss Portfolio Transfer
27 Financial Data Schedule
*Designates management or compensatory agreements
(b) Reports on Form 8-K.
-------------------
Report dated February 20, 1998 reporting the issuance of the Company's
shareholders rights plan. No financial statements were required in the
report.
31
<PAGE>
Employee Solutions, Inc. March 31, 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: May 15, 1998 /S/ Marvin D. Brody
-------------------- ------------------------------
Marvin D. Brody
Chief Executive Officer
/S/ Morris C. Aaron
------------------------------
Morris C. Aaron
Chief Financial Officer
/S/ John V. Prince
------------------------------
John V. Prince
Chief Accounting Officer
32
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is made this 16th day of
April, 1998 by and between EMPLOYEE SOLUTIONS, INC., an Arizona corporation (the
"Company"), and MARK J. GAMBILL ("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 Chief
Executive Officer, President and/or Board of Directors (the "Board"). Employee's
title shall be Senior Vice President - Sales & Marketing, with responsibility
for the Company's sales and marketing and related functions and such executive
responsibilities as may be assigned from time to time by, and subject to the
direction of, the Board, the Chief Executive Officer and/or the President.
Employee shall report directly to the Chief Executive Officer or President.
Subject to Sections 7.f and 8, such title and duties may be changed from time to
time by the Board, so long as Employee is maintained in an executive capacity
throughout the term of his employment.
2. Term. The employment of Employee by the Company pursuant to this
Agreement shall commence on the date hereof and continue until terminated as
provided elsewhere herein.
3. Compensation.
a. Salary. The initial annual base salary payable to Employee
shall be
<PAGE>
$160,000. The base salary shall be reviewed in 1998 (subject to the timing of a
current compensation study), and at least annually thereafter on approximately
Employee's anniversary date of hire, and may be increased from time to time in
accordance with the Company's policies and practices regarding periodic review
and adjustment of executive compensation.
b. Incentive Plan. The Company may establish and implement an
incentive compensation system which will provide additional incentive payments
to Employee based upon his performance and the performance of the Company.
4. Fringe Benefits. In addition to the options for shares of the
Company's Common Stock available to Employee under the same terms as those
available to Company employees, and any other employee benefit plans generally
available to Company employees, the Company shall include Employee (and
Employee's dependents) in any group medical insurance plan maintained for the
employees of the Company at the Company's expense. The manner of implementation
of such benefits with respect to such items as procedures and amounts is
discretionary with the Company but shall be commensurate with Employee's
executive status and shall include medical, dental and hospital coverage for
Employee and Employee's dependents who are eligible under the applicable plans.
The Company shall also pay Employee $5,000 per year (starting with execution of
this Agreement and payable throughout the year in accordance with the Company's
normal payroll practices) 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
-2-
<PAGE>
through the date of termination. Cause shall include willful and persistent
failure to abide by instructions or policies from or set by the Board of
Directors, wilful and persistent failure to attend to material duties or
obligations imposed under this Agreement, or commission of a felony or serious
misdemeanor offense or pleading guilty or nolo contendere to same.
b. Without Cause. The Chairman or the Company may terminate
Employee's employment by the Company at any time, without cause, by giving 90
days written notice to the Employee. If the Company terminates under this
Section 7.b, it shall pay to Employee an amount equal to 12 months base salary,
payable monthly, less applicable withholdings; and shall continue coverage of
Employee and Employee's dependents under its medical plans and other benefit
arrangements for 12 months or until Employee secures other employment (unless
continuation of coverage under such plans is unfeasible, in which event the
Company will provide substantially similar benefits). The two 12-month periods
mentioned above each shall be extended to 24 months in the event termination
pursuant to this Section 7.b occurs prior to March 20, 1999.
c. Disability. If Employee experiences a permanent disability
(as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended), the Company shall have the right to terminate this Agreement without
further obligation hereunder except for any bonus amount payable in accordance
with the next sentence and any amounts payable pursuant to disability plans
generally applicable to executive employees. Within 90 days after the end of the
fiscal year in which termination pursuant to this Section 7.c occurs, so long as
Employee is in full compliance with this Agreement, Employee shall be entitled
to receive an incentive compensation payment (calculated and payable in the
manner referred to in Section 3.b), if any, based upon the Company's financial
performance for such fiscal year, which shall be prorated to the extent that
Employees employment during such fiscal year was for a period of less than the
full year.
d. Death. If Employee dies, this Agreement shall terminate
immediately, and Employee's legal representative shall be entitled to receive
the base salary due to Employee through the 60th day from the date on which his
death shall have occurred and any other death benefits generally applicable to
executive employees. In addition, Employee's legal representative shall be
entitled to receive, at the end of the first quarter of the year following the
fiscal year in which such death shall have occurred, an incentive compensation
payment (calculated and payable in the manner referred to in Section 3.b), if
any, based upon the Company's financial performance for such fiscal year, which
shall be prorated to the extent that Employee's employment during such fiscal
year was for a period of less than the full year.
e. Resignation Without Good Reason. Employee may resign at any
time by giving 90 days written notice to the Company, in which event Employee
shall be entitled to receive only the base salary due him through the date of
termination plus any other vested rights under employee stock options (pursuant
to the terms of such options) or other employee benefit plans.
f. Resignation for Good Reason. Employee may resign at any
time for Good Reason (as defined in Section 8.c), in which event Employee shall
be entitled to payments and
-3-
<PAGE>
benefits to the same extent and payable in the same manner as if Employee was
terminated without cause as described in Section 7.b above.
8. Change in Control.
a. Severance Benefits. Notwithstanding Section 7.b. or 7.f
above, if Employee's employment with the Company terminates within 12 months
after a Change in Control (as defined in Section 8.b below), Employee shall be
entitled to the severance benefits provided in Section 8.e unless such
termination is in accordance with Section 7.a, 7.c, 7.d or 7.e above, in which
case such other section shall apply. Any amount paid pursuant to Section 8 shall
be in lieu of any payment otherwise due under Section 7.b or 7.f.
b. "Change in Control" shall be deemed to have occurred if (I)
any "person" (as such term is used in Paragraphs 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended [the "Exchange Act"]), other than a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing 20% or more of the total voting power represented by the Company's
then outstanding Voting Securities, or (ii) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof, or (iii) the stockholders of the Company approve
a merger or consolidation of the Company with any other corporation, other than
a merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the stockholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of (in one transaction or a series of transactions)
all or substantially all the Company's assets.
c. "Good Reason" shall mean, for purposes of this Agreement,
(I) without Employee's express written consent, a reduction of Employee's
compensation or the assignment to Employee of duties inconsistent with
Employee's positions, duties, responsibilities and status with the Company
immediately prior to the Change in Control, or a demotion or a change in titles
or offices as in effect immediately prior to a Change in Control (except in
connection with termination of Employee's employment in compliance with Section
7.a, 7.c, 7.d or 7.e above); (ii) a material breach by the Company of any of its
obligations hereunder which (if curable) is not cured by the Company within 20
days after written notice thereof; or (iii) without Employee's express
-4-
<PAGE>
written consent, relocation of the site of Employee's duties to a location
outside the Phoenix, Arizona metropolitan area, or a requirement that Employee
average more than 10 business days outside of the Phoenix, Arizona metropolitan
area per month.
d. "Voting Securities" shall mean any securities of the
Company which vote generally in the election of directors.
e. Amount of Benefit. If Employee is entitled to severance
benefits under Section 8.a, the amount of such benefit shall equal (I) a
lump-sum payment equal to 2.99 times the "Base Amount" (as such term is defined
in Section 280G of the Internal Revenue Code of 1986) applicable to Employee,
whether or not the provisions of Section 280G actually apply to the payment;
(ii) a continuation of medical coverage and other benefits in the manner
contemplated in Section 7.b above; and (iii) such other benefits to which the
Employee is entitled under the Company's benefits plans and policies as in
effect immediately prior to the Change in Control with respect to terminated
Employees.
9. Return of the Company's Materials. Upon the termination of this
Agreement, Employee shall promptly return to the Company all files, credit
cards, keys, instruments, equipment, and other materials owned or provided by
the Company.
10. Insurance. The Company shall use commercially reasonable efforts to
carry director's and officer's professional liability insurance coverage for
Employee while in the performance of Employee's duties hereunder in an amount of
at least $10,000,000.
11. Nondelegability of Employee's Rights and Company Assignment Rights.
The obligations, rights and benefits of Employee hereunder are personal and may
not be delegated, assigned, or transferred in any manner whatsoever, nor are
such obligations, rights or benefits subject to involuntary alienation,
assignment or transfer. The Company may transfer its obligations hereunder to a
subsidiary, affiliate or successor.
12. Notices. All notices, demands and communications required by this
Agreement shall be in writing and shall be deemed to have been given for all
purposes when sent to the respective addresses set forth below, (I) upon
personal delivery, (ii) one day after being sent, when sent by overnight courier
service to and from locations within the continental United States, (iii) three
days after posting when sent by registered, certified, or regular United States
mail, with postage prepaid and return receipt requested, or (iv) on the date of
transmission when sent by confirmed facsimile.
-5-
<PAGE>
If to the Company: Employee Solutions, Inc.
6225 North 24th Street
Phoenix Arizona 85016
Attn: Chief Executive Officer
If to Employee: Mark J. Gambill
6225 North 24th Street
Phoenix, AZ 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 and Confidential Information and Non-Compete Agreement, each dated the
same date as this Agreement, dated and an agreement evidencing a stock option
grant issued to Employee from time to time (the "Other Agreements") constitutes
the final written expression of all of the agreements between the parties, and
is a complete and exclusive statement of those terms. It supersedes all
understandings and negotiations concerning the matters specified herein
(including all prior written employment agreements and arrangements, if any),
except as provided in the Other Agreements. Any representations, promises,
warranties or statements made by either party that differ in any way from the
terms of this written Agreement or the Other Agreements shall be given no force
or effect. Except as provided in the Other Agreements, the parties specifically
represent, each to the other, that there are no additional or supplemental
agreements between them related in any way to the matters herein contained
unless specifically included or referred to herein. No addition to or
modification of any provision of this Agreement shall be binding upon any party
unless made in writing and signed by all parties.
14. Waiver. The waiver by either party of the breach of any covenant or
provision in this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either party.
15. Invalidity of Any Provision. The provision of this Agreement are
severable, it being the intention of the parties hereto that should any
provisions hereof be invalid or unenforceable, such invalidity or
unenforceability of any provision shall not affect the remaining provisions
hereof, but the same shall remain in full force and effect as if such invalid or
unenforceable provisions were omitted.
16. Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of Arizona exclusive of the
conflict of law provisions thereof. The parties agree that in the event of
litigation, venue shall lie exclusively in Maricopa County, Arizona.
17. Headings; Construction. Headings in this Agreement are for
informational purposes only and shall not be used to construe the intent of this
Agreement. The language in all parts of this Agreement shall in all cases be
construed as a whole according to its fair meaning and not strictly
-6-
<PAGE>
for nor against any party.
18. Counterparts; Facsimile Signatures. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same agreement.
Delivery by any party of a facsimile signature to the other parties to this
Agreement shall constitute effective delivery by said party of an original
counterpart signature to this Agreement.
19. Binding Effect; Benefits. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
successors, executors, administrators and assigns. Notwithstanding anything
contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
20. Binding Effect on Marital Community. Employee represents and
warrants to the Company that he has the power to bind his marital community (if
any) to all terms and provisions of this agreement by his execution hereof.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement and caused the same to be duly delivered on its behalf as
of the date first above written.
EMPLOYEE SOLUTIONS, INC.,
an Arizona corporation
By /S/ Marvin D. Brody
----------------------
Marvin D. Brody, Chief Executive Officer
"COMPANY"
/S/ Mark J. Gambill
----------------------
Mark J. Gambill
"EMPLOYEE"
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
AND AMENDMENT TO OPTION AGREEMENT
(Edward L. Cain, Jr.)
This Second Amended and Restated Employment Agreement and Amendment to
Option Agreement (together with all schedules hereto, this "Agreement") is made
and entered into by and between EMPLOYEE SOLUTIONS-EAST, INC., a Georgia
corporation ("Employer" or "ESI-East"), as employer, and EDWARD L. CAIN, JR, an
unmarried individual ("Employee"), with the consent and approval of EMPLOYEE
SOLUTIONS, INC., an Arizona corporation ("ESI"). (ESI, ESI-East and their
respective affiliates are sometimes are referred to severally and collectively
herein, as the context may require, as "the ESI Group.") (Employee and the
Agency (defined below) shall not be deemed as members of the ESI Group.)
R E C I T A L S :
- - - - - - - -
A. Employer and ESI are professional employer organizations,
which contract with client companies to become the "employer of record" for the
client companies' employees ("PEOs"). In their capacity as PEOs, Employer and
ESI provide employers throughout the United States with comprehensive employee
payroll, human resources, and benefits outsourcing services, including 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. All of these activities are referred to herein
as the "PEO Business." Employer is a wholly owned subsidiary of ESI.
B. Employer, Employee and ESI entered into an Employment
Agreement on or about November 11, 1994, with an effective date of June 24,
1994, as amended and restated by that Amended and Restated Employment Agreement
by and among the same parties, dated as of January 1, 1996, as further amended
by that certain extension letter agreement, dated as of October 17, 1997,
captioned "Extension of Employment Agreement" (collectively, the "Prior
Employment Agreement").
C. In conjunction with the execution by Employer, Employee,
ESI and the Edward L. Cain Agency, Inc. (the "Agency") of that Asset Purchase,
Joint Venture Termination and Mutual Release Agreement of even date herewith
(together with the schedules thereto, the "Asset Agreement"), Employer and
Employee desire to replace the Prior Employment Agreement with this Agreement to
provide for the continued employment of Employee hereunder, with the intent that
the noncompetition and confidentiality provisions of the Prior Employment
Agreement, as expressly set
<PAGE>
forth herein, shall continue, as modified and restated by this Agreement. In all
other respects, that this Agreement shall become effective on, and shall
supersede and replace the Prior Employment Agreement in its entirety as of,
April 7, 1998 (the "Modification Date").
D. ESI desires to have Employer engage Employee pursuant to
the terms of this Agreement, and is willing to make the agreements and
representations required of it herein.
NOW, THEREFORE, in consideration of the premises and mutual
agreements hereinafter set forth, the parties agree as follows:
1. Employment.
a. Engagement. Employer agrees to continue Employee's
employment, on a part-time basis, upon the terms and conditions provided herein,
and Employee agrees to accept such part-time employment, upon said terms and
conditions.
b. Duties. Employee will perform only customer
service functions with respect to accounts generated by Employee or the Agency
prior to the Modification Date, and will only be required to perform such
customer service functions upon instruction from time to time by Employer's or
ESI's Board of Directors (the "Board") or ESI's President/Chief Executive
Officer; provided that Employee shall not be deemed to guarantee the retention
of any such accounts. If not specifically instructed to perform customer service
functions, Employee shall have no obligations to perform, and shall not perform,
any such functions. Employee will not contact customers for such accounts,
except as instructed in the manner set forth above. Employee also shall provide
reasonable assistance from time to time with respect to current or future
litigation involving the ESI Group and relating to matters in which Employee was
involved. Employee will report directly to ESI's President/Chief Executive
Officer. Such employment will be on a part-time basis.
c. Resignations. Effective as of March 31, 1998,
Employee hereby resigns from all positions as a director and/or officer of
Employer, ESI and any other members of the ESI Group. Employee will cooperate
with Employer, ESI and all other members of the ESI Group in preparing any
filings or documents necessary to effect such resignations and to ensure
continuing compliance with all licensing, reporting and other requirements, if
any, affected by such resignations.
d. Exclusive Employment Agreement. This Agreement
shall be the sole agreement with respect to the employment relationship between
Employer and Employee. The Prior Employment Agreement and any other materials,
discussions, understandings, agreements or commitments with respect to any
aspect of the employment relationship between Employer and Employee or any other
matters discussed herein (collectively with the Prior Employment Agreement, the
"Prior Agreements") are hereby terminated, replaced and superseded by this
Agreement, except as otherwise expressly set forth herein.
e. Limitations on Authority. Employee shall not enter
into any agreements or incur any obligations on behalf of, or attempt in any way
to bind, any member of the ESI Group. Employee shall have no other job titles or
duties aside from those expressly set forth herein.
<PAGE>
2. Term. This Agreement shall commence on the Modification
Date and continue until December 31, 1999 (the "Term"). Thereafter, this
Agreement shall automatically terminate unless Employer and Employee agree in
writing to continue the Agreement. Notwithstanding the foregoing provisions of
this paragraph, this Agreement shall be subject to earlier termination, but only
as set forth in paragraph 5 below.
3. Compensation.
a. Base Salary. Commencing as of March 1, 1998,
Employer shall pay Employee a salary, before deducting all applicable federal
and state tax withholdings, at the rate of $42,000 per year, payable at the
times and in the manner dictated by Employer's standard payroll policies.
b. Commissions. Except as otherwise expressly set
forth herein, Employee is not entitled to receive for any period on or prior to
the date hereof, and shall not be entitled to receive for any period hereafter,
directly or indirectly (through the Agency or otherwise), any further
commissions, compensation or payments of any type for any prior or future sales
of PEO Business, or otherwise, except as expressly agreed to by Employer,
Employee and ESI in writing hereafter.
c. Fringe Benefits. Except as otherwise expressly set
forth herein, Employer, Employee and ESI agree that Employee shall not
participate in any benefit programs offered by Employer or ESI.
d. Stock Options. Employee shall retain the 400,000
stock options granted pursuant to the Prior Agreements, and evidenced by the
option grant letter attached hereto as Exhibit "A" (although the letter
references 100,000 options, the amount of options has increased to 400,000 due
to stock splits, and the exercise price per share has decreased from $8.50 to
$2.125 due to stock splits). ESI agrees that 100,000 of the options shall vest
fully upon execution of this Agreement by all parties, and the attached option
grant letter is hereby modified to reflect the immediate vesting of these
options. The remaining options shall vest later, if at all, in accordance with
the terms of the attached option grant letter. The option grant letter also is
amended to change the address for exercise in paragraph 5 thereof to the address
for notice to ESI under paragraph 9 hereof.
e. Offsets. Notwithstanding any other provisions of
this Agreement which may be interpreted to the contrary, it is specifically
agreed that in the event Employee is in material default hereunder in any
respect whatsoever, after giving effect to any releases granted herein and/or in
the Asset Agreement as of the Modification Date (which default has not been
cured within all applicable grace periods) (an "Uncured Default"), or in the
event that Employee has any unfulfilled indemnification obligation under any
provision of this Agreement, the Asset Agreement or in any other document
executed in conjunction herewith or therewith (collectively "Unfulfilled
Indemnification Obligations"), or in the event of any other unpaid accrued
liability of Employee hereunder or under the Asset Agreement or in any other
document executed in conjunction herewith or therewith (an "Accrued But Unpaid
Debt"), then Employer or ESI may in its sole discretion, upon
-3-
<PAGE>
at least fifteen (15) days' prior written notice to Employee, offset against the
amounts otherwise payable to the Employee, the amount or amounts owed by
Employee to Employer or ESI as a result of the Uncured Default(s), Unfulfilled
Indemnification Obligations and Accrued But Unpaid Debt or Debts (individually,
an "Unfulfilled Employee Obligation" or, collectively, the "Total Unfulfilled
Employee Obligations"). Without limiting its other remedies, Employer or ESI
also shall have the right to terminate or exercise the options granted to
Employee to satisfy any Unfulfilled Employee Obligations, with the options
valued in the same manner set forth in Section 3(c) of the Asset Agreement. If
the Total Unfulfilled Employee Obligations should exceed the total amounts owed
by Employer or ESI to Employee at such time, then, unless Employer and ESI
otherwise agree in writing, no additional amounts will be paid to Employee until
such time as said Total Unfulfilled Employee Obligations have been satisfied and
Employee shall remain liable to Employer for the amount by which the unpaid
Total Unfulfilled Employee Obligations exceed the total amounts owed by Employer
or ESI to Employee, from time to time. Unless another rate is expressly
provided, each delinquent Unfulfilled Employee Obligation will bear interest at
the rate of twelve percent (12%) per annum from the date of delinquency until
paid.
4. Office Space; Expenses. Employer and Employee agree that
the duties to be performed by Employee do not require the use of any
Employer-provided office space. Consequently, Employee agrees to vacate his
current office space at Employer's offices on or before April 3, 1998, and the
parties agree that Employer shall not have any obligation to provide, or
reimburse Employee for, any office space. Employer agrees to reimburse Employee
for any ordinary, necessary and reasonable business expenses requested by
Employee and approved by Employer in writing in advance.
5. Termination. This Agreement may be terminated only by
written notice, given in compliance with this Agreement, for any one or more of
the following events:
a. Termination for Material Breach. In the event that
any party, after the Modification Date, materially fails to fulfill any of his
or its representations, warranties, agreements or obligations hereunder or under
the Asset Agreement, this Agreement may be terminated by the other party;
provided, however, that in the event of any proposed termination because of a
party's alleged material failure to fulfill any such item, the party seeking to
terminate this Agreement ("Terminating Party") must first give the other party
("Defaulting Party") fifteen (15) days' advance written notice of the alleged
failure, breach or default on the part of the Defaulting Party and an
opportunity to cure the same, if curable, within said time period before the
Terminating Party terminates this Agreement due to the Defaulting Party's
alleged failure, breach or default.
b. Termination for Cause. Employer may terminate
Employee for "cause," upon reasonable notice given not fewer than five (5) days
but not more than ten (10) days in advance of such termination's effective date.
For purposes of this Agreement, "cause" shall mean the occurrence of any one or
more of the following during the Term, as determined by a majority vote of the
Employer's Board of Directors:
(1) Employee's conviction of a felony; or
(2) An act of fraud or theft on the part of Employee.
-4-
<PAGE>
c. Mutual Consent. At any time during the term of
this Agreement, the parties hereto may terminate this Agreement by mutual
consent, provided, however, that such termination by mutual consent must be made
in writing signed by both parties.
d. Death of the Employee. Upon the death of the
Employee, this Agreement shall terminate and Employer shall pay to the executor,
administrator or personal representative of Employee's estate any salary earned
by the Employee, and any amounts reimbursable hereunder up to the time of his
death, and shall honor all rights conferred upon Employee upon his death, if
any, pursuant to the attached option grant letter, but all further rights to
salary shall cease upon Employee's death.
e. Disability. Notwithstanding anything in this
Agreement to the contrary, if, during the term of the Agreement, the Employee
becomes "disabled" (as hereinafter defined), Employer may immediately terminate
this Agreement at any time prior to the cessation of Employee's disability and
the resumption of Employee's performance of his duties hereunder, provided
Employer shall pay any amounts reimbursable hereunder, up to the time of
termination and shall honor all rights conferred upon Employee upon his
disability, if any, pursuant to the attached option grant letter. However, in
the event Employee ceases to be disabled and returns to work for Employer,
Employer's right to later terminate Employee for disability shall be dependent
upon Employee once again becoming disabled. For purposes of this Agreement,
Employee shall be deemed to have become disabled if, because of ill health,
physical or mental disability, Employee shall have been unable, in a material
way, to perform his duties under this Agreement for a period of sixty (60)
consecutive days.
6. Confidential Information. For the Confidentiality
Consideration (defined below), Employee agrees as follows with respect to his
actions during the Term (and, as may be provided below, after the Term):
a. In General. Employee acknowledges that, in his
capacity as an employee, he will occupy a position of trust and confidence, and
that he will develop and have much information about Employer, ESI, and other
members of the ESI Group, and their operations that is confidential or not
generally known in the PEO Business ("Confidential Information"). Employee
agrees that all such information is proprietary or confidential or constitutes
trade secrets and is the sole property of the ESI Group. From and after the
Modification Date through December 31, 2001, Employee agrees to keep
confidential, and will not reproduce, copy or disclose to any other person or
firm, any such Confidential Information which shall include, but not be limited
to, any documents or information relating to the ESI Group's methods, clients,
accounts, systems, programs, procedures, correspondence or records, or any other
documents used or owned by the ESI Group related to such Confidential
Information (including, but not limited to, this Agreement), nor will he advise,
discuss with or in any way assist any other person or firm in obtaining or
learning about such Confidential Information, except as authorized in the
following two (2) sentences. Accordingly, he agrees that from and after the
Modification Date through December 31, 2001, during the term of this Agreement,
and afterwards, he will not disclose, permit or encourage anyone to disclose any
such Confidential Information, nor will he utilize any such Confidential
Information, either alone or with others, outside the scope of his duties and
responsibilities as an employee of Employer. This paragraph 6 should not,
however, be construed or interpreted as preventing Employee from making any
disclosures required
-5-
<PAGE>
or otherwise ordered by any court of competent jurisdiction or any government
agency lawfully requiring or otherwise lawfully ordering such a disclosure. The
"Confidentiality Consideration" shall consist of the consideration set forth in
(i) this Agreement, (ii) the Asset Agreement, and (iii) the Prior Agreements (as
defined in the Asset Agreement), all of which contained and/or provided
consideration for prior confidentiality agreements of Employee, which prior
confidentiality agreements shall continue as modified by this paragraph 6 and
shall continue to provide consideration for the agreements of Employee in this
paragraph 6; provided that all references to the "continuing" effect of the
confidentiality covenants in the Prior Agreements are intended solely to
incorporate said provisions herein, as modified herein, as of the Modification
Date. Employee shall have no liability for any actions or inactions taken,
directly or indirectly, prior to the Modification Date, with respect to the
confidentiality covenants of the Prior Agreements; provided that nothing in this
sentence shall limit the representations, warranties, covenants, and agreements
of Employee in the Asset Agreement, or the rights of ESI or Employer upon a
breach of any such items.
b. Remedies. It is agreed that the restrictions
contained in this paragraph 6 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, Employee has agreed that in addition to
and without limiting any other right or remedy any member of the ESI Group may
have (except for the right to prove and recover actual damages), they shall each
have the right to an injunction against him issued by a court of competent
jurisdiction enjoining any such breach, and in addition thereto, they shall be
entitled to Five Hundred Dollars ($500.00) per day, in the aggregate, for each
and every day of such violation, not as a penalty but as liquidated damages.
c. Survival. Unless otherwise agreed by Employer and
ESI in writing, the obligations described in this paragraph 6 shall survive any
termination of this Agreement or any termination of the employment relationship
created hereunder.
7. Non-Competition. For the Non-Competition Consideration
(defined below), Employee agrees as follows with respect to his actions during
the term (and, as may be provided below, after the Term):
a. In General. During such time as Employee is
employed with Employer pursuant to this Agreement, except as specifically
provided in this paragraph 7, Employee agrees that all activities relating to or
in furtherance of PEO Business performed by him will be performed hereunder or
in accordance herewith, for the benefit of, and/or on behalf of, Employer. In
addition, except as otherwise provided in this paragraph 7 and except as may
hereafter be agreed to expressly in writing by ESI, Employer and Employee,
Employee agrees that, at all times from and after the Modification Date through
December 31, 2001, Employee shall not engage, directly or indirectly, whether on
his own account or as a shareholder (other than as a less than five percent (5%)
passive 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 one or
more of the states in which any member of the ESI Group does business or has
leased employees (collectively, the "Restricted States"):
-6-
<PAGE>
(1) Enter into or engage in any PEO Business
or arrange for any PEO or other provider of PEO Business to provide any PEO
Business for a commission or other fee in any of the Restricted States;
(2) Solicit customers, suppliers, or PEO
Business, or use any customer lists for the purpose of or which results in
competition with Employer or any other member of the ESI Group concerning the
PEO Business in any of the Restricted States;
(3) Solicit the employment of Employer's or
any other ESI Group member's officers, directors, employees or independent
contractors; or
(4) Render PEO Business services or provide
loans to any person, firm, association, corporation, or other entity engaged in
the PEO Business in any one or more of the Restricted States.
The "Non-Competition Consideration" shall consist of the consideration set forth
in (i) this Agreement, (ii) the Asset Agreement, and (iii) the Prior Agreements
(as defined in the Asset Agreement), all of which contained and/or provided
consideration for prior noncompetition agreements of Employee, which prior
noncompetition agreements shall continue as modified by this paragraph 7 and
shall continue to provide consideration for the agreements of Employee in this
paragraph 7; provided that all references to the "continuing" effect of the
non-competition covenants in the Prior Agreements are intended solely to
incorporate said provisions herein, as modified herein, as of the Modification
Date. Employee shall have no liability for any actions or inactions taken,
directly or indirectly, prior to the Modification Date, with respect to the
non-competition covenants of the Prior Agreements; provided that nothing in this
sentence shall limit the representations, warranties, covenants, and agreements
of Employee in the Asset Agreement, or the rights of ESI or Employer upon a
breach of any such items.
b. Remedies. It is agreed that the restrictions
contained in this paragraph 7 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, Employee has agreed that, in addition
to and without limiting any other right or remedy Employer or the other member
of the ESI Group may have, Employer and the other members of the ESI Group shall
each have the right to seek an injunction against him issued by a court of
competent jurisdiction enjoining any such breach.
c. Acknowledgments. Employee also agrees,
acknowledges, covenants, represents and warrants as follows:
(1) That he has read and fully understands
the foregoing restrictions and that he has consulted with a competent attorney
regarding the uses and enforceability of restrictive covenants in the Restricted
States or has elected not to do so, at his own risk;
(2) That he is aware that there may be
defenses to the enforceability of the foregoing restrictive covenants, based on
time or territory considerations, and that he knowingly, consciously,
intentionally and entirely voluntarily, irrevocably waives any and all such
defenses relating to time or territory considerations and will not assert the
same in any action
-7-
<PAGE>
or other proceeding brought by Employer or any one or more members of the ESI
Group for the purpose of enforcing the restrictive covenants or in any other
action or proceeding involving Employee, on the one hand, and Employer or any
one or more members of the ESI Group, on the other hand;
(3) That the provisions of this Agreement do
not impose an extreme hardship on him and that the provisions of this Agreement
are reasonable under the circumstances (in particular considering his exposure
to the highest level information due to his former status as an officer/director
and the fact that he was entrusted with many significant aspects of the ESI
Group's PEO Business in those roles); that any restrictions contained in the
Agreement are necessary to protect the legitimate business interests of the ESI
Group; that restrictions in the Agreement have been reasonably tailored as to
time and place, and are not overly broad as to the activities proscribed (after
taking into consideration the interests of the Employee in gaining and pursuing
a livelihood, and the ESI Group's legitimate business interests and concerns in
protecting its property, its confidential information, its relationships, its
goodwill and its economic advantage); and that because of payments being made in
consideration of, under or in connection with this Agreement and the Asset
Agreement, the restrictions of this Agreement are agreed to be equivalent to
restrictions found in the sale of a business; and
(4) That he is fully and completely aware
that, and further understands that, the foregoing restrictive covenants are an
essential part of the consideration for Employer and ESI entering into this
Agreement and the Asset Agreement, and that Employer and ESI are entering into
this Agreement and the Asset Agreement in full reliance on these
acknowledgments, covenants, representations and warranties.
d. Severability. 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 7(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.
e. Non-Compete Exception for Certain Insurance
Business and OORC Business; No Other Exceptions. Notwithstanding anything in
this paragraph 7 to the contrary, Employee shall be permitted to provide
management, sales and marketing services (i) for insurance and financial
products (other than worker's compensation insurance), provided that such
services are not on behalf of or result in the placement of any PEO Business
with a PEO; and (ii) to Owner Operator Resources Corp. ("OORC"); provided that
in performing any such activities for or on behalf of OORC, Employee shall not,
directly or indirectly, place any PEO Business with OORC, or take any other
action related to OORC that would adversely affect any PEO Business of any
member of the ESI Group. All other exceptions to the noncompetition provisions
of any Prior Agreements are terminated, and the exceptions described above in
this subparagraph 7(e) shall be the sole exceptions to the full compliance by
Employee with the terms of this paragraph 7.
-8-
<PAGE>
f. Survival. Unless otherwise agreed by Employer and
ESI in writing, the obligations described in this paragraph 7 shall survive any
termination of this Agreement or any termination of the employment relationship
created hereunder.
8. Remedies. In addition to the other rights and remedies set
forth herein, each party shall retain all rights and remedies at law or in
equity for any breach or default by the other party.
9. Notices. All notices and other communications required or
permitted under this Agreement shall be in writing and shall be delivered or
sent to the parties at the address set forth below, or at such other address
that they designate by notice to all other parties in accordance with this
Section. Any party delivering notice to Seller shall deliver it to:
Edward L. Cain, Jr.
With a copy to:
---------------
Chester G. Rosenberg, Esq.
McCullough Sherrill, LLP
1409 Peachtree Road, N.E.
Atlanta, Georgia 30309
Any party delivering notice to ESI or ESI-East shall deliver it to:
Marvin D. Brody
Chief Executive Officer
-and-
Paul M. Gales, Esq.
Senior Vice President and General Counsel
EMPLOYEE SOLUTIONS, INC.
6225 North 24th Street
Phoenix, Arizona 85016
Fax No. (602) 955-1235
All notices and communications shall be deemed to have been received: (i) in the
case of personal delivery, on the date of such delivery; (ii) in the case of
telex or facsimile transmission, on the date of such delivery; (iii) in the case
of overnight air courier, on the second business day following the day sent,
with receipt confirmed by the courier; and (iv) in the case of mailing by first
class certified or registered mail, postage prepaid, return receipt requested,
on the date of delivery, as evidenced by the certified or registered mail
receipt.
10. Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior or contemporaneous understandings or agreements in regard
thereto. No modification or addition to this Agreement shall be valid unless in
writing. No waiver of any rights under this Agreement shall be valid unless in
writing and signed by the party to be charged with such waiver. No waiver of any
term or condition
-9-
<PAGE>
contained in this Agreement shall be deemed or construed as a further or
continuing waiver of such term or condition, unless the waiver specifically
provides otherwise.
11. Governing Law. This Agreement and all amendments thereof
shall be governed by and construed in accordance with the law of the State of
Arizona applicable to contracts made and to be performed therein, without regard
to principles relating to conflicts of laws.
12. Arbitration; Exclusive Venue. Any controversy or claim
arising out of or relating to this agreement or the breach or validity thereof,
whether or not a contract claim, shall be settled exclusively by binding and
non-appealable arbitration in Phoenix, Arizona, by one (1) arbitrator selected
by the parties, or if the parties cannot agree upon a single arbitrator within
thirty (30) days of a party giving notice to the other of a proposed choice for
an arbitrator, then by a single arbitrator appointed by the Phoenix Office of
the American Arbitration Association; all such proceedings shall be conducted in
accordance with the rules of said association. Judgment upon the award rendered
by the arbitrators may be entered in any court having jurisdiction thereof, and
the parties consent to the exclusive jurisdiction of the Maricopa County,
Arizona courts and the Arizona Federal District Court for this purpose and for
all other purposes under this Agreement.
13. Construction. 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. The paragraph headings contained in this
Agreement are for reference purposes only and will not affect in any way the
meaning or interpretation of this Agreement. All terms used in one number or
gender shall be construed to include any other number or gender as the context
may require. The parties agree that each party has reviewed this Agreement and
has had the opportunity to have counsel review the same and that any rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not apply in the interpretation of this Agreement or any
amendment or any exhibits thereof.
14. Binding Effect; Third Party Beneficiary. This Agreement
shall be binding upon and inure to the benefit of the parties hereto, their
heirs, personal representatives, permitted successors, assigns, and
beneficiaries-in-interest. Each member of the ESI Group shall be a third party
beneficiary hereunder, and shall be entitled to enforce the provisions of this
Agreement conveying any right or remedies to such party.
15. Severability. In the event any term or provision of this
Agreement is declared by a court of competent jurisdiction to be invalid or
unenforceable for any reason, this Agreement shall remain in full force and
effect, and either (a) the invalid or unenforceable provision shall be modified
to the minimum extent necessary to make it valid and enforceable, or (b) if such
modification is not possible, this Agreement shall be interpreted as if such
invalid or unenforceable provision were not a part hereof.
16. Attorneys Fees. Except as otherwise provided herein, in
the event any party hereto institutes an action or arbitration or other
proceeding to enforce any rights arising out of this Agreement, the party (or
parties) prevailing in such action or arbitration or other proceeding shall be
paid all reasonable costs and attorneys' fees by the non-prevailing party (or
parties, as the case may
-10-
<PAGE>
be), such fees to be set by the court and not by a jury and to be included in
any judgment or arbitration order entered in such proceeding.
17. Consents; Authority. ESI and Employer have obtained all
consents, approvals, authorizations and orders necessary for the execution,
delivery and performance of this Agreement, and ESI and Employer have the full
right, power and authority to enter into this Agreement, including, but not
limited to, the right, power and authority to amend the stock option grant in
the manner set forth herein. No permission, approval, determination, consent or
waiver by, or any declaration, filing or registration with, any governmental or
regulatory authority is required in connection with the execution, delivery and
performance of this Agreement by ESI or Employer, except those that already have
been obtained prior to the Closing.
18. Publicity. Employer and ESI agree that Employee shall have
the opportunity to review and approve in a reasonable manner any public
disclosures relating to this Agreement, subject to ESI's reporting obligations
under federal securities laws.
19. Counterparts. This Agreement may be executed in
counterparts, all of which, taken together, shall constitute one and same
original instrument.
20. Construction with Asset Agreement. This Agreement is being
entered into concurrently with the Asset Agreement. To the greatest extent
possible, this Agreement and the Asset Agreement shall be construed to
supplement each other; provided, however, that in the event of any direct
conflict, the Asset Agreement shall control.
-11-
<PAGE>
Dated as of April 7, 1998.
EMPLOYEE: /S/ Edward L. Cain, Jr.
------------------------------------
EDWARD L. CAIN, JR.
EMPLOYER: EMPLOYEE SOLUTIONS-EAST, INC., a
Georgia corporation
By: /S/ Marvin D. Brody
---------------------------------
Marvin D. Brody
Chief Executive Officer and
Chairman of the Board
ESI: EMPLOYEE SOLUTIONS, INC., an
Arizona corporation
By: /S/ Marvin D. Brody
---------------------------------
Marvin D. Brody
Chief Executive Officer and
Chairman of the Board
-12-
ASSET PURCHASE, JOINT VENTURE
-----------------------------
TERMINATION AND MUTUAL RELEASE AGREEMENT
----------------------------------------
This Asset Purchase, Joint Venture Termination and Mutual Release
Agreement (together with the schedules attached hereto, this "Agreement"), dated
as of April 7, 1998, is entered into by and among the following parties:
EMPLOYEE SOLUTIONS, INC., an Arizona corporation ("ESI"), EMPLOYEE
SOLUTIONS-EAST, INC., a Georgia corporation ("ESI-East"), EDWARD L. CAIN, JR.,
an unmarried individual ("Cain"), and THE EDWARD L. CAIN AGENCY, INC., a Georgia
corporation ("Agency"). Cain and Agency are sometimes referred to severally and
collectively herein as "Seller," and severally and collectively with their
Affiliates (as defined below) as the "Seller Group." ESI, ESI-East and their
Affiliates are sometimes referred to severally and collectively as the "ESI
Group."
RECITALS
--------
1. ESI and ESI-East, which is a wholly-owned subsidiary of
ESI, are professional employer organizations, which contract with client
companies to become the "employer of record" for the client companies' employees
("PEOs"). In their capacity as PEOs, ESI and ESI-East provide employers
throughout the United States with comprehensive employee payroll, human
resources, and benefits outsourcing services, including 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. All of these activities are referred to herein as the "PEO
Business."
2. ESI, ESI-East and Cain entered into a Joint Venture
Agreement dated as of June 24, 1994, pursuant to which, among other things,
Cain, through ESI-East, which was owned 99% by Cain and 1% by ESI, was to market
and sell certain types of PEO Business east of the Mississippi River.
3. ESI, ESI-East and Cain, in conjunction with the Joint
Venture Agreement, entered into an Employment Agreement dated November 11, 1994,
with an effective date of June 24, 1994, which was amended and restated in
conjunction with the Acquisition Agreement by that Amended and Restated
Employment Agreement, with an effective date as of January 1, 1996, and
thereafter was modified by an extension letter agreement dated as of October 17,
1997 (collectively, the "Prior Employment Agreement").
1
<PAGE>
4. ESI now desires to buy, and Seller desires to sell, all of
Seller's Assets (as defined below) on the terms and conditions set forth herein.
5. In conjunction with the purchase and sale of Seller's
Assets, the parties also desire to address a number of other issues related
thereto, and to the Joint Venture Agreement, the Prior Employment Agreement, and
all other prior agreements and understandings between any of the parties
relating to any of the matters discussed herein or therein (collectively, the
"Prior Agreements"), all on the terms and conditions set forth herein.
AGREEMENT
---------
In consideration of the mutual covenants and agreements hereinafter set
forth, the parties hereby agree as follows:
1. Purchase and Sale of Assets. Subject to and upon the other terms and
conditions set forth in this Agreement, Seller will sell, transfer, convey,
assign and deliver to ESI, and ESI will purchase, the following assets
(collectively, the "Assets" or "Seller's Assets"):
(a) All of Seller's rights to receive commissions or any other
type of compensation or payment on any PEO Business,
including, but not limited to, PEO Business generated from the
customers described on Schedule "1(a)" (the "Customers"), and
all of Seller's contract rights relating to the Customers;
(b) Without limiting Section 1(a) above, all of Seller's rights to
the repayment of commission advances, including, but not
limited to, obligations to repay commission advances evidenced
by a $17,000 promissory note payable from Mike DeSante to
Agency and a $13,477.03 promissory note payable from Jeff
Moyer to Agency (collectively, the "Transferred Notes"); and
(c) The termination of the Joint Venture Agreement.
The Seller's Assets will be conveyed to ESI, and ESI will purchase the Seller's
Assets, at the Closing (as defined below). Seller's Assets shall be conveyed
free and clear of all liabilities, obligations, liens and encumbrances, except
only the following (hereinafter collectively referred to as the "Permitted
Exceptions"): (i) those liabilities, obligations, liens and encumbrances in
favor of any member of the ESI Group, and (ii) those liabilities for payments of
commissions or other sums to producers, sub-producers or other third parties
disclosed on Schedule "1(b)", to the extent accruing after the Closing Date,
with such payments in the amounts and upon the terms described on Schedule
"1(b)" (to the extent accruing after the Closing Date, the "Authorized
Continuing Commissions"). The conveyance of Seller's Assets shall be deemed to
include any of Seller's contract rights with regard to contracts for Authorized
Continuing Commissions. ESI shall only assume the Authorized Continuing
Commissions and those obligations which may be imposed upon a transferee payee
or holder of the Transferred Notes (provided that any assumption of obligations
with respect to the Transferred Notes
2
<PAGE>
shall not limit the representations, warranties, covenants, agreements and
indemnification obligations of Seller with respect to the Transferred Notes),
and shall have no obligation whatsoever to provide any commission payments or
other compensation to producers, sub-producers or third parties with respect to
any of Seller's Assets.
2. Payment of Purchase Price. In full payment for the sale, transfer,
conveyance, assignment and delivery of Seller's Assets to ESI, and in reliance
upon the representations, warranties, agreements and releases, made herein by
Seller, ESI will pay the following to Seller at Closing, which payment in shall
be by wire transfer and shall be the entire purchase price for Seller's Assets
and the other warranties, agreements and releases of Seller set forth herein:
(i) $10,000 to Cain for the termination of the Joint Venture Agreement and for
the noncompetition agreement contained in the New Employment Agreement (defined
below); and (ii) $505,000 to Agency for the other Seller's Assets.
Notwithstanding the preceding sentence, of the amount payable to Agency, (A)
$16,418.20 shall be applied directly to the payment of past-due PERC accounts
receivable to ESI, and (B) approximately $15,000 shall be applied to past
commissions owing from Agency to H.P. Stith, Lynn Hughes and Jeff Bartelt and
paid directly by ESI, on behalf of Agency, to those individuals. The sums
described in the preceding sentence shall be credited toward the purchase price
payment owing from ESI to Agency and shall reduce the joint wire from ESI to
Cain and Agency from $515,000 to $483,581.80, with the exact amount of the wire
subject to further adjustment based upon the exact amount of the payments to
Messrs. Stith, Hughes and Bartelt. Seller also shall provide a full release of
the ESI Group from Wayne Wickard (and/or any applicable entity owned or
controlled by Wickard) on or before closing with respect to similar commissions
owing to Wickard (and/or any such Wickard entity). ESI will make the payment of
the entire purchase price to Agency, and Agency shall be solely responsible for
apportioning the payment between Cain and itself. Seller acknowledges and agrees
that said purchase price constitutes the sole and entire payment from all
members of the ESI Group to all members of the Seller Group for the Seller's
Assets.
3
<PAGE>
3. Closing Matters.
(a) Time and Place. The closing shall take place on Tuesday, April 7,
1998, or as promptly as possible thereafter, subject to fulfillment of all
closing contingencies, in Phoenix, Arizona at the offices of Quarles & Brady
(the "Closing" or the "Closing Date"). If Seller elects, ESI will initiate a
wire transfer into the trust account of Seller's counsel of funds payable at
Closing on the day preceding Closing if ESI has received (i) facsimile
signatures from Seller to all of the Closing documents, (ii) confirmation from
Seller's counsel that it holds all of such original documents and other Closing
deliveries of Seller with unconditional instructions to forward immediately the
counterpart originals of all such documents by overnight courier for arrival on
the next business day at the offices of Quarles & Brady, and (iii) confirmation
from Seller's counsel that any funds wired into the trust account of Seller's
counsel will be held by Seller's counsel in trust for ESI at all times prior to
Closing and will not be turned over to Seller until ESI and its counsel have
received the counterpart original documents from Seller and have confirmed in
writing to Seller's counsel that they are in appropriate form, with the further
agreement of Seller's counsel to rewire funds back to ESI upon instructions from
ESI to do so, in which event, ESI will return all of the Closing deliveries of
Seller to Seller. The counterparts for all of the original documents shall be
assembled at the offices of Quarles & Brady. Notwithstanding anything herein to
the contrary, the Closing also may occur at such other time and place, and in
such other manner, as the parties may agree.
(b) Seller's Deliveries. At the Closing, Seller will deliver to ESI the
following items, all duly executed, as applicable, and in form and content
acceptable to ESI:
(i) this Agreement;
(ii) Bill of Sale and Assignment of Contract Rights attached
hereto as Schedule 3(b)(ii);
(iii) New Employment Agreement (including that certain Option
Grant Agreement attached thereto as Schedule "A" (the "Option
Agreement"));
(iv) $350,000 Promissory Note (discussed below);
(v) the original Transferred Notes, with an acceptable
endorsement to ESI affixed to each Transferred Note;
(vi) such other consents and instruments of conveyance,
assignment and transfer as may be necessary to vest in ESI good and
marketable title to Seller's Assets free from the claims of any third
parties, including, but not limited to, the Wickard release, certain
other agreements from Wickard and PERC, and certain agreements from
Henry Nagel, Steve Naish and Paul Garrigan, subject only to the
Permitted Exceptions;
(vii) all contracts, files, records, data and documents
relating to (A) Seller's Assets and the Authorized Continuing
Commissions, and (B) contract and due diligence disclosure documents
required pursuant to Section 4(j) below; and
4
<PAGE>
(viii) a satisfactory engagement letter with Fried, Frank,
Harris et al.
(c) ESI's and ESI-East's Deliveries. At the Closing, ESI and ESI-East
will deliver to Seller the following items, all duly executed, as applicable,
and in form and content acceptable to Seller:
(i) this Agreement;
(ii) a wire transfer to Agency (for its benefit and for
Cain's benefit) in the approximate amount of $483,581.80;
(iii) [Reserved];
(iv) New Employment Agreement (including the Option Agreement);
and
(v) the following obligations, all instruments evidencing
which shall be marked as "canceled and superseded by that $350,000
promissory note from Edward L. Cain, Jr. to Employee Solutions, Inc.,
dated as of April 7, 1998" (collectively, the "Former Obligations"):
(A) that certain promissory note dated as of December 31, 1996 in the
principal amount of $273,000 from PERC Insurance, Inc., a/k/a
Professional Employer Resources Corporation, f/k/a PER Corp. ("PERC"),
as maker, to ESI, as payee, and (B) those certain obligations of Cain
to ESI in relation to commissions overpaid by ESI to Cain. The Former
Obligations shall be deemed automatically released, canceled, voided,
superseded, and replaced by and upon the execution of the
aforementioned $350,000 note, notwithstanding any failure to so mark
instruments evidencing the Former Obligations at Closing.
4. Representations, Warranties and Covenants of Seller and Agency. Each
party comprising Seller, jointly and severally, represents, warrants and
covenants to ESI and ESI-East, as of the date of Closing, as follows, which
shall be subject to the materiality qualification contained in Subsection 4(l)
hereof:
(a) Organization, Standing and Qualification. Agency is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Georgia.
(b) Consents; Authority. Seller has obtained all consents, approvals,
authorizations and orders necessary for the execution, delivery and performance
of this Agreement, and Seller has the full right, power and authority to enter
into this Agreement. No permission, approval, determination, consent or waiver
by, or any declaration, filing or registration with, any governmental or
regulatory authority is required in connection with the execution, delivery and
performance of this Agreement by Seller, except those that already have been
obtained prior to the Closing.
(c) Enforceability. This Agreement and all other documents contemplated
hereby constitute the legal, valid and binding obligations of Seller,
enforceable in accordance with their
5
<PAGE>
respective terms (except as such enforcement may be limited by applicable
bankruptcy, insolvency, moratorium or similar laws affecting the rights of
creditors generally or by the general principles of equity).
(d) Compliance with Laws. Seller has complied with all existing laws,
rules, regulations, ordinances, orders, judgments and decrees now or hereafter
applicable to Seller's Assets. Neither the execution, delivery nor performance
of this Agreement by Seller will, with or without the giving of notice or the
passage of time, or both, violate or conflict with any provision of Agency's
articles of incorporation or bylaws, or any agreement, understanding, law,
ordinance, rule, regulation, order, judgment, decree or other legal or
contractual requirement to which Seller is a party or may be bound or affected.
(e) Litigation. Except as set forth in Schedule "4(e)", to the
Knowledge (defined below) of Seller, there is no claim, legal action, suit,
arbitration, governmental investigation or other legal or administrative
proceeding affecting Seller or Seller's Assets, nor any order, decree or
judgment in progress, pending or in effect, or to the Knowledge of Seller
threatened, against or relating to Seller or Seller's Assets, and Seller has no
Knowledge of any basis for the same.
(f) Title to Properties. Subject only to the Permitted Exceptions,
Seller has good and marketable title to Seller's Assets, free and clear of all
liabilities, obligations, liens and encumbrances.
(g) Customers. To the Knowledge of Seller, but without any due
diligence inquiry, there is no reason why any of the Customers would terminate
its relationship or materially decrease its PEO Business with the ESI Group
after the Closing; provided, however, that Seller does not guarantee that any
Customers will continue their relationship with the ESI Group after the Closing.
(h) [Reserved.]
(i) No Broker. There are no broker's or finder's fees or obligations
due to any persons engaged by Seller, or any of the affiliates, employees,
representatives or agents of any of such persons, in connection with the sale of
Seller's Assets contemplated by this Agreement, except for the fees and expenses
of Seller's counsel and accountants, all of which shall be paid by Seller.
(j) PEO Business, Contract and Due Diligence Disclosures. Except as
listed on Schedules 4(j)(i) through 4(j)(ix), Seller represents and warrants the
following (1) with respect to each of Seller and (2) to Seller's Knowledge, with
respect to any member of the Seller Group other than Seller:
(i) except for the contracts evidencing Agency's obligation to
pay Authorized Continuing Commissions, all of which have been provided to ESI,
no member of Seller Group, directly or indirectly, has any written or oral
contracts, agreements or understandings for conducting any PEO Business;
6
<PAGE>
(ii) no member of Seller Group has any business, ownership or
pecuniary interest or commitment to purchase any business, ownership or
pecuniary interest, direct or indirect, in any corporation, partnership, limited
liability company, joint venture or other business enterprise or entity (other
than in a member of the ESI Group or as a less than five percent (5%) passive
shareholder of a publicly-held company) which conducts or, to Seller's
Knowledge, plans to conduct any PEO Business;
(iii) no member of Seller Group has any contract or
understanding, written or oral, with any PEO Business producer or sub-producer
of any kind;
(iv) no member of Seller Group has any contract or
understanding, written or oral, with Professional Employers Resource
Corporation, dba PERC Insurance, Inc., fka PERC Corp., an Indiana corporation
("PERC"), Wayne Wickard or any affiliate of PERC or Wayne Wickard that relates,
directly or indirectly, to any PEO Business;
(v) no member of Seller Group has placed since January 1, 1996
any PEO Business with any party that is not a member of the ESI Group, other
than PEO Business placed with the McClary-Trapp Group (prior to its acquisition
by ESI), the "ERC" companies and/or "STI" (prior to their acquisition by ESI),
or Prompt Pay, Inc. (prior to its acquisition by ESI);
(vi) except as set forth in or with respect to Subsection
4(j)(v), no member of Seller Group has placed since January 1, 1996, any
workers' compensation PEO Business with any party other than ESI Risk Management
Agency;
(vii) except for Authorized Continuing Commissions, there are
no arrangements whereby any member of Seller Group splits any commissions or
other payments on PEO Business with sub-producers or other third parties, and
for each commission splitting arrangement, if any, disclosed on Schedule
4(j)(vii), Seller has provided a complete and accurate summary of the
arrangements with respect thereto;
(viii) true and correct copies of Agency's 1996 and 1997 year
end balance sheets and income statements are attached on Schedule 4(j)(viii),
which fairly present in all material respects the results of operations of the
Agency for the periods presented using a cash basis of accounting; and
(ix) no member of Seller Group has conducted any business
other than the PEO Business generating revenues in excess of $100,000 for any
one year period since and including January 1, 1996.
Seller further represents and warrants that true and complete copies of all
contracts disclosed pursuant to this Section 4(j) are attached to the end of the
Schedules for Section 4(j).
(k) Disclosure. No representation or warranty by Seller contained in
this Agreement, nor any statement or certificate attached hereto from Seller
contains any untrue statement of a material
7
<PAGE>
fact, or omits to state any material fact required to make the statements herein
or therein contained not misleading.
(l) Materiality. Notwithstanding the foregoing, no inaccuracy or
omission by Seller with respect to the foregoing representations and warranties
and the schedules thereto shall be deemed a breach of said provisions until said
inaccuracies or omissions cause the ESI Group to sustain damages in excess of
$10,000 by reason thereof, at which point, all such inaccuracies or omissions
shall be deemed to constitute a breach, and the ESI Group shall be entitled to
exercise its rights and remedies hereunder for all damages, including the first
$10,000.
5. Representations, Warranties and Covenants by ESI and ESI-East. ESI
and ESI-East, jointly and severally, each represents, warrants and covenants to
Seller and Agency, as of the date of the Closing, as follows, which shall be
subject to the materiality qualification contained in Subsection (g) hereof:
(a) Organization. ESI is a corporation duly organized, validly existing
and in good standing under the laws of Arizona. ESI-East is a corporation duly
organized, validly existing and in good standing under the laws of Georgia.
(b) Consents; Authority. ESI and ESI-East have obtained all consents,
approvals, authorizations and orders necessary for the execution, delivery and
performance of this Agreement, and ESI and ESI-East have the full right, power
and authority to enter into this Agreement. No permission, approval,
determination, consent or waiver by, or any declaration, filing or registration
with, any governmental or regulatory authority is required in connection with
the execution, delivery and performance of this Agreement by ESI or ESI-East,
except those that already have been obtained prior to the Closing.
(c) Enforceability. This Agreement and all other documents contemplated
hereby constitute the legal, valid and binding obligations of ESI and ESI-East,
enforceable in accordance with their respective terms (except as such
enforcement may be limited by applicable bankruptcy, insolvency, moratorium or
similar laws affecting the rights of creditors generally or by the general
principles of equity).
(d) Compliance With Laws. Neither the execution, delivery nor
performance of this Agreement by ESI or ESI-East will, with or without the
giving of notice or the passage of time, or both, violate or conflict with any
provision of ESI's or ESI-East's articles of incorporation or bylaws, or any
agreement, understanding, law, ordinance, rule, regulation, order, judgment,
decree or other legal or contractual requirement to which ESI or ESI-East is a
party or may be bound or affected.
(e) No Broker. There are no broker's or finder's fees or obligations
due to any persons engaged by ESI or ESI-East, or any of the affiliates,
employees, representatives or agents of any such persons in connection with the
sale of Seller's Assets contemplated by this Agreement, except for the fees and
expenses of ESI's and ESI-East's counsel and accountants, all of which shall be
paid by ESI and/or ESI-East.
8
<PAGE>
(f) Disclosure. No representation or warranty by ESI or ESI-East
contained in this Agreement, nor any statement or certificate attached hereto
from ESI or ESI-East contains or will contain any untrue statement of a material
fact, or omits or will omit to state any material fact required to make the
statements herein or therein contained not misleading.
(g) Materiality. Notwithstanding the foregoing, no inaccuracy or
omission by ESI or ESI-East with respect to the foregoing representations and
warranties and the schedules thereto shall be deemed a breach of said provisions
until said inaccuracies or omissions cause the Seller Group to sustain damages
in excess of $10,000 by reason thereof, at which point, all such inaccuracies or
omissions shall be deemed to constitute a breach, and the Seller Group shall be
entitled to exercise its rights and remedies hereunder for all damages,
including the first $10,000.
6. New Employment Agreement. At the Closing, ESI, ESI-East and Cain
will execute and deliver that Second Amended and Restated Employment Agreement
(Edward L. Cain, Jr.), with noncompete and other provisions in form and
substance to be agreed upon by the parties (the together with the schedules
thereto, "New Employment Agreement"). The New Employment Agreement shall replace
and supersede the Prior Employment Agreement, except that certain noncompetition
and confidentiality provisions of the Prior Employment Agreement shall continue
in the manner specified in the New Employment Agreement.
7. Termination of Joint Venture Agreement. The Joint Venture Agreement
is terminated as of the Closing Date, with all representations, warranties,
covenants and provisions of the Joint Venture Agreement, and all rights and
remedies of any party thereunder, being terminated immediately as of the Closing
Date, regardless of whether such items by their terms were intended to survive
such termination. Each party acknowledges this complete and final termination
and waives any and all rights and remedies with respect to the Joint Venture
Agreement and the Prior Agreements.
8. Payment of Amounts Owing from Seller to ESI.
(a) New Note. In settlement of the Former Obligations, Cain
shall execute a promissory note in the principal amount of $350,000, which note
shall bear interest at 6% per annum (the "New Note"). The New Note shall be due
and payable on February 28, 2000, and if not paid in full by said date, the
interest rate shall increase to 10% per annum until payment is received. Except
as otherwise provided in the New Note, no payments of principal or interest
shall be due upon the New Note prior to its maturity. Without limiting other
provisions of the New Note that address the timing for payment of principal and
interest, the New Note provides that payments of principal and all accrued and
unpaid interest shall be due and payable at an earlier date under the following
circumstances:
(i) Upon exercise of any options held by Cain in the
Common Stock of ESI (as described in more detail in the New Employment
Agreement), a portion of the principal
9
<PAGE>
balance of the New Note, and any accrued and unpaid interest with respect
thereto, shall be due (the "Required Payment"), with the principal portion of
the Required Payment calculated as follows:
($350,000 x [no. of options currently being exercised/400,000])
Provided, however, that if the net proceeds after Cain's income taxes from the
exercise and sale of the options currently being exercised is less than the
amount calculated pursuant to the above formula, the "Required Payment" shall be
reduced to the amount of such net proceeds. The options shall be governed by
Section 3(d) of the New Employment Agreement and the Option Agreement. As a
requirement to the exercise of any options, Seller agrees to cooperate with ESI
to ensure payment of the Required Payment in a manner reasonably acceptable to
ESI in conjunction with the exercise of options and issuance of the ESI Common
Stock. The Required Payment shall be made as quickly as possible after the
exercise date, and in no event later than twenty (20) days after the exercise
date.
(ii) At any time and from time to time after April 7,
1999, when the Average Price (defined below) of ESI's Common Stock is at least
$5.00 per share, ESI shall have the right to force Seller upon thirty (30) days'
written notice to pay the Required Payment that would be due at such point upon
the exercise of all then-vested options by Cain. In such event, Cain agrees to
cooperate with ESI to ensure payment of the Required Payment in a manner
reasonably acceptable to ESI.
(b) Remedies for Non Payment. If Cain fails to pay the Required Payment
by the applicable deadline, in addition to all other rights and remedies
available at law or in equity, ESI shall have the right either (i) to terminate
all or any part of the vested options that Cain would have been required to
exercise to make the Required Payment, with each such terminated option valued
based upon the difference between the Average Price and the exercise price, with
the "Average Price" equal to the average of the quoted closing prices for ESI
Common Stock for the thirty (30) day period immediately preceding ESI's delivery
of the 30-day notice required pursuant to Section 8(a)(ii) above, or (ii) to
exercise all or any part of the vested options necessary to make the Required
Payment, with each such exercised option valued at the difference between the
Average Price and the exercise price, and issue Common Stock pursuant thereto,
and to retain all such Common Stock in payment of the Required Payment. Further,
if the New Note is not paid in full on or before February 28, 2000, ESI shall
have the same rights as set forth in the preceding sentence for the collection
of all amounts owing on the New Note, and not just the Required Payment,
regardless of whether ESI's Common Stock is trading above or below $5.00 per
share at such time.
(c) Security Interest. To secure repayment of the New Note, Seller
hereby pledges to ESI, and grants to ESI a security interest in all of Seller's
rights with respect to the options and any Common Stock relating thereto, and
agrees to execute any financing statements required by ESI with respect to such
security interest.
(d) Power of Attorney. Seller hereby constitutes and appoints ESI as
the true and lawful attorney of Seller with full power of substitution in the
name of ESI to institute and prosecute all
10
<PAGE>
proceedings which ESI in its sole discretion deems proper to carry out any of
the rights granted to ESI in this Section 8, including, but not limited to, the
right to exercise the options, to transfer any Common Stock issued upon exercise
of the options, and to demand and receive payment from the selling brokerage
firm or any purchaser of said Common Stock.
9 Payment of Authorized Continuing Commissions. After Closing, ESI
and/or ESI-East shall pay the Authorized Continuing Commissions in the manner
and to the sub-producers set forth on Schedule "1(b)."
10 Return of Materials. Seller agrees on or before Closing to return to
ESI, and to cause the Seller Group and all attorneys, accountants and other
parties to whom Seller Group has provided any billing factor worksheets to
return to ESI, all billing factor worksheets in their possession. Seller further
agrees to leave all ESI Group Materials (defined below) in Seller's possession
or located at ESI-East's office in Atlanta, Georgia (the "Office"), at the
Office when Seller vacates the same in accordance with the terms of the New
Employment Agreement. "ESI Group Materials" shall include, in all forms,
including, but not limited to, print, computer disks and databases and other
electronic media, all information relating to Customers, pricing and payment
information, all information relating to commission payments, rates and
structures, all marketing materials, all strategic plans, all billing factor
worksheets and any Confidential Information (as defined in the New Employment
Agreement), but shall not include any personal notes taken by Cain relating to
matters other than customer, price or cost information. Seller represents and
warrants on behalf of the Seller Group that, upon vacating the Office, the
Seller Group will have returned to ESI all originals and copies of ESI Group
Materials and no member of Seller Group will have retained any ESI Group
Materials or any copies thereof. The failure of Seller Group to return to ESI or
leave behind at the Office any ESI Group Materials in the manner required above,
or, with respect to ESI Group Materials discovered after Closing, to turn over
the same within forty-eight (48) hours after the earlier of discovery thereof by
Seller or demand by ESI shall constitute a material breach of this Agreement and
the New Employment Agreement for which no additional cure period shall be
required before the exercise by the ESI Group of its rights and remedies.
11 Securities Class Action Litigation. Cain withdraws his request for
separate representation in the securities class action litigation matters
presently pending against ESI, Cain and other members of the ESI Group, among
others; Cain agrees to conduct a coordinated and common defense with ESI and
other defendants against the claims asserted in the securities class action
litigation, provided that Cain reserves the right to reinstate his request for
separate representation in the event Cain reasonably believes that a conflict of
interest has arisen that requires separate representation.
12 Mutual Releases and Waiver.
(a) Except as set forth in Subsection (c) below, effective as of the
Closing Date, each member of Seller, for himself or itself, and on behalf of his
or its present and former officers, directors, shareholders, partners, members,
managers, agents and employees, and their separate and respective heirs,
personal representatives, successors and assigns, unconditionally and
irrevocably
11
<PAGE>
releases and forever discharges each member of the ESI Group, and, with respect
to each such member, all of its present and former officers, directors,
shareholders, partners, members, managers, agents, finders, brokers, attorneys
and employees, and their separate and respective heirs, personal
representatives, successors and assigns (collectively, the "ESI Entities"), of
and from any and all costs, damages, liabilities, claims, demands, actions and
causes of actions, whether known or unknown, contingent or matured, and whether
arising pursuant to statute, contract, tort or equity, now existing or hereafter
acquired, arising from or in any way, directly or indirectly, connected with (i)
the Prior Agreements (except those portions of the Prior Agreements that
expressly survive pursuant to the New Employment Agreement), or (ii) any acts or
omissions of any of the ESI Entities at any time on or prior to the Closing
Date.
(b) Except as set forth in Subsection (c) below, effective as of the
Closing Date, each of ESI and ESI-East, for itself and on behalf of its present
and former members, managers, officers, directors, partners, shareholders,
agents and employees, and their separate and respective heirs, personal
representatives, successors and assigns, unconditionally and irrevocably
releases and forever discharges each member of Seller, and, with respect to each
such member, all of his or its present and former officers, directors,
shareholders, partners, members, managers, agents, finders, brokers, attorneys
and employees, and their separate and respective heirs, personal
representatives, successors and assigns (collectively, the "Seller Entities"),
of and from any and all costs, damages, liabilities, claims, demands, actions
and causes of actions, whether known or unknown, contingent or matured, and
whether arising pursuant to statute, contract, tort or equity, now existing or
hereafter acquired, arising from or in any way, directly or indirectly,
connected with (i) the Prior Agreements (except those portions of the Prior
Agreements that expressly survive pursuant to the New Employment Agreement), or
(ii) any acts or omissions of the Seller Entities at any time on or prior to the
Closing Date.
(c) Notwithstanding anything to the contrary herein, the releases set
forth herein shall not release any party from breaches of, or any other
obligations or liabilities created by, this Agreement, the New Employment
Agreement, the New Note, the Bill of Sale and Assignment of Contract Rights or
by any other written agreements or instruments entered into in connection
herewith or therewith and which are attached hereto or thereto. All such items
are expressly excluded from the releases set forth herein and shall survive the
execution hereof.
13 Indemnification.
(a) Indemnification by Seller. Each member of Seller, jointly and
severally, agrees to indemnify, defend and hold harmless each of the ESI
Entities from, against and in respect of (and shall on demand reimburse the ESI
Entities for):
(i) any and all losses, liabilities or damages suffered or
incurred by reason of (A) any untrue representation, breach of warranty
or non-fulfillment of any covenant, representation or agreement by
Seller contained herein, in the New Employment Agreement, the New Note,
the Bill of Sale and Assignment of Contract Rights, or in any other
certificate, document or instrument attached hereto or thereto, or (B)
any obligations, claims or demands
12
<PAGE>
to pay commissions or other compensation to producers, sub-producers or
other third parties other than the Authorized Continuing Commissions
and as contracted for by the ESI Group after Closing;
(ii) any and all losses, liabilities or damages suffered or
incurred by reason of any action, suit, proceeding, claim or demand by
or on behalf of Legion Insurance Company or any brokers, agents or
finders of PERC relating to or arising from Legion's contracts,
arrangements and/or understandings with PERC, except for premium
payments owing from the ERC Companies to PERC for the period from
September 1, 1997 through November 25, 1997, up to, but not exceeding,
the amounts set forth on Schedule 13(a)(ii) attached hereto (except for
any excess due solely to increases in payroll), which ESI agrees to pay
(or to cause the ERC Companies to pay) within seven (7) days following
Closing; and
(iii) any and all actions, suits, proceedings, claims,
demands, assessments, judgments, costs and reasonable expenses,
including, without limitation, reasonable legal fees and expenses,
incident to any of the matters referenced in Sections 13(a)(i) and/or
13(a)(ii) above or incurred in investigating or attempting to avoid the
same or to oppose the imposition thereof, or in enforcing this
Agreement (including the release set forth herein and this indemnity).
(b) Indemnification by ESI and ESI-East. ESI and ESI-East, jointly and
severally, each hereby agrees to indemnify, defend and hold harmless each of
Seller Entities from, against and in respect of (and shall on demand reimburse
the Seller Entities for):
(i) any and all losses, liabilities or damages suffered or
incurred by reason of any untrue representation, breach of warranty or
non-fulfillment of any covenant, representation or agreement by ESI or
ESI-East contained herein, in the New Employment Agreement, the New
Note, the Bill of Sale and Assignment of Contract Rights, or in any
other certificate, document or instrument attached hereto or thereto;
and
(ii) any and all actions, suits, proceedings, claims, demands,
assessments, judgements, costs and expenses, including, without
limitation, legal fees and expenses, incident to any of the foregoing
or incurred in investigating or attempting to avoid the same or to
oppose the imposition thereof, or in enforcing this Agreement
(including the releases set forth herein and this indemnity).
(c) Notice and Defense. If at any time a party entitled to
indemnification hereunder (the "Indemnitee") shall receive notice of any matter
claimed to give rise to indemnification hereunder, the Indemnitee shall promptly
give notice thereof (a "Claims Notice") to the party obligated to provide
indemnification (the "Indemnitor") therefor. The Claims Notice shall set forth a
brief description of the facts and circumstances giving rise to such claim for
indemnification, and, if ascertainable, the estimated amount of the losses,
liabilities or damages that have been or may be suffered by the Indemnitee.
Thereafter, the Indemnitor shall have at its election, the right to settle or
defend any such matter at the Indemnitor's sole cost and expense through counsel
chosen by the Indemnitor and
13
<PAGE>
approved by the Indemnitee (which approval shall not unreasonably be withheld);
provided, however, that any such settlement or defense shall be conducted in a
manner which is reasonable and not contrary to the Indemnitee's interests and
the Indemnitee shall in all events have a right to reasonably veto any
settlement or any defense which would jeopardize in any material respect any
assets or business of the Indemnitee or any of its affiliates or increase the
potential liability of, or create a new liability for, the Indemnitee or any of
its affiliates and provided further that the Indemnitor hereby agrees to
indemnify the Indemnitee and its affiliates for the manner in which such matter
is settled or defended including any failure to pay any such claim which such
litigation is pending. In the event that the Indemnitor does so undertake to
settle and defend a claim, the Indemnitor shall notify the Indemnitee of its
intention to do so in writing within ten (10) business days after receipt of
notice from Indemnitee; otherwise Indemnitee may proceed to undertake its own
defense. Even if the Indemnitor undertakes to settle or defend a claim, the
Indemnitee shall have the right to settle any matter for which a claim for
indemnification has been made hereunder upon notice to the Indemnitor and by
waiving any right against Indemnitor with respect to such matter. Subject to the
above, each party agrees in all cases to cooperate with the defending party and
its counsel in the settlement of or defending of any such liabilities or claims.
In addition, the non-defending party shall at all times be entitled to monitor
such defense through the appointment, at its own cost and expense, of advisory
counsel of its own choosing.
14 Notices. All notices and other communications required or permitted
under this Agreement shall be in writing and shall be delivered or sent to the
parties at the address set forth below, or at such other address that they
designate by notice to all other parties in accordance with this Section. Any
party delivering notice to Seller shall deliver it to:
Edward L. Cain, Jr.
With a copy to:
---------------
Richard Haynes, Esq.
Layne Vaughn, Esq.
4300 Scotland
Houston, Texas 77007
And a copy to:
--------------
Chester G. Rosenberg, Esq.
McCullough Sherrill, LLP
1409 Peachtree Road, N.E.
Atlanta, Georgia 30309
14
<PAGE>
Any party delivering notice to ESI or ESI-East shall deliver it to:
Marvin D. Brody
Chief Executive Officer
-and-
Paul M. Gales, Esq.
Senior Vice President and General Counsel
EMPLOYEE SOLUTIONS, INC.
6225 North 24th Street
Phoenix, Arizona 85016
Fax No. (602) 955-1235
All notices and communications shall be deemed to have been received: (i) in the
case of personal delivery, on the date of such delivery; (ii) in the case of
telex or facsimile transmission, on the date of such delivery; (iii) in the case
of overnight air courier, on the second business day following the day sent,
with receipt confirmed by the courier; and (iv) in the case of mailing by first
class certified or registered mail, postage prepaid, return receipt requested,
on the date of delivery, as evidenced by the certified or registered mail
receipt.
15 Survival of Representations and Warranties. All statements,
representations, warranties, indemnities, covenants and agreements made by each
of the parties hereto, shall survive the Closing and shall not expire until
December 31, 2001. Notwithstanding the previous sentence, any misrepresentations
set forth herein or in the Employment Agreement, the New Note, the Bill of Sale
and Assignment of Contract Rights or any other written agreements attached
hereto or thereto amounting to actual fraud shall survive until the expiration
of the applicable statute of limitations for the fraud in question. Claims for
violations of representations and warranties shall be subject to the same
limitations and mechanics as claims for indemnification. Any party may make a
claim for indemnification by sending written notice to the other party or
parties hereto on or before midnight M.S.T. on the last date of the time period
for survival of the representation and warranty in question. The termination,
during the pendency of the prosecution of any claims qualifying for
indemnification hereunder, of the rights of an indemnified party to receive
indemnification as provided in the Agreement shall not affect any person's right
to prosecute to conclusion any claim made by that person prior to the time that
the relevant right of indemnity terminates.
16 Miscellaneous.
(a) Entire Agreement. This writing constitutes the entire agreement of
the parties with respect to the subject matter hereof and may not be modified,
amended or terminated except by a written agreement specifically referring to
this Agreement signed by all of the parties hereto.
(b) No Waiver. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
of the same or similar nature.
15
<PAGE>
(c) Binding Effect; Third Party Beneficiary. This Agreement shall be
binding upon and inure to the benefit of the parties hereto, their heirs,
personal representatives, permitted successors, assigns, and
beneficiaries-in-interest. Each member of the ESI Group shall be a third party
beneficiary hereunder, and shall be entitled to enforce the provisions of this
Agreement conveying any right or remedies to such party.
(d) Headings. The paragraph headings contained herein are for the
purposes of convenience only and are not intended to define or limit the
contents of said paragraphs.
(e) Further Assurances. Each party hereto shall cooperate, shall take
such further action and shall execute and deliver such further documents as may
be reasonably requested by any other party in order to carry out the provisions
and purposes of this Agreement.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall be deemed one original.
(g) Governing Law. This Agreement and all amendments thereof shall be
governed by and construed in accordance with the law of the State of Arizona
applicable to contracts made and to be performed therein, without regard to
principles relating to conflicts of laws.
(h) Arbitration; Exclusive Venue. Any controversy or claim arising out
of or relating to this agreement or the breach or validity thereof, whether or
not a contract claim, shall be settled exclusively by binding and non-appealable
arbitration in Phoenix, Arizona, by one (1) arbitrator selected by the parties,
or if the parties cannot agree upon a single arbitrator within thirty (30) days
of a party giving notice to the other of a proposed choice for an arbitrator,
then by a single arbitrator appointed by the Phoenix Office of the American
Arbitration Association; all such proceedings shall be conducted in accordance
with the rules of said association. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof, and the
parties consent to the exclusive jurisdiction of the Maricopa County, Arizona
courts and the Arizona Federal District Court for this purpose and for all other
purposes under this Agreement.
(i) No Disparagement. Each party agrees that neither it nor any of its
Affiliates, officers or directors will make any public statement regarding the
transactions contemplated by this Agreement without first consulting the other
parties hereto in order than such public statement shall be jointly worded and
issued by the parties; each party, however, shall retain the right to make
disclosures (A) necessary in the enforcement of such party's rights hereunder,
and/or (B) required by any court of competent jurisdiction or any government
agency lawfully requiring such disclosures. Further, ESI shall be entitled to
make such disclosures as it reasonably concludes are required of it by
applicable securities law.
(j) Costs. If the Defaulting Party defaults in its obligations under
this Agreement and, as a result thereof, the Non-Defaulting Party seeks to
legally enforce its rights hereunder against the Defaulting Party, then, in
addition to all damages and other remedies to which the Non-Defaulting Party is
entitled by reason of such default, the Defaulting Party shall promptly pay to
the Non-
16
<PAGE>
Defaulting Party an amount equal to all reasonable costs and expenses (including
reasonable attorneys' fees) paid or incurred by the Non-Defaulting Party in
connection with such enforcement.
(k) Certain Definitions. "Knowledge" shall mean, with respect to any
party, the actual knowledge of that party after due inquiry into the matter to
which the knowledge relates. "Affiliate" shall mean (i) any other person that
directly or indirectly controls, is controlled by or is under common control
with, such person or any of its subsidiaries and (ii) if such person is an
individual, any other individual that is a relative (by blood or marriage) of
such person. The term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by contract or
otherwise.
(l) Incorporation of Schedules. All schedules attached to this
Agreement or listed on the page immediately following the signature page hereto
are deemed incorporated into this Agreement by this reference and made a part
hereof for all purposes. Notwithstanding any provision in this Agreement to the
contrary, each time that the Selling Group makes any representation, warranty,
covenant or agreement (i) based upon the list of Customers set forth on Schedule
1(a), the Selling Group shall only be deemed as representing, warranting,
covenanting and/or agreeing as to the accuracy of Schedule 1(a) to the Knowledge
of the Selling Group, without any due diligence inquiry, and (ii) based upon the
Authorized Continuing Commission list set forth on Schedule 1(b), the Selling
Group shall only be deemed as representing, warranting, covenanting and/or
agreeing to the accuracy of Schedule 1(b) to the Knowledge of the Selling Group
for all Authorized Continuing Commissions on or before January 15, 1998, and to
the Knowledge of the Selling Group without any due diligence inquiry for all
Authorized Continuing Commissions after January 15, 1998, through the Closing
Date.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
ESI: EMPLOYEE SOLUTIONS, INC., an
Arizona corporation
By: /S/ Marvin D. Brody
-------------------------------
Marvin D. Brody
Chief Executive Officer and
Chairman of the Board
ESI-EAST: EMPLOYEE SOLUTIONS-EAST, INC.,
a Georgia corporation
By: /S/ Marvin D. Brody
-------------------------------
Marvin D. Brody
Chief Executive Officer and
Chairman of the Board
CAIN: /S/ Edward L. Cain, Jr.
----------------------------------
EDWARD L. CAIN, JR., an unmarried
individual
AGENCY: THE EDWARD L. CAIN AGENCY, INC., a
Georgia corporation
By: /S/ Edward L. Cain, Jr.
-------------------------------
Edward L. Cain, Jr.
President
18
Am-Re Managers, Inc.
Michael A. Blumenfeld, CPCU
Assistant Vice President
April 23, 1998
Mr. Dennis O'Connor
Sedgwick James of New York
1285 Avenue of the Americas
New York, NY 10019
Re: Reinsurance Binder for Loss Portfolio Transfer for Employee Solutions,
Inc. (Revision of April 10th Binder)
Dear Dennis:
Pursuant to your letter of April 9, 1998, we are binding coverage for this Loss
Portfolio Transfer as outlined below. Reinsurance will be provided to Reliance
National Indemnity Company, Reliance National Insurance Company, and, if
applicable, to Reliance Insurance Company (collectively "Reliance"), and to
Camelback Insurance, Ltd.
("Camelback") in accordance with their interests set forth in this binder.
Reinsurer: American Re-Insurance Company
A.M. Best's rating A++ XV
Effective Date of Transfer: February 28, 1998
Lines of Business to be included:
1) Workers' Compensation and Employer's Liability Insurance as insured by
Reliance National Indemnity Company, Reliance National Insurance
Company and Reliance Insurance Company, if applicable, for the years
1995 through 1997 as presently reinsured by Camelback pursuant to a
reinsurance agreement effective May 1, 1995 (the "Reliance Reinsurance
Agreement") with a loss accident date not later than December 31, 1997
and
2) the self-insured deductibles and retentions to be insured by Camelback
under Reimbursement of Loss Policies covering, in the case of the Ohio
self-insured program (the "Ohio Program"), losses with a loss accident
date from and including July 1, 1997 through and including December 31,
1997, and in the case of the policy covering deductibles under Policy
No. WC1-0136158 issued to Logistics Personnel Corp. by
<PAGE>
Legion Insurance Company (the "Legion Program"), losses during the
policy period August 1, 1996 to August 1, 1997 with a loss accident
date not later than August 1, 1997. (1) will be covered under a
Reinsurance Agreement issued to Reliance and (2) will be covered under
a Reinsurance Agreement issued to Camelback.
Losses included in this Agreement:
All losses incurred with a loss accident date not later than December 31, 1997,
limited to:
o $250,000 per accident with respect to claims currently covered under the
Reliance Reinsurance Agreement,
o $500,000 per occurrence in the case of the Ohio program, and
o the retention, up to a maximum of $350,000 per occurrence, in the case of
the Legion Program.
Limits of Liability of this Agreement:
o $35,000,000 Aggregate for all losses and expenses allocated as follows:
o $26,100,000 for losses and expenses of Reliance
o $8,900,000 for losses and expenses of Camelback, except that Camelback
may, at its sole option, assign any unutilized portion of its limit to
Reliance, by written notice to American Re-Insurance Company.
Premium: $19,950,000
Profit Sharing Provision:
American Re-Insurance will pay to Camelback on or before March 31, 2005 an
amount equal to the greater of (1) zero or (2) 80% of [0.89 ($19,950,000) minus
the sum of (i) 100% of the losses and loss adjustment expenses paid by American
Re-Insurance from February 28, 1998 to February 28, 2005 and (ii) 120% of open
case reserves as of February 28, 2005].
Exclusion for Losses Paid:
American Re-Insurance Company will not reimburse Reliance for the first $250,000
of losses and expenses paid in March 1998.
Terms agreed to and additional information required for Implementation of this
program:
1) Lindsey Morden to remain as the TPA except that Employee Solutions may
replace Lindsey Morden with another TPA approved by American Re, whose
approval will not be unreasonably withheld. Employee Solutions TPA
oversight will be conducted in a
<PAGE>
manner consistent with past practice. Claims contract language between
Employee Solutions and American Re-Insurance will be determined
shortly. American Re-Insurance Company's responsibility for future TPA
expenses will be determined subsequent to the receipt by American
Re-Insurance of any applicable claims handling contracts with Lindsey
Morden. American Re-Insurance will not be responsible for Employee
Solutions' oversight expenses.
2) Final review and approval of contract terms and conditions by all
parties' legal departments.
3) Coverage for extra contractual obligations and obligations in excess of
policy limits is provided.
4) Subrogation and accidental death and dismemberment (AD&D) recoveries
will NOT inure to the benefit of American Re.
5) Specific information regarding all policies to be reinsured by this
Loss Portfolio Transfer, including the policy numbers, dates, and terms
(including deductible amounts, if any).
6) All Legion and Reliance policies that are part of this Loss Portfolio
Transfer remain in force.
7) Receipt by American Re-Insurance of total premium ($19,950,000) via
wire transfer on April 23, 1998. In the event of non-payment of premium
on this date, this binder is void from inception.
Thank you again for this opportunity, and we look forward to continuing to work
with you on this account. Please let us know if you have any questions.
Sincerely,
/S/ Michael Blumenfeld
Michael A. Blumenfeld
cc: Diana Burns
Vice President Risk Services
Employee Solutions, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S FORM 10-Q FOR THE PERIOD
ENDED MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 11,446
<SECURITIES> 49,937
<RECEIVABLES> 57,448
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 133,608
<PP&E> 4,176
<DEPRECIATION> 0
<TOTAL-ASSETS> 204,803
<CURRENT-LIABILITIES> 76,437
<BONDS> 0
0
0
<COMMON> 34,600
<OTHER-SE> 6,964
<TOTAL-LIABILITY-AND-EQUITY> 204,803
<SALES> 0
<TOTAL-REVENUES> 220,930
<CGS> 0
<TOTAL-COSTS> 211,464
<OTHER-EXPENSES> 9,057
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,120
<INCOME-PRETAX> (938)
<INCOME-TAX> (33)
<INCOME-CONTINUING> (905)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (905)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
