Employee Solutions, Inc. Announces Second Quarter Results; Announces Resignation of Chairman and CEO; Introduces Company-Wide Restructuring and Cost Reduction Plan
Business Wire - August 11, 1998 08:17
PHOENIX--(BUSINESS WIRE)--Aug. 11, 1998--Employee Solutions, Inc. (ESI) (Nasdaq:ESOL), a leading professional employer organization (PEO), today reported results for its second quarter and six month periods ended June 30, 1998. The Company also indicated that it has completed an extensive operational review directed by James E. Gorman, who joined ESI as President and Chief Operating Officer during the second quarter. The review has culminated in a company-wide restructuring and cost-reduction plan designed to achieve profitability no later than the first quarter of 1999, and includes certain one-time charges.
In connection with these developments, the Company announced that Marvin D. Brody has resigned from the positions of Chairman of the Board and Chief Executive Officer. Mr. Gorman has been elected Chief Executive Officer and a Director of the Company. Current board member Quentin P. Smith, Jr. has been elected Chairman of the Board of Directors.
For the quarter ended June 30, 1998, revenues increased 12.5% to $254.4 million from second quarter 1997 revenues of $226.1 million. Revenues for the first six months of 1998 increased 12.6% to $475.3 million from $422.0 million from the comparable prior period.
Including various one-time items discussed below, the Company reported a net loss for the quarter of $5.7 million, or $0.18 per diluted share, compared to net income of $824,000, or $0.03 per diluted share, for the second quarter of 1997. This resulted in a net loss for the six month period ended June 30, 1998, of $6.6 million, or $0.21 per diluted share compared to net income of $1.5 million, or $0.05 per diluted share for the same period in 1997.
"Since joining ESI in May 1998, I have consistently emphasized the need to focus on the bottom line," stated Mr. Gorman. "We are announcing today our plans to restore ESI to profitability through a series of swift, decisive actions. As we restore profitability, we will pursue growth -- but only through controlled steps intended to contribute promptly to the bottom line. ESI enjoys the strong support of its customer base. With plentiful cash resources, talented employees and an undisputed leadership position in the rapidly-growing PEO industry, I am excited to have the opportunity to lead ESI's efforts to build significant value for our shareholders."
Newly-elected Chairman Mr. Smith commented, "The Board has given Jim Gorman and the rest of the management team a strong mandate to take decisive action to restore ESI to profitability. They will have our full support in implementing the restructuring announced today."
The restructuring plan developed by Mr. Gorman is expected to result in annualized cost reductions of approximately $7 million to $9 million. The Company will take a one-time restructuring charge in the third quarter of approximately $1.7 million to $2.0 million. The plan involves the following principal elements:
-- Closure (completed in July 1998) of the Company's former Atlanta sales headquarters.
-- Closure in the fourth quarter 1998 of the Company's remote payroll processing centers in Framingham, Massachusetts and Angola, Indiana.
-- Closure or consolidation in the fourth quarter 1998 of additional smaller offices, including locations in Chicago, Los Angeles and other markets.
-- Reduction of workers' compensation-related staffing levels (to take advantage of the recent transition to a guaranteed cost program).
-- Implementation of stringent controls on expenditures for consulting and other outside professional services, travel and other SG&A items.
-- Reduction of commission expense by re-negotiating commission rates and accelerating the transition from an independent to an employee sales force.
-- Termination, effective August 1998, of the Company's contract with its largest customer, US Xpress, due to the contract's failure to contribute to profitability.
-- Implementation of an acquisition strategy generally focusing on smaller targets that are easier to assimilate and offer the immediate ability to support internal sales growth in strategic markets.
Where offices are being closed or consolidated pursuant to the restructuring plan, the Company will maintain an active sales and customer service presence to meet the local needs of customers and support future internal sales growth. Back office functions will be consolidated at ESI's headquarters in Phoenix to take advantage of investments in systems upgrades completed in early 1998.
The Company indicated that its second quarter results were adversely affected primarily by the following factors, including a number of significant factors not expected to recur in future periods:
-- A revenue mix for the quarter which consisted of an increased proportion of lower-margin US Xpress and TEAM Services business, resulting in part from slower than anticipated revenue growth in
the Company's core PEO business as the Company continues to transition its internal sales functions (as discussed above).
-- Increased SG&A expense (primarily due to special charges noted below).
-- Charges of approximately $1.0 million related to US Xpress, primarily for liabilities associated with accelerated losses under US Xpress' medical plan. As previously announced, the Company will take legal action against US Xpress for these and other amounts.
-- Unanticipated write-down of approximately $1.6 million in accounts receivable relating to recent collection difficulties associated with the discontinuation of the Company's stand-alone workers' compensation program.
-- Unanticipated write-offs of approximately $1.0 million in relation to loans and advances to salespersons and strategic sales partners, primarily in connection with the closure of the former sales headquarters in Atlanta and circumstances associated with the prior sales organization and strategy.
-- Unusual SG&A charges of approximately $400,000 relating primarily to consulting fees for one-time projects (such as a review of workers' compensation operations and various other processes in preparation for operational consolidation) and litigation-related expenses.
-- Costs of approximately $200,000 incurred in connection with the recently terminated SES acquisition effort.
The Company also indicated that it has received a notice concerning the continued listing of its Common Stock on the Nasdaq National Market due to the recent failure to maintain a stock price of at least $5 per share. The Company has asked for a hearing at which it will request a temporary exception to the $5 requirement and discuss other strategies (including a possible reverse stock split) intended to maintain a Nasdaq listing. ESI's Common Stock will continue to trade on the Nasdaq National Market pending the outcome of the hearing.
At June 30, 1998, the Company serviced 47,400 worksite employees covering 1,960 client companies, compared to 42,900 worksite employees and 1,440 client companies at June 30, 1997.
Employee Solutions, Inc. is a leading professional employer organization, providing employers throughout the United States with comprehensive employee payroll, human resources and benefits outsourcing services. ESI's integrated outsourcing services
include payroll processing and reporting, human resources administration, employment regulatory compliance, risk management/workers' compensation services, retirement and health care programs, as well as non-employment related products and services provided directly to worksite employees. For additional information on ESI's products and services, you may access our website at www.employeesolutions.com.
The discussions in this press release which are not historical facts are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. Such risks and uncertainties include, but are not limited to the Company's ability to implement cost-savings initiatives, delays in implementing systems or sales force improvements, unanticipated difficulties associated with transitioning various functions from the Company's remote processing locations to the Company's Phoenix headquarters and related potential disruptions of client service, the Company's ability to integrate acquired operations effectively with existing operations, the Company's ability to locate and acquire other businesses in furtherance of its acquisition strategy, competitive pricing pressures, general business and economic conditions, general market acceptance of the Company's products, uncertainty associated with various matters in litigation or arbitration and the hearing scheduled with respect to the Company's Nasdaq listing, unanticipated loss development related to workers? compensation and health care, and other risks set forth in the Company's Report on Form 10-K for the year ended December 31, 1997 and its Report on Form 10-Q for the quarter ended March 31, 1998. |
