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 June 30, 1999
[ ] 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:
34,008,433 Common shares, no par value were outstanding as of August 13, 1999.
<PAGE>
EMPLOYEE SOLUTIONS, INC.
FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1999
INDEX
Page
PART I. Financial Information Number
------
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 2
Consolidated Statements of Operations for the
Quarters and Six Months Ended June 30, 1999 and 1998 3
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months Ended June 30, 1999 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosure About Market Risk 33
PART II. Other Information
Item 1. Legal Proceedings 34
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Matters 35
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(In thousands of dollars, except share data) 1999 1998
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,166 $ 39,287
Investments and marketable securities 1,488 9,997
Restricted cash and investments 1,000 1,088
Accounts receivable, net 47,651 38,742
Receivables from insurance companies 6,696 6,704
Prepaid expenses and deposits 5,125 2,303
Income taxes receivable -- 5,040
Deferred income taxes 862 811
--------- ---------
Total current assets 76,988 103,972
Property and equipment, net 4,028 4,543
Deferred income taxes 58 60
Goodwill and other assets, net 73,869 66,530
--------- ---------
Total assets $ 154,943 $ 175,105
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ -- $ 13,727
Accrued salaries, wages and payroll taxes 29,048 28,719
Accounts payable 6,375 5,898
Accrued workers' compensation and health insurance 8,053 9,617
Income taxes payable 102 751
Other accrued expenses 11,664 13,595
--------- ---------
Total current liabilities 55,242 72,307
--------- ---------
Deferred income taxes 920 871
--------- ---------
Long-term debt 85,000 85,000
--------- ---------
Other long-term liabilities 3,211 1,211
--------- ---------
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, 33,308,433 shares issued and
outstanding June 30, 1999, and 32,419,595 shares
issued and outstanding December 31, 1998 36,703 35,800
Common stock to be issued 851 --
Accumulated deficit (26,982) (20,085)
Cumulative unrealized gain (loss) on investment
securities (2) 1
--------- ---------
Total stockholders' equity 10,570 15,716
--------- ---------
Total liabilities and stockholders' equity $ 154,943 $ 175,105
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter ended June 30, Six months ended June 30,
(In thousands of dollars, except ---------------------------- ----------------------------
share and per share data) 1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 206,088 $ 254,399 $ 404,998 $ 475,329
------------ ------------ ------------ ------------
Cost of revenues:
Salaries and wages of worksite employees 172,574 213,057 338,268 393,741
Healthcare and workers' compensation 11,265 15,639 21,817 29,906
Payroll and employment taxes 13,674 17,232 28,601 33,745
------------ ------------ ------------ ------------
Cost of revenues 197,513 245,928 388,686 457,392
------------ ------------ ------------ ------------
Gross profit 8,575 8,471 16,312 17,937
Selling, general and administrative expenses 8,872 12,340 16,384 20,111
Depreciation and amortization 1,673 1,544 3,340 2,830
------------ ------------ ------------ ------------
Loss from operations (1,970) (5,413) (3,412) (5,004)
Other income (expense):
Interest income 523 376 767 1,146
Interest expense (2,002) (2,152) (4,288) (4,272)
Other 13 2 36 5
------------ ------------ ------------ ------------
Loss before benefit for income taxes (3,436) (7,187) (6,897) (8,125)
Income tax benefit -- (1,465) -- (1,498)
------------ ------------ ------------ ------------
Net loss $ (3,436) $ (5,722) $ (6,897) $ (6,627)
============ ============ ============ ============
Net loss per common and common equivalent share:
Basic $ (.10) $ (.18) $ (.21) $ (.21)
Diluted $ (.10) $ (.18) $ (.21) $ (.21)
Weighted average number of common and
common equivalent shares outstanding:
Basic 33,266,969 31,766,725 32,846,452 31,734,062
============ ============ ============ ============
Diluted 33,266,969 31,766,725 32,846,452 31,734,062
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Common Unrealized Total Comprehensive
(In thousands of dollars, Common Accumulated Stock To Gain on Stockholders' Income
except share data) Stock Deficit Be Issued Investments Equity (Loss)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 $ 35,800 $(20,085) $ -- $ 1 $ 15,716 $ --
Issuance of 1,668 shares of common
stock in connection with exercise of
common stock options 3 -- -- -- 3 --
Issuance of 895,020 shares of common
stock in connection with settlement of
litigation 900 -- -- -- 900 --
To be issued 851,149 shares of common
stock in connection with settlement of
shareholder litigation -- -- 851 -- 851 --
Change in unrealized net gains,
net of applicable taxes -- -- -- (3) (3) (3)
Net loss -- (6,897) -- -- (6,897) (6,897)
-------- -------- -------- -------- -------- --------
COMPREHENSIVE LOSS $ (6,900)
========
BALANCE, JUNE 30, 1999 $ 36,703 $(26,982) $ 851 $ (2) $ 10,570
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months
ended June 30,
----------------------
(In thousands of dollars) 1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 396,089 $ 488,960
Cash paid to suppliers and employees (411,531) (487,622)
Cash paid in loss portfolio transfer -- (19,950)
Interest received 767 1,146
Interest paid (4,252) (4,163)
Income taxes refunded (paid), net 4,391 (43)
--------- ---------
Net cash used in operating activities (14,536) (21,672)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (128) (2,251)
Business acquisitions (5,879) (796)
Change in investments and marketable securities 8,509 (19,221)
Cash released from restricted cash and investments 88 19,000
Disbursements for deferred costs (3) (633)
--------- ---------
Net cash (used in) provided by investing activities 2,587 (3,901)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred loan costs -- (221)
Proceeds from issuance of common stock 555 186
Increase (decrease) in bank overdraft (13,727) 3,201
--------- ---------
Net cash (used in) provided by financing activities (13,172) 3,166
--------- ---------
Net decrease in cash and cash equivalents (25,121) (22,407)
CASH AND CASH EQUIVALENTS, beginning of period 39,287 40,110
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 14,166 $ 17,703
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
EMPLOYEE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Six months
ended June 30,
--------------------
1999 1998
-------- --------
RECONCILIATION OF NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (6,897) $ (6,627)
-------- --------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization 3,340 2,830
(Increase) decrease in accounts receivable, net (8,909) 13,631
Decrease (increase) in insurance company receivables 8 (2,560)
Increase in prepaid expenses and deposits (2,822) (1,696)
Decrease in deferred income taxes, net -- 342
Decrease (increase) in other assets 518 (1,528)
Increase (decrease) in accrued salaries,
wages and payroll taxes 329 (8,863)
Decrease in accrued workers'
compensation and health insurance (1,564) (18,695)
Increase in accounts payable 477 1,327
Decrease (increase) in income taxes payable/receivable 4,391 (1,883)
(Decrease) increase in other accrued expenses and
long-term liabilities (3,407) 2,050
-------- --------
(7,639) (15,045)
-------- --------
Net cash used in operating activities $(14,536) $(21,672)
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
EMPLOYEE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF CORPORATION
Employee Solutions, Inc. (together with its subsidiaries, "ESI" or the
"Company") is a leading professional employer organization (PEO) providing
employers throughout the United States with comprehensive employee payroll,
human resources and benefits outsourcing services. The Company's integrated
outsourcing services include payroll processing and reporting, human resources
administration, employment regulatory compliance management, risk
management/workers' compensation services, retirement and health care programs,
and other products and services provided directly to worksite employees. At June
30, 1999, ESI serviced approximately 2,000 client companies with approximately
38,100 worksite employees in 48 states.
The Company conducts its business on a national scale across many industries and
is not concentrated to any material extent within a single local market or
industry, although the transportation industry, at approximately 27%, represents
the largest concentration of clients.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. In the opinion of management the consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary in order to make the consolidated financial statements
not misleading. Results of operations for the quarter and six months ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. 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, 1998.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the activities of Employee
Solutions, Inc. and its wholly owned subsidiaries from their respective
acquisition dates. All acquisitions were accounted for as purchases. All
significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. The
nature of the Company's business requires significant estimates to be made in
the areas of workers' compensation and 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.
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 when purchased. All cash equivalents
are invested in high quality investment grade instruments, such as commercial
paper, at June 30, 1999 and December 31, 1998, and are stated at fair market
value. Substantially all cash and cash equivalents, including restricted cash
and investments, are not insured at June 30, 1999.
RESTRICTED CASH AND INVESTMENTS
At June 30, 1999, restricted cash was $1.0 million, which represents a
short-term certificate of deposit held for securing a letter of credit.
7
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
INVESTMENTS AND MARKETABLE SECURITIES
At June 30, 1999, the Company maintained approximately $7.5 million of
investments in its cash and cash equivalents and investments and marketable
securities accounts. These securities are considered available-for-sale and,
accordingly, are recorded at market value. Securities with original maturities
of 90 days or less consisted of commercial paper, money market and mutual funds
that had an estimated fair value of $6.0 million at June 30 1999. Securities
with original maturities greater than 90 days consisted of $450,000 in
commercial paper, $900,000 in corporate bonds and $100,000 in certificates of
deposit and had an estimated fair value of $1.5 million at June 30, 1999.
BANK OVERDRAFT
Bank overdraft represents outstanding checks in excess of cash on hand at the
applicable bank, and generally result from timing differences in the transfer of
funds between banks. Historically, these checks are covered when presented for
payment through the transfer of funds from other Company cash accounts held in
other banks.
CREDIT RISK
The Company conducts only a limited credit investigation prior to accepting most
new clients and thus may encounter collection problems which could adversely
affect its cash flow. The nature of the Company's business is such that a small
number of client credit failures could have an adverse effect on its business
and financial condition.
8
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
The computation of adjusted net loss and weighted average common and common
equivalent shares used in the calculation of net loss per common share is as
follows:
<TABLE>
<CAPTION>
Quarter ended June 30,
------------------------------------------------------------
1999 1998
(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 33,266,969 33,266,969 31,766,725 31,766,725
Dilutive effect of options
and warrants outstanding -- -- -- --
------------ ------------ ------------ ------------
Weighted average of
common and common
equivalent shares 33,266,969 33,266,969 31,766,725 31,766,725
============ ============ ============ ============
Net loss $ (3,436) $ (3,436) $ (5,722) $ (5,722)
Adjustments to net loss -- -- -- --
------------ ------------ ------------ ------------
Adjusted net loss for
purposes of the income per
common share calculation $ (3,436) $ (3,436) $ (5,722) $ (5,722)
============ ============ ============ ============
Net loss per common and
common equivalent share $ (.10) $ (.10) $ (0.18) $ (0.18)
============ ============ ============ ============
</TABLE>
9
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------------------------------------
1999 1998
(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 32,846,452 32,846,452 31,734,062 31,734,062
Dilutive effect of options
and warrants outstanding -- -- -- --
------------ ------------ ------------ ------------
Weighted average of
common and common
equivalent shares 32,846,452 32,846,452 31,734,062 31,734,062
============ ============ ============ ============
Net loss $ (6,897) $ (6,897) $ (6,627) $ (6,627)
Adjustments to net loss -- -- -- --
------------ ------------ ------------ ------------
Adjusted net loss for
purposes of the income per
common share calculation $ (6,897) $ (6,897) $ (6,627) $ (6,627)
============ ============ ============ ============
Net loss per common and
common equivalent share $ (.21) $ (.21) $ (0.21) $ (0.21)
============ ============ ============ ============
</TABLE>
The calculation of weighted average common and common equivalent shares for
purposes of calculating the June 30, 1999 diluted earnings per share, excludes
approximately 3,406,233 weighted average shares of options, warrants, and
contingently issuable shares computed under the treasury stock method, as their
effects would be anti-dilutive.
(2) LONG-TERM DEBT:
NOTE OFFERING
On October 21, 1997, the Company issued $85 million of 10% Senior Notes due 2004
(the Notes) in an Offering (the Offering) exempt from registration under the
Securities Act of 1933 as amended (Securities Act). Interest under the Notes is
payable semi-annually commencing April 15, 1998, and the Notes are not callable
until October 2001 subject to the terms of the Indenture under which the Notes
were issued. 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.
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 June 30, 1999 and December 31, 1998; the results of operations
for the quarter and six months ended June 30, 1999 and June 30, 1998 and the
statements of cash flows for the six months ended June 30, 1999 and June 30,
1998, of Employee Solutions, Inc. (Parent), the guarantor subsidiaries
(Guarantors) and the subsidiaries which are not guarantors (Non-guarantors).
10
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,234 $ 4,081 $ 3,851 $ -- $ 14,166
Investments and marketable securities 1,488 -- -- -- 1,488
Restricted cash and investments 1,000 -- -- -- 1,000
Accounts receivable, net 15,836 30,696 1,119 -- 47,651
Receivables from insurance companies -- -- 6,696 -- 6,696
Prepaid expenses and deposits 4,933 169 23 -- 5,125
Income taxes receivable -- -- -- -- --
Deferred income taxes 862 -- -- -- 862
Due from affiliates 7,957 2,644 (6,828) (3,773) --
--------- --------- --------- --------- ---------
Total current assets 38,310 37,590 4,861 (3,773) 76,988
Property and equipment, net 3,761 255 12 -- 4,028
Deferred income taxes 58 -- -- -- 58
Goodwill and other assets, net 42,133 31,472 264 -- 73,869
Investment in subsidiaries 41,572 -- -- (41,572) --
--------- --------- --------- --------- ---------
Total assets $ 125,834 $ 69,317 $ 5,137 $ (45,345) $ 154,943
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts $ -- $ -- $ -- $ -- $ --
Accrued salaries, wages and payroll taxes 8,489 19,655 904 -- 29,048
Accounts payable 1,162 1,401 3,812 -- 6,375
Accrued workers' compensation
and health insurance 56 1,397 6,600 -- 8,053
Income taxes payable 102 -- -- -- 102
Other accrued expenses 8,367 1,009 2,288 -- 11,664
Due to affiliates 9,168 14,710 (20,105) (3,773) --
--------- --------- --------- --------- ---------
Total current liabilities 27,344 38,172 (6,501) (3,773) 55,242
--------- --------- --------- --------- ---------
Deferred income taxes 920 -- -- -- 920
--------- --------- --------- --------- ---------
Long-term debt 85,000 -- -- -- 85,000
--------- --------- --------- --------- ---------
Other long-term liabilities 2,000 1,211 -- -- 3,211
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Class A convertible preferred stock -- -- -- -- --
Common stock, no par value 36,703 2,622 771 (3,393) 36,703
Common stock to be issued 851 -- -- -- 851
Additional paid in capital -- 26,342 50 (26,392) --
(Accumulated deficit) retained earnings (26,982) 970 10,817 (11,787) (26,982)
Unrealized gain on
investment securities (2) -- -- -- (2)
--------- --------- --------- --------- ---------
Total stockholders' equity 10,570 29,934 11,638 (41,572) 10,570
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 125,834 $ 69,317 $ 5,137 $ (45,345) $ 154,943
========= ========= ========= ========= =========
</TABLE>
11
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
December 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 $ 8,176 $ 24,503 $ 6,608 $ -- $ 39,287
Investments and marketable securities 9,997 -- -- -- 9,997
Restricted cash and
investments 1,088 -- -- -- 1,088
Accounts receivable, net 15,460 22,495 787 -- 38,742
Receivable from insurance
companies -- -- 6,704 -- 6,704
Prepaid expenses and deposits 1,532 753 18 -- 2,303
Income taxes receivable 5,040 -- -- -- 5,040
Deferred income taxes 811 -- -- -- 811
Due from affiliates 7,789 2,711 (6,726) (3,774) --
--------- --------- --------- --------- ---------
Total current assets 49,893 50,462 7,391 (3,774) 103,972
Property and equipment, net 4,213 314 16 -- 4,543
Deferred income taxes 60 -- -- -- 60
Goodwill and other assets, net 34,044 32,208 278 -- 66,530
Investment in subsidiaries 36,005 -- -- (36,005) --
--------- --------- --------- --------- ---------
Total assets $ 124,215 $ 82,984 $ 7,685 $ (39,779) $ 175,105
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 308 $ 13,419 $ -- $ -- $ 13,727
Accrued salaries, wages and
payroll taxes 5,932 22,167 620 -- 28,719
Accounts payable 1,584 1,051 3,263 -- 5,898
Accrued workers' compensation
and health insurance 3,141 618 5,858 -- 9,617
Income taxes payable 751 -- -- -- 751
Other accrued expenses 9,123 2,316 2,156 -- 13,595
Due to affiliates 1,789 16,030 (14,045) (3,774) --
--------- --------- --------- --------- ---------
Total current liabilities 22,628 55,601 (2,148) (3,774) 72,307
--------- --------- --------- --------- ---------
Deferred income taxes 871 -- -- -- 871
--------- --------- --------- --------- ---------
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 35,800 2,622 771 (3,393) 35,800
Additional paid in capital -- 26,342 50 (26,392) --
(Accumulated deficit) retained earnings (20,085) (2,792) 9,012 (6,220) (20,085)
Unrealized gain on
investments 1 -- -- -- 1
--------- --------- --------- --------- ---------
Total stockholders' equity 15,716 26,172 9,833 (36,005) 15,716
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 124,215 $ 82,984 $ 7,685 $ (39,779) $ 175,105
========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 1999
------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 49,357 $ 150,504 $ 6,227 $ -- $ 206,088
--------- --------- --------- --------- ---------
Cost of revenues:
Salaries and wages of
worksite employees 41,717 125,861 4,996 -- 172,574
Healthcare and workers'
compensation 1,507 9,571 187 -- 11,265
Payroll and employment taxes 3,135 10,055 484 -- 13,674
--------- --------- --------- --------- ---------
Cost of revenues 46,359 145,487 5,667 -- 197,513
--------- --------- --------- --------- ---------
Gross profit 2,998 5,017 560 -- 8,575
Selling, general and
administrative expenses 6,285 2,548 39 -- 8,872
Depreciation and amortization 1,265 401 7 -- 1,673
--------- --------- --------- --------- ---------
Income (loss) from operations (4,552) 2,068 514 -- (1,970)
Other income (expense):
Interest income 219 24 280 -- 523
Interest expense (1,991) (11) -- -- (2,002)
Other income (expense) -- 13 -- -- 13
--------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes (6,324) 2,094 794 -- (3,436)
Income tax provision (benefit) -- -- -- -- --
--------- --------- --------- --------- ---------
(6,324) 2,094 794 -- (3,436)
Income from wholly-owned
subsidiaries 2,888 -- -- (2,888) --
--------- --------- --------- --------- ---------
Net income (loss) $ (3,436) $ 2,094 $ 794 $ (2,888) $ (3,436)
========= ========= ========= ========= =========
</TABLE>
13
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 1998
-------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 82,763 $ 162,789 $ 9,122 $ (275) $ 254,399
--------- --------- --------- --------- ---------
Cost of revenues:
Salaries and wages of
worksite employees 69,611 134,686 8,760 -- 213,057
Healthcare and workers'
compensation 4,331 11,433 (125) -- 15,639
Payroll and employment taxes 5,926 10,558 748 -- 17,232
--------- --------- --------- --------- ---------
Cost of revenues 79,868 156,677 9,383 -- 245,928
--------- --------- --------- --------- ---------
Gross profit 2,895 6,112 (261) (275) 8,471
Selling, general and
administrative expenses 8,338 3,971 31 -- 12,340
Intercompany selling, general
and administrative expense 179 67 29 (275) --
Depreciation and amortization 1,139 396 9 -- 1,544
--------- --------- --------- --------- ---------
Income (loss) from operations (6,761) 1,678 (330) -- (5,413)
Other income (expense):
Interest income 220 23 133 -- 376
Interest expense and other (2,223) (3) 76 -- (2,150)
--------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes (8,764) 1,698 (121) -- (7,187)
Income tax provision (benefit) (2,207) 810 (68) -- (1,465)
--------- --------- --------- --------- ---------
(6,557) 888 (53) -- (5,722)
Income from wholly-owned
subsidiaries 835 -- -- (835) --
--------- --------- --------- --------- ---------
Net income (loss) $ (5,722) $ 888 $ (53) $ (835) $ (5,722)
========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
-------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 107,202 $ 284,727 $ 13,069 $ -- $ 404,998
--------- --------- --------- --------- ---------
Cost of revenues:
Salaries and wages of
worksite employees 91,200 236,263 10,805 -- 338,268
Healthcare and workers'
compensation 3,385 18,771 (339) -- 21,817
Payroll and employment taxes 7,107 20,483 1,011 -- 28,601
--------- --------- --------- --------- ---------
Cost of revenues 101,692 275,517 11,477 -- 388,686
--------- --------- --------- --------- ---------
Gross profit 5,510 9,210 1,592 -- 16,312
Selling, general and
administrative expenses 11,592 4,711 81 -- 16,384
Depreciation and amortization 2,524 802 14 -- 3,340
--------- --------- --------- --------- ---------
Income (loss) from operations (8,606) 3,697 1,497 -- (3,412)
Other income (expense):
Interest income 419 40 308 -- 767
Interest expense (4,277) (11) -- -- (4,288)
Other income (expense) -- 36 -- -- 36
--------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes (12,464) 3,762 1,805 -- (6,897)
Income tax provision (benefit) -- -- -- -- --
--------- --------- --------- --------- ---------
(12,464) 3,762 1,805 -- (6,897)
Income from wholly-owned
subsidiaries 5,567 -- -- (5,567) --
--------- --------- --------- --------- ---------
Net income (loss) $ (6,897) $ 3,762 $ 1,805 $ (5,567) $ (6,897)
========= ========= ========= ========= =========
</TABLE>
15
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
------------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 152,430 $ 305,728 $ 18,544 $ (1,373) $ 475,329
--------- --------- --------- --------- ---------
Cost of revenues:
Salaries and wages of
worksite employees 125,990 251,915 15,836 -- 393,741
Healthcare and workers'
compensation 7,986 21,408 512 -- 29,906
Payroll and employment taxes 11,972 20,273 1,500 -- 33,745
--------- --------- --------- --------- ---------
Cost of revenues 145,948 293,596 17,848 -- 457,392
--------- --------- --------- --------- ---------
Gross profit 6,482 12,132 696 (1,373) 17,937
Selling, general and
administrative expenses 14,449 5,552 110 -- 20,111
Intercompany selling, general
and administrative expense 490 821 62 (1,373) --
Depreciation and amortization 2,041 776 13 -- 2,830
--------- --------- --------- --------- ---------
Income (loss) from operations (10,498) 4,983 511 -- (5,004)
Other income (expense):
Interest income 577 43 526 -- 1,146
Interest expense and other (4,417) (1) 151 -- (4,267)
--------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes (14,338) 5,025 1,188 -- (8,125)
Income tax provision (benefit) (2,779) 927 354 -- (1,498)
--------- --------- --------- --------- ---------
(11,559) 4,098 834 -- (6,627)
Income from wholly-owned
subsidiaries 4,932 -- -- (4,932) --
--------- --------- --------- --------- ---------
Net income (loss) $ (6,627) $ 4,098 $ 834 $ (4,932) $ (6,627)
========= ========= ========= ========= =========
</TABLE>
16
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
-----------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET LOSS TO
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income (loss) $ (6,897) $ 3,762 $ 1,805 $ (5,567) $ (6,897)
-------- -------- -------- -------- --------
ADJUSTMENTS TO RECONCILE
NET LOSS TO NET CASH
PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization 2,524 802 14 -- 3,340
Increase in accounts
receivable, net (376) (8,201) (332) -- (8,909)
Decrease in insurance
company receivable -- -- 8 -- 8
(Increase) decrease in prepaid
expenses and deposits (3,401) 584 (5) -- (2,822)
Increase in deferred income taxes, net -- -- -- -- --
Decrease in other assets 512 3 3 -- 518
Increase (decrease) from inter-
company transactions 1,643 (1,252) (5,958) 5,567 --
Increase (decrease) in accrued salaries,
wages, and payroll taxes 2,557 (2,512) 284 -- 329
Increase (decrease) in accrued workers'
compensation and health insurance (3,085) 779 742 -- (1,564)
Decrease in income taxes payable/receivable 4,391 -- -- -- 4,391
Increase (decrease) in accounts payable (422) 350 549 -- 477
(Decrease) increase in other accrued
expenses and long-term liabilities (2,232) (1,307) 132 -- (3,407)
-------- -------- -------- -------- --------
2,111 (10,754) (4,563) 5,567 (7,639)
-------- -------- -------- -------- --------
Net cash used in
operating activities (4,786) (6,992) (2,758) -- (14,536)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (118) (11) 1 -- (128)
Business acquisitions (5,879) -- -- -- (5,879)
Change in investments
and marketable securities 8,509 -- -- -- 8,509
Cash released from restricted cash and
investments 88 -- -- -- 88
Disbursements for deferred costs (3) -- -- -- (3)
-------- -------- -------- -------- --------
Net cash (used in) provided by
investing activities 2,597 (11) 1 -- 2,587
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 555 -- -- -- 555
Decrease in bank overdraft (308) (13,419) -- -- (13,727)
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities 247 (13,419) -- -- (13,172)
-------- -------- -------- -------- --------
Net decrease in cash and cash
equivalents (1,942) (20,422) (2,757) -- (25,121)
CASH AND CASH EQUIVALENTS,
beginning of period 8,176 24,503 6,608 -- 39,287
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 6,234 $ 4,081 $ 3,851 $ -- $ 14,166
======== ======== ======== ======== ========
</TABLE>
17
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
-----------------------------------------------------------
Non-
(In thousands of dollars) Parent Guarantors Guarantors Eliminating Consolidated
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO
NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES:
Net income (loss) $ (6,627) $ 4,098 $ 834 $ (4,932) $ (6,627)
-------- -------- -------- -------- --------
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization 2,041 776 13 -- 2,830
Decrease (increase) in accounts
receivable, net 5,260 8,426 (55) -- 13,631
Decrease (increase) decrease in insurance
company receivable -- 96 (2,656) -- (2,560)
(Increase) decrease in prepaid
expenses and deposits (1,576) (306) 186 -- (1,696)
Increase in deferred income taxes, net 342 -- -- -- 342
(Increase) decrease in other assets (1,663) 261 (126) -- (1,528)
Increase (decrease) from inter-
company transactions 14,715 (18,362) (1,285) 4,932 --
(Decrease) increase in accrued salaries,
wages, and payroll taxes (7,834) (1,179) 150 -- (8,863)
Increase (decrease) in accrued workers'
compensation and health insurance 167 (712) (18,150) -- (18,695)
Increase in income taxes payable/receivable (1,883) -- -- -- (1,883)
Increase (decrease) in accounts payable 198 2,072 (943) -- 1,327
(Decrease) increase in other accrued
expenses and long-term liabilities 2,051 (1,432) 1,431 -- 2,050
-------- -------- -------- -------- --------
11,818 (10,360) (21,435) 4,932 (15,045)
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities 5,191 (6,262) (20,601) -- (21,672)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,122) (129) -- -- (2,251)
Business acquisitions (430) (344) (22) -- (796)
Change in investments
and marketable securities (19,109) -- 18,888 -- (221)
Disbursements for deferred costs (633) -- -- -- (633)
-------- -------- -------- -------- --------
Net cash (used in) provided by
investing activities (22,294) (473) 18,866 -- (3,901)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 186 -- -- -- 186
Increase in bank overdraft -- 3,201 -- -- 3,201
Payment of deferred
loan costs (221) -- -- -- (221)
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities (35) 3,201 -- -- 3,166
-------- -------- -------- -------- --------
Net decrease in cash and cash
equivalents (17,138) (3,534) (1,735) -- (22,407)
CASH AND CASH EQUIVALENTS,
beginning of period 22,692 11,848 5,570 -- 40,110
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 5,554 $ 8,314 $ 3,835 $ -- $ 17,703
======== ======== ======== ======== ========
</TABLE>
18
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
(3) SEGMENT INFORMATION
The Company, in relation to SFAS No. 131 "Disclosure About Segments of an
Enterprise and Related Information," has defined the following five reportable
segments: Core PEO services, Logistics Personnel Corp, TEAM Services and
Stand-Alone Workers' Compensation services and US Xpress.
The Company, through its Core PEO segment, provides a full-range of services and
products to its customers. Typically, ESI becomes the "employer of record" for
the client company's employees and provides payroll administration, workers'
compensation insurance and risk management administration, human resources
administration and benefits programs. Additionally, other products and services
are offered directly to worksite employees, such as employee payroll deduction
programs for disability and specialty health insurance, debit cards, prepaid
telephone cards and other personal financial services.
Formerly, the Company provided its Core PEO services to US Xpress, a large
transportation company. US Xpress was the Company's largest customer with
approximately 6,200 worksite employees. The Company terminated its subscriber
service agreement with US Xpress effective August 19, 1998.
Logistics Personnel Corp (LPC) provides specialized leasing of all types of
distribution personnel, including drivers, warehouse workers, mechanics,
dispatchers, forklift operators and administrators. A full range of services,
including employee recruiting, hiring and management; payroll administration;
claims and audit handling; workers' compensation insurance coverage; employee
benefits programs and tax reporting is provided to its customers.
TEAM Services specializes in leasing commercial talent (actors and actresses),
musicians and recording engineers to the music and advertising segments of the
entertainment industry. In addition, TEAM generates revenue from touring bands
with the entertainment industry.
The Company, formerly through its Stand-Alone Workers' Compensation segment,
provided its workers' compensation program to non-PEO customers on a stand-alone
basis. Based on a change in business strategy as of 1998, the Company will no
longer market new stand-alone policies. This change is the result of a
determination to emphasize other PEO marketing strategies and because of the
decreased profit opportunities resulting from increased price competition in the
overall workers' compensation market.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
19
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
Information concerning revenue, gross profit and assets by business segment was
as follows (in thousands):
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenue
Core PEO $ 136,085 $ 141,853 $ 278,176 $ 265,069
US Xpress -- 50,282 -- $ 96,195
LPC 28,067 24,888 53,427 48,097
TEAM 41,936 36,839 73,395 64,390
Stand-Alone -- 537 -- $ 1,578
--------- --------- --------- ---------
Consolidated Total 206,088 254,399 404,998 475,329
--------- --------- --------- ---------
Gross Profit
Core PEO 5,904 6,863 11,127 13,117
US Xpress -- (683) -- (198)
LPC 2,155 1,984 4,184 4,407
TEAM 516 370 1,001 857
Stand-Alone -- (63) -- (246)
--------- --------- --------- ---------
Total 8,575 8,471 16,312 17,937
Selling, General and
Administrative Expense 8,872 12,340 16,384 20,111
Depreciation and Amortization 1,673 1,544 3,340 2,830
--------- --------- --------- ---------
Loss from Operations (1,970) (5,413) (3,412) (5,004)
--------- --------- --------- ---------
Other Income (expense)
Interest income 523 376 767 1,146
Interest expense (2,002) (2,152) (4,288) (4,272)
Other 13 2 36 5
--------- --------- --------- ---------
Loss before tax benefit (3,436) (7,187) (6,897) (8,125)
Income tax benefit -- (1,465) -- (1,498)
--------- --------- --------- ---------
Net loss $ (3,436) $ (5,722) $ (6,897) $ (6,627)
========= ========= ========= =========
Depreciation and Amortization
Core PEO $ 1,392 $ 1,272 $ 2,778 $ 2,300
LPC 245 225 491 448
TEAM 36 46 71 81
Stand-Alone -- 1 -- 1
--------- --------- --------- ---------
Consolidated Total $ 1,673 $ 1,544 $ 3,340 $ 2,830
========= ========= ========= =========
JUNE 30, DECEMBER 30,
1999 1998
--------- ---------
Total assets
Core PEO $ 107,721 $ 94,540
LPC 35,317 35,192
TEAM 11,905 29,380
Stand-Alone -- 15,993
--------- ---------
Consolidated Total $ 154,943 $ 175,105
========= =========
20
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
(4) CONTINGENCIES:
The Company has received a letter from the Arizona Department of Economic
Security indicating that the Company has been assigned a higher state
unemployment tax rate for calendar year 1994 than the Company believes it is
entitled. In consultation with legal counsel the Company believes that based on
Arizona Revised Statutes it is entitled to the lower rate. If it was ultimately
determined that the higher rate applies, the Company would owe $500,000 (before
interest and the income tax effect) more than is reflected in the Company's
financial statements. As of June 30, 1999, the compounded interest totaled
approximately $278,000.
The State of New York has asserted that the Company is a successor for state
unemployment insurance (SUI) purposes to certain entities from which the Company
acquired limited assets in connection with the Hazar acquisition effective
January 1996. The State further asserts that the Company was subject to
increased tax rates during 1996 and 1997 as a result of successor status. The
liabilities asserted are approximately $640,000. The Company is appealing the
determination and has commenced negotiations with the State concerning a
settlement of the matter.
The State of Ohio has issued an assessment of $5.2 million (plus penalty)
relating to sales taxes potentially applicable to certain types of services.
While the Company believes that no tax ultimately will be payable based on the
assessment, there can be no assurance that this will be the case.
The Company was named as a defendant in an action filed by Ladenburg Thalmann &
Co., Inc. in the United States District Court, Southern District of New York in
May 1997 alleging breach of contract under certain stock warrants. The plaintiff
sought damages of at least $2.5 million. In March 1999, the Court granted the
Company's motion for summary judgment and dismissed the plaintiff's case. After
the plaintiff commenced an appeal process, the parties reached a settlement
agreement pursuant to which the litigation is being dismissed in exchange for
nominal consideration.
An arbitration panel awarded HDVT, Inc. (the seller of certain assets acquired
by the Company from Employers Trust in February 1997) a total of $10.4 million
in additional acquisition purchase price in February 1999. HDVT's motion to
confirm the award was granted in Superior Court, Maricopa County, Arizona in
April 1999. The parties entered into a settlement agreement in June 1999 whereby
all claims against the Company by HDVT were dismissed in consideration of the
payment of $7.5 million in cash (of which $5.5 million was paid at closing, $1.0
million is due in September 1999 and $1.0 million is due in December 1999) and
675,000 shares of the Company's Common Stock (deliverable not later than
September 1999).
The State of Ohio issued a sales tax assessment in the amount of approximately
$16.5 million (including interest and penalties) in July 1999 against HDVT with
respect to the operations of HDVT prior to the Company's acquisition of certain
assets of HDVT (then known as Employers Trust) in February 1997. The State of
Ohio concurrently issued an assessment in the same amount against the Company as
successor to HDVT. The Company believes that meritorious defenses are available
to the assessment. In addition, $6.0 million of the cash and the entire stock
portion of the settlement payment described in the preceding paragraph are being
held in escrow solely for payment of amounts, if any, ultimately determined to
be due pursuant to such assessment. If the Company is held to have liability
pursuant to such assessment, the escrowed assets prove insufficient to satisfy
such liability, and HDVT is unable to pay any such shortfall, the Company's
maximum liability with respect to the assessment is approximately $3.2 million.
An arbitration proceeding between the Company and US Xpress Enterprises, Inc.
was scheduled for May 1999 regarding issues under a PEO service agreement
between the parties that was terminated by the Company in August 1998. US Xpress
sought recovery of approximately $3.0 million plus unspecified punitive damages
primarily relating to unpaid medical claims. In June 1999, all claims between
the parties were settled pursuant to the payment by the Company to US Xpress of
$1.2 million in cash (a portion of which was payable over time) and
approximately 547,000 shares of the Company's Common Stock.
The Company has been named as a defendant in an action filed by James E. Gorman
in Arizona Superior Court in August 1999 alleging breach of contract, fraud,
defamation and related matters in connection with the termination of Mr. Gorman
as the Company's president and chief executive officer in February 1999. The
complaint seeks contractual damages of approximately $588,000 plus unspecified
tort damages. The Company believes that the complaint is without merit and
intends to contest it vigorously.
International Color Services, L.L.C. filed for arbitration in December 1998
alleging breach of contract regarding fee issues under the PEO service agreement
between the parties. The Company has filed a complaint in Superior Court,
Maricopa County, Arizona in January 1999 seeking a declaratory judgment that the
dispute is not subject to arbitration. Plaintiff has filed a motion to compel
arbitration and a counterclaim seeking damages of over $400,000 plus attorneys
fees and costs and unspecified punitive damages. The Company intends to contest
the claim vigorously.
21
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
From time to time, the Company is named as a defendant in lawsuits in the
ordinary course of business. These lawsuits are not expected to have a material
adverse effect on the Company's financial position or results of operations.
(5) SUBSEQUENT EVENTS:
The Company has signed a letter of intent to sell its TEAM Services subsidiary
to Jeffery A. Colby, TEAM's current president and a member of the Company's
Board of Directors. The transaction is anticipated to close on or before October
31,1999 and to net the Company approximately $500,000 in cash. Completion of the
transaction is subject to agreement upon final documentation and satisfaction of
closing conditions, including due diligence reviews.
The Company has accepted a proposal from a third party lender for up to $20
million in new debt financing. The proposed financing consists of a $10 million
term loan at an interest rate of 13.5% and a revolving loan based on eligible
accounts receivable to a maximum of $10 million at an interest rate of prime
plus 2%. The Company also would be subject to certain fees and charges.
Completion of the transaction is subject to agreement upon final documentation
and satisfaction of closing conditions, including due diligence reviews.
22
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
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, 1998. 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, 1998, 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.
COSTS OF REVENUES
The Company's direct costs of revenues include salaries and wages paid to
worksite employees, employment related taxes, costs of health and welfare
benefit plans, and workers' compensation insurance costs.
The largest component of direct costs is salaries and wages to worksite
employees. Although this cost is generally directly passed through to clients,
the Company may be responsible for payment of these costs even if not reimbursed
by its clients.
Employment related taxes consist of the employer's portion of payroll taxes
required under FICA, which includes Social Security and Medicare, and federal
and state unemployment taxes. The federal tax rates are defined by the
appropriate federal regulations. State unemployment rates are subject to change
each year based on, among other matters, claims histories and vary from state to
state.
Workers' compensation liabilities are fully insured under a guaranteed cost
policy, subject to limited exceptions described below. Accordingly, workers'
compensation expense includes premiums paid to the Company's third party
insurance carriers for workers' compensation insurance. Workers' compensation
expense also includes the cost of a defined portfolio of stand-alone policies in
place at December 31, 1997 which expired at various dates during 1998 and as to
which the Company retains liability of $250,000 per occurrence plus fees as
described above; and costs under the Company's self-insurance program in Ohio,
with respect to which the Company retains liability of $50,000 per occurrence.
23
<PAGE>
EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
Health care and other employee benefits costs consist of medical and dental
insurance premiums, payments of and reserves for claims subject to deductibles
and the costs of vision care, disability, life insurance and other similar
benefit plans. The Company's health care benefit plans consist of a mixture of
fully-insured programs and one self-insured programs with a built-in maximum
coverage cap of $100,000 per person per year. The Company recognizes a liability
for self-insured health insurance claims at the time a claim is reported to the
Company by the third party claims administrator, and also provides for claims
incurred, but not reported based on industry-wide data and the Company's past
claims experience. The liability recorded may be more or less than the actual
amount of ultimate claims. While the Company believes that its reserves for
healthcare and workers' compensation claims are adequate for future claims
payments, there can be no assurance that this will be the case. See "Outlook:
Issues and Risks" herein.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's primary operating expenses are personnel expenses, other general
and administrative expenses, and sales and marketing expenses. Personnel
expenses include compensation, fringe benefits and other personnel expenses
related to the Company's internal employees. Other general and administrative
expenses include rent, office supplies and expenses, legal and accounting fees,
bad debt expenses, insurance and other operating expenses. Sales and marketing
expenses include commissions and salaries to sales personnel and related
expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization consists primarily of the amortization of goodwill
and the depreciation of property and equipment. The Company amortizes goodwill
over periods of three to thirty years, depending on the assets acquired, using
the straight-line method. Acquisitions generally result in considerable goodwill
because PEOs generally require few fixed assets to conduct their operations.
ACQUISITIONS
Period-to-period comparisons may be substantially affected by the Company's
acquisition of other companies providing PEO services. The Company has accounted
for its acquisitions using the "purchase" method of accounting, whereby the
results of such acquired companies are reflected in the Company's financial
statements prospectively from the date of acquisition. In addition to increasing
revenues, acquisition activity can affect gross profits and margins because the
industry mix of the acquired companies may differ from that of the Company.
Further, during the transition period after an acquisition the Company may act
to implement pricing changes where appropriate and to eliminate client
relationships which do not meet the Company's risk or profitability profiles.
Acquisition activity historically has increased the Company's workers'
compensation expense, primarily by accelerating the Company's overall growth
rate and accelerating its exposure in specific higher-risk segments, such as
transportation. The Company also seeks to eliminate certain general and
administrative costs of acquired companies although such results may not be
achieved.
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 driver leasing services acquired in the Leaseway
acquisition (LPC) in any particular period.
Certain employment-related taxes are based on the cumulative earnings of
individual employees up to a specified wage level. Therefore, these expenses
tend to decline over the course of a year. Also, fourth quarter revenues are
typically increased by year-end bonuses and distributions paid to worksite
employees, historically resulting in little to no revenue growth from fourth to
first quarter (excluding acquisitions). In addition, the Company's first quarter
revenues tend to be adversely affected by decreased activity by various of its
transportation clients due to seasonal factors.
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
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RESULTS OF OPERATIONS--
QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO QUARTER AND SIX MONTHS
ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
Percent Percent
(In thousands of dollars) 1999 Change 1998 1999 Change 1998
--------- ------ --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 206,088 (19) $ 254,399 $ 404,998 (15) $ 475,329
Cost of revenues 197,513 (20) 245,928 388,686 (15) 457,392
Gross profit 8,575 1 8,471 16,312 (9) 17,937
Selling, general
and administrative 8,872 (28) 12,340 16,384 (19) 20,111
Depreciation
and amortization 1,673 8 1,544 3,340 18 2,830
Interest income 523 39 376 767 (33) 1,146
Interest expense 2,002 (7) 2,152 4,288 0 4,272
Net loss (3,436) (40) (5,722) (6,897) 4 (6,627)
</TABLE>
REVENUES
Revenues decreased to $206.1 million for the quarter ended June 30, 1999 from
$254.4 million for the quarter ended June 30, 1998, a decrease of 19%. For the
six months ended June 30, 1999, revenue was $405 million compared to $475.3
million for the six months ended June 30, 1998, a decrease of 15%. The primary
contributing factor to the decline in 1999 revenues over last year was the loss
of US Xpress as a major customer in August of 1998. US Xpress was an
unprofitable customer relationship that contributed $50.2 million to second
quarter 1998 revenues and $96.1 million to revenues for the first six months of
1998. Excluding this revenue, 1999 revenues for the quarter and six months ended
June 30, 1999 actually reflected increases of $2.0 million and $25.8 million for
each respective period. The number of worksite employees decreased to
approximately 38,100 covering approximately 2,000 client companies at June 30,
1999 from approximately 47,400 covering 1,960 client companies at June 30, 1998.
The primary contributing factor to the decline in employees was the loss of
approximately 6,500 worksite employees from US Xpress.
COST OF REVENUES
Cost of revenues decreased 20% to $197.5 million in the quarter ended June 30,
1999 from $245.9 million for the quarter ended June 30, 1998. For the six month
period ended June 30, 1999, the cost of revenues was $388.7 million, a decrease
of 15% over the $457.4 million for the six month period ended June 30, 1998.
This decrease is primarily due to the decrease in the Company's business related
to the loss of US Xpress as described above.
GROSS PROFIT
The Company's gross profit margin increased to 4.2% in the quarter ended June
30, 1999 from 3.3% in the quarter ended June 30, 1998. For the six month period
ended June 30, 1999, the gross profit margin was 4.0% compared to 3.8% for the
same period in 1998. This increase was attributable to several factors including
the impact of repricing existing customers to meet the Company's minimum pricing
standards, Company initiated terminations of other unprofitable customers, and
the favorable impact on heath insurance costs associated with the settlement of
the dispute with US Xpress. The proportion of gross profit related to TEAM
Services revenues, which have lower margins, increased in the period ended June
30, 1999 relative to the same period in 1998. The proportion of gross profit
related to driver leasing revenues, which have higher margins, increased in the
period ended June 30, 1999 relative to the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the quarter ended June 30, 1999
decreased approximately $3.5 million to $8.9 million, or 28%, from $12.3 million
for the quarter ended June 30, 1998. Included in the quarter ended June 30, 1999
were approximately $900,000 of legal, recruiting, and meetings and travel
expenses that are not expected to recur in future periods. For the six month
periods ended June 30, 1999 and 1998, respectively, selling, general and
administrative expenses were $16.4 million and $20.1 million, a 19% decrease.
The expense savings are primarily the result of cost savings initiated during
the fourth quarter of 1998, as well as certain incremental initiatives
implemented during the first half of 1999.
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization represents depreciation of property and equipment
and amortization of organizational costs, customer lists and goodwill. For the
quarter ended June 30, 1999, depreciation and amortization expense totaled $1.7
million compared to $1.5 million for the quarter ended June 30, 1998. Total
depreciation and amortization expense for the six months ended June 30, 1999 was
$3.3 compared to $2.8 million for the six month period ended June 30, 1998. The
increase is primarily due to additional purchase price paid on the Employers'
Trust acquisition.
INTEREST
Interest expense for the quarter ended June 30, 1999 totaled $2.0 million
compared to $2.2 million for the quarter ended June 30, 1998. For the six month
periods ended June 30, 1999 and 1998, interest expense totaled $4.3 million.
EFFECTIVE TAX RATE
The Company's effective tax rate provides for federal, state and local income
taxes. As of June 30, 1999, the Company has incurred losses in excess of what
can be carried back and applied against prior years' income to generate federal
income tax refunds. The remaining operating loss will be available for
carry-forward benefit only to the extent of any subsequently generated taxable
income.
LIQUIDITY AND CAPITAL RESOURCES
The Company defines liquidity as the ability to mobilize cash to meet operating
and capital needs. The Company's primary use of cash in the six months ended
June 30, 1999 was for the payment of payroll taxes, interest and other operating
activities, the payment of prepaid workers' compensation premiums, the reduction
in bank overdrafts, and an increase in trade Account Receivables. The
Company's liquidity position also was materially reduced during the first six
months of 1999 due to the payment of $5.5 million of additional purchase price
for the Company's February 1997 acquisition of assets from Employers' Trust.
Subsequent Employers' Trust purchase price disbursements of $1.0 million each
are due to be paid in the third and fourth quarters of 1999. The Company has
also received a notice from the Ohio Bureau of Workers' Compensation requesting
a $1.8 million letter of credit to secure the Company's contingent liability
associated with its self insured Ohio workers' compensation insurance, which the
Company anticipates using a portion of a new revolving line of credit to secure
(see new debt discussion below). While the Company believes it has sufficient
liquidity resources to meet anticipated cash needs in accordance with its plan,
it may not have sufficient liquidity to meet unanticipated or unplanned cash
needs.
The Company has accepted a proposal from a third party lender for up to $20
million in new debt financing. The proposed financing consists of a $10 million
term loan at an interest rate of 13.5% and a revolving loan based on eligible
accounts receivable to a maximum of $10 million at an interest rate of prime
plus 2%. The Company also would be subject to certain fees and charges.
Completion of the transaction is subject to agreement upon final documentation
and satisfaction of closing conditions, including due diligence reviews.
Cash used by operating activities was $14.5 million for the six months ended
June 30, 1999 compared to cash used by operating activities of $21.7 million for
the six months ended June 30, 1998. Operating cash flows are derived from
customers for full PEO services rendered by the Company. 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 seven to 45 days as is customary in their respective market
segments. If the Company expands in these market segments or enters into new
market segments, or extends credit to additional clients, its working capital
requirements may increase. Included in other assets is a receivable of
approximately $1.4 million from a single stand-alone client as to which disputes
have risen. The Company has initiated litigation against the former client
seeking, among other remedies, collection of the receivable. While the Company
believes that it will prevail in the litigation, there can be no assurance that
this will be the case and an adverse outcome could result in the write-off of
all or a substantial portion of the unreserved balance of the receivable.
Cash provided from investing activities was $2.6 million during the six months
ended June 30, 1999, compared to $3.9 million used during the comparable prior
year period. Included in investing activities in 1999 is the sale of $8.5
million in marketable securities to fund the subsequent payment of $5.5 million
in additional purchase price on the 1997 acquisition of Employers' Trust. Future
acquisitions are not expected to be a significant use of cash. See "Outlook:
Issues and Risks - Risks Associated with Significant Growth, Including Growth
Through Acquisitions."
26
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
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For the six months ended June 30, 1999 and 1998, capital expenditures were
$128,000 and $2.3 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 1999, 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 1999
capital expenditures will continue in order to meet the needs of the Company's
base of worksite employees.
Cash used in financing activities was $13.2 million for the six months ended
June 30, 1999 compared to cash provided by financing activities of $3.2 million
for the same period in 1998. Cash use in 1999 was primarily for the reduction of
bank overdrafts.
At June 30, 1999 and December 31, 1998, the Company had working capital of $21.7
million and $31.7 million, respectively.
During the second quarter of 1999 the Company's primary bank asked it to
maintain collateral at the bank for the various transactions, such as payroll
checks, tax payments, and other transactions conducted through the bank in the
ordinary course of the Company's business. The Company has agreed to maintain a
deposit of $5 million as collateral. See "Outlook: Issues and Risks" below and,
in particular, "Future Capital and Liquidity Needs; Uncertainty of Additional
Financing;" Substantial Leverage;" and "Litigation and Other Contingencies" and
"Credit Risks."
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.
FUTURE CAPITAL AND LIQUIDITY NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources combined
with anticipated funds from operations will be sufficient to meet its presently
anticipated working capital and capital expenditures requirements under its 1999
operating plan, though the Company's liquidity position recently was reduced
materially primarily as a result of providing certain collateral to its primary
bank and making certain payments in settlement of outstanding litigation. See
"Liquidity and Capital Resources" and Part II, Item 1 - "Legal Proceedings." The
Company's liquidity could be affected by the litigation and other claims
discussed elsewhere herein. While the Company has accepted and intends to
conclude a proposed transaction under which a third party lender would make
available up to $20 million in new debt financing, there can be no assurance
that the proposed transaction will be concluded or the final terms thereof. If
the proposed new financing transaction is not concluded, the Company will need
to raise additional funds through public or private debt or equity financing if
the revenue and cash flow elements of its 1999 operating plan are not met, to
take advantage of unanticipated opportunities, to respond to unanticipated
competitive pressures or adverse outcomes associated with litigation or other
claims, or to deal with unanticipated cash requirements, such as material
customer payment defaults. If additional funds are raised through the issuance
of equity securities, the percentage ownership of the then current shareholders
of the Company will be reduced, perhaps materially, and such equity securities
may have rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. There can be no assurance that additional financing will
be available on terms favorable to the Company, or at all. If adequate funds are
not available or are not available on acceptable terms, the Company's business,
operating results, financial condition and ability to operate will be materially
adversely affected.
SUBSTANTIAL LEVERAGE
The Company has incurred significant debt primarily in connection with its
expansion through acquisitions and its October 1997 issuance of its 10% Senior
Notes due 2004. As of June 30, 1999, the Company had outstanding senior
indebtedness of $85.0 million and stockholders' equity of approximately $10.6
million, respectively.
The Company's ability to make scheduled principal payments in respect of, or to
pay the interest 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
27
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
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scheduled payments of interest on its indebtedness, including the Notes, for the
foreseeable future. However, the Company may not have sufficient liquidity to
deal with unanticipated cash needs. Also, the Company may need to refinance all
or a portion of the principal of the Notes at or prior to maturity. There can be
no assurance that the Company's business will generate sufficient cash flow from
operations, that anticipated growth will occur or that funds will be available
from other sources or otherwise in an amount sufficient to enable the Company to
service or refinance its indebtedness, including the Notes, or make anticipated
capital expenditures and lease payments. In addition, there can be no assurance
that the Company will be able to effect any such refinancing (or any equity
financing) on commercially reasonable terms. See "Future Capital and Liquidity
Needs; Uncertainty of Additional Financing;" "Litigation and Other
Contingencies" and "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 contains financial and restrictive covenants that limit the ability of
the Company to, among other things, borrow additional funds. Failure by the
Company to comply with such covenants could result in an event of default which,
if not cured or waived, could have a material adverse effect on the Company's
business and financial performance.
LITIGATION AND OTHER CONTINGENCIES
While certain significant litigation matters have been resolved recently, other
significant matters remain unresolved. For example, the State of Ohio has
assessed significant sales and use taxes against the Company that the Company
believes have been assessed erroneously and is contesting vigorously. The
Company faces other claims relating to prior contractual relationships and other
matters. While the Company will continue to seek vigorously to resolve these
matters favorably, there can be no assurance that the outcome of these matters,
or any of them, will not have a material adverse effect upon the Company's
results of operations or financial position.
RESTRUCTURING AND COST-REDUCTION PLAN; EFFECT ON CLIENT RETENTION
In 1998, the Company completed a restructuring and cost-reduction plan primarily
involving the closing of remote payroll processing centers and other offices and
various other expense reduction strategies. Back office functions were
consolidated at the Company's corporate headquarters. While the Company believes
that completion of the plan will result in long-term improvements in its
operational and customer service capabilities (in addition to significant
operating expense reductions), the plan resulted in increases in client
attrition and decreases in internal sales due primarily to short-term
disruptions in client service. While the Company has recently taken measures to
improve customer service and reduce attrition, there can be no assurance that
the effectiveness of these measures can be maintained.
RISKS ASSOCIATED WITH SIGNIFICANT GROWTH, INCLUDING GROWTH THROUGH ACQUISITIONS
The Company has experienced significant growth that has challenged the Company's
management, personnel, resources and systems. A significant portion of the
Company's growth has been accomplished through the acquisition of other PEOs.
Growth through acquisition involves substantial risks, including the risk of
improper valuation of the acquired business and the risks inherent in
integrating such businesses with the Company's operations. As part of its
business strategy, the Company intends to pursue continued growth, though its
current growth strategy does not emphasize acquisitions. There can be no
assurance that the Company will be able to achieve growth in the future or
manage this growth effectively.
INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES AND WORKERS'
COMPENSATION RATES; AVAILABILITY OF PROGRAMS
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. Similarly, workers'
compensation costs are directly affected by experience. Should the Company
experience an increase in claims activity for unemployment, workers'
compensation and/or healthcare, or if other factors result in higher expenses in
these areas, the Company's costs in these areas would increase. In such a case,
the Company may not be able to pass these higher costs to its clients due to
contractual or competitive factors. In addition, the Company would have
difficulty competing with PEOs with lower rates that may offer lower rates to
clients.
The maintenance of health and workers' compensation insurance plans that cover
worksite employees is a significant part of the Company's business. While the
Company believes that replacements for its current contracts could be obtained
on competitive terms, if doing so became necessary, without causing significant
disruption to the Company's business, there can be no assurance in this regard.
28
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
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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. In light of
the IRS Market Segment Study Group and the general uncertainty in this area,
certain proposed legislation has been drafted to clarify the employer status of
PEOs in the context of the Code and benefit plans. However, there can be no
assurance that such legislation will be proposed and adopted or in what form it
would be adopted. Even if it were adopted, the Company may need to change
aspects of its operations or programs to comply with any requirements which may
ultimately be adopted. In particular, the Company may need to retain increased
sole or shared control over worksite employees if the legislation is passed in
its current form.
CREDIT RISKS; EMPLOYER LIABILITY
As the employer of record for its worksite employees, the Company may be
contractually obligated to pay their wages, benefit costs and payroll taxes
whether or not the Company receives payment from its customer. 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 timely payment is not received. 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.
By way of example, a group of employees filed suit against the Company in 1998
alleging that they were employees of the Company and that they had not been paid
certain wages. The maximum amount claimed could exceed $600,000, potentially
subject to trebling under applicable wage statutes. The Company does not believe
that it has any liability to the plaintiffs based on the facts of the case and
successfully obtained a dismissal of the suit. Plaintiffs have commenced an
appeal process.
In addition, the Company competes in several market segments 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. 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.
CUSTOMER RELATIONSHIPS
The Company's agreements with its customers generally may be canceled upon 30
days written notice of termination by either party, except where different
arrangements are required by applicable law. While the Company has commenced the
use of longer-term agreements, the short-term nature of most current customer
agreements means that customers could terminate a substantial portion of the
Company's business upon short notice. See "RESTRUCTURING AND COST-REDUCTION
PLAN; EFFECT ON CLIENT RETENTION."
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
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Through recent acquisitions and internal growth, the percentage of the Company's
clients in the transportation industry has increased. Increased concentration in
a single industry could make the Company subject to risks and trends of that
industry. Also, certain aspects of the transportation industry may be subject to
particular risks, such as the risk of property damage, injury and death from
accidents inherent in the operation of a motor vehicle. In addition, the Company
is providing driver leasing services through LPC, in which the Company acts as
sole employer, which may increase risk to the Company as a result of the direct
nature of the employment relationship.
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 customer
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. In addition, the Company believes that a portion of its clients are
not maintaining the insurance coverage required under their service agreements
with the Company. Although the client generally is required to indemnify the
Company for any liability attributable to the conduct of the client or employee,
the Company may not be able to collect on such a contractual indemnification
claim and thus may be responsible for satisfying such liabilities. In addition,
employees of the client may be deemed to be agents of the Company, subjecting
the Company to liability for the actions of such employees.
While many states do not explicitly regulate PEOs, various states have passed
laws that have licensing or registration requirements and other states are
considering such regulation. Such laws vary from state to state but generally
provide for monitoring the fiscal responsibility of PEOs. There can be no
assurance that the Company will be able to satisfy licensing requirements or
other applicable regulations of any particular state from time to time.
ADEQUACY OF LOSS RESERVES
The Company obtained fully-insured guaranteed cost workers' compensation
coverage effective January 1, 1998, thereby eliminating, with certain
exceptions, the Company's risk retention on workers' compensation claims arising
after that date. The Company retained risk up to $250,000 per occurrence with
respect to a defined portfolio of stand-alone policies, which expired at various
dates during 1998. The Company also retained risk up to $50,000 per occurrence
for claims under Ohio's monopolistic workers' compensation structure, with an
aggregate liability limitation.
The Company's reserves for losses and loss adjustment expenses under the Ohio
and stand-alone programs referred to in the preceding paragraph are estimates of
amounts needed to pay reported and unreported claims and related loss adjustment
expenses. Loss reserves are inherently uncertain and are subject to a number of
circumstances that are highly variable and difficult to predict. 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.
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,
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
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though 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,
the Company expects that as the PEO industry becomes better established,
competition will increase because existing PEO firms will likely consolidate
into fewer and better competitors and well organized new entrants with greater
resources than the Company, including some of the non-PEO companies described
above, have entered or will enter the PEO market.
ISSUANCE OF ADDITIONAL SHARES
The Company is a party to several agreements that call for the issuance of
additional shares of its Common Stock during 1999. Shares of Common Stock are
issuable in payment of the purchase price for the June 1996 acquisition of the
Company's TEAM Services subsidiary, though this issuance will be cancelled if
the Company completes the sale of TEAM Services as scheduled for October 1999
pursuant to a recent letter of intent (see Part II, Item 5 "Other Matters.").
Shares of Common Stock also are issuable in payment of the remaining purchase
price for the September 1997 acquisition of the ERC companies. As reported in
the Company's 1998 Annual Report on Form 10-K, the Company also is obligated to
issue additional shares of Common Stock (or pay additional cash, in its
discretion) in connection with the December 1998 acquisition of Fidelity
Resources Corp. if the price of the Company's Common Stock is less than $4 per
share during the month of November 1999, subject to certain conditions.
YEAR 2000 COMPLIANCE
Many computer programs process transactions based on using two digits for the
year of the transaction rather than a full four year digits (e.g. "98" for
1998). Systems that process Year 2000 transactions with the year "00" may
encounter significant processing inaccuracies or inoperability. Management has
determined that, like most other companies, it will be required to modify or
replace portions of its software so that its information systems will be able to
properly utilize dates subsequent to December 31, 1999.
STATE OF READINESS
The Company began developing its plan to address Year 2000 in 1997. The plan
includes hardware, software, electronic equipment and building systems, and
evaluates risk associated with vendor readiness. The plan includes (1)
inventorying Year 2000 items; (2) assigning priorities to identified items; (3)
assessing Year 2000 compliance of material items (whether internal or third
party-related); (4) repairing or replacing material items determined not to be
Year 2000 compliant; (5) testing material items; and (6) assessing contingency
plans.
At June 30, 1999, the inventory, priority assessment and internal compliance
assessment phases are substantially completed. Prioritization of items has been
based on the level of disruption to Company operations and client service that
would result from noncompliance. While Year 2000 issues present significant
risks for the Company due to the nature of its business, no significant
noncompliance issues were identified during these phases, though there can be no
assurance that such issues will not be identified in the future. Due in part to
the Company's relatively short operating history, the Company operates only one
so-called "legacy" system, limiting its exposure to certain Year 2000 issues.
The repair and replacement phase of the Company's plan has been implemented
primarily through various systems upgrades that have been conducted in the
ordinary course of business, which upgrades primarily were implemented to meet
the Company's needs in view of its rapid growth and independently of Year 2000
considerations. The Company anticipates that repair and replacement
considerations relevant to its LPC subsidiary, if any, will be managed through a
transition of LPC functions onto the Company's core software platform, which
transition previously had been scheduled for operational reasons independent of
Year 2000 considerations. A limited amount of software has been purchased
primarily for Year 2000 compliance purposes.
The Company is completing the testing phase of its Year 2000 plan. The Company
is testing its systems for accuracy through the use of test data on a wide
variety of the Company's normal operating transactions under various date
conditions. The testing phase is approximately 90% complete.
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
The Company believes that it does not have material risks associated with Year
2000 issues for non-information technology systems due to the nature of its
operations.
The Company has also assessed its third party relationships and has identified a
list of vendors that it considers most significant to its operations. These
vendors primarily include third party hardware and software vendors, financial
institutions, taxing authorities, third party administrators and benefit
providers. The Company already has obtained compliance statements from a
substantial majority of its key vendors (generally through information publicly
available from such vendors), and has commenced the process of requesting
written information from designated key vendors regarding their Year 2000 plans
and state of readiness. Upon completion of the third-party evaluation and the
testing of its internal systems, the Company intends to test significant data
interfaces with third party vendors to verify their compliant status.
COSTS TO ADDRESS YEAR 2000 ISSUE
The Company has not incurred and does not expect to incur significant costs
related to Year 2000 issues other than the time of internal personnel to
complete the Company's Year 2000 plans. As referred to above, the Company has
expended significant resources to upgrade various systems in the ordinary course
of its business, which upgrades were implemented primarily to meet the Company's
needs in view of its rapid growth and independently of Year 2000 considerations.
A limited amount of software has been purchased primarily for Year 2000
compliance purposes. Total costs for Year 2000 upgrades are expected to be less
than $30,000.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES; CONTINGENCY PLANNING
The Company presently believes that the Year 2000 issues will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, repair or replacement, and
testing are not effected timely with respect to Year 2000 problems that are
identified, there can be no assurance that the Year 2000 issues will not
materially adversely impact the Company's results of operations or materially
adversely affect the Company's relationships with customers, vendors or others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities will not have a material adverse impact on the Company's systems or
results of operations. Among the problems which might occur without appropriate
planning and testing are: the inability to transmit direct deposit payroll
through banking systems to deposit funds into worksite employees' bank accounts;
the inability to collect funds electronically in payment of the Company's
service fees; the failure to properly calculate payroll information; the
untimely transmission of benefits enrollment or claims data to and from benefit
providers; and the inability to deliver payroll checks to employees due to
failure in transportation or courier systems.
The Company has begun, but not yet completed, an analysis of the operational
problems and costs (including loss of revenues) that would be reasonably likely
to result from the failure by the Company and key third parties to complete
efforts necessary to achieve Year 2000 compliance on a timely basis. A
contingency plan has not yet been finalized for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning during the second half of 1999.
The costs of the Company's Year 2000 efforts and the dates on which the Company
believes it will complete such efforts are based upon management's best
estimates, which were derived using numerous assumptions regarding future
events, including the continued availability of certain resources, third-party
compliance, and other factors. There can be no assurance that these estimates
will prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that could cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in Year 2000 issues, the ability of the Company and third
parties (including vendors, customers and, in particular, federal, state and
local governments) to identify, assess, replace or repair and test all relevant
items (including embedded technology), the ability of third parties to
communicate compliance issues to the Company on a timely basis, unforeseen
expenses, and similar uncertainties.
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is primarily exposed to market risks from fluctuations in interest
rates and the effects of those fluctuations on the market values of its
investments and marketable securities that are classified as AVAILABLE-FOR-SALE
marketable securities. Cash equivalent short-term investments consist primarily
of high quality investment grade instruments, such as commercial paper, which
are not significantly exposed to interest rate risk, except to the extent that
changes in interest rates will ultimately affect the amount of interest income
earned on these investments. The available-for-sale marketable securities are
subject to interest rate risk because these securities generally include
financial instruments such as certificates of deposit, corporate bonds, and U.S.
Treasury securities and agency notes that have an original maturity of greater
than 90 days. Because these instruments are considered highly liquid, they are
not significantly exposed to interest rate risk. However, the market values of
these securities may be affected by changes in prevailing interest rates. The
Company attempts to limit its exposure to interest rate risk primarily through
diversification and strict adherence to the Company's investment policy. The
Company's investment policy is designed to maximize interest income while
preserving its principal investment.
33
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in the Company's Report on Form 10-Q for the quarter ended March 31,
1999, the Company was named as a defendant in an action filed by Ladenburg
Thalmann & Co., Inc. in the United States District Court, Southern District of
New York in May 1997 alleging breach of contract under certain stock warrants.
The plaintiff sought damages of at least $2.5 million. In March 1999, the Court
granted the Company's motion for summary judgment and dismissed the plaintiff's
case. After the plaintiff commenced an appeal process, the parties reached a
settlement agreement pursuant to which the litigation is being dismissed in
exchange for nominal consideration.
As reported in the Company's Report on Form 10-Q for the quarter ended March 31,
1999, an arbitration panel awarded HDVT, Inc. (the seller of certain assets
acquired by the Company from Employers' Trust in February 1997) a total of $10.4
million in additional acquisition purchase price in February 1999. HDVT's motion
to confirm the award was granted in Superior Court, Maricopa County, Arizona in
April 1999. The parties entered into a settlement agreement in June 1999 whereby
all claims against the Company by HDVT were dismissed in consideration of the
payment to HDVT of $7.5 million in cash (of which $5.5 million was paid at
closing, $1.0 million is due in September 1999 and $1.0 million is due in
December 1999) and 675,000 shares of the Company's Common Stock (deliverable not
later than September 1999).
The State of Ohio issued a sales tax assessment in the amount of approximately
$16.5 million (including interest and penalties) in July 1999 against HDVT with
respect to the operations of HDVT prior to the Company's acquisition of certain
assets of HDVT (then known as Employers' Trust) in February 1997. The State of
Ohio concurrently issued an assessment in the same amount against the Company as
successor to HDVT. The Company believes that meritorious defenses are available
to the assessment. In addition, $6.0 million of the cash and the entire stock
portion of the settlement payment described in the preceding paragraph are being
held in escrow solely for payment of amounts, if any, ultimately determined to
be due pursuant to such assessment. If the Company is held to have liability
pursuant to such assessment, the escrowed assets prove insufficient to satisfy
such liability, and HDVT is unable to pay any such shortfall, the Company's
maximum liability with respect to the assessment is approximately $3.2 million.
As reported in the Company's Report on Form 10-K for the year ended December 31,
1998, an arbitration proceeding between the Company and US Xpress Enterprises,
Inc. was scheduled for May 1999 regarding issues under a PEO service agreement
between the parties that was terminated by the Company in August 1998. US Xpress
sought recovery of approximately $3.0 million plus unspecified punitive damages
primarily relating to unpaid medical claims. In June 1999, all claims between
the parties were settled pursuant to the payment by the Company to US Xpress of
$1.2 million in cash (a portion of which was payable over time) and
approximately 547,000 shares of the Company's Common Stock.
The Company has been named as a defendant in an action filed by James E. Gorman
in Arizona Superior Court in August 1999 alleging breach of contract, fraud,
defamation and related matters in connection with the termination of Mr. Gorman
as the Company's president and chief executive officer in February 1999. The
complaint seeks contractual damages of approximately $588,000 plus unspecified
tort damages. The Company believes that the complaint is without merit and
intends to contest it vigorously.
From time to time, the Company is named as a defendant in lawsuits in the
ordinary course of business. See Part I, Item 2 - "Management's Discussion and
Analysis - Outlook: Issues and Risks - Litigation and Other Contingencies;
Uncertainty of Extent of PEO's Liability; Government Regulation of PEOs; Credit
Risks - Employer Liability."
34
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 25, 1999. Of the
32,413,413 outstanding shares of the Company's common stock as of the April 20,
1999 record date, 25,207,467 shares, or 77.8% of the total, were voted by proxy
or in person.
(a) At the Annual Meeting of the Shareholders, the shareholders elected seven
directors. With respect to the election of directors, the following votes
were cast in favor of, or withheld authority, for each of the following
directors:
Directors In Favor of Withheld
--------- ----------- --------
Marvin D. Brody 24,389,084 2,567,547
David R. Carpenter 24,795,630 2,161,001
Jeffery A. Colby 24,769,710 2,186,921
Sara R. Dial 25,573,500 1,383,131
Kennard F. Hill 25,713,450 1,243,181
Robert L. Mueller 25,507,030 1,449,601
Quentin P. Smith, Jr. 25,725,375 1,231,256
(b) At the Annual Meeting of Shareholders, the shareholders also voted on a
proposal to amend the Company's 1995 Stock Option Plan to enlarge the
option grant provisions applicable to non-employee directors. With respect
to that amendment, of the reported 26,956,631 votes cast, 23,442,184 were
for, 3,395,685 were against and 118,762 abstained.
ITEM 5. OTHER MATTERS
The Company has signed a letter of intent to sell its TEAM Services subsidiary
to Jeffery A. Colby, TEAM's current president and a member of the Company's
Board of Directors. The transaction is anticipated to close on or before October
31,1999 and to net the Company approximately $500,000 in cash. Completion of the
transaction is subject to agreement upon final documentation and satisfaction of
closing conditions, including due diligence reviews.
The Company has accepted a proposal from a third party lender for up to $20
million in new debt financing. The proposed financing consists of a $10 million
term loan at an interest rate of 13.5% and a revolving loan based on eligible
accounts receivable to a maximum of $10 million at an interest rate of prime
plus 2%. The Companty also would be subject to certain fees and charges.
Completion of the transaction is subject to agreement upon final documentation
and satisfaction of closing conditions, including due diligence reviews.
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
Number Description Location
------ ----------- --------
10.1* Employment Agreement dated April Filed herewith
30, 1999 between Registrant and
Lee E. Martin
10.2* Employee Solutions, Inc. 1995 Filed herewith
Stock Option Plan, as amended
through May 25, 1999
10.3* Indemnification Agreement between (Document in same
the Registrant and each of Kennard form has previously
F. Hill and Robert L. Mueller been filed as Exhibit
10.21.7 to Registrant's
Report on Form 10-K for
the year ended December
31, 1996)
27 Financial Data Schedule
* Designates management or compensatory agreements
(b) REPORTS ON FORM 8-K.
Not applicable.
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EMPLOYEE SOLUTIONS, INC. JUNE 30, 1999
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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: August 16, 1999 /s/ Quentin P. Smith, Jr.
----------------------------------------
Quentin P. Smith, Jr.
Chief Executive Officer
/s/ John V. Prince
----------------------------------------
John V. Prince
Chief Financial Officer
37
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made effective as of this
30th day of April, 1999 by and between EMPLOYEE SOLUTIONS, INC., an Arizona
corporation (the "Company"), and LEE E. MARTIN ("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 President, Board of
Directors (the "Board"), Chairman of the Board or Chief Executive Officer.
Employee's title shall be Senior Vice President - Sales, with responsibility for
the sales operations of the Company and its subsidiaries, including, but not
limited to, supervision and direction of the Company's sales force, and such
other executive responsibilities as may be assigned from time to time by, and
subject to the direction of, the Company's President, Board, Chairman of the
Board or Chief Executive Officer. Employee's title may be changed by Company,
from time to time, in Company's sole discretion, so long as such title
realistically reflects Employee's responsibilities and Employee is maintained in
an executive capacity. Employee shall have all power and authority of a
corporate officer as provided by the Company's bylaws. Employee shall report to
the President or Chief Executive Officer of the Company.
2. TERM. The employment of Employee by the Company pursuant to this
Agreement shall commence on the date hereof and continue for a term of three
years or until terminated as provided elsewhere herein.
3. COMPENSATION.
a. SALARY. The initial monthly base salary payable to Employee shall
be $16,667, which base salary shall be paid according to the Company's normal
payroll practices and shall be reviewed at least annually in accordance with the
Company's policies and practices regarding periodic review and adjustment of
executive compensation. Employee's base salary shall not be reduced during the
term hereof without Employee's written consent.
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<PAGE>
b. INCENTIVE PLAN. During the term of this Agreement, Employee shall
be entitled to receive 15% of amounts paid from commission pool(s) available to
employees and independent sales agents of the Company that are established from
time to time in the Company's discretion with respect to national or other
large-group accounts that are developed by Employee or Employee's reports after
the commencement date of this Agreement and designated by the Company in its
discretion as national accounts. This incentive plan may be modified by the
Company in its discretion after the second anniversary of the effective date of
this Agreement, provided that the Company shall consult with Employee in
developing any such modification.
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 equivalent to benefits provided generally to
Senior Vice Presidents of the Company and shall include medical, dental and
hospital coverage for Employee and Employee's dependents who are eligible under
the applicable plans.
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 service anniversary year. In addition, Employee shall be entitled to
such holidays as the Company may approve for its executive personnel.
6. EXPENSE REIMBURSEMENT.
a. ONGOING EXPENSES. In addition to the compensation and benefits
provided above, the Company shall pay a $500 per month automobile allowance and
all other, non-automobile related, 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 and the cost of a phone
line at Employee's residence to be dedicated to use for Company business. In its
discretion and upon agreement of the parties, the Company may reimburse
job-related training or education expenses of Employee.
b. RELOCATION EXPENSES. The Company shall reimburse Employee's
reasonable expenses for packing, loading, storage, transportation, unloading and
unpacking of household goods from Employee's residence in San Diego to the
Phoenix metropolitan area, provided that Employee shall use one of two moving
companies designated by the Company. The Company also shall provide a taxable
lump sum payment of up to $36,000 for other relocation expenses, including
temporary living expenses, to be used in Employee's discretion.
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<PAGE>
7. TERMINATION. This Agreement may be terminated in the manner provided
below:
a. FOR CAUSE. The Company may terminate Employee's employment by the
Company, for cause, upon written notice to the Employee stating the facts
constituting such cause, provided that Employee shall have 20 days following
such notice to cure any conduct or act, if curable, alleged to provide grounds
for termination for cause hereunder. In the event of termination for cause, the
Company shall be obligated to pay the Employee only the base salary due him
through the date of termination. Cause shall include willful and persistent
failure to abide by instructions or policies from or set by the Board of
Directors; willful and persistent failure to attend to material duties or
obligations imposed under this Agreement; commission of a felony, a misdemeanor
involving moral turpitude or any other serious misdemeanor offense or pleading
guilty or NOLO CONTENDERE to same; an act of fraud, dishonesty or theft on the
part of Employee; or any act or failure to act on the part of Employee, which
materially harms or injures or may materially harm or injure the reputation,
good name or interests of Company (which shall include, to the extent allowed by
applicable law, but not be limited to, any drug, alcohol and/or any other
substance abuse which materially impairs the ability of Employee to perform his
duties and services hereunder).
b. DISABILITY. If Employee experiences a permanent disability (as
defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended),
the Company shall have the right to terminate this Agreement without further
obligation hereunder except for any amounts payable pursuant to disability plans
generally applicable to executive employees.
c. DEATH. If Employee dies, this Agreement shall terminate
immediately, and Employee's legal representative shall be entitled to receive
the base salary due to Employee through the 60th day from the date on which his
death shall have occurred and any other death benefits generally applicable to
executive employees.
d. TERMINATION WITHOUT CAUSE. Should the Company incur liability to
Employee as a result of terminating Employee's employment without cause, the
Company's liability to Employee in connection with such termination shall be as
follows: the minimum liability shall be equal to 3 months of Employee's
then-current base salary and the maximum liability shall be equal to 12 months
of Employee's then-current base salary; provided, however, that such salary
shall be paid under the normal payment schedule as if Employee were still
employed by Company and shall be reduced by applicable withholdings; and
provided further, that, immediately upon such termination, Employee shall use
reasonable efforts to obtain new employment at the earliest practicable time,
shall keep Company informed of his employment search progress and provide
Company with such information regarding same as Company shall request, and then,
upon the commencement of such new employment, Company's further liability to
Employee shall terminate, including, but not limited to, the obligation to make
further such payments of base salary.
e. TERMINATION BY EMPLOYEE. Employee may terminate his employment in
the event of a material breach of this Agreement by the Company, upon written
notice to the Employee stating the facts constituting such material breach,
provided that the Company shall have 30 days following such notice to cure any
conduct or act, if curable, alleged to provide grounds for termination for
material breach hereunder.
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<PAGE>
8. 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.
9. 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.
10. NON-DELEGABILITY 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.
11. NOTICES. All notices, demands and communications required by this
Agreement shall be in writing and shall be deemed to have been given for all
purposes when sent to the respective addresses set forth below, (i) upon
personal delivery, (ii) one day after being sent, when sent by overnight courier
service to and from locations within the continental United States, (iii) three
days after posting when sent by registered, certified, or regular United States
mail, with postage prepaid and return receipt requested, or (iv) on the date of
transmission when sent by confirmed facsimile.
If to the Company: Employee Solutions, Inc.
6225 North 24th Street
Phoenix, Arizona 85016
Attn: Legal Department
If to Employee: Lee E. Martin
c/o Employee Solutions, Inc.
6225 North 24th Street
Phoenix, Arizona 85016
(Or when sent to such other address as any party shall specify by written notice
so given.)
12. ENTIRE AGREEMENT. This Agreement, together with the non-compete and
confidentiality agreement and the stock option grant letter, each dated as of
the same date as this Agreement (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.
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<PAGE>
13. 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.
14. 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.
15. 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.
16. HEADINGS; CONSTRUCTION. Headings in this Agreement are for
informational purposes only and shall not be used to construe the intent of this
Agreement. The language in all parts of this Agreement shall in all cases be
construed as a whole according to its fair meaning and not strictly for nor
against any party.
17. 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.
18. 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.
19. 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.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement and caused the same to be duly delivered on its behalf as
of the date first above written.
EMPLOYEE SOLUTIONS, INC.,
an Arizona corporation
By:
-----------------------------------
Its:
-----------------------------------
"COMPANY"
---------------------------------------
Lee E. Martin
"EMPLOYEE"
EMPLOYEE SOLUTIONS, INC.
1995 STOCK OPTION PLAN
AS AMENDED BY SHAREHOLDER ACTION
ON JUNE 26, 1996; JULY 9, 1997; JUNE 2, 1998; AND MAY 25, 1999
AND BY BOARD OF DIRECTORS ACTION ON JANUARY 25, 1998
1. Purpose
The purposes of the 1995 Stock Option Plan ("Plan") of Employee Solutions,
Inc., an Arizona corporation, are to attract and retain the best available
employees and directors of Employee Solutions, Inc. or any parent or subsidiary
or affiliate of Employee Solutions, Inc. which now exists or hereafter is
organized or acquired by or acquires Employee Solutions, Inc. (collectively or
individually as the context requires the "Company") as well as appropriate third
parties who can provide valuable services to the Company, to provide additional
incentive to such persons and to promote the success of the business of the
Company. This Plan is intended to comply with Rule 16b-3 under Section 16 of the
Securities Exchange Act of 1934, as amended or any successor rule ("Rule
16b-3"), and the Plan shall be construed, interpreted and administered to comply
with Rule 16b-3.
2. Definitions
(a) "Affiliate" means any corporation, partnership, joint venture or other
entity, domestic or foreign, in which the Company, either directly or through
another affiliate or affiliates, has a 50% or more ownership interest.
(b) "Affiliated Group" means the group consisting of the Company and any
entity that is an "affiliate," a "parent" or a "subsidiary" of the Company.
(c) "Board" means the Board of Directors of the Company.
(d) "Committee" means the Compensation or Stock Option (or successor)
Committee of the Board (as designated by the Board), if such a committee has
been appointed.
(e) "Code" means the United States Internal Revenue Code of 1986, as
amended.
(f) "Incentive Stock Options" means options intended to qualify as
incentive stock options under Section 422 of the Code, or any successor
provision.
(g) "ISO Group" means the group consisting of the Company and any
corporation that is a "parent" or a "subsidiary" of the Company.
(h) "Nonemployee Director" shall have the meaning assigned in Section
4(a)(ii) hereof.
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(i) "Nonqualified Stock Options" means options that are not intended to
qualify for favorable income tax treatment under Sections 421 through 424 of the
Code.
(j) "Parent" means a corporation that is a "parent" of the Company within
the meaning of Code Section 424(e).
(k) "Section 16" means Section 16 of the Securities Exchange Act of 1934,
as amended.
(l) "Subsidiary" means a corporation that is a "subsidiary" of the Company
within the meaning of Code Section 424(f).
3. Incentive and Nonqualified Stock Options
Two types of options (referred to herein as "options," without distinction
between such two types) may be granted under the Plan: Incentive Stock Options
and Nonqualified Stock Options.
4. Eligibility and Administration
(a) ELIGIBILITY. The following individuals shall be eligible to receive
grants pursuant to the Plan as follows:
(i) Any employee (including any officer or director who is an
employee) of the Company or any ISO Group member shall be eligible to
receive either Incentive Stock Options or Nonqualified Stock Options under
the Plan. An employee may receive more than one option under the Plan.
(ii) Any director who is not an employee of the Company or any
Affiliated Group member (a "Nonemployee Director") shall be eligible to
receive only Nonqualified Stock Options in the manner provided in paragraph
12 hereof.
(iii) Any other individual whose participation the Board or the
Committee determines is in the best interests of the Company shall be
eligible to receive Nonqualified Stock Options.
(b) ADMINISTRATION. The Plan may be administered by the Board or by a
Committee appointed by the Board which is constituted so to permit the Plan to
comply under Rule 16b-3.
The Company shall indemnify and hold harmless each director and Committee
member for any action or determination made in good faith with respect to the
Plan or any option. Determinations by the Committee or the Board shall be final
and conclusive upon all parties.
2
<PAGE>
5. Shares Subject to Options
The stock available for grant of options under the Plan shall be shares of
the Company's authorized but unissued or reacquired voting common stock. The
aggregate number of shares that may be issued pursuant to exercise of options
granted under the Plan shall be 4,500,000 shares. No individual shall be granted
options for more than 250,000 shares in any calendar year. If any outstanding
option grant under the Plan for any reason expires or is terminated, the shares
of common stock allocable to the unexercised portion of the option grant shall
again be available for options under the Plan as if no options had been granted
with respect to such shares.
6. Terms and Condition of Options
Option grants under the Plan shall be evidenced by agreements in such form
and containing such provisions as are consistent with the Plan as the Board or
the Committee shall from time to time approve. Each agreement shall specify
whether the option(s) granted thereby are Incentive Stock Options or
Nonqualified Stock Options. Such agreements may incorporate all or any of the
terms hereof by reference and shall comply with and be subject to the following
terms and conditions:
(a) SHARES GRANTED. Each option grant agreement shall specify the number of
Incentive Stock Options and/or Nonqualified Stock Options being granted; one
option shall be deemed granted for each share of stock. In addition, each option
grant agreement shall specify the exercisability and/or vesting schedule of such
options, if any.
(b) PURCHASE PRICE. The purchase price for a share subject to (i) a
Nonqualified Stock Option may be any amount determined in good faith by the
Committee, and (ii) an Incentive Stock Option shall not be less than 100% of the
fair market value of the share on the date the option is granted, provided,
however, the option price of an Incentive Stock Option shall not be less than
110% of the fair market value of such share on the date the option is granted to
an individual then owning (after the application of the family and other
attribution rules of Section 424(d) or any successor rule of the Code) more than
10% of the total combined voting power of all classes of stock of the Company or
any ISO Group member. For purposes of the Plan, "fair market value" at any date
shall be (i) the reported closing price of such stock on the New York Stock
Exchange or other established stock exchange or Nasdaq National Market on such
date, or if no sale of such stock shall have been made on that date, on the
preceding date on which there was such a sale, (ii) if such stock is not then
listed on an exchange or the Nasdaq National Market, the last trade price per
share for such stock in the over-the-counter market as quoted on Nasdaq or the
pink sheets or successor publication of the National Quotation Bureau on such
date, or (iii) if such stock is not then listed or quoted as referenced above,
an amount determined in good faith by the Board or the Committee.
(c) TERMINATION. Unless otherwise provided herein or in a specific option
grant agreement which may provide for accelerated vesting and/or longer or
shorter periods of exercisability, no option shall be exercisable after the
expiration of the earliest of
3
<PAGE>
(i) in the case of an Incentive Stock Option:
(1) 10 years from the date the option is granted, or five years
from the date the option is granted to an individual owning (after the
application of the family and other attribution rules of Section
424(d) of the Code) at the time such option was granted, more than 10%
of the total combined voting power of all classes of stock of the
Company or any ISO Group member,
(2) three months after the date the optionee ceases to perform
services for the Company or any ISO Group member, if such cessation is
for any reason other than death, disability (within the meaning of
Code Section 22(e)(3)), or cause,
(3) one year after the date the optionee ceases to perform
services for the Company or any ISO Group member, if such cessation is
by reason of death or disability (within the meaning of Code Section
22(e)(3)), or
(4) the date the optionee ceases to perform services for the
Company or any ISO Group member, if such cessation is for cause, as
determined by the Board or the Committee in its sole discretion;
(ii) in the case of a Nonqualified Stock Option;
(1) 10 years from the date the option is granted,
(2) two years after the date the optionee ceases to perform
services for the Company or any Affiliated Group member, if such
cessation is for any reason other than death, permanent disability,
retirement or cause,
(3) three years after the date the optionee ceases to perform
services for the Company or any Affiliated Group member, if such
cessation is by reason of death, permanent disability or retirement,
or
(4) the date the optionee ceases to perform services for the
Company or any Affiliated Group member, if such cessation is for
cause, as determined by the Board or the Committee in its sole
discretion; provided, that, unless otherwise provided in a specific
option grant agreement, an option shall only be exercisable for the
periods above following the date an optionee ceases to perform
services to the extent the option was exercisable on the date of such
cessation.
(d) METHOD OF PAYMENT. The purchase price for any share purchased pursuant
to the exercise of an option granted under the Plan shall be paid in full upon
exercise of the option by any of the following methods, (i) by cash, (ii) by
check, or (iii) to the extent permitted under the particular grant agreement, by
transferring to the Company shares of stock of the Company at their fair market
value as of the date of exercise of the option as determined in accordance with
paragraph 6(b), provided that the optionee held the shares of stock for at least
4
<PAGE>
six months. Notwithstanding the foregoing, the Company may arrange for or
cooperate in permitting broke - assisted cashless exercise procedures. The
Company may also extend and maintain, or arrange for the extension and
maintenance of, credit to an optionee to finance the optionee's purchase of
shares pursuant to the exercise of options, on such terms as may be approved by
the Board or the Committee, subject to applicable regulations of the Federal
Reserve Board and any other applicable laws or regulations in effect at the time
such credit is extended.
(e) EXERCISE. Except for options which have been transferred pursuant to
paragraph 6(f), no option shall be exercisable during the lifetime of an
optionee by any person other than the optionee, his or her guardian or legal
representative. The Board or the Committee shall have the power to set the time
or times within which each option shall be exercisable and to accelerate the
time or times of exercise; provided, however, except as provided in paragraph
12, no options may be exercised prior to the later of the expiration of six
months from the date of grant thereof or shareholder approval, unless otherwise
provided by the Board or Committee. To the extent that an optionee has the right
to exercise one or more options and purchase shares pursuant thereto, the
option(s) may be exercised from time to time by written notice to the Company
stating the number of shares being purchased and accompanied by payment in full
of the purchase price for such shares. Any certificate for shares of outstanding
stock used to pay the purchase price shall be accompanied by a stock power duly
endorsed in blank by the registered owner of the certificate (with the signature
thereon guaranteed). If the certificate tendered by the optionee in such payment
covers more shares than are required for such payment, the certificate shall
also be accompanied by instructions from the optionee to the Company's transfer
agent with respect to the disposition of the balance of the shares covered
thereby.
(f) NONTRANSFERABILITY. No option shall be transferable by an optionee
otherwise than by will or the laws of descent and distribution, provided that
the Committee in its discretion may grant options that are transferable, without
payment of consideration, to immediate family members of the optionee or to
trusts or partnerships for such family members; the Committee may also amend
outstanding options to provide for such transferability.
(g) ISO $100,000 LIMIT. If required by applicable tax rules regarding a
particular grant, to the extent that the aggregate fair market value (determined
as of the date an Incentive Stock Option is granted) of the shares with respect
to which an Incentive Stock Option grant under this Plan (when aggregated, if
appropriate, with shares subject to other Incentive Stock Option grants made
before said grant under this Plan or another plan maintained by the Company or
any ISO Group member) is exercisable for the first time by an optionee during
any calendar year exceeds $100,000 (or such other limit as is prescribed by the
Code), such option grant shall be treated as a grant of Nonqualified Stock
Options pursuant to Code Section 422(d).
(h) INVESTMENT REPRESENTATION. Unless the shares of stock covered by the
Plan have been registered with the Securities and Exchange Commission pursuant
to Section 5 of the Securities Act of 1933, as amended, each optionee by
accepting an option grant represents and agrees, for himself or herself and his
or her transferees by will or the laws of descent and distribution, that all
shares of stock purchased upon the exercise of the option grant will be acquired
for investment and not for resale or distribution. Upon such exercise of any
portion of any option grant, the person entitled to exercise the same shall upon
request of the Company furnish evidence satisfactory to the Company (including a
5
<PAGE>
written and signed representation) to the effect that the shares of stock are
being acquired in good faith for investment and not for resale or distribution.
Furthermore, the Company may if it deems appropriate affix a legend to
certificates representing shares of stock purchased upon exercise of options
indicating that such shares have not been registered with the Securities and
Exchange Commission and may so notify its transfer agent.
(i) RIGHTS OF OPTIONEE. An optionee or transferee holding an option grant
shall have no rights as a shareholder of the Company with respect to any shares
covered by any option grant until the date one or more of the options granted
thereunder have been properly exercised and the purchase price for such shares
has been paid in full. No adjustment shall be made for dividends (ordinary or
extraordinary, whether cash, securities or other property) or distributions or
other rights for which the record date is prior to the date such share
certificate is issued, except as provided for in paragraph 6(k). Nothing in the
Plan or in any option grant agreement shall confer upon any optionee any right
to continue performing services for the Company or any Affiliated Group member,
or interfere in any way with any right of the Company or any Affiliated Group
member to terminate the optionee's services at any time.
(j) FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of an option. The value of any fractional
share subject to an option grant shall be paid in cash in connection with an
exercise that results in all full shares subject to the grant having been
exercised.
(k) REORGANIZATIONS, ETC. Subject to paragraph 9 hereof, if the outstanding
shares of stock of the class then subject to this Plan are increased or
decreased, or are changed into or exchanged for a different number or kind of
shares or securities, as a result of one or more reorganizations, stock splits,
reverse stock splits, stock dividends, spin-offs, other distributions of assets
to shareholders, appropriate adjustments shall be made in the number and/or type
of shares or securities for which options may thereafter be granted under this
Plan and for which options then outstanding under this Plan may thereafter be
exercised. Any such adjustments in outstanding options shall be made without
changing the aggregate exercise price applicable to the unexercised portions of
such options.
(l) OPTION MODIFICATION. Subject to the terms and conditions and within the
limitations of the Plan, the Board or the Committee may modify, extend or renew
outstanding options granted under the Plan, accept the surrender of outstanding
options (to the extent not theretofore exercised), reduce the exercise price of
outstanding options, or authorize the granting of new options in substitution
therefor (to the extent not theretofore exercised). Notwithstanding the
foregoing, no modification of an option (either directly or through modification
of the Plan) shall, without the consent of the optionee, alter or impair any
rights of the optionee under the option.
(m) GRANTS TO FOREIGN OPTIONEES. The Board or the Committee in order to
fulfill the Plan purposes and without amending the Plan may modify grants to
participants who are foreign nationals or performing services for the Company or
an Affiliated Group member outside the United States to recognize differences in
local law, tax policy or custom.
6
<PAGE>
(n) OTHER TERMS. Each option grant agreement may contain such other
terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Board or the Committee, such as without limitation
discretionary performance standards, tax withholding provisions, or other
forfeiture provisions regarding competition and confidential information.
7. Termination or Amendment of the Plan
The Board may at any time terminate or amend the Plan; provided, that
shareholder approval shall be obtained of any action for which shareholder
approval is required in order to comply with Rule 16b-3, the Code or other
applicable laws or regulatory requirements within such time periods prescribed.
8. Shareholder Approval and Term of the Plan
The Plan shall be effective as of April 6, 1995, the date as of which it
was adopted by the Board, subject to ratification by the shareholders of the
Company within (each of) the time period(s) prescribed under Rule 16b-3, the
Code, and any other applicable laws or regulatory requirements, and shall
continue thereafter until terminated by the Board. Unless sooner terminated by
the Board, in its sole discretion, the Plan will expire on April 6, 2005 solely
with respect to the granting of Incentive Stock Options or such later date as
may be permitted by the Code for Incentive Stock Options, provided that options
outstanding upon termination or expiration of the Plan shall remain in effect
until they have been exercised or have expired or been forfeited.
9. Merger, Consolidation or Reorganization
In the event of a merger, consolidation or reorganization with another
corporation in which the Company is not the surviving corporation, the Board,
the Committee (subject to the approval of the Board) or the board of directors
of any corporation assuming the obligations of the Company hereunder shall take
action regarding each outstanding and unexercised option pursuant to either
clause (a) or (b) below:
(a) Appropriate provision may be made for the protection of such option by
the substitution on an equitable basis of appropriate shares of the surviving
corporation, provided that the excess of the aggregate fair market value (as
defined in paragraph 6(b)) of the shares subject to such option immediately
before such substitution over the exercise price thereof is not more than the
excess of the aggregate fair market value of the substituted shares made subject
to option immediately after such substitution over the exercise price thereof;
or
(b) Appropriate provision may be made for the cancellation of such option.
In such event, the Company, or the corporation assuming the obligations of the
Company hereunder, shall pay the optionee an amount of cash (less normal
withholding taxes) equal to the excess of the highest fair market value (as
defined in paragraph 6(b)) per share of the Common Stock during the 60-day
period immediately preceding the merger, consolidation or reorganization over
the option exercise price, multiplied by the number of shares subject to such
options (whether or not then exercisable).
7
<PAGE>
10. Dissolution or Liquidation
Anything contained herein to the contrary notwithstanding, on the effective
date of any dissolution or liquidation of the Company, the holder of each then
outstanding option (whether or not then exercisable) shall receive the cash
amount described in paragraph 9(b) hereof and such option shall be cancelled.
11. Withholding Taxes
(a) GENERAL RULE. Pursuant to applicable federal and state laws, the
Company is or may be required to collect withholding taxes upon the exercise of
an option. The Company may require, as a condition to the exercise of an option
or the issuance of a stock certificate, that the optionee concurrently pay to
the Company (either in cash or, at the request of optionee but in the discretion
of the Board or the Committee and subject to such rules and regulations as the
Board or the Committee may adopt from time to time, in shares of Common Stock of
the Company) the entire amount or a portion of any taxes which the Company is
required to withhold by reason of such exercise, in such amount as the Committee
or the Board in its discretion may determine.
(b) WITHHOLDING FROM SHARES TO BE ISSUED. In lieu of part or all of any
such payment, the optionee may elect, subject to such rules and regulations as
the Board or the Committee may adopt from time to time, or the Company may
require that the Company withhold from the shares to be issued that number of
shares having a fair market value (as defined in paragraph 6(b)) equal to the
amount which the Company is required to withhold.
(c) SPECIAL RULE FOR INSIDERS. Any such request or election (to satisfy a
withholding obligation using shares) by an individual who is subject to the
provisions of Section 16 shall be made in accordance with the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
12. Grants to Certain Directors
(a) GRANT. Except in the case of an initial election of a Nonemployee
Director (which shall be governed by subsection (c) hereof) each person who is
elected as a Nonemployee Director at any Annual Meeting of Shareholders
automatically shall be granted, effective as of the date of such Annual Meeting,
options to acquire 2,500 shares of the Company's Common Stock. Options granted
pursuant to this paragraph 12(a) shall become exercisable upon the date of the
first Annual Meeting following the date of grant, provided that the Nonemployee
Director has served as such throughout the preceding year. Notwithstanding
anything herein to the contrary, any person who is a Nonemployee Director as of
April 30, 1996 shall not be entitled to receive any grant under this paragraph
12 until the 2000 Annual Meeting of Shareholders.
(b) CERTAIN OPTION TERMS. Options granted pursuant to subparagraphs 12(a)
or (c) shall have a 10-year term from the date of grant, provided that any
option held by a Nonemployee Director who is removed from the Board for cause
shall expire on the date of such removal. The exercise price of all options
granted pursuant to subparagraphs 12(a) and (c) shall be the fair market value
of the Company's Common Stock on the date of grant.
(c) INITIAL ELECTION TO BOARD OF DIRECTORS. Any person who initially
becomes a Nonemployee Director, whether at an Annual Meeting of Shareholders or
at any time other than on the date of an Annual Meeting, shall be eligible to
receive a grant of options exercisable for up to 50,000 shares of Common Stock
Options for one third of such shares shall vest on each of the first three
anniversary dates of the initial election to the Board, subject to continued
Board service. Other terms of such options shall be as set forth elsewhere in
this paragraph 12.
8
<PAGE>
(d) SUPPLEMENTAL GRANTS. In addition to option grants otherwise available
under this Paragraph 12, Nonemployee Directors shall be eligible for
supplemental grants from time to time in the discretion of the Committee or the
Board.
(e) LIMITATION ON AMENDMENT. This paragraph 12 shall not be amended more
than once every six months other than to comport with changes in the Code, the
Employee Retirement Income Security Act, or the rules thereunder.
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 15,166
<SECURITIES> 1,488
<RECEIVABLES> 54,347
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 76,988
<PP&E> 4,028
<DEPRECIATION> 0
<TOTAL-ASSETS> 154,943
<CURRENT-LIABILITIES> 55,242
<BONDS> 0
0
0
<COMMON> 37,554
<OTHER-SE> (26,984)
<TOTAL-LIABILITY-AND-EQUITY> 154,943
<SALES> 0
<TOTAL-REVENUES> 404,998
<CGS> 0
<TOTAL-COSTS> 388,686
<OTHER-EXPENSES> 19,724
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,288
<INCOME-PRETAX> (6,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,897)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,897)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
