<PAGE>
FILED PURSUANT TO RULE NO. 424(b)(4)
REGISTRATION NO. 333-46547
PROSPECTUS
MARCH 20, 1998
$100,000,000
[LOGO]
MAY & SPEH
5 1/4% Convertible Subordinated Notes due 2003
The 5 1/4% Convertible Subordinated Notes due 2003 (the "Notes") will be
convertible at the option of the holder into shares of common stock, par value
$0.01 per share, of the Company (the "Common Stock"), at any time prior to
maturity, unless previously redeemed or repurchased, at a conversion price
(the "Conversion Price") of $15.91 per share (equivalent to a conversion rate
of 62.8535 shares per $1,000 principal amount of Notes), subject to adjustment
in certain events. Interest on the Notes is payable semi-annually on April 1
and October 1 of each year, commencing on October 1, 1998. On March 19, 1998,
the last reported sale price of the Common Stock on the Nasdaq National Market
(where it trades under the symbol "SPEH") was $12 5/8 per share.
The Notes are redeemable, in whole or in part, at the option of the Company,
at any time on or after April 3, 2001, at the redemption prices set forth
herein, plus accrued and unpaid interest to the date of redemption. The
Company will be required to offer to purchase the Notes upon a Change in
Control (as defined), at 100% of the principal amount thereof, plus accrued
and unpaid interest to the date of repurchase.
The Notes are general, unsecured obligations of the Company, subordinated in
right of payment to all current and future Senior Indebtedness (as defined) of
the Company. In addition, the Notes will be structurally subordinated to all
current and future liabilities (including trade payables) of the Company's
subsidiaries. At December 31, 1997, as adjusted to give effect to the issuance
and sale of the Notes and the application of the estimated net proceeds
therefrom, approximately $26.0 million of outstanding indebtedness of the
Company would have constituted Senior Indebtedness, and the Company's
subsidiary had no outstanding obligations. The Company's existing revolving
credit facility (the "Existing Credit Facility") provides for borrowings of up
to $2.0 million. No amounts were outstanding under the Existing Credit
Facility as of December 31, 1997. In addition, the Company is negotiating with
a group of banks for a new revolving credit facility (the "New Credit
Facility") which is expected to provide for borrowings of up to $100.0
million. Indebtedness under the Existing Credit Facility and the New Credit
Facility would be Senior Indebtedness. The Indenture (as defined) will not
restrict the incurrence of Senior Indebtedness or other indebtedness by the
Company and its subsidiaries. See "Description of Notes."
The Notes offered hereby have been approved for trading on the Nasdaq
SmallCap Market under the symbol "SPEHG."
Concurrently with this offering of Notes (the "Note Offering"), certain
selling stockholders (the "Selling Stockholders") of the Company are offering
4,000,000 shares of Common Stock pursuant to a separate Prospectus (the
"Common Stock Offering"). In addition, certain Selling Stockholders will sell
up to 275,000 shares of Common Stock and the Company will sell up to 325,000
shares of Common Stock in the Common Stock Offering if and to the extent the
underwriters' over-allotment option is exercised. The Company will not receive
any of the net proceeds from the sale of the Common Stock by the Selling
Stockholders. Consummation of the Note Offering is not a condition to
consummation of the Common Stock Offering, and consummation of the Common
Stock Offering is not a condition to consummation of the Note Offering.
See "Risk Factors" beginning on page 9 for a discussion of certain
information that should be considered by prospective investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................ 100.00% 3.25% 96.75%
Total(4)................................ $100,000,000 $3,250,000 $96,750,000
</TABLE>
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $434,000.
(4) The Company has granted to the Underwriters an option exercisable within
30 days after the date of this Prospectus to purchase up to an additional
$15,000,000 aggregate principal amount of Notes on the same terms as set
forth above, at the Price to the Public, less the Underwriting Discounts
and Commissions, solely for the purpose of covering over-allotments, if
any. If such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$115,000,000, $3,737,500, and $111,262,500, respectively. See
"Underwriting."
The Notes are being offered by the several Underwriters when, as and if
delivered to and accepted by them, subject to certain conditions, including
their rights to withdraw, cancel or reject orders in whole or in part. It is
expected that delivery of the Notes will be made in New York, New York, on or
about March 25, 1998, in book-entry form through the facilities of The
Depository Trust Company against payment therefor in immediately available
funds.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
ABN AMRO INCORPORATED
PAINEWEBBER INCORPORATED
<PAGE>
The inside front cover contains a collage of five photographs depicting
various facilities and operations of the Company as follows:
Top left--a photograph of a May & Speh systems programmer
Top right--a photograph of a Company employee and telecommunications equipment
Bottom right--a photograph of two personal computers showing screens used in
the Company's direct marketing services operations
Bottom left--a photograph of the Company's computer operations command center
and employees
Middle left--a photograph of a computer circuit board
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE NOTES AND
THE COMMON STOCK OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN
CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE THE NOTES ON THE
NASDAQ SMALLCAP MARKET, OR SHARES OF COMMON STOCK ON THE NASDAQ NATIONAL
MARKET, OR OTHERWISE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the Selected Financial, Operating and Other Data and the
Company's Consolidated Financial Statements and Notes thereto, included or
incorporated by reference in this Prospectus. Except as otherwise specified,
all information in this Prospectus has been adjusted to reflect a 12-for-1
split of the Common Stock effected in December 1995, assumes that the
Underwriters do not exercise the over-allotment option described under the
caption "Underwriting" and, to the extent the Common Stock Offering is
described herein, further assumes no exercise of the underwriters' over-
allotment option in the Common Stock Offering. Diluted earnings per share have
been presented for all periods, unless otherwise specified. The terms "Company"
and "May & Speh" refer to May & Speh, Inc. and its subsidiary, unless otherwise
indicated or the context requires otherwise.
THE COMPANY
May & Speh provides computer-based information management services with a
focus on direct marketing and information technology ("IT") outsourcing
services. The Company's direct marketing services help companies execute more
profitable direct marketing and customer management programs. Services include
strategic analysis and strategy management; systems consulting; custom data
warehouse and datamart design, build, implementation and management;
statistical (predictive) modeling and analysis; and list processing. May &
Speh's IT outsourcing services support multi-platform processing and network
management for clients seeking to outsource their IT operations. The Company's
direct marketing and IT outsourcing services are synergistic and allow the
Company to leverage its investment in technical personnel and its state-of-the-
art data processing facilities, as well as its core competencies in customized
software systems development, large database management, high speed data
processing and data center management. May & Speh's open architecture and
multiple platform data facilities provide its clients with superior processing
flexibility and speed.
Direct marketing enables the delivery of a customized message to a defined
audience and the measurement of the response to that message. The use of direct
marketing by businesses has increased significantly in recent years, as has
spending in support of direct marketing activities. Industry sources estimate
that United States expenditures for information and database services in
connection with direct marketing activities were approximately $17.0 billion in
1996, and that such expenditures are growing at an annual rate of 15% to 20%.
During the past few years, IT outsourcing has become increasingly recognized as
a valuable option for many enterprises. Originally seen as a way of controlling
costs, IT outsourcing is now viewed by many businesses as an integral component
of their growth strategy by allowing companies to focus on their core
competencies and strategic initiatives. According to G2 Research, Inc., total
expenditures for IT outsourcing services in the United States were
approximately $32.7 billion in 1996, and such expenditures are projected to
grow at an average annual rate of approximately 25.2% through 2001.
Direct marketing services accounted for approximately 61.6% of the Company's
net revenues for fiscal 1997. Through customized applications and Company-
developed software tools, May & Speh transforms and enhances its clients'
customer and transactional data from a raw and often disparate form into
useful, actionable information. The Company is increasingly focused on
developing integrated database management solutions, including marketing
strategy development; prospect data and data enhancement services; database
design and maintenance; data modeling, profiling and analysis; and ongoing
strategic evaluation and planning. The Company's integrated solutions enable
clients to access and analyze information collected across multiple client
functions through decision support and campaign management tools. May & Speh
currently targets companies that utilize direct marketing in the financial
services, retail, consumer goods, insurance and high tech industries. The
Company currently provides direct marketing services for approximately 180
clients including Green Tree Financial Corporation, Intel Corporation, Philips
Electronics North America Corporation, Sears, Roebuck and Co. ("Sears") and
Trans Union Corporation.
3
<PAGE>
IT outsourcing services accounted for approximately 38.4% of the Company's
net revenues for fiscal 1997. By outsourcing their IT infrastructure, May &
Speh's clients increase their flexibility, tap the expertise of scarce, skilled
IT professionals, liberate capital, and turn their fixed IT infrastructure
costs into variable costs. May & Speh's IT outsourcing services allow clients
to improve the speed of delivery and response while controlling their
information processing costs and reducing their exposure to rapid changes in
technology. Outsourcing contracts are typically multi-year arrangements, which
provide a recurring revenue stream that helps May & Speh achieve stable and
consistent growth. May & Speh continues to focus on the mid-sized IT
outsourcing market, which includes clients such as American National Can
Company ("American National Can"), CCC Information Services, Continental Grain
Company, Heller Financial, Inc. and Sanwa Business Credit Corporation.
Over the past five years, May & Speh has experienced significant growth in
revenues and earnings per share and expansion of its operating margins. For the
five fiscal years ended September 30, 1997, the Company's net revenues grew
from $41.8 million to $92.5 million and earnings per share increased from $0.15
to $0.45. During this period, operating margins expanded from 17.9% to 22.1%.
In 1997, the Company further strengthened its management team with the addition
of Peter I. Mason as Chairman, President and Chief Executive Officer, and other
senior management and Board members, each of whom has significant technology
experience.
MAY & SPEH'S COMPETITIVE STRENGTHS
The Company believes it has competitive strengths which have contributed to
its growth and profitability. These include:
Integrated Database Management Solutions. May & Speh offers integrated
database management solutions focused on targeted industries. These integrated
solutions include marketing strategy execution; prospect data and data
enhancement services; database design and maintenance; on-line access and
decision support tools; data modeling, profiling and analysis; and ongoing
strategic evaluation and management. The Company believes that this approach is
a competitive strength because it offers clients strategic direct marketing
tools rather than generic data processing services, resulting in the Company's
integrated database management solutions becoming integral to clients executing
their marketing strategies.
Focus on Targeted Industries. May & Speh's direct marketing services focus on
clients in targeted industries including financial services, retail, consumer
goods, insurance and high tech. The Company believes that as a result of its
focus and experience in specific industries, its sales and technical personnel
better understand the data processing needs, competitive dynamics and
regulatory issues of its clients.
Investment and Scale of its Client Service and Technical Infrastructure. May
& Speh's direct marketing and IT outsourcing services continue to benefit from
its investments in technical personnel and technology. The Company has a
current staff of over 500 skilled IT and direct marketing services personnel,
and maintains state-of-the-art data processing facilities. As a result of these
investments, the Company has developed its client service and technical
infrastructure to a significant scale, which enables the Company to develop and
support mainframe, mid-range and network applications and platforms,
accommodate growth and provide efficient and flexible services.
Long-Term Client Relationships with Recurring Revenues. May & Speh's long-
term client relationships provide the Company with recurring revenues. Over 50%
of the Company's fiscal 1997 revenues were derived from clients who have used
the Company's services for over three years. The Company's direct marketing
revenues are typically recurring because its direct marketing services become
an integral part of the clients' marketing programs and a portion of these
revenues are derived through multi-year contracts. The Company's IT outsourcing
revenues are typically recurring and generated through multi-year contracts.
4
<PAGE>
Significant Operating Flexibility. May & Speh's financial position provides
the Company with significant operating flexibility. The Company has generated
operating margins in excess of 20% in each of the last four fiscal years. These
operating margins have enabled the Company to reinvest the cash generated from
operations for strategic expenditures, including technology, skilled technical
personnel and capital investments relating to new clients.
GROWTH STRATEGY
May & Speh's strategy is to continue to grow its business by leveraging its
competitive strengths. The principal components of May & Speh's growth strategy
are:
Offer Integrated Database Management Solutions. May & Speh continues to
develop integrated database management solutions focused on targeted industries
which are expected to continue to attract new clients with significant direct
marketing budgets and increase revenues from existing clients. May & Speh's
approach offers integrated solutions rather than general, disparate services
and systems.
Increase Penetration of Existing Targeted Industries and Target New
Industries. Currently, May & Speh's direct marketing services target the
financial services, retail, consumer goods, insurance and high tech industries.
The Company believes these industries offer significant opportunity for direct
marketing services, and continues to focus on attracting additional clients
within these targeted industries. In addition, the Company believes that direct
marketing is increasingly prevalent in the utilities, telecommunications,
automotive and healthcare industries, and that such industries provide
attractive near term opportunities for potential penetration.
Extend IT Outsourcing Services. May & Speh continues to extend its IT
outsourcing service offerings. In order to build upon and complement its
traditional mainframe outsourcing services, the Company offers client/server
outsourcing and network management services. The Company's strengthened IT
outsourcing capabilities have resulted in the addition of new clients and
contracts such as May & Speh's $41 million, five-year contract with American
National Can. Under this agreement, American National Can is outsourcing its
entire IT infrastructure to the Company including client/server, mainframe and
network management services. The Company believes its broad range of IT
outsourcing services and expertise will continue to attract new clients and
expand relationships with current clients.
Expand Sales Efforts. The Company plans to increase the number of new clients
by expanding its sales efforts in both direct marketing and IT outsourcing. The
direct marketing sales force is focused on increasing penetration within
current targeted industries as well as penetrating new industries. In IT
outsourcing services, the Company intends to continue focusing on United
States-based companies with mid-level processing requirements. In addition, the
Company plans to expand its sales presence in certain geographic areas for both
direct marketing and IT outsourcing services.
Pursue Strategic Acquisitions and Alliances. May & Speh will continue to
explore strategic acquisitions and alliances for additional growth
opportunities. The Company will seek to acquire or form alliances with
companies that have services, technologies, industry specialties or personnel
that would complement or extend those of the Company and facilitate the
addition of new clients. For example, the Company recently agreed to form
Energy Market Connect, LLC, a joint venture with Metzler & Associates, a
leading provider of management consulting services to the energy industry. The
Company believes this joint venture will provide a new sales channel and enable
the Company to incorporate utilities industry expertise in its integrated
database management solutions for the utilities industry. In May 1997, the
Company also formed a strategic alliance with Trans Union Corporation, the
nation's leading credit reporting company. The alliance will combine May &
Speh's expertise in creating custom and generic models with Trans Union
Corporation's data management capabilities.
The Company's executive offices are located at 1501 Opus Place, Downers
Grove, Illinois 60515, and its telephone number at that address is (630) 964-
1501.
5
<PAGE>
THE NOTE OFFERING
Securities Offered............ $100,000,000 principal amount of 5 1/4%
Convertible Subordinated Notes due 2003.
Maturity...................... April 1, 2003, unless previously redeemed,
repurchased or converted.
Interest Payment Dates........ April 1 and October 1, commencing October 1,
1998.
Conversion Rights............. The Notes are convertible at the option of the
holder into shares of Common Stock at any time
prior to maturity, unless previously redeemed
or repurchased, at a conversion price of $15.91
per share, subject to adjustment under certain
circumstances as described herein. Accordingly,
each $1,000 principal amount of Notes is
convertible into 62.8535 shares of Common
Stock, subject to adjustment, initially for an
aggregate of 6,285,350 shares.
Optional Redemption........... The Notes are redeemable, in whole or in part,
at the option of the Company at any time on or
after April 3, 2001, at the redemption prices
set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption.
Change of Control............. Upon a Change of Control, the Company will be
required to offer to purchase the Notes at 100%
of the principal amount thereof, plus accrued
and unpaid interest to the date of purchase.
Subordination................. The Notes will be general, unsecured obliga-
tions of the Company subordinated in right of
payment to all existing and future Senior In-
debtedness of the Company and will be structur-
ally subordinated to all liabilities (including
trade payables) of the Company's subsidiaries.
At December 31, 1997, as adjusted to give ef-
fect to the issuance and sale of the Notes and
the application of the estimated net proceeds
therefrom, approximately $26.0 million of out-
standing indebtedness of the Company would have
constituted Senior Indebtedness, and the
Company's subsidiary had no outstanding obliga-
tions. The Existing Credit Facility provides
for borrowings of up to $2.0 million. No
amounts were outstanding under the Existing
Credit Facility as of December 31, 1997. In ad-
dition, the Company is negotiating with a group
of banks for the New Credit Facility which is
expected to provide for borrowings of up to
$60.0 million. Indebtedness under the Existing
Credit Facility and the New Credit Facility
would be Senior Indebtedness. The Indenture
will not restrict the incurrence of Senior In-
debtedness or other indebtedness by the Company
and its subsidiaries.
Use of Proceeds............... The Company intends to use approximately $10.0
million of the estimated net proceeds to repay
the Company's entire indebtedness under a term
loan. The remainder of the estimated net
proceeds will be used for capital expenditures,
working capital and other general corporate
purposes. The Company also intends to use a
portion of the estimated net proceeds for
acquisitions. See "Use of Proceeds."
6
<PAGE>
Listing....................... The Notes offered hereby have been approved for
trading on the Nasdaq SmallCap Market under the
symbol "SPEHG."
Common Stock Traded........... The Common Stock is traded on the Nasdaq
National Market under the symbol "SPEH."
Concurrent Offering........... Concurrently with the Note Offering, the Sell-
ing Stockholders are offering, pursuant to a
separate Prospectus, 4,000,000 shares of Common
Stock. In addition, certain Selling Stockhold-
ers will sell up to 275,000 shares of Common
Stock and the Company will sell up to 325,000
shares of Common Stock in the Common Stock Of-
fering if and to the extent the underwriters'
over-allotment option is exercised. The Company
will not receive any of the net proceeds from
the sale of the Common Stock by the Selling
Stockholders. Consummation of the Note Offering
is not a condition to consummation of the Com-
mon Stock Offering, and consummation of the
Common Stock Offering is not a condition to
consummation of the Note Offering.
For a description of the terms of the Notes, see "Description of Notes." For
a description of the Common Stock, see "Description of Capital Stock."
7
<PAGE>
SUMMARY FINANCIAL, OPERATING AND OTHER DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------------------------- ---------------------
1993 1994 1995 1996 (1) 1997 (1) 1996 (1) 1997 (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $41,792 $51,667 $61,641 $77,223 $92,457 $ 21,229 $ 26,351
Restructuring costs
(2)................... -- -- -- -- -- -- 4,700
Operating income....... 7,479 11,024 13,872 17,025 20,463 4,090 1,592
Interest expense....... 1,974 1,693 1,543 1,843 2,618 577 756
Net income............. 3,406 5,838 7,861 10,224 11,716 2,367 656
Diluted earnings per
share................. $ 0.15 $ 0.26 $ 0.38 $ 0.43 $ 0.45 $ 0.09 $ 0.02
Weighted average shares
outstanding, including
common equivalents.... 22,917 22,110 20,611 23,653 26,179 26,220 26,470
PRO FORMA DATA (3):
Interest expense....... $ 7,695 $ 1,840 $ 2,036
Income (loss) from
continuing operations
(4)................... 8,569 1,584 (139)
Diluted income (loss)
from continuing
operations per share
(4)................... $ 0.33 $ 0.06 $ (0.01)
OPERATING AND OTHER
DATA:
Operating margin (5)... 17.9% 21.3% 22.5% 22.0% 22.1% 19.3% 6.0%
Number of employees at
end of period......... 272 306 331 434 574 579
Ratio of earnings to
fixed charges (6)..... 2.6x 3.5x 3.8x 3.9x 3.9x 3.5x 1.6x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED (7) ADJUSTED (8)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities........... $ 15,920 $101,056 $101,056
Working capital.......................... 46,736 133,120 133,825
Total assets............................. 148,632 237,900 238,605
Current maturities of long-term debt..... 5,868 5,068 5,068
Long-term debt........................... 30,151 120,951 120,951
Total stockholders' equity............... 92,845 92,112 92,817
</TABLE>
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(1) Includes the results of operations of GIS Information Systems, Inc.,
effective July 1, 1996.
(2) Represents the present value of payments under existing contracts with
prior members of management. Excluding this one-time charge, operating
income and net income for the three months ended December 31, 1997 would
have increased by $4,700,000 and $2,913,000, respectively.
(3) Pro forma information for the fiscal year ended September 30, 1997 gives
effect to the sale of the Notes and the use of the estimated net proceeds
therefrom as if these transactions had occurred on October 1, 1996. Pro
forma information for the three months ended December 31, 1996 and 1997
gives effect to the sale of the Notes and the use of the estimated net
proceeds therefrom as if these transactions had occurred on October 1, 1996
and 1997, respectively. See "Use of Proceeds."
(4) Does not include an assumed extraordinary loss of $0.7 million (after-tax)
relating to the early extinguishment of debt.
(5) Operating margin represents operating income expressed as a percentage of
net revenues.
(6) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, plus fixed charges.
Fixed charges consist of interest expense on all indebtedness and one-third
of rental expense, which represents an appropriate interest factor of
rental expense.
(7) Gives effect to the Note Offering and the use of the estimated net proceeds
therefrom as if such transactions had occurred on December 31, 1997.
(8) Gives effect to the Common Stock Offering and the exercise by a Selling
Stockholder of options to purchase 176,000 shares of Common Stock at a
weighted average exercise price of $2.08 per share, as if such transactions
had occurred on December 31, 1997.
8
<PAGE>
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus, prospective investors should consider carefully the
following factors relating to the business of the Company and the sale of the
Notes before acquiring any of the Notes offered hereby.
ABILITY TO CONTINUE GROWTH; MANAGEMENT OF GROWTH
The Company has experienced significant growth over the last several years.
For the five fiscal years ended September 30, 1997, the Company's net revenues
grew from $41.8 million to $92.5 million, operating margins increased from
17.9% to 22.1% and net income increased from $3.4 million to $11.7 million.
While the Company's strategy contemplates continued growth of its business,
there can be no assurances that the Company will be able to sustain its recent
growth. In addition, such growth has placed significant demands on the
Company's management, other employees, operations and physical resources.
There can be no assurances that, if the Company continues to grow, management
will be effective in attracting and retaining additional qualified personnel,
expanding the Company's physical facilities, integrating acquired businesses
and otherwise managing growth. Any failure to effectively manage growth could
have a material adverse effect on the Company's business, operating results or
financial condition. See "--Acquisitions and Alliances," "--Dependence on
Personnel; Scarcity of Trained Technical Personnel," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
INTENSE COMPETITION
The information management services industry is extremely competitive, and
the Company faces intense competition in all of its customer markets. The
Company may also encounter new entrants, including well-capitalized
information services companies and other companies, as the markets for May &
Speh's services develop. Many of the Company's competitors have more extensive
financial, technical, marketing and other resources than the Company and may
have a greater ability to obtain client contracts where sizable up-front asset
purchases or investments are required and to respond more quickly than the
Company to new or emerging technologies and other competitive pressures. There
can be no assurances that the Company will be able to compete successfully
against its present or future competitors or that competitive pressures will
not have a material adverse effect on the Company's business, operating
results or financial condition. See "--Rapid Technological Change,"
"Business--Market Overview" and "--Competition."
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's net revenues, cash flows and operating results are subject to
significant variation between quarters. A significant portion of the Company's
quarterly revenues is derived from new projects for direct marketing services
and new contracts for IT outsourcing services, the timing of which is subject
to a variety of factors, such as client marketing budgets and modifications in
client strategies, outside the Company's control. The variability in revenues,
combined with the relatively fixed cost nature of the Company's business, can
have a substantial impact on the Company's quarterly results of operations.
Additionally, the Company periodically incurs cost increases due to both
hiring of new employees and computer capacity upgrades in anticipation of
future revenue growth. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Comparisons."
RISKS ASSOCIATED WITH LEVERAGE
At December 31, 1997, on a pro forma basis after giving effect to the Note
Offering and the use of the estimated net proceeds therefrom and the Common
Stock Offering (assuming the exercise by a Selling Stockholder of options to
purchase 176,000 shares of Common Stock with a weighted average exercise price
of $2.08 per share), the Company would have had (i) total long-term
indebtedness of $121.0 million, of which $100.0 million would be represented
by the Notes, (ii) stockholders' equity of $92.8 million and (iii) available
borrowing capacity of approximately $2.0 million (subject to customary
borrowing conditions) under the
9
<PAGE>
Existing Credit Facility. See "Capitalization." In addition, the Company is
negotiating with a group of banks for the New Credit Facility which is
expected to provide for borrowings of up to $60.0 million. Furthermore, the
Indenture will not restrict the incurrence of additional indebtedness by the
Company or its subsidiaries. The degree to which the Company is leveraged
could have important consequences to holders of the Notes, including: (i) the
ability of the Company to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements, acquisitions
or other purposes may be limited; (ii) a substantial portion of the Company's
cash flows from operations must be dedicated to the payment of the principal
of and interest on its indebtedness and will not be available for other
purposes; (iii) the Company's level of indebtedness could limit its
flexibility in planning for, or reacting to, changes in its business or in
economic conditions; and (iv) the Company's level of indebtedness will make it
more vulnerable in the event of a downturn in its business.
The Company's ability to pay interest and principal on the Notes and to
satisfy its other debt obligations will depend upon its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its
control, as well as the availability of revolving credit borrowings under the
Company's credit facilities. The Company anticipates that net cash provided by
its operating activities, together with the balance of the estimated net
proceeds from the sale of the Notes and funds available under the Existing
Credit Facility, will be sufficient to meet its operating expenses, and
working capital, capital expenditures and debt service requirements, through
at least fiscal 1999. However, if the Company is unable to service its debt,
it will be forced to pursue one or more alternative strategies such as selling
assets, curtailing any expansion, restructuring or refinancing its
indebtedness or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on terms satisfactory to the
Company, if at all.
ACQUISITIONS AND ALLIANCES
A key element of the Company's growth strategy is to pursue strategic
acquisitions of or alliances with companies that have services, products,
technologies, industry specializations or technical personnel that extend or
complement those of the Company. There is extensive competition for attractive
candidates for acquisitions or alliances and there can be no assurances that
the Company will be able to identify or reach mutually agreeable terms with
such candidates. In addition, the Company's management has had limited
experience in making acquisitions and entering into alliances, and there can
be no assurance that any acquired business will be effectively integrated or
that any acquired business or alliance will be profitable. A substantial
portion of the Company's capital resources, including a portion of the
estimated net proceeds of the Note Offering, could be used for acquisitions or
alliances. In addition, the Company may require additional debt or equity
financing for future acquisitions or alliances, which financing may not be
available on terms satisfactory to the Company. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Growth Strategy."
RISK OF DATA CENTER FAILURE
The Company's operations are dependent upon its ability to protect its data
center against damage from fire, power loss, telecommunications failure,
natural disaster or a similar event. A substantial portion of the Company's
computer equipment and operations are located at its headquarters in Downers
Grove, Illinois. While the Company maintains a disaster recovery plan with a
vendor to provide alternative data processing sites in the event the Company
experiences a natural disaster or other interruption at its data center, the
Company could nonetheless be materially adversely affected by damage or
failure that causes significant interruptions in the Company's operations. The
Company's property and business interruption insurance may not be adequate to
compensate the Company for all losses that may occur. See "Business--
Technological Resources and Facilities."
DEPENDENCE ON PERSONNEL; SCARCITY OF TRAINED TECHNICAL PERSONNEL
The Company is highly dependent on the collective skills and efforts of its
senior management team. Among these persons, the Company has employment
agreements with Peter I. Mason, Eric M. Loughmiller, Michael J. Loeffler and
Robert C. Early which include non-competition agreements with all of these
individuals. The
10
<PAGE>
Company does not have "key man" life insurance policies covering any of these
individuals. As the Company's business has grown, the Company has found it
difficult to hire the new employees needed, particularly trained technical
personnel with database management services knowledge. Because of the recent
emergence of the industry, only a limited number of such trained technical
personnel are available for hire. Competition for qualified technical and
other personnel is intense, and the Company periodically is required to pay
premium wages to attract and retain personnel. There can be no assurance that
the Company will be able to continue to hire and retain sufficient qualified
management, technical, sales and other personnel necessary to conduct its
operations successfully, particularly if the planned growth occurs. See "--
Ability to Continue Growth; Management of Growth," "Business--Employees" and
"Management."
RELIANCE ON SIGNIFICANT CLIENTS; ABSENCE OF LONG-TERM CONTRACTS
A significant portion of May & Speh's net revenues is derived from
relatively few clients. Sears accounted for 17.6% and 18.9% of the Company's
net revenues in fiscal 1996 and fiscal 1997, respectively. Collectively, the
Company's 20 largest clients accounted for 63.6% and 58.9% of such revenues in
such periods.
The Company's revenues from many of its direct marketing clients are not
derived from multi-year or long-term contracts. Continued revenues from such
clients require ongoing sales efforts, and there is no assurance that the
Company will continue to be successful in generating future sales. While the
Company does have multi-year contracts with most of its IT outsourcing
services clients and a growing number of direct marketing clients, such
contracts usually include provisions for early termination by the client. In
most cases, there are clauses that specify certain customer payments to the
Company upon early termination. However, there can be no assurance that the
Company will successfully collect such payments even when it is contractually
entitled to receive them. Further, in a competitive situation, the Company
may, as it has in the past, renegotiate prices and terms for an existing
contract. Such situations can occur at any time and such re-negotiations
generally result in an erosion of the Company's profitability. See "Business--
Clients."
GOVERNMENT REGULATION; PRIVACY ISSUES
The direct marketing industry has recently been subject to increased
legislative attention. In addition, consumers are growing increasingly aware
of privacy issues related to direct marketing. In 1996, the Fair Credit
Reporting Act ("FCRA") was amended to provide consumers with easier access to
their credit reports and to facilitate the correction of errors in such
reports. New regulations interpreting the amendments were issued by the
Federal Trade Commission ("FTC") in 1997. Among other issues, the amendment
and regulations also addressed the issue of "prescreening," a procedure
utilized by many bankcard issuers and insurance companies in their direct
marketing programs. This legislation regulates the use of credit reports in
the preparation and generation of lists used by companies in offering credit.
This law also provides for significant fines for misuse of credit reports.
Although the Company believes its list processing activities for credit
grantors are in compliance with the recent amendments to FCRA, due to its
recent adoption, there is uncertainty as to its interpretation and
application. Therefore, there can be no assurances that significant fines will
not be levied against the Company or that this portion of its list processing
services will not be adversely affected. In addition to the federal
legislation, numerous bills are pending in various state legislatures. Such
bills are intended to give consumers more control over how personal
information is utilized in the marketplace. There can be no assurance that
this legislation or additional federal or state consumer-oriented legislation
will not significantly limit, or increase the costs of, the direct marketing
activities of the Company's clients. Direct marketing services accounted for
approximately 61.6% of the Company's net revenues in fiscal 1997. See
"Business--Consumer Privacy and Legislative Issues."
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in part upon its technological expertise and
proprietary technologies. The Company relies upon its trade secret program and
non-disclosure safeguards to protect its proprietary technologies. There can
be no assurance that these steps will be adequate to deter misappropriation or
11
<PAGE>
infringement of its proprietary technologies. Further, given the rapid
evolution of technology and uncertainties in intellectual property law, there
can be no assurance that the Company's current or future products will not be
determined to infringe proprietary rights of others. If such infringement
occurs, the Company may not be able to obtain the requisite licenses or rights
to use such technology upon reasonable terms, if at all. See "Business--
Intellectual Property Rights."
RAPID TECHNOLOGICAL CHANGE
The market for the Company's services and products is characterized by
rapidly changing technology and frequent new and enhanced service and product
introductions. The Company believes that its future success will be highly
dependent upon its ability to enhance existing products and services and to
develop and introduce new products and services to respond to changing client
needs. There can be no assurances that the Company can successfully identify,
develop and bring new and enhanced services and products to market in a timely
manner, that such services or products will be commercially successful or that
services, products or technologies developed by others will not render the
Company's services and products noncompetitive or obsolete. See "Business--
Services and Products" and "--Competition."
SUBORDINATION
The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness and will be structurally subordinated to all
liabilities (including trade payables) of the Company's subsidiaries. The
Indenture does not restrict the incurrence of Senior Indebtedness or other
indebtedness by the Company or its subsidiaries. By reason of such
subordination of the Notes, in the event of the insolvency, bankruptcy,
liquidation, reorganization, dissolution or winding up of the business of the
Company or similar proceeding or upon a default in payment with respect to any
indebtedness of the Company or an event of default with respect to such
indebtedness resulting in the acceleration thereof, the assets of the Company
will be available to pay the amounts due on the Notes only after all Senior
Indebtedness has been paid in full. The Notes will rank pari passu with all
other unsecured, subordinated obligations of the Company. See "Description of
Notes--Subordination."
At December 31, 1997, as adjusted to give effect to the issuance and sale of
the Notes and the application of the estimated net proceeds therefrom,
approximately $26.0 million of outstanding indebtedness of the Company would
have constituted Senior Indebtedness, and the Company's subsidiary had no
outstanding obligations. The Existing Credit Facility provides for borrowing
of up to $2.0 million. No amounts were outstanding under the Existing Credit
Facility as of December 31, 1997. In addition, the Company is negotiating with
a group of banks for the New Credit Facility which is expected to provide for
borrowings of up to $60.0 million. Indebtedness under the Existing Credit
Facility and the New Credit Facility would be Senior Indebtedness. The
Indenture will not restrict the incurrence of Senior Indebtedness or other
indebtedness by the Company and its subsidiaries.
ABSENCE OF EXISTING MARKET FOR NOTES
The Notes will constitute a new issue of securities with no established
trading market. The Notes have been approved for listing on the Nasdaq
SmallCap Market. No assurance can be given that an active trading market for
the Notes will develop or, if such a market develops, as to the liquidity or
sustainability of such market. If a trading market does not develop or is not
maintained, holders of the Notes may experience difficulty in reselling the
Notes or may be unable to sell them at all. If a market for the Notes
develops, any such market may be discontinued at any time. If a public trading
market for the Notes develops, future trading prices of the Notes will depend
on many factors, including, among others things, prevailing interest rates,
the Company's results of operations and financial condition, the market for
similar securities and the price of the Common Stock. Depending on such
factors, the Notes may trade at a discount from their initial public offering
price.
12
<PAGE>
LIMITATIONS ON REPURCHASE OF NOTES UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
offer to purchase the Notes. If a Change of Control were to occur, there can
be no assurance that the Company would have sufficient financial resources, or
would be able to arrange financing, to pay the repurchase price for all Notes
tendered by holders thereof. In addition, the Company's repurchase of the
Notes as a result of a Change of Control may be prohibited or limited by, or
create an event of default under, the terms of the Existing Credit Facility
and other agreements related to borrowings which the Company may enter into
from time to time including, without limitation, the New Credit Facility.
Failure of the Company to purchase tendered Notes would constitute an Event of
Default under the Indenture. See "Description of Notes--Repurchase of Notes at
the Option of the Holder Upon a Change of Control."
CONTROLLING INTEREST OF CERTAIN PERSONS
The Company's executive officers and directors and their respective
affiliates beneficially own approximately 25.2% of the outstanding Common
Stock (14.7% if the Common Stock Offering is consummated), excluding shares
allocated to the accounts of such persons under the Company's Employee Stock
Ownership Plan (the "ESOP"). The ESOP owns approximately 31.6% of the
outstanding Common Stock (25.6% if the Common Stock Offering is consummated),
and employee participants, including certain executive officers and directors,
exercise voting power over all of such shares. If such stockholders were to
act in concert in the future, they likely would be able to continue to elect
all of the Company's directors, determine the outcome of most corporate
actions requiring stockholder approval and otherwise control the business
affairs of the Company. Under the terms of an employment agreement with Peter
I. Mason, the Company has agreed to have Casey Cowell and Paul G. Yovovich
serve as directors of the Company. Under the terms of an employment agreement
with Lawrence J. Speh, the Company has agreed to nominate Mr. Speh as a
director for so long as Mr. Speh owns at least 500,000 shares of Common Stock,
and for so long as Mr. Speh is a director or nominee for director, Mr. Speh
has agreed to vote all shares of Common Stock owned by him in favor of the
Company's nominees. In addition, Mr. Mason has agreed to support the
nomination and election to the Board of Albert J. Speh, Jr. See "Management,"
"Principal Stockholders" and "Description of Capital Stock--Delaware Law and
Certain Corporate and Contractual Provisions."
ABSENCE OF FINANCIAL COVENANTS
The Indenture will not contain any financial covenants or restrictions on
the payment of dividends, the incurrence of indebtedness, including Senior
Indebtedness, by the Company or the issuance or repurchase of securities by
the Company. The Indenture will not contain any covenants or other provisions
to afford protection to holders of the Notes in the event of a highly
leveraged transaction, reorganization, restructuring, merger, spin-off or
similar transaction that may adversely affect holders of the Notes except to
the extent described under "Description of Notes--Repurchase of Notes at
Option of the Holder Upon a Change of Control." The term "Change of Control"
(as defined under the Indenture) is limited to certain specified transactions
and may not include other events that may involve an actual change of control
of the Company.
ANTI-TAKEOVER PROVISIONS
The Company has a stockholder rights plan which may have the effect of
delaying or preventing a change of control of the Company. Further, certain
provisions of the Company's Certificate of Incorporation and By-laws, and
certain provisions of the Delaware General Corporation Law, may make it
difficult to change control of the Company and replace incumbent management.
For example, the Company's Certificate of Incorporation provides for a
staggered Board of Directors and permits the Board of Directors, without
stockholder approval, to issue additional shares of Common Stock or establish
one or more classes or series of Preferred Stock having the number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations that the Board of Directors establishes.
The Company has entered into employment agreements with certain members of
senior management that provide for substantial severance pay in the event of a
change of control of the Company and the Company's 1994 Executive Stock Option
Plan and 1995 Key Employee Stock Option Plan provide that unexercised options,
whether vested or unvested, may be exercised in full upon a "change of
control" as defined in such plans. See "Description of Capital Stock." Upon
the occurrence of a Change of Control, the Company will be required to offer
to purchase the Notes. This purchase feature may in certain circumstances have
an anti-takeover effect. See "Description of Notes--Repurchase of Notes at the
Option of the Holder Upon a Change of Control."
13
<PAGE>
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Information contained or incorporated by reference in this Prospectus
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), which can be
identified by the use of forward-looking terminology such as "believes,"
"contemplates," "expects," "may," "will," "should," "would" or "anticipates"
or the negative thereof or other variations thereon or comparable terminology,
or by discussions of strategy. No assurance can be given that the future
results covered by the forward-looking statements will be achieved. Various
factors, including certain risks and uncertainties described herein under
"Risk Factors," could cause actual results to vary materially from the future
results covered in such forward-looking statements.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes are estimated to
be $96.3 million ($110.8 million if the Underwriters' over-allotment option is
exercised in full), after deducting underwriting discounts and commissions and
estimated offering expenses. The Company intends to use approximately $10.0
million of the estimated net proceeds to repay the Company's entire
indebtedness under a term loan that bears interest at a rate of 8.5% per annum
and matures in 2005. The Company also will use a portion of the estimated net
proceeds for an assumed prepayment penalty of approximately $1.2 million ($0.7
million after-tax). The remainder of the estimated net proceeds will be used
for capital expenditures, including the acquisition of computer and related
equipment and expansion of facilities, working capital and other general
corporate purposes. During calendar year 1998, the Company anticipates that it
will use approximately $15.0 million of the estimated net proceeds for capital
expenditures. The Company also intends to use a portion of the estimated net
proceeds for acquisitions. From time to time, the Company evaluates potential
acquisitions. However, the Company currently has no understandings,
commitments or agreements with respect to such transactions. Pending such
uses, the proceeds will be invested in marketable, investment-grade debt
instruments of the U.S. Government or tax free municipal bonds.
CAPITALIZATION
The following table sets forth the historical consolidated capitalization of
the Company at December 31, 1997 (i) on an actual basis, (ii) as adjusted to
give effect to the Note Offering and the application of the estimated net
proceeds therefrom, and (iii) as further adjusted for the Common Stock
Offering (assuming the exercise by a Selling Stockholder of options to
purchase 176,000 shares of Common Stock at a weighted average exercise price
of $2.08 per share). See "Use of Proceeds." This table should be read in
conjunction with and is qualified by reference to the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and marketable securities............ $ 15,920 $101,056 $101,056
======== ======== ========
Current maturities of long-term debt...... 5,868 5,068 5,068
-------- -------- --------
Long-term debt:
Term loan............................... 9,200 -- --
5 1/4% Convertible Subordinated Notes
due 2003............................... -- 100,000 100,000
Other debt.............................. 20,951 20,951 20,951
-------- -------- --------
Total long-term debt.................. 30,151 120,951 120,951
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.01 par value,
2,000,000 shares authorized; no shares
issued................................. -- -- --
Common stock, $0.01 par value,
50,000,000 shares authorized;
25,219,854 shares issued and
outstanding actual and as adjusted and
25,395,854 as further adjusted......... 252 252 254
Additional paid-in capital.............. 48,737 48,737 49,440
Retained earnings....................... 46,231 45,499(1) 45,499(1)
Unearned ESOP compensation.............. (2,376) (2,376) (2,376)
-------- -------- --------
Total stockholders' equity............ 92,844 92,112 92,817
-------- -------- --------
Total capitalization................ $128,863 $218,131 $218,836
======== ======== ========
</TABLE>
- ---------------------
(1) Reflects a $0.7 million (after-tax) reduction in retained earnings due to
an assumed prepayment penalty resulting from the early extinguishment of
debt. See "Use of Proceeds."
15
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company has traded on the Nasdaq National Market
under the symbol "SPEH" since March 26, 1996, the date of the Company's
initial public offering of Common Stock. The following table sets forth for
the fiscal periods indicated the range of high and low closing sales prices of
the Common Stock as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Fiscal year ended September 30, 1996:
Second Quarter.............................................. $12 $10 15/16
Third Quarter............................................... 16 1/2 10 7/8
Fourth Quarter.............................................. 21 1/2 13 3/4
Fiscal year ended September 30, 1997:
First Quarter............................................... $19 7/8 $11 1/2
Second Quarter.............................................. 14 7 1/2
Third Quarter............................................... 13 1/2 7 3/8
Fourth Quarter.............................................. 14 3/4 12
Fiscal year ending September 30, 1998:
First Quarter............................................... $15 7/8 $11 1/4
Second Quarter (through March 19)........................... 15 1/8 12
</TABLE>
On March 19, 1998, the last sale price of the Common Stock on the Nasdaq
National Market was $12 5/8 per share. As of that date, there were 25,554,054
shares of Common Stock issued and outstanding, held by 105 stockholders of
record.
DIVIDEND POLICY
The Company currently intends to retain its earnings for future growth and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. The Company's credit agreements prohibit the Company from paying
dividends and making other distributions on its Common Stock without the
consent of its lenders. Any future payment of dividends will depend upon the
Company's results of operations, financial condition, cash requirements and
other factors deemed relevant by the Board of Directors.
16
<PAGE>
SELECTED FINANCIAL, OPERATING AND OTHER DATA
The following table sets forth selected financial, operating and other data
of the Company for the five fiscal years ended September 30, 1997 and for the
three months ended December 31, 1996 and 1997. The selected statement of
operations data for the fiscal years ended September 30, 1995, 1996 and 1997
and the selected balance sheet data as of September 30, 1996 and 1997 have
been derived from the Company's audited financial statements included
elsewhere herein. The selected statement of operations data for the fiscal
years ended September 30, 1993 and 1994 and the selected balance sheet data as
of September 30, 1993, 1994 and 1995 have been derived from audited financial
statements of the Company not included herein. The selected statement of
operations data for the three months ended December 31, 1996 and 1997 and the
selected balance sheet data as of December 31, 1997 have been derived from the
unaudited financial statements of the Company. In the opinion of management of
the Company, the unaudited financial statements have been prepared on the same
basis as the Company's audited financial statements and include all
adjustments, consisting only of normal recurring items, necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended December 31, 1997 are
not necessarily indicative of the results to be expected for the entire fiscal
year. This financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------- ----------------
1993 1994 1995(1) 1996(2) 1997(2) 1996(2) 1997(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING AND OTHER
DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $41,792 $51,667 $61,641 $77,223 $92,457 $21,229 $26,351
Operating expenses:
Wages and benefits..... 14,709 18,624 20,984 23,950 30,437 7,143 8,949
Services and supplies.. 3,240 3,650 4,160 6,839 6,192 2,039 1,371
Rents, leases and
maintenance........... 9,848 11,156 13,878 18,064 20,137 4,637 5,251
Depreciation and
amortization.......... 740 912 1,230 2,155 4,420 901 1,779
Other operating
expenses.............. 3,667 4,034 5,106 6,814 8,433 1,824 2,115
ESOP principal payments
(3)................... 2,109 2,267 2,411 2,376 2,376 594 594
Restructuring costs
(4)................... -- -- -- -- -- -- 4,700
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 34,313 40,643 47,769 60,198 71,995 17,138 24,759
------- ------- ------- ------- ------- ------- -------
Operating income........ 7,479 11,024 13,872 17,025 20,462 4,091 1,592
ESOP interest........... 1,208 1,022 864 611 403 124 69
Other expense (income),
net.................... 662 474 482 (84) 1,161 149 468
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 5,609 9,528 12,526 16,498 18,898 3,818 1,055
Income taxes............ 2,203 3,690 4,665 6,274 7,182 1,451 399
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 3,406 $ 5,838 $ 7,861 $10,224 $11,716 $ 2,367 $ 656
======= ======= ======= ======= ======= ======= =======
Basic earnings per share
(5).................... $ 0.15 $ 0.26 $ 0.38 $ 0.45 $ 0.47 $ 0.09 $ 0.03
Weighted average shares
outstanding (5)........ 22,917 22,110 20,426 22,634 25,029 24,953 25,172
Diluted earnings per
share (5).............. $ 0.15 $ 0.26 $ 0.38 $ 0.43 $ 0.45 $ 0.09 $ 0.02
Weighted average shares,
including common
equivalents (5)........ 22,917 22,110 20,611 23,653 26,179 26,220 26,470
OPERATING AND OTHER
DATA:
Operating margin (6).... 17.9% 21.3% 22.5% 22.0% 22.1% 19.3% 6.0%
Number of employees at
end of period.......... 272 306 331 434 574 579
Processing capacity
(MIPS) at end of
period................. 168 198 500 1,329 5,995
Ratio of earnings to
fixed charges (7)...... 2.6x 3.5x 3.8x 3.9x 3.9x 3.5x 1.6x
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable
securities............. $ 4,881 $ 4,459 $ 8,602 $ 30,732 $ 22,305 $ 15,920
Working capital......... 10,840 12,091 16,519 46,149 47,040 46,736
Total assets............ 29,971 33,978 46,804 115,218 148,796 148,632
Current maturities of
long-term debt......... 2,724 3,035 3,359 5,330 5,811 5,868
Long-term debt.......... 17,697 15,051 16,860 22,251 31,546 30,151
Total stockholders'
equity................. 3,989 8,701 17,644 75,731 91,135 92,845
</TABLE>
- -------------------
(1) In fiscal 1995, the Company paid a special dividend of $2.5 million. The
principal purpose of the dividend was to permit the ESOP to prepay without
penalty a portion of its outstanding loan balance.
(2) Includes the results of operations of GIS Information Systems, Inc.,
effective July 1, 1996.
(3) Represents tax deductible contributions to the Company's ESOP which are
used to service principal payments on the related ESOP loan.
(4) Represents the present value of payments under existing contracts with
prior members of management. Excluding this one-time charge, operating
income and net income would have increased by $4,700,000 and $2,913,000,
respectively.
(5) Reflects 12-for-1 stock split in December 1995.
(6) Operating margin represents operating income expressed as a percentage of
net revenues.
(7) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, plus fixed charges.
Fixed charges consist of interest expense on all indebtedness and one-
third of all rental expense, which represents an appropriate interest
factor of rental expense.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
May & Speh celebrated its 50th anniversary as a provider of information
technology services in 1997. May & Speh provides computer-based information
management services with a focus on direct marketing and IT outsourcing
services. The Company's direct marketing services help companies execute more
profitable direct marketing and customer management programs. Services include
strategic analysis and strategy management; systems consulting; custom data
warehouse and datamart design, build, implementation and management;
statistical (predictive) modeling and analysis; and list processing. May &
Speh's IT outsourcing services support multi-platform processing and network
management for clients seeking to outsource their IT operations, thereby
liberating capital and redirecting their focus to more strategic IT
initiatives.
May & Speh has experienced strong growth in revenues and earnings per share
over the last five years. For the five fiscal years ended September 30, 1997,
the Company's net revenues grew from $41.8 million to $92.5 million and
earnings per share increased from $0.15 to $0.45. During this period,
operating margins increased from 17.9% to 22.1%, reflecting achievement of
certain economies of scale. The Company has invested in human resources,
facilities and technology at rates consistent with growth in revenues over
this period. The number of employees has increased from 272 at September 30,
1993 to 574 at September 30, 1997, reflecting the addition of new technical,
sales and marketing and administrative personnel to support the Company's
overall growth. In addition, the Company's ESOP principal payments, which have
remained relatively constant in dollar terms, have declined as a percentage of
net revenues to 2.6% for fiscal 1997 from 5.0% in fiscal 1993.
In fiscal 1997, approximately 61.6% of the Company's net revenues were from
direct marketing services. Revenues from the Company's existing direct
marketing clients are typically recurring in nature, although many of the
Company's direct marketing clients are not under long-term contracts. IT
outsourcing services provided approximately 38.4% of net revenues and are
typically performed under multi-year contracts. May & Speh's direct marketing
and IT outsourcing services are synergistic and leverage the Company's
investment in its technical personnel and state-of-the-art data facilities.
Investments required to provide services to new clients are typically spread
across multiple contracts. This approach reduces the Company's investment risk
and allows for economies of scale.
The Company regularly evaluates whether to lease or buy its computer
equipment. An environment of rapidly changing technology and cost efficient
financing arrangements has resulted in the Company leasing a significant
amount of its computer equipment under three to ten year leases. Generally,
the Company's computer leases with terms in excess of five years are
classified as capital leases.
As of December 31, 1997, the Company had more than 300 clients. The
Company's 20 largest clients accounted for approximately 58.9% of the
Company's net revenues in fiscal 1997. Sears represented 18.9% of the fiscal
1997 net revenues. The Company's net revenues for fiscal 1996 and 1997 were
concentrated in the following industries:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Direct Marketing:
Financial and banking......................................... 27% 23%
Retail........................................................ 19 18
Consumer goods................................................ 10 8
Insurance..................................................... 6 5
Agency........................................................ 5 5
High tech and other........................................... 7 3
--- ---
Total direct marketing........................................ 74% 62%
=== ===
Outsourcing (not industry specific)............................. 26% 38%
=== ===
</TABLE>
18
<PAGE>
In October 1988, the Company established the ESOP. At the time, the ESOP
acquired 43.1% of the Company's Common Stock from certain stockholders and
incurred a loan obligation of $22.5 million. As of March 2, 1998, the ESOP
owned approximately 31.7% of the Company's outstanding Common Stock. The loan
obligation is being repaid by the Company through annual tax deductible
contributions and as of December 31, 1997, the loan obligation was $2.4
million. ESOP contributions are reflected in the Company's consolidated
statements of operations as "ESOP principal payments" as an operating expense
and as an interest expense.
The Company recorded a one-time, pre-tax restructuring charge of
approximately $4.7 million ($2.9 million after-tax) in the first quarter of
fiscal 1998. This charge represents the present value of payments under
existing contracts with prior members of management.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
derived from the Company's statements of operations as a percentage of
revenues:
<TABLE>
<CAPTION>
FISCAL YEARS THREE MONTHS
ENDED SEPTEMBER ENDED
30, DECEMBER 31,
-------------------- -----------------
1995 1996 1997 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Direct marketing services............ 78.6% 73.0% 61.6% 62.6% 58.6%
Information technology outsourcing
services............................ 21.4 27.0 38.4 37.4 41.4
------ ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
------ ----- ----- ----- -----
Operating expenses:
Wages and benefits................... 34.0 31.0 32.9 33.7 34.0
Services and supplies................ 6.7 8.9 6.7 9.6 5.2
Rents, leases and maintenance........ 22.5 23.4 21.8 21.8 19.9
Depreciation and amortization........ 2.0 2.8 4.8 4.2 6.8
Other operating expenses............. 8.3 8.8 9.1 8.6 8.0
ESOP principal payments.............. 3.9 3.1 2.6 2.8 2.3
Restructuring costs.................. -- -- -- -- 17.8
------ ----- ----- ----- -----
Total operating expenses........... 77.4 78.0 77.9 80.7 94.0
------ ----- ----- ----- -----
Operating income....................... 22.6 22.0 22.1 19.3 6.0
Interest and other expenses............ (2.2) (0.7) (1.7) (1.3) (2.0)
------ ----- ----- ----- -----
Income before income taxes............. 20.4 21.3 20.4 18.0 4.0
Income taxes........................... (7.6) (8.1) (7.8) (6.8) (1.5)
------ ----- ----- ----- -----
Net income............................. 12.8% 13.2% 12.6% 11.2% 2.5%
====== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1996
Net revenues increased to $26.4 million for the three months ended December
31, 1997 from $21.2 million for the three months ended December 31, 1996, an
increase of 24%. The Company's direct marketing services revenues increased to
$15.4 million for the three months ended December 31, 1997 compared to $13.3
million for the three months ended December 31, 1996, an increase of 16%. IT
outsourcing services revenues increased to $10.9 million for the three months
ended December 31, 1997 compared to $7.9 million for the three months ended
December 31, 1996, an increase of 38%.
Wages and benefits expenses increased to $8.9 million for the three months
ended December 31, 1997 from $7.1 million for the three months ended December
31, 1996, an increase of 25%. The increased expenses reflect additional
employees hired to continue the Company's expansion of business volume and the
strengthening of its infrastructure.
19
<PAGE>
Services and supplies expenses decreased to $1.4 million for the three
months ended December 31, 1997 from $2.0 million for the three months ended
December 31, 1996, a decrease of 33%. This decrease reflects the reduction in
cost for outside consultants as full-time employees were hired. Service and
supplies generally consist of outsourced data entry services, general
supplies, contract labor and costs related to the use of outside consultants.
Rents, leases and maintenance expenses increased to $5.3 million for the
three months ended December 31, 1997 from $4.6 million for the three months
ended December 31, 1996, an increase of 13%. The increase was primarily due to
leasing computers, computer peripheral hardware, additional software and
additional facility rent to accommodate overall growth. A portion of this
increase is due to the acquisition in fiscal 1997 of Credit Strategy
Management, Inc. ("CSM"), now known as Strategic Decision Services ("SDS"),
and its existing facility leases.
Depreciation and amortization expenses increased to $1.8 million for the
three months ended December 31, 1997 from $0.9 million for the three months
ended December 31, 1996, an increase of 97%. The increase was primarily
attributable to continued investment in technology including the purchase of
the Hitachi Data System Skyline 21 mainframe computer during the third quarter
of fiscal 1997. In addition, the Company recorded additional goodwill of $3.7
million in fiscal 1997 relating to the acquisition of CSM and incentive
payments and estimated costs to be incurred in consolidating the operations of
GIS Information Systems, Inc. ("GIS"), which the Company acquired during the
fourth quarter of fiscal 1996, resulting in increased goodwill amortization.
Other operating expenses increased to $2.1 million for the three months
ended December 31, 1997 from $1.8 million for the three months ended December
31, 1996, an increase of 16%. The increase was primarily attributable to
variable costs relating to several client contracts.
Research and development costs representing primarily wages and benefits for
information technology staff and reflected as such in the Company's financial
statements increased to $1.0 million for the three months ended December 31,
1997 from $0.8 million for the three months ended December 31, 1996, an
increase of 33%. The Company's research and development expenses relate
primarily to new product development activities.
Restructuring costs of $4.7 million ($2.9 million after-tax) for the three
months ended December 31, 1997 represent a one-time charge equal to the
present value of payments under existing contracts with prior members of
management. Excluding this one-time charge, operating income and net income
would have been approximately $6.3 million and $3.6 million, respectively.
Income taxes decreased to $0.4 million for the three months ended December
31, 1997 from $1.5 million for the three months ended December 31, 1996. The
Company's effective tax rate was 38% for the three months ended December 31,
1997 and 1996.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1996
Net revenues increased to $92.5 million in fiscal 1997 from $77.2 million in
fiscal 1996, an increase of 20%. Of this net increase, $13.7 million was
attributable to new IT outsourcing services clients and $7.9 million to new
direct marketing services clients. These increases were offset by a reduction
in revenues of approximately $6.5 million from credit card issuing clients.
The Company's direct marketing services revenues increased to $57.0 million
for fiscal 1997 versus $56.4 million for fiscal 1996, an increase of 1%. The
Company's IT outsourcing services revenues increased to $35.5 million for
fiscal 1997 versus $20.8 million for fiscal 1996, an increase of 70%. Of this
increase, $9.7 million is attributable to revenues from GIS, which was
acquired effective July 1, 1996.
Wages and benefits increased to $30.4 million for fiscal 1997 from $24.0
million for fiscal 1996, an increase of 27%. The increased expenses reflect
the net addition of 140 employees as a result of the Company's continued
20
<PAGE>
expansion of business volume, the strengthening of its infrastructure, the
1996 acquisition of GIS, the 1997 acquisition of CSM, and the replacement of
temporary labor with full-time employees during 1997.
Services and supplies expenses decreased to $6.2 million for fiscal 1997
from $6.8 million for fiscal 1996, a decrease of 9%. This decrease reflects
the reduction in cost for outside consultants as full-time employees were
hired. Services and supplies generally consist of outsourced data entry
services, general supplies, contract labor and costs related to the use of
outside consultants.
Rents, leases and maintenance expenses increased to $20.1 million for fiscal
1997 from $18.1 million for fiscal 1996, an increase of 11%. The increase was
primarily due to leasing computers, computer peripheral hardware, additional
software, and additional facility rent to house print operations and new
employees. A portion of this increase was due to the acquisition of GIS and
its existing computer, computer peripheral hardware, software and facility
leases, and the acquisition of CSM and its existing facility leases.
Depreciation and amortization expenses increased to $4.4 million for fiscal
1997 from $2.2 million for fiscal 1996, an increase of 105%. The increase was
primarily attributable to continued investment in technology including the
upgrade of the Company's mainframe computer and the conversion of the lease
for the mainframe from an operating lease to a capital lease in the fourth
quarter of fiscal 1996. The Company also purchased the Hitachi Data System
Skyline 21 mainframe computer during the third quarter of fiscal 1997. In
addition, the acquisitions of GIS in the fourth quarter of fiscal 1996 and CSM
in the second quarter of fiscal 1997 created goodwill of approximately $21
million that is being amortized over 40 years.
Other operating expenses increased to $8.4 million for fiscal 1997 from $6.8
million for fiscal 1996, an increase of 24%. The increase was primarily
attributable to variable costs relating to several client contracts.
Research and development costs representing primarily wages and benefits for
information technology staff increased to $3.4 million for fiscal 1997 from
$2.5 million for fiscal 1996, an increase of 38%.
Income taxes increased to $7.2 million for fiscal 1997 from $6.3 million for
fiscal 1996. The Company's effective tax rate was 38% for fiscal 1997 and for
fiscal 1996.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1995
Net revenues increased to $77.2 million in fiscal 1996 from $61.6 million in
fiscal 1995, an increase of 25%. Of the increase, $12.6 million was
attributable to services provided to new clients and the remainder was
attributable to increased demand for services by existing clients. The
Company's direct marketing services revenues increased to $56.4 for fiscal
1996 versus $48.4 million for fiscal 1995, an increase of 16%. Of this
increase, $1.7 million is attributable to the establishment of SDS. The
Company's IT outsourcing services revenues increased to $20.8 million for
fiscal 1996 versus $13.2 million for fiscal 1995, an increase of 58%. Of this
increase, $3.4 million is attributable to revenues from GIS, which was
acquired effective July 1, 1996.
Wages and benefits increased to $24.0 million for fiscal 1996 from $21.0
million for fiscal 1995, an increase of 14%. The increased expenses reflect
the net addition of 103 employees as a result of the Company's continued
expansion of business volume and strengthening of its infrastructure. It also
reflects the addition of GIS' staff of 48 employees during the fourth quarter
of fiscal 1996.
Services and supplies expenses increased to $6.8 million for fiscal 1996
from $4.2 million for fiscal 1995, an increase of 64%. Services and supplies
generally consist of outsourced data entry services, general supplies,
contract labor and costs related to the use of outside consultants. This
increase resulted principally from outsourcing of technical support and data
entry services and the use of outside consultants to improve productivity and
to re-engineer certain work flow processes.
Rents, leases and maintenance expenses increased to $18.1 million for fiscal
1996 from $13.9 million for fiscal 1995, an increase of 30%. The increase was
primarily due to leasing computers, computer peripheral
21
<PAGE>
hardware, additional software, and additional facility rent to house print
operations and new employees. A portion of this increase was due to the
acquisition of GIS and its existing computer, computer peripheral hardware,
software and facility leases.
Depreciation and amortization expenses increased to $2.2 million for fiscal
1996 from $1.2 million for fiscal 1995, an increase of 75%. The increase was
primarily attributable to continued investment in technology including the
upgrade of the Company's mainframe computer and the conversion of the lease
for the mainframe from an operating lease to a capital lease.
Other operating expenses increased to $6.8 million for fiscal 1996 from $5.1
million for fiscal 1995, an increase of 33%. The increase was primarily
attributable to variable costs relating to several client contracts.
Research and development costs representing primarily wages and benefits for
information technology staff increased to $2.5 million for fiscal 1996 from
$1.9 million for fiscal 1995, an increase of 34%.
Income taxes increased to $6.3 million for fiscal 1996 from $4.7 million for
fiscal 1995. The Company's effective tax rate was 38% for fiscal 1996 and 37%
for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $46.7 million as of December 31, 1997
compared to $47.0 million as of September 30, 1997. Cash and marketable
securities decreased to $15.9 million at December 31, 1997 from $22.3 million
at September 30, 1997. The decrease in cash and marketable securities reflects
$2.0 million for capital expenditures and $3.5 million for general operating
expenses, including approximately $2.0 million for payments under existing
contracts with prior members of management. The Company's investment policy is
to invest in marketable, investment-grade debt instruments of the U.S.
Government or tax-free municipal bonds. These investments typically have
maturities of three years or less. The Company historically limits its
concentration of investments in individual municipalities to $500,000 or less.
These tax-free municipal bonds are backed by U.S. Treasuries or insured (as to
principal and interest) by a major municipal insurer. As of December 31, 1997,
the Company's net accounts receivable were $29.9 million, an increase of 5%
from September 30, 1997.
The Company has available borrowings of $2.0 million under the Existing
Credit Facility. At December 31, 1997, there were no outstanding borrowings
under this credit facility. Borrowings under a $12.0 million unsecured term
loan were $10.0 million at December 31, 1997, bear interest at 8.5% per annum
and mature in 2005. The Company will use a portion of the estimated net
proceeds from the Note Offering to repay this loan in full. Capital lease debt
aggregated $22.9 million at December 31, 1997. This debt primarily results
from a sale-leaseback of the Company's primary facility and related land
during fiscal 1997 and an upgrade of one of the Company's mainframe computers
in fiscal 1996. Interest on the capital lease debt approximates 8% per annum.
The Company entered into a loan at the time of the formation of the ESOP. This
loan currently has an outstanding balance of $2.4 million with a blended
interest rate of approximately 8.8% per annum. The Company currently is
negotiating with a group of banks for the New Credit Facility which is
expected to provide for borrowings of up to $60.0 million. No commitment has
been issued with respect to the New Credit Facility, and there can be no
assurances that it will be obtained.
In connection with the Company's acquisition of GIS, the Company is required
to pay $0.5 million of the purchase price on a deferred basis in the fourth
quarter of fiscal 1998. In addition, the Company paid $1.1 million to the
former GIS shareholder in fiscal 1997 based on the Company's earnings from
former GIS clients and expects to make a similar payment in fiscal 1998.
Effective April 1, 1997, the Company entered into a new license agreement
with a major software vendor for software used for IT outsourcing services
clients. This agreement permits the Company to increase its outsourcing client
base and mainframe capacity to double current levels without an increase in
the fixed license fee for seven years. This new arrangement increased rents,
leases and maintenance expenses for the three months ended December 31, 1997
compared to the three months ended December 31, 1996.
22
<PAGE>
Prior to fiscal 1997, the Company's capital expenditures ranged from
approximately $3.0 million to $7.0 million per year. During fiscal 1997, the
Company's capital expenditures of $19.3 million included expenditures for
mainframe and mid-range computers and related equipment, and equipment to
support the Company's network services agreement with American National Can.
The Company expects capital expenditures in calendar year 1998 to be
approximately $15.0 million.
Software development costs of $7.1 million were capitalized in fiscal 1997.
The Company does not expect research and development expenses to increase
materially as a percentage of revenues in the future.
The Company believes that cash flow from operations, together with the
estimated net proceeds from the sale of the Notes and funds available under
the Existing Credit Facility, will be sufficient to fund its operating
expenses, and working capital, capital expenditures and debt service
requirements through at least fiscal 1999.
QUARTERLY COMPARISONS
The following table sets forth certain quarterly financial information of
the Company for each quarter of fiscal 1996 and fiscal 1997 and for the first
quarter of fiscal 1998. The information has been derived from the quarterly
financial statements of the Company which are unaudited but which, in the
opinion of management, have been prepared on the same basis as the audited
financial statements included herein and include all adjustments (consisting
only of normal recurring items) necessary for a fair presentation of the
financial results for such periods. This information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
the other financial information appearing elsewhere in this Prospectus. The
operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1996 1996 1996(1) 1996(1) 1997(1) 1997(1) 1997(1) 1997(1)(2)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $16,044 $19,133 $19,997 $22,050 $21,229 $21,693 $23,625 $25,910 $26,351
Operating income....... 3,070 4,154 4,855 4,947 4,090 4,347 5,348 6,677 1,592
Net income............. 1,661 2,369 3,067 3,126 2,367 2,419 3,087 3,842 656
PERCENTAGE OF NET
REVENUES:
Operating income....... 19.1% 21.7% 24.3% 22.4% 19.3% 20.0% 22.6% 25.8% 6.0%
Net income............. 10.4 12.4 15.3 14.2 11.1 11.2 13.1 14.8 2.5
</TABLE>
- ---------------------
(1) Includes the results of operations of GIS, effective July 1, 1996.
(2) Includes a one-time, pre-tax restructuring charge of $4.7 million ($2.9
million after-tax).
A significant portion of the Company's quarterly net revenues is derived
from new projects for clients, the timing of which are outside the Company's
control. Operating income and net income as a percent of net revenues have
fluctuated from quarter to quarter principally as a result of the hiring of
new employees and the expansion of computing capacity in response to increased
demand. This quarterly fluctuation is primarily due to the fixed nature of
these expenses and the time difference between such expenses and the
generation of revenues.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits, rather than four, to define the applicable year. Accordingly, any
of the Company's computer programs that have date sensitive software may cause
system failures or miscalculations if data entry of "00" is recognized as 1900
rather than 2000.
Based on a recent assessment, the Company determined that it is required to
modify portions of its software so that its computer systems will properly
utilize dates beyond December 31, 1999. The Company believes that
23
<PAGE>
with upgrades or modifications to existing software and conversion to new
software, the impact of the Year 2000 Issue can be mitigated. However, if such
upgrades, modifications and conversions are not made, or are not made in a
timely manner, the Year 2000 Issue could have a material impact on the
Company's operations.
The Company will utilize both internal and external resources to reprogram,
or replace, and test software for Year 2000 compliance. The Company has a
full-time manager dedicated to addressing Year 2000 compliance for the
Company, clients and vendors. The Company expects to complete all material
aspects of the Year 2000 project not later than December 31, 1998. The total
Year 2000 project cost is estimated to be $1.0 million to $3.0 million.
Amounts incurred are expected to be expensed as incurred, unless new software
is purchased which will be capitalized. The Company has not incurred
significant costs prior to December 31, 1997 other than internal costs to
evaluate the extent of Year 2000 compliance and to develop a remediation plan.
The costs of the Year 2000 project and the schedule for completion of Year
2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
24
<PAGE>
BUSINESS
May & Speh provides computer-based information management services with a
focus on direct marketing and IT outsourcing services. The Company's direct
marketing services help companies execute more profitable direct marketing and
customer management programs. Services include strategic analysis and strategy
management; systems consulting; custom data warehouse and datamart design,
build, implementation and management; statistical (predictive) modeling and
analysis; and list processing. May & Speh's IT outsourcing services support
multi-platform processing and network management for clients seeking to
outsource their IT operations. The Company's direct marketing and IT
outsourcing services are synergistic and allow the Company to leverage its
investment in its technical personnel and state-of-the-art data processing
facilities, as well as its core competencies in customized software systems
development, large database management, high speed data processing and data
center management.
MARKET OVERVIEW
DIRECT MARKETING SERVICES
Direct marketing enables the delivery of a customized message to a defined
audience and the measurement of the response to that message. The marketing
program can then be evaluated, refined and continuously improved. Effective
direct marketing programs require a detailed understanding of customers' and
prospective customers' purchasing patterns to promote more relevant and timely
offers. The ability to measure the response to a specific marketing program
allows the financial return on marketing expenditures to be analyzed. The use
of direct marketing by businesses has increased significantly in recent years,
as has spending in support of direct marketing activities. Industry sources
estimate that United States expenditures for information and database services
in connection with direct marketing activities were approximately $17.0
billion in 1996, and that such expenditures are growing at an annual rate of
15% to 20%.
Demographic shifts and lifestyle changes, combined with a proliferation of
new products and services and the evolution of new marketing mediums
(including cable, telemarketing, direct mail, direct response, on-line
services and the Internet) have made marketing campaigns increasingly complex.
At the same time, marketing costs have been subjected to growing scrutiny by
marketing managers. Many marketers have responded to these pressures by
reallocating their expenditures from traditional mass marketing to direct
marketing.
Direct marketing programs depend upon the ability of a marketer to access
information about their customers and prospects. Historically, valuable sales
and customer data within large corporations was often inaccessible as it
resided in various incompatible systems. Through advances in computer and
software technology, it is now possible to compile very large databases using
disparate customer record files combined with data collected from compiled
lists owned by third parties. With the development of relational and
multidimensional databases, marketers can add new categories of data without
having to redesign or rebuild their databases, making it possible to use this
data in order to develop customer profiles based on many different attributes.
Finally, the development of decision support software has allowed utilization
of database marketing at the decision maker level in a client/server
environment.
Direct marketing service providers require the technical resources to manage
exceptionally large relational and multidimensional databases and the software
capabilities to convert vast amounts of data into usable information. These
functions must be performed within tight time constraints making processing
speed critical. Many companies choose not to invest in the technological
resources necessary to build these capabilities and as a result, choose to
outsource database management and list processing services to a proven vendor
as a more effective means of accessing the latest technological resources and
expertise.
IT OUTSOURCING
IT outsourcing includes the provision and management of all or a portion of
a client's data processing and information systems functions. In essence, the
IT outsourcing services vendor assumes the client's data center
25
<PAGE>
functions and the client continues to retain direct access to their
information, although the hardware and software are no longer located on the
client's premises. Increasingly, companies are outsourcing their information
processing applications as part of an overall effort to focus internal
resources on their core competencies while improving operating efficiencies
and reducing costs. According to G2 Research, Inc., total expenditures for IT
outsourcing services in the United States were approximately $32.7 billion in
1996, and such expenditures are projected to grow at an average annual rate of
approximately 25.2% through 2001.
Many companies' IT departments are burdened with increasing demands for
instant access and communication of large amounts of data to multiple
locations in real time, requiring high speed processing and telecommunications
capabilities. In addition, because computing technology is evolving rapidly,
companies are increasingly faced with the decision to either continually
invest a significant amount of capital in new technology or to outsource. The
increasing demands on IT departments coupled with the significant ongoing
investments required to remain technologically current are key factors in the
growing trend towards outsourcing. The advantages to organizations of
outsourcing their data processing activities include improved flexibility,
reduced capital investments, higher performance and service levels, improved
speed of delivery, capacity on demand and cost control.
The Company believes that the market in which it competes is best defined by
the scale of its clients' data processing requirements, not by such clients'
revenues. Typically, the scale of these requirements is large but not of a
size typically sought by the larger outsourcing service providers. The Company
believes that its data center processing capabilities, while not of a similar
scale, are similar to or better than the capabilities of its large competitors
in terms of throughput, turnaround capabilities and state-of-the-art equipment
utilized.
MAY & SPEH'S COMPETITIVE STRENGTHS
The Company believes it has competitive strengths which have contributed to
its growth and profitability. These include:
Integrated Database Management Solutions. May & Speh offers integrated
database management solutions focused on targeted industries. These integrated
solutions include marketing strategy execution; prospect data and data
enhancement services; database design and maintenance; on-line access and
decision support tools; data modeling, profiling and analysis; and ongoing
strategic evaluation and management. The Company believes that this approach
is a competitive strength because it offers clients strategic direct marketing
tools rather than generic data processing services, resulting in the Company's
integrated database management solutions becoming integral to clients
executing their marketing strategies.
Focus on Targeted Industries. May & Speh's direct marketing services focus
on clients in targeted industries including financial services, retail,
consumer goods, insurance and high tech. The Company believes that as a result
of its focus and experience in specific industries, its sales and technical
personnel better understand the data processing needs, competitive dynamics
and regulatory issues of its clients.
Investment and Scale of its Client Service and Technical Infrastructure. May
& Speh's direct marketing and IT outsourcing services continue to benefit from
its investments in technical personnel and technology. The Company has a
current staff of over 500 skilled IT and direct marketing services personnel,
and maintains state-of-the-art data processing facilities. As a result of
these investments, the Company has developed its client service and technical
infrastructure to a significant scale, which enables the Company to develop
and support mainframe, mid-range and network applications and platforms,
accommodate growth and provide efficient and flexible services.
Long-Term Client Relationships with Recurring Revenues. May & Speh's long-
term client relationships provide the Company with recurring revenues. Over
50% of the Company's fiscal 1997 revenues were derived from clients who have
used the Company's services for over three years. The Company's direct
marketing revenues are typically recurring because its direct marketing
services become an integral part of the clients' marketing programs and a
portion of these revenues are derived through multi-year contracts. The
Company's IT outsourcing revenues are typically recurring and generated
through multi-year contracts.
26
<PAGE>
Significant Operating Flexibility. May & Speh's financial position provides
the Company with significant operating flexibility. The Company has generated
operating margins in excess of 20% in each of the last four fiscal years.
These operating margins have enabled the Company to reinvest the cash
generated from operations for strategic expenditures, including technology,
skilled technical personnel and capital investments relating to new clients.
GROWTH STRATEGY
May & Speh's strategy is to continue to grow its business by leveraging its
competitive strengths. The principal components of May & Speh's growth
strategy are:
Offer Integrated Database Management Solutions. May & Speh continues to
develop integrated database management solutions focused on targeted
industries which are expected to continue to attract new clients with
significant direct marketing budgets and increase revenues from existing
clients. May & Speh's approach offers integrated solutions rather than
general, disparate services and systems.
Increase Penetration of Existing Targeted Industries and Target New
Industries. Currently, May & Speh's direct marketing services target the
financial services, retail, consumer goods, insurance and high tech
industries. The Company believes these industries offer significant
opportunity for direct marketing services, and continues to focus on
attracting additional clients within these targeted industries. In addition,
the Company believes that direct marketing is increasingly prevalent in the
utilities, telecommunications, automotive and healthcare industries, and that
such industries provide attractive near term opportunities for potential
penetration.
Extend IT Outsourcing Services. May & Speh continues to extend its IT
outsourcing service offerings. In order to build upon and complement its
traditional mainframe outsourcing services, the Company offers client/server
outsourcing and network management services. The Company's strengthened IT
outsourcing capabilities have resulted in the addition of new clients and
contracts such as May & Speh's $41 million, five-year contract with American
National Can. Under this agreement, American National Can is outsourcing its
entire IT infrastructure to the Company including client/server, mainframe and
network management services. The Company believes its broad range of IT
outsourcing services and expertise will continue to attract new clients and
expand relationships with current clients.
Expand Sales Efforts. The Company plans to increase the number of new
clients by expanding its sales efforts in both direct marketing and IT
outsourcing. The direct marketing sales force is focused on increasing
penetration within current targeted industries as well as penetrating new
industries. In IT outsourcing services, the Company intends to continue
focusing on United States-based companies with mid-level processing
requirements. In addition, the Company plans to expand its sales presence in
certain geographic areas for both direct marketing and IT outsourcing
services.
Pursue Strategic Acquisitions and Alliances. May & Speh will continue to
explore strategic acquisitions and alliances for additional growth
opportunities. The Company will seek to acquire or form alliances with
companies that have services, technologies, industry specialties or personnel
that would complement or extend those of the Company and facilitate the
addition of new clients. For example, the Company recently agreed to form
Energy Market Connect, LLC, a joint venture with Metzler & Associates, a
leading provider of management consulting services to the energy industry. The
Company believes this joint venture will provide a new sales channel and
enable the Company to incorporate utilities industry expertise in its
integrated database management solutions for the utilities industry. In May
1997, the Company also formed a strategic alliance with Trans Union
Corporation, the nation's leading credit reporting company. The alliance will
combine May & Speh's expertise in creating custom and generic models with
Trans Union Corporation's data management capabilities.
27
<PAGE>
SERVICES AND PRODUCTS
DIRECT MARKETING SERVICES
May & Speh provides comprehensive direct marketing services, including
database creation, data warehousing, data enhancement, predictive behavioral
modeling and list processing. Rather than selling standard products and
services to its clients, the Company's approach has been to design and
implement creative custom database solutions around the specific needs of its
clients. The principal advantages of customized services include (i) the
ability of the database to expand and adapt to the client's changing business
needs, (ii) the ability to have these services developed on a platform of the
client's choosing, and (iii) the integration of database services with the
list processing services necessary to keep the database current.
Database Management Services. May & Speh's broad range of database
management services begins with the Company's proven approach to database
development which includes planning and analytical processes to determine the
client's needs. Typically, direct marketing databases originate with the
client's own files, both current and historical, which generally include name,
address and gender, as well as frequency and value of products purchased.
May & Speh analyzes all of the client's disparate operational files and
determines what data will add value and can be made actionable. Utilizing both
commercial and Company-developed software tools, the Company consolidates all
of the disparate information and relationships across multiple files and
converts the client's raw information into a clean, consolidated format so
that relationships can be understood at both the customer and household
levels.
Once the client's customer data is consolidated and the database created,
May & Speh enhances the data by utilizing a wide selection of demographic,
geographic, census (age, approximate income level, education level and
household composition) and lifestyle information for over 100 million
individuals and households. May & Speh licenses this information from leading
data compilers. The combination of each client's proprietary customer
information with these external data files provides a complete profile of a
client's customers, enabling the client, through the use of May & Speh's
behavior modeling and analysis services, to act on the data. Through the
development of a scoring model, the client can segment its database and
determine its best customers and prospects in each marketplace. The entire
process results in a marketing program that can be targeted to distinct
audiences with a high propensity to buy the client's products. These databases
typically reside at May & Speh's data center. Because of the dynamic nature
and complexity of these databases, May & Speh is routinely asked by its
clients as part of their ongoing direct marketing efforts to update the
databases with the results of recent marketing programs and to periodically
perform the list processing service described below.
List Processing Services. List processing includes the preparation and
generation of comprehensive name and address lists which are used in direct
marketing promotions. May & Speh's state-of-the-art data processing facilities
and large volume processing capabilities allow the Company to meet the direct
marketing needs of its clients, processing over seven billion records through
its advanced list processing software services in fiscal 1997. May & Speh
customizes a list processing solution by utilizing a variety of commercial and
Company-developed software products, such as Address Conversion and Reformat,
Address Standardization and Enhanced Merge/Purge, as well as products which
are licensed through the United States Postal Service such as National Change
of Address, Delivery Sequence File and Locatable Address Conversion System.
Other licensed products are databases used for suppressions such as the Direct
Marketing Association's Mail Preference File, the American Correctional
Association Prison Suppress File and other files.
May & Speh's list processing services seek to reduce its clients' mailing
costs. For instance, because approximately 15% to 20% of the population moves
each year, mailings may be misaddressed or not delivered at all. Through the
utilization of May & Speh's Merge/Purge, Address Standardization software,
National Change of Address database, Delivery Sequence File and Locatable
Address Conversion Database, the Company can eliminate most duplicate names as
well as reduce the amount of undeliverable items by an average of 6%.
Quiddity(TM). In fiscal 1997, development activities were substantially
completed for Quiddity and this new product was introduced to clients and
prospects. Quiddity is an on-line relational and open database management
28
<PAGE>
system designed specifically for marketing professionals. The product's user-
friendly format allows non-technical users to easily access and directly work
with marketing databases to create more targeted and profitable one-to-one
marketing programs. Quiddity integrates custom-developed and commercial
software that complement the Company's suite of direct marketing services. Key
features include open architecture, scaleable platforms and an object-oriented
application that is work-flow-oriented and intuitive.
IT OUTSOURCING
May & Speh's primary IT outsourcing service is to manage all or a portion of
a client's information processing needs on a cost effective basis from the
Company's data center. After migrating their workload to the Company's data
center, clients continue to retain direct access to their information from
their remote sites. The Company also provides, to a much lesser extent,
applications outsourcing services which include the replacement of a client's
in-house technical development staff.
The primary outsourcing services provided include migration (takeover and
turnover) support, on-line and batch processing capacity, technical support,
help desk access and support, back-up and recovery, disaster recovery
services, operations support, account management, media (tapes, documents,
high speed Direct Access Storage Devices subsystems ("DASD"), etc.) management
and handling, production control, telecommunications and network management
support. These services and support functions are available 24 hours a day,
seven days a week.
Historically, the Company's success in IT outsourcing has resulted in part
from its ability to provide its services with minimal disruption to the
client. The Company has established rigorous formal processes to ensure a
successful ongoing processing of a client's workload at the Company's data
centers.
MARKETING AND SALES
The Company markets its direct marketing and IT outsourcing services through
separate direct sales forces. Maintaining a separate sales force for each
service offering allows the Company's sales representatives to concentrate on
particular services, technology and customer demands, thereby staying abreast
of developments in these areas. Sales representatives are encouraged to
identify cross-selling opportunities. The Company's sales force compensation
system provides incentives to salespeople to focus on both attracting larger
clients and selling the Company's most profitable services.
Pricing for direct marketing services is dependent upon the complexity of
service required. In general, May & Speh establishes a price list for clients
detailing the prices for a broad range of service options. These prices are
based on the nature and complexity of the services, volume of records to be
processed and the level of customization required. Additionally, if the level
of up-front customization is high, the Company charges development fees based
on the level of customization required.
Pricing for IT outsourcing services is dependent upon the anticipated range
of resource consumption. Typically, clients are charged a flat or stepped rate
for IT outsourcing services provided under multi-year contracts. If the
processing time, data storage, retrieval requirements and output volume exceed
the budgeted amounts, the client is charged additional amounts. Minimum
charges and early termination charges are typically included in contracts.
CLIENTS
The Company has over 180 direct marketing clients, including Fortune 500
companies and other large and medium-sized companies that have significant
direct marketing requirements. These clients are primarily in the financial
services, retail, consumer goods, insurance and high tech industries. The 10
largest direct marketing clients represented approximately 62.8% of the
Company's direct marketing net revenues in fiscal 1997.
29
<PAGE>
The Company has approximately 150 IT outsourcing clients. These clients are
located primarily in the mid-western United States. The 10 largest outsourcing
clients represented approximately 45.5% of the Company's IT outsourcing
services net revenues in fiscal 1997.
The Company seeks to maintain long-term relationships with its clients. In
fiscal 1997, over 50% of net revenues were derived from clients served by the
Company for more than three years including Sears, the Company's first client
in 1947. In fiscal 1997, Sears accounted for approximately 18.9% of the
Company's net revenues. Net revenues from the Company's 10 largest clients in
fiscal 1997 increased 31.8% from fiscal 1996. IT outsourcing clients typically
operate under contracts, usually three years in length. Direct marketing
clients have traditionally maintained multi-year relationships with May &
Speh, although many of the Company's direct marketing clients are not under
long-term contracts.
TECHNOLOGICAL RESOURCES AND FACILITIES
The Company maintains state-of-the-art data facilities with approximately
6,000 MIPS (million instructions per second) of mainframe and UNIX processing
power. The Company's processors include a Hitachi Skyline Series mainframe
computer, the world's fastest IBM-compatible processor, a Hitachi GX/8824
series mainframe computer capable of executing 390 MIPS, and four Hitachi
Pilot mainframe computers, which are the fastest CMOS, IBM-compatible
mainframe computers. The Company utilizes other state-of-the-art data center
components, such as robotic tape sub-systems, high-speed laser, LED and impact
printers and high speed DASD. The Company supports multiple platforms
including mainframe, UNIX and other mid-range computer systems.
The Company maintains a disaster recovery plan with a commercial disaster
recovery service to provide alternative data processing sites in the event the
Company experiences a natural disaster or other interruption at its data
center. The Company conducts recovery exercises several times per year and
encourages its clients to join in this process.
The Company's headquarters building was custom-designed to be a secure data
center environment. Building characteristics include 24-hour security
protection, television surveillance, fire and motion alarms and a fire
protection system backed up by a sprinkler system. The Company added a
generator system which allows it to be self-sufficient if there is a power
outage by operating continually until power is restored by the electric
utility provider.
COMPETITION
The markets in which the Company operates are highly competitive, with no
single dominant competitor. Although numerous smaller companies compete in the
direct marketing and IT outsourcing markets, the Company regularly competes
with companies that have more extensive financial, marketing and other
resources than the Company. Many of the Company's competitors have
substantially greater assets and thus, may have a greater ability to obtain
client contracts where sizable asset purchases or investments are required.
In the direct marketing services market, competition is based on the quality
and reliability of products and services, technological expertise, historical
experience, ability to develop customized solutions for clients, processing
capabilities and price. Management believes that the Company competes
favorably in this market based upon these competitive factors. The Company's
principal competitors include Acxiom Corporation, Database America Companies,
a subsidiary of American Business Information, Inc., Harte-Hanks
Communication, Inc. and Metromail Corporation.
In the IT outsourcing market, competition is based on the quality and
reliability of services, technical expertise, processing capabilities,
processing environment and price. Management believes that the Company
competes favorably in this market based upon these competitive factors.
Although there are many competitors within the IT outsourcing services
marketplace, the Company's principal competitors are Affiliated Computer
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<PAGE>
Services, Inc., Lockheed Martin Corporation, PKS Information Services, Inc.
and other regional outsourcers. In addition, but on a less frequent basis, the
Company competes with International Business Machine Corporation's Global
Services division, Electronic Data Systems Corporation, Computer Sciences
Corporation, Perot Systems Corporation and MCI/Systemhouse, Inc., a subsidiary
of MCI Communications Corp.
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon its trade secret protection program and
nondisclosure safeguards to protect its proprietary technologies. The Company
enters into license or other agreements with its clients in the ordinary
course of business which contain terms and conditions prohibiting unauthorized
reproduction of the Company's products. In addition, the Company generally
enters into confidentiality agreements with its employees, clients, potential
clients and suppliers with access to sensitive information and limits access
to and distribution of its software documentation and other proprietary
information. While there can be no assurance that the steps taken by the
Company will be adequate to deter misappropriation of its proprietary rights,
the Company believes that due to the rapid pace of technological change in the
Company's business, legal protections afforded through patent protection for
its products are less significant than the knowledge, ability and experience
of its employees, the frequency of product enhancements and the timeliness and
quality of support.
EMPLOYEES
As of December 31, 1997, the Company employed 579 persons and utilized 52
full-time equivalent contract personnel. None of the Company's employees are
represented by a labor union, and the Company believes that its relations with
employees are good.
PROPERTIES
The Company's executive offices and principal operations are located at 1501
Opus Place, Downers Grove, Illinois, in a 105,352 square foot building leased
from a third party for a term of 20 years. The facility is comprised of 67,352
square feet of office space, 25,000 square feet of raised floor facilities
which house the Company's data center and 13,000 square feet of tape library.
The Company currently occupies an additional 20,000 square feet in connection
with the Company's network services agreement with American National Can, and
leases 127,448 square feet of warehouse and office space in three separate
locations in the metropolitan Chicago area with lease terms expiring on
various dates through August 2002.
The Company has executed a 20 year lease for a 200,000 square foot office
building under construction on property adjacent to the Company's executive
offices. The lease commences upon completion of the building which is expected
in September 1998.
The Company believes that its existing facilities are adequate for its
present needs and that the additional facilities proposed for construction
will be sufficient to sustain the growth of the Company for the foreseeable
future. Notwithstanding, the Company believes that additional space will be
available for lease on commercially reasonable terms on an as needed basis.
CONSUMER PRIVACY AND LEGISLATIVE ISSUES
The direct marketing industry could be adversely affected by growing
consumer awareness of privacy issues. The Company has adopted several policies
to address these privacy concerns. The Company requires each employee to sign
an agreement not to disclose confidential information. The Company's data
center has a sophisticated data security system, which includes 24-hour
security protection, television surveillance and limited access to
confidential information. Periodically, the Company undergoes a detailed audit
of its security system. In addition, the Company subscribes to a Direct
Marketing Association ("DMA") service which allows consumers to request not to
receive unsolicited direct mail offers. At a client's request, the Company
will purge the client lists of all names appearing on the DMA list.
Furthermore, under FCRA, the Company's clients
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<PAGE>
are required to provide the Company with the names of consumers wishing to be
removed from certain lists. Management believes that the policies and
procedures that have been implemented, together with the Company's continuing
efforts to remain informed and responsive to privacy concerns, will prevent
the Company from being adversely affected by increased public concern over
privacy issues.
In 1996, FCRA was amended to provide consumers with easier access to their
credit reports and to facilitate the correction of errors in such reports. New
regulations interpreting the amendments were issued by the FTC in 1997. The
legislation also addresses the issue of "prescreening," a procedure utilized
by many bankcard issuers and insurance companies in their direct marketing
programs. This legislation regulates the use of credit reports in the
preparation and generation of lists used by companies in offering credit. This
law also provides for significant fines for misuse of credit reports. Although
the Company believes its list processing activities for credit grantors are in
compliance with the recent amendments to FCRA, due to its recent adoption,
there is uncertainty as to its interpretation and application. Therefore,
there can be no assurances that significant fines will not be levied against
the Company or that this portion of its list processing services will not be
adversely affected. While the Company provides list processing activities for
credit grantors as part of its direct marketing services, such activities
accounted for less than $5.0 million in net revenues in fiscal 1997.
32
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES HELD
<S> <C> <C>
Peter I. Mason.......... 45 Chairman, President and Chief Executive Officer
Terrance C. Cieslak..... 51 Executive Vice President and Chief Technology Officer
Robert C. Early......... 45 Executive Vice President, Corporate Development, and a Director
Michael J. Loeffler..... 40 Executive Vice President, Direct Marketing Services
Eric M. Loughmiller..... 38 Executive Vice President, Chief Financial Officer and Secretary
John G. Jazwiec......... 38 Senior Vice President and Chief Information Officer
Willard E. Engel, Jr.... 51 Vice President, Chief Accounting Officer and Treasurer
Albert J. Speh, Jr...... 78 Chairman Emeritus
Deborah A. Bricker...... 45 Director
Casey Cowell............ 45 Director
Lawrence J. Speh........ 48 Director
Paul G. Yovovich........ 44 Director
Jonathan Zakin.......... 48 Director
</TABLE>
Peter I. Mason has been a director of the Company since November 1994, and
has served as President and Chief Operating Officer of the Company since May
1997, as President and Chief Executive Officer since October 1997 and as
Chairman since November 1997. Prior to joining May & Speh, Mr. Mason was a
partner in the Chicago law firm of Freeborn & Peters, which he co-founded in
1983, and served as chairman of its operating committee from 1986 to 1996. He
served as a director of U.S. Robotics Corporation from 1983 to 1997, and
currently serves as a director of Mastering, Inc. and several privately held
businesses.
Terrance C. Cieslak has served as Executive Vice President and Chief
Technology Officer since October 1995 and is responsible for systems
management and integration for the Company. Since joining the Company in 1987,
Mr. Cieslak has served in a variety of senior management positions including
Technical Support Manager, Data Center Manager and Vice President of Services
and Solutions. Prior to joining the Company, Mr. Cieslak worked with
Electronic Data Systems Corporation and Official Airline Guide.
Robert C. Early has served as Executive Vice President, Corporate
Development since January 1997. Prior to that, Mr. Early served as Executive
Vice President, Chief Financial Officer and Treasurer of the Company from
October 1995 through January 1997 and Director of Corporate Growth for the
Company from 1993 through October 1995. Mr. Early also has served as a
director of the Company since November 1994. Prior to joining the Company, Mr.
Early worked as an independent contractor with business advisory firms,
including Ridge Capital Corp. and Ridge Advisors, Inc., which provide merger
and acquisitions, capital financing and strategic planning advisory services.
From 1990 through 1992 Mr. Early was also Vice Chairman of Consolidated
Convenience Systems, Inc., a holding company. Prior to 1990, Mr. Early spent
approximately 12 years at Grant Thornton LLP, and was the partner responsible
for the Chicago office Capital Markets Group from 1985 through 1990.
Michael J. Loeffler has served as Executive Vice President, Direct Marketing
Services since April 1996 and is responsible for the direct marketing services
group of the Company. Mr. Loeffler joined May & Speh in 1988 as an Account
Executive and has also served as Vice President of Sales and Sales Manager.
Prior to joining May & Speh, Mr. Loeffler had seven years of experience in the
direct marketing industry with UARCO, Inc. and Colorforms Division of Wallace
Press.
33
<PAGE>
Eric M. Loughmiller has served as Executive Vice President and Chief
Financial Officer of the Company since January 1997. Prior to joining May &
Speh, Mr. Loughmiller was an audit partner at Price Waterhouse LLP where he
had spent over 15 years in that firm's Accounting and Business Advisory
Services practice. Mr. Loughmiller is a Certified Public Accountant.
John G. Jazwiec has served as Senior Vice President and Chief Information
Officer of the Company since May 1997. He joined the Company with over 15
years experience in data processing services with a background in both
mainframe and client server platforms. From 1994 to 1997, Mr. Jazwiec served
as Vice President and CIO of Fiserv, a banking outsourcing firm. Prior to that
time, he served as Vice President and CIO of Siebe Environmentals, a
subsidiary of Siebe PLC.
Willard J. Engel, Jr. has served as Vice President and Chief Accounting
Officer of the Company since 1986 and in other financial and accounting
capacities since 1972. Effective January 1997, Mr. Engel became Treasurer and
Chief Accounting Officer.
Albert J. Speh, Jr. co-founded the Company and served as Chairman of the
Board of Directors from 1992 to November 1997. Prior to founding the Company,
Mr. Speh served in the Armed Forces during World War II. He was later employed
by Sears, General Finance, Inc. and Encyclopedia Britannica in the field of
data processing. Mr. Speh currently serves as a consultant to the Company and
on the board of Fenwick High School.
Deborah A. Bricker is the President of Bricker & Associates Inc., a
productivity consulting firm based in Chicago, Illinois which she founded in
1979. Ms. Bricker has served as a director of the Company since March 1996.
Casey Cowell has served as Vice Chairman of 3Com Corporation since June
1997. From January 1996 to May 1997, Mr. Cowell was Chairman and Chief
Executive Officer of U.S. Robotics Corporation. Prior to January 1996, he
served for approximately 12 years as Chairman, President and Chief Executive
Officer of U.S. Robotics Corporation. Mr. Cowell has served as a director of
the Company since May 1997. Mr. Cowell currently serves as a director of 3Com
Corporation, Mastering, Inc. and System Software Associates.
Lawrence J. Speh served as Chief Executive Officer of the Company from
January 1993 to September 1997, and as President from January 1993 to May
1997. Mr. Speh currently serves as a consultant to the Company. From 1977
until June 1988, Mr. Speh held various senior management positions with the
Company including President of Direct Marketing Services, Marketing Director
and Treasurer.
Paul G. Yovovich served, from 1993 to 1996, as President of Advance Ross
Corp., a public company until its 1996 merger with CUC International. He
served in various executive capacities at Centel Corporation from 1982 to
1992, including as President of Central Telephone Co., a subsidiary of Centel,
from 1990 to 1992. Mr. Yovovich has served as a director of the Company since
May 1997. Mr. Yovovich is a director of 3Com Corporation, APAC TeleServices,
Inc., Comarco, Inc. and Mastering, Inc.
Jonathan Zakin currently serves as President of Leeward Management/Seaview
Holdings. From 1987 to 1997, Mr. Zakin served in various senior management
positions and was a director of U.S. Robotics Corporation. Mr. Zakin has
served as a director of the Company since November 1997.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 19, 1998, the number of shares
of Common Stock beneficially owned by all persons known by the Company to
beneficially own more than five percent of the outstanding Common Stock, each
director of the Company, certain executive officers and all directors and
executive officers as a group. Unless otherwise indicated, the persons named
below have sole voting and investment power with respect to all shares shown
as beneficially owned by them.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
<S> <C> <C>
May & Speh, Inc. Employee Stock Ownership
Plan(1)................................... 8,086,849 31.6%
Lawrence J. Speh(2)........................ 3,867,216 15.0
William Blair & Company, L.L.C.(3)......... 1,980,300 7.7
Albert J. Speh, Jr.(4)..................... 1,672,503 6.5
Robert C. Early(5)......................... 185,130 *
Michael J. Loeffler(6)..................... 177,158 *
Terrance C. Cieslak(7)..................... 170,666 *
Casey Cowell............................... 100,004 *
Peter I. Mason(8).......................... 91,200 *
Jonathan Zakin(9).......................... 68,003 *
Deborah A. Bricker(10)..................... 14,400 *
Paul G. Yovovich........................... 5,000 *
All directors and executive officers as a
group (13 persons)(2)(4)(11).............. 6,567,076 25.2
</TABLE>
- ---------------------
*Less than one percent.
(1) The address of the May & Speh, Inc. Employee Stock Ownership Plan (the
"ESOP") is c/o Cole Taylor Bank, 850 W. Jackson Blvd., Chicago, Illinois
60607. Includes 6,899,180 shares that have been allocated or are
available for allocation to the accounts of certain employees or former
employees of the Company. ESOP participants have shared voting and
investment power with respect to the shares allocated to their individual
accounts. The ESOP has agreed to sell 1,503,790 shares in the Common
Stock Offering.
(2) Includes 176,000 shares issued upon the exercise of stock options
concurrent with the Common Stock Offering, and 3,758 shares allocated to
Mr. Speh's ESOP account. Excludes 40,612 shares held by Mr. Speh's wife,
as to which he disclaims beneficial ownership. Mr. Speh's address is c/o
May & Speh, Inc., 1501 Opus Place, Downers Grove, Illinois 60515. Mr.
Speh has agreed to sell 1,804,524 shares in the Common Stock Offering, of
which 1,269,017 shares are held in trust for the benefit of Lawrence J.
Speh, Kathleen M. Malinger (Albert J. Speh, Jr.'s daughter, Lawrence J.
Speh's sister and a former executive officer of the Company), Albert J.
Speh III (Albert J. Speh, Jr.'s son and Lawrence J. Speh's brother) and
certain of Albert J. Speh, Jr.'s grandchildren. Lawrence J. Speh serves
as sole trustee of each of these trusts and has sole voting and
dispositive power with respect to such shares.
(3) Based on a Schedule 13G dated February 14, 1998 filed by William Blair &
Company, L.L.C. ("WBC") in which WBC reported sole voting power with
respect to 821,500 shares and sole dispositive power with respect to
1,980,300 shares. The address of WBC is 222 West Adams Street, Chicago,
Illinois 60606.
(4) Includes 3,758 shares allocated to Mr. Speh's ESOP account. Mr. Speh's
address is c/o May & Speh, Inc., 1501 Opus Place, Downers Grove, Illinois
60515. Mr. Speh has agreed to sell 607,819 shares in the Common Stock
Offering, of which 6,725 shares are held in trust for the benefit of
certain of Mr. Albert J. Speh, Jr.'s grandchildren and 200,000 shares are
held by a charitable foundation. Albert J. Speh, Jr. serves as the sole
trustee of each of the trusts and the foundation and has sole voting and
dispositive power with respect to such shares.
(5) Includes 120,803 shares issuable pursuant to currently exercisable
options, and 43,015 shares allocated to Mr. Early's ESOP account.
(6) Includes 91,100 shares issuable pursuant to options that are currently
exercisable or that will become exercisable within 60 days, and 86,058
shares allocated to Mr. Loeffler's ESOP account.
(7) Includes 75,100 shares issuable pursuant to options that are currently
exercisable or that will become exercisable within 60 days, and 95,566
shares allocated to Mr. Cieslak's ESOP account.
(8) Includes 14,400 shares issuable pursuant to options that are currently
exercisable or will become exercisable within 60 days.
(9) Represents shares held by a family foundation with respect to which Mr.
Zakin has shared voting and investment power.
(10) Represents shares issuable pursuant to options that are currently
exercisable or will become exercisable within 60 days.
(11) Includes 315,803 shares issuable pursuant to options that are currently
exercisable or that will become exercisable within 60 days, and 321,575
shares allocated to the ESOP accounts of the executive officers.
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<PAGE>
DESCRIPTION OF NOTES
Set forth below is a summary of certain provisions of the Notes. The Notes
will be issued pursuant to an indenture (the "Indenture") to be dated as of
March 25, 1998, by and between the Company and Harris Trust and Savings Bank
as trustee (the "Trustee"). The following summary of the Notes and the
Indenture does not purport to be complete and is subject to, and is qualified
in its entirety by, reference to all of the provisions of the Indenture,
including the definitions therein of certain terms. Capitalized terms used
herein without definition have the meanings ascribed to them in the Indenture,
as appropriate. As used in this section, the "Company" refers to May & Speh,
Inc. exclusive of its Subsidiaries. Wherever particular provisions or defined
terms of the Indenture (or the form of Note which is part thereof) are
referred to in this summary, such provisions or defined terms are incorporated
by reference as a part of the statements made and such statements are
qualified in their entirety by such reference. Certain definitions of terms
used in the following summary are set forth under "--Certain Definitions"
below.
GENERAL
The Notes are general, unsecured obligations of the Company, limited in
aggregate principal amount to $100,000,000 ($115,000,000 if the over-allotment
option is exercised in full). The Notes are subordinated in right of payment
to all Senior Indebtedness, as described under "--Subordination" below. The
Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and integral multiples thereof.
The Notes will mature on April 1, 2003. The Notes bear interest at the rate
per annum stated on the cover page of this Prospectus from the date of
issuance, or from the most recent Interest Payment Date to which interest has
been paid or provided for, payable semi-annually in cash on April 1 and
October 1 of each year, commencing October 1, 1998, to the persons in whose
names such Notes are registered at the close of business on the March 15 and
September 15 immediately preceding such Interest Payment Date. Principal of,
premium, if any, and interest on the Notes will be payable, the Notes will be
convertible and the Notes may be presented for registration of transfer or
exchange, at the office or agency of the Company maintained for such purpose,
which office or agency shall be maintained in the Borough of Manhattan, The
City of New York. Interest will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
At the option of the Company, payment of interest may be made by check
mailed to the Holders of the Notes at the addresses set forth upon the
registry books of the Company. No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
The Indenture does not contain any financial covenants or any restrictions
on the payment of dividends, the repurchase of securities of the Company or
the incurrence of Indebtedness or Senior Indebtedness. The Indenture contains
no covenants or other provisions to afford protection to Holders of Notes in
the event of a highly leveraged transaction or a change of control of the
Company, except to the limited extent described under "--Repurchase of Notes
at the Option of the Holder Upon a Change of Control" below.
CONVERSION RIGHTS
Each Holder of Notes will have the right at any time prior to the close of
business on the Stated Maturity of the Notes, unless previously redeemed or
repurchased, at the Holder's option, to convert any portion of the principal
amount thereof that is $1,000 or an integral multiple thereof into shares of
Common Stock at the Conversion Price set forth on the cover page of this
Prospectus (subject to adjustment as described below). The right to convert a
Note called for redemption or delivered for repurchase and not withdrawn will
terminate at the close of business on the Business Day immediately prior to
the Redemption Date or Repurchase Date for such Note, unless the Company
subsequently fails to pay the applicable Redemption Price or Repurchase Price,
as the case may be.
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In the case of any Note that has been converted into Common Stock after any
Record Date, but on or before the next Interest Payment Date, interest, the
stated due date of which is on such Interest Payment Date, shall be payable on
such Interest Payment Date notwithstanding such conversion, and such interest
shall be paid to the Holder of such Note who is a Holder on such Record Date.
Any Note converted after any Record Date but before the next Interest Payment
Date (other than Notes called for redemption) must be accompanied by payment
of an amount equal to the interest payable on such Interest Payment Date on
the principal amount of Notes being surrendered for conversion. No fractional
shares of Common Stock will be issued upon conversion but, in lieu thereof, an
appropriate amount will be paid in cash by the Company based on the market
price of Common Stock (determined in accordance with the Indenture) at the
close of business on the day of conversion. As a result of the foregoing
provisions, Holders that surrender Notes for conversion on a date that is not
an Interest Payment Date will not receive any interest for the period from the
Interest Payment Date next preceding the date of conversion to the date of
conversion or for any later period, except for Notes that are called for
redemption.
The Conversion Price will be subject to adjustment in certain events,
including (a) any payment of a dividend (or other distribution) payable in
Common Stock on any class of Capital Stock of the Company, (b) any issuance to
all or substantially all holders of Common Stock of rights, options or
warrants entitling them to subscribe for or purchase Common Stock at less than
the then current market price of Common Stock (determined in accordance with
the Indenture); provided, however, that if such rights, options or warrants
are only exercisable upon the occurrence of certain triggering events, then
the Conversion Price will not be adjusted until such triggering events occur,
(c) certain subdivisions, combinations or reclassifications of Common Stock,
(d) any distribution to all or substantially all holders of Common Stock of
evidences of indebtedness, shares of Capital Stock other than Common Stock,
cash or other assets (including securities, but excluding those dividends,
rights, options, warrants and distributions referred to above and excluding
dividends and distributions paid exclusively in cash and in mergers and
consolidations to which the third succeeding paragraph applies), (e) any
distribution consisting exclusively of cash (excluding any cash portion of
distributions referred to in (d) above, or cash distributed upon a merger or
consolidation to which the second succeeding paragraph applies) to all or
substantially all holders of Common Stock in an aggregate amount that,
combined together with (i) all other such all-cash distributions made within
the then preceding 12 months in respect of which no adjustments have been made
and (ii) any cash and the fair market value of other consideration paid or
payable in respect of any tender or exchange offer by the Company or any of
its Subsidiaries for Common Stock concluded within the preceding 12 months in
respect of which no adjustment has been made, exceeds 15% of the Company's
market capitalization (defined as being the product of the then current market
price of the Common Stock times the number of shares of Common Stock then
outstanding) on the record date of such distribution, and (f) the completion
of a tender or exchange offer made by the Company or any of its Subsidiaries
for Common Stock that involves an aggregate consideration that, together with
(i) any cash and other consideration payable in a tender or exchange offer by
the Company or any of its Subsidiaries for Common Stock expiring within the 12
months preceding the expiration of such tender or exchange offer in respect of
which no adjustment has been made and (ii) the aggregate amount of any such
all-cash distributions referred to in (e) above to all holders of Common Stock
within the 12 months preceding the expiration of such tender or exchange offer
in respect of which no adjustments have been made, exceeds 15% of the
Company's market capitalization on the expiration of such tender or exchange
offer. No adjustment of the Conversion Price will be required to be made until
the cumulative adjustments amount to 1.0% or more of the Conversion Price as
last adjusted.
In the event of a taxable distribution to holders of Common Stock (or other
transaction) which results in any adjustment of the Conversion Price, the
Holders of Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States federal income tax as a dividend; in
certain other circumstances, the absence of such an adjustment may result in a
taxable dividend to the holders of Common Stock. The Company, from time to
time and to the extent permitted by law, may reduce the Conversion Price by
any amount for any period of at least 20 Business Days, in which case the
Company shall give at least 15 days notice of such reduction, if the Board of
Directors has made a determination that such reduction would be in the best
interests of the Company, which determination shall be conclusive. The Company
may, at its option, make such reductions in the Conversion Price, in addition
to those set forth above, as the Board of Directors deems advisable to avoid
or diminish any income tax resulting from any dividend or distribution of
stock (or rights to
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acquire stock) or from any event treated as such for United States federal
income tax purposes. See "Certain United States Federal Income Tax
Consequences."
In case of any reclassification or change of outstanding shares of Common
Stock issuable upon conversion of the Notes (other than certain changes in par
value) or consolidation or merger of the Company with or into another Person
or any merger of another Person with or into the Company (with certain
exceptions), or in case of any sale, transfer or conveyance of all or
substantially all of the assets of the Company, each Note then outstanding
will, without the consent of any Holder of Notes, become convertible only into
the kind and amount of securities, cash and other property receivable upon
such reclassification, change, consolidation, merger, sale, transfer or
conveyance by a holder of the number of shares of Common Stock into which such
Note was convertible immediately prior thereto, after giving effect to any
adjustment event; provided, that if the kind or amount of securities, cash and
other property is not the same for each share of Common Stock held immediately
prior to such reclassification, change, consolidation, merger, sale, transfer
or conveyance, any Holder who fails to exercise any right of election shall
receive per share the kind and amount of securities, cash or other property
received per share by a plurality of non-electing shares.
The Company will cause all registrations to be made with, and will obtain
any approvals by, any governmental authority under any Federal or state law of
the United States that may be required on the part of the Company in
connection with the conversion of the Notes into Common Stock.
SUBORDINATION
The Notes are general, unsecured obligations of the Company, subordinated in
right of payment to all existing and future Senior Indebtedness. The Notes are
structurally subordinated in right of payment to all Indebtedness and other
liabilities (including trade payables) of the Company's Subsidiaries. At
December 31, 1997, on a pro forma basis after giving effect to the sale of the
Notes and the use of the estimated net proceeds therefrom, approximately $26.0
million of outstanding indebtedness of the Company would have constituted
Senior Indebtedness, and the Company's subsidiary had no outstanding
obligations. The Existing Credit Facility provides for borrowings of up to
$2.0 million. No amounts were outstanding under the Existing Credit Facility
as of December 31, 1997. In addition, the Company is negotiating with a group
of banks for the New Credit Facility which is expected to provide for
borrowings of up to $60.0 million. Indebtedness under the Existing Credit
Facility and the New Credit Facility would be Senior Indebtedness. The
Indenture will not restrict the incurrence of Senior Indebtedness or other
Indebtedness by the Company or its Subsidiaries or the ability of the Company
to transfer assets or business operations to its Subsidiaries, subject to the
provisions described under "--Repurchase of Notes at the Option of the Holder
Upon a Change of Control" and "--Limitation on Merger, Sale or Consolidation"
below.
The Indenture will provide that no payment (by setoff or otherwise) may be
made by the Company on account of the principal of, premium, if any, or
interest on the Notes, or to acquire any of the Notes (including repurchases
of Notes at the option of the Holder) for cash or property (other than Junior
Securities), or on account of the redemption provisions of the Notes, (i) upon
the maturity of any Senior Indebtedness, by lapse of time, acceleration
(unless waived) or otherwise, unless and until all principal of, premium, if
any, and interest on such Senior Indebtedness are first paid in full (or such
payment is duly provided for), or (ii) in the event of default in the payment
of any principal of, premium, if any, or interest on any Senior Indebtedness
when it becomes due and payable, whether at maturity or at a date fixed for
prepayment or by declaration or otherwise (collectively, a "Payment Default"),
unless and until such Payment Default has been cured or waived or otherwise
has ceased to exist. The payment of cash, property or securities (other than
Junior Securities) upon conversion of a Note will constitute payment on a Note
and therefore will be subject to the subordination provisions in the
Indenture.
Upon (i) the happening of an event of default (other than a Payment Default)
that permits, or would permit with (a) the passage of time, (b) the giving of
notice, (c) the making of any payment of the Notes then required to be made or
(d) any combination thereof (collectively, a "Non-Payment Default"), the
holders of Senior
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Indebtedness having a principal amount then outstanding in excess of $10.0
million (or with respect to which Senior Indebtedness the holders are
obligated to lend in excess of $10.0 million principal amount) or their
representative immediately to accelerate its maturity and (ii) written notice
of such Non-Payment Default given to the Company and the Trustee by the
holders of an aggregate of at least $10.0 million outstanding principal amount
(or commitments to lend up to at least $10.0 million in principal amount) of
such Senior Indebtedness or their representative (a "Payment Notice"), then,
unless and until such Non-Payment Default has been cured or waived or
otherwise has ceased to exist, no payment (by setoff or otherwise) may be made
by or on behalf of the Company on account of the principal of, premium, if
any, or interest on, the Notes, or to acquire or repurchase any of the Notes
for cash or property, or on account of the redemption provisions of the Notes,
in any such case other than payments made with Junior Securities.
Notwithstanding the foregoing, unless (i) the Senior Indebtedness in respect
of which such Non-Payment Default exists has been declared due and payable in
its entirety within 179 days after the Payment Notice is delivered as set
forth above (the "Payment Blockage Period"), and (ii) such declaration has not
been rescinded or waived, at the end of the Payment Blockage Period, the
Company shall be required to pay all sums not paid to the Holders of the Notes
during the Payment Blockage Period due to the foregoing prohibitions and to
resume all other payments as and when due on the Notes. Not more than one
Payment Notice may be given in any consecutive 365-day period, irrespective of
the number of defaults with respect to Senior Indebtedness during such period.
In no event, however, may the total number of days during which any Payment
Blockage Period is or Payment Blockage Periods are in effect exceed 179 days
in the aggregate during any consecutive 365-day period.
Upon any distribution of assets of the Company upon any dissolution, winding
up, total or partial liquidation or reorganization of the Company, whether
voluntary or involuntary, in bankruptcy, insolvency, receivership or a similar
proceeding or upon assignment for the benefit of creditors or any marshaling
of assets or liabilities (i) the holders of all Senior Indebtedness will first
be entitled to receive payment in full (or have such payment duly provided
for) before the Holders of the Notes are entitled to receive any payment on
account of the principal of, premium, if any, and interest on, the Notes
(other than Junior Securities) and (ii) any payment or distribution of assets
of the Company of any kind or character, whether in cash, property or
securities (other than Junior Securities) to which the Holders of the Notes or
the Trustee on behalf of the Holders would be entitled (by setoff or
otherwise), except for the subordination provisions contained in the
Indenture, will be paid by the liquidating trustee or agent or other person
making such a payment or distribution directly to the holders of Senior
Indebtedness or their representative to the extent necessary to make payment
in full of all such Senior Indebtedness remaining unpaid, after giving effect
to any concurrent payment or distribution, or provision therefor, to the
holders of such Senior Indebtedness.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company (other than Junior Securities) shall be
received by the Holders of the Notes or the Trustee on behalf of the Holders
or any Paying Agent at a time when such payment or distribution is prohibited
by the foregoing provisions, such payment or distribution shall be held in
trust for the benefit of the holders of Senior Indebtedness, and shall be paid
or delivered by such Holders or the Trustee or such Paying Agent, as the case
may be, to the holders of the Senior Indebtedness remaining unpaid or
unprovided for or their representative or representatives, or to the trustee
or trustees under any indenture pursuant to which any instruments evidencing
any of such Senior Indebtedness may have been issued, ratably according to the
aggregate amounts remaining unpaid on account of the Senior Indebtedness held
or represented by each, for application to the payment of all Senior
Indebtedness remaining unpaid, to the extent necessary to pay or to provide
for the payment of all such Senior Indebtedness in full after giving effect to
any concurrent payment or distribution, or provision therefor, to the holders
of such Senior Indebtedness.
No provision contained in the Indenture or the Notes will affect the
obligation of the Company, which is absolute and unconditional, to pay, when
due, principal of, premium, if any, and interest on, the Notes. The
subordination provisions of the Indenture and the Notes will not prevent the
occurrence of any Default or Event of Default under the Indenture or limit the
rights of the Trustee or any Holder of any Notes, subject to the preceding
paragraphs, to pursue any other rights or remedies with respect to the Notes.
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<PAGE>
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company or
any of its Subsidiaries or a marshaling of assets or liabilities of the
Company and its Subsidiaries, Holders of Notes may receive ratably less than
other creditors.
REDEMPTION AT THE COMPANY'S OPTION
The Notes will not be subject to redemption prior to April 3, 2001 and will
be redeemable on and after such date at the option of the Company, in whole or
in part, upon not less than 30 nor more than 60 days' notice to each Holder,
at the following Redemption Prices (expressed as percentages of the principal
amount) if redeemed during the 12-month period commencing on the dates
indicated below, in each case (subject to the right of Holders of record on a
Record Date to receive interest due on an Interest Payment Date that is on or
prior to such Redemption Date) together with accrued and unpaid interest, if
any, to, but excluding, the Redemption Date:
<TABLE>
<CAPTION>
DATE PERCENTAGE
<S> <C>
April 3, 2001................. 102.10%
April 1, 2002 and thereafter.. 101.05
</TABLE>
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first-class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption (the
"Redemption Date"), to the Holder of each Note to be redeemed to such Holder's
last address as then shown upon the registry books of the Registrar. The
notice of redemption must state the Redemption Date, the Redemption Price and
the amount of accrued interest, if any, to be paid. Any notice that relates to
a Note to be redeemed in part only must state the portion of the principal
amount to be redeemed and must state that on and after the Redemption Date,
upon surrender of such Note, a new Note or Notes in principal amount equal to
the unredeemed portion thereof will be issued. On and after the Redemption
Date, interest will cease to accrue on the Notes or portions thereof called
for redemption, unless the Company defaults in its obligations with respect
thereto.
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture will provide that in the event that a Change of Control has
occurred, the Company is required to make an irrevocable and unconditional
(except as described below) offer (the "Repurchase Offer") to purchase all
Notes on the date (the "Repurchase Date") that is no later than 45 Business
Days (except as described below) after the occurrence of such Change of
Control at a cash price (the "Repurchase Price") equal to 100% of the
principal amount thereof, together with accrued and unpaid interest, to (but
excluding) the Repurchase Date. A Holder of Notes may accept the Repurchase
Offer with respect to all or a portion of its Notes (provided that the
principal amount of such Notes must be $1,000 or an integral multiple
thereof). The Repurchase Offer shall be made within 25 Business Days following
a Change of Control and shall remain open for 20 Business Days following its
commencement except to the extent that a longer period is required by
applicable law (the "Repurchase Offer Period"). Upon expiration of the
Repurchase Offer Period, the Company shall purchase all Notes tendered in
response to the Repurchase Offer. If required by applicable law, the
Repurchase Date and the Repurchase Offer Period may be extended as so
required; however, if so extended, it shall nevertheless constitute an Event
of Default if the Repurchase Date does not occur within 60 Business Days of
the Change of Control.
On or before the Repurchase Date, the Company will (i) accept for payment
Notes or portions thereof properly tendered pursuant to the Repurchase Offer,
(ii) deposit with the Paying Agent cash sufficient to pay the
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Repurchase Price (together with accrued and unpaid interest of all Notes so
tendered) and (iii) deliver to the Trustee the Notes so accepted, together
with an officers' certificate listing the Notes or portions thereof being
purchased by the Company. The Paying Agent will promptly mail to the Holders
of Notes so accepted payment in an amount equal to the Repurchase Price
(together with accrued and unpaid interest) and the Trustee will promptly
authenticate and mail or deliver to such Holders a new Note or Notes equal in
principal amount to any unpurchased portion of the Notes surrendered. Any
Notes not so accepted will be promptly mailed or delivered by the Company to
the Holder thereof. The Company will publicly announce the results of the
Repurchase Offer on or as soon as practicable after the Repurchase Date.
The phrase "all or substantially all" of the assets of the Company, as
included in the definition of Change of Control, is likely to be interpreted
by reference to applicable state law at the relevant time, and will be
dependent on the facts and circumstances existing at such time. As a result,
there may be a degree of uncertainty in ascertaining whether a sale or
transfer of "all or substantially all" of the assets of the Company has
occurred.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between the Company and the Underwriters.
The provisions of the Indenture relating to a Change of Control may not
afford the Holders of the Notes protection in the event of a highly leveraged
transaction, reorganization, restructuring, merger, spin-off or similar
transaction that may adversely affect Holders, if such transaction does not
constitute a Change of Control. Moreover, certain events with respect to the
Company which may involve an actual change of control of the Company may not
constitute a Change of Control for purposes of the Indenture.
The Company may not have sufficient financial resources available to fulfill
its obligation to repurchase the Notes upon a Change of Control or to
repurchase other debt securities of the Company or its Subsidiaries providing
similar rights to the holders thereof. Further, either the occurrence of a
Change of Control or the right to require the Company to repurchase Notes as a
result of the Change of Control, could create an event of default under Senior
Indebtedness. As a result, in each case, any repurchase of the Notes could,
absent a waiver, be blocked by the subordination provisions of the Notes.
Failure of the Company to repurchase the Notes when required would result in
an Event of Default with respect to the Notes whether or not such repurchase
is permitted by the subordination provisions. See "--Subordination" above.
Except as described herein, no modification of the Indenture regarding the
provisions on repurchase at the option of any Holder of a Note upon a Change
of Control that adversely affects a Holder is permissible without the consent
of the Holder of the Note so affected. In the event of a Change of Control, if
Holders of in excess of two-thirds of the outstanding aggregate principal
amount of the Notes so determine at any time following the occurrence of such
Change of Control and before the close of business on the Business Day
immediately preceding the Repurchase Date, such event shall not be treated as
a Change of Control for purposes of the Indenture. In such event, (i) the
Company shall not be required to make the Repurchase Offer, (ii) to the extent
the Repurchase Offer has already been made, such Repurchase Offer shall be
deemed revoked and (iii) to the extent any Notes have been tendered in
response to any such revoked Repurchase Offer, such tender shall be rescinded
and the Notes so tendered shall be promptly returned to the Holders thereof.
For purposes of any such determination by the Holders of the outstanding
Notes, Notes held by the Company or an Affiliate of the Company (including any
Person that would become an Affiliate of the Company (or its successor) as a
consequence of the event or series of events that otherwise would be treated
as a Change of Control for purposes of the Indenture) shall be disregarded.
To the extent applicable, the Company will comply with the provisions of
Rule 13e-4 or any other tender offer rules under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and will file a Schedule 13E-4 or
any other schedule required under such rules, in connection with any offer by
the Company to repurchase Notes at the option of the Holders upon a Change of
Control.
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LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture will provide that the Company may not, directly or indirectly,
consolidate with or merge with or into, or sell, lease, convey or transfer all
or substantially all of its assets (on a consolidated basis), whether in a
single transaction or a series of related transactions, to another Person or
group of affiliated Persons (other than to its wholly owned Subsidiaries),
unless (i) either (a) in the case of a merger or consolidation the Company is
the surviving entity or (b) the resulting, surviving or transferee entity is a
corporation organized under the laws of the United States, any state thereof
or the District of Columbia and expressly assumes by supplemental indenture
all of the obligations of the Company in connection with the Notes and the
Indenture; and (ii) no Default or Event of Default shall exist immediately
before or immediately after giving effect to such transaction.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged
or to which such transfer is made, shall succeed to, and be substituted for,
and may exercise every right and power of, the Company under the Indenture
with the same effect as if such successor corporation had been named therein
as the Company, and the Company will be released from its obligations under
the Indenture and the Notes, except as to any obligations that arise from or
as a result of such transaction.
REPORTS
Whether or not the Company is subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company shall deliver to the
Trustee, within 15 days after it is or would have been required to file such
with the Commission, annual and quarterly consolidated financial statements
substantially equivalent to financial statements that would have been included
in reports filed with the Commission if the Company were subject to the
requirements of Section 13 or 15(d) of the Exchange Act, including, with
respect to annual information only, a report thereon by the Company's
certified independent public accountants as such would be required in such
reports to the Commission and, in each case, together with a management's
discussion and analysis of financial condition and results of operations as
such would be so required.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will define an Event of Default as (i) the failure by the
Company to pay any installment of interest on the Notes as and when due and
payable and the continuance of any such failure for 30 days, (ii) the failure
by the Company to pay all or any part of the principal of, or premium, if any,
on the Notes when and as the same become due and payable at maturity,
redemption, by acceleration or otherwise, including, without limitation,
pursuant to any Repurchase Offer, (iii) the failure of the Company to perform
any conversion of Notes required under the Indenture and the continuance of
any such failure for 30 days, (iv) the failure by the Company to observe or
perform any other covenant or agreement contained in the Notes or the
Indenture and, subject to certain exceptions, the continuance of such failure
for a period of 60 days after written notice is given to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25% in
aggregate principal amount of the Notes outstanding, (v) certain events of
bankruptcy, insolvency or reorganization in respect of the Company or any of
its Significant Subsidiaries, (vi) failure of the Company or any Significant
Subsidiary to make any payment at maturity, including any applicable grace
period, in respect of Indebtedness (other than non-recourse obligations) in an
amount in excess of $15.0 million and continuance of such failure for 30 days
after written notice is given to the Company by the Trustee or to the Company
and the Trustee by the Holders of at least 25% in aggregate principal amount
of Notes outstanding, (vii) default by the Company or any Significant
Subsidiary with respect to any Indebtedness (other than non-recourse
obligations), which default results in the acceleration of Indebtedness in an
amount in excess of $15.0 million without such Indebtedness having been
discharged or such acceleration having been rescinded or annulled for 30 days
after written notice is given to the Company by the Trustee or to the Company
and the Trustee by the Holders of at least 25% in aggregate principal amount
of Notes outstanding and (viii) final unsatisfied judgments not covered by
insurance aggregating in excess of $20.0 million, at any one time rendered
against the Company or any of its Significant Subsidiaries and not stayed,
bonded or discharged within 60 days. The Indenture will provide that if a
Default occurs and is
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continuing, the Trustee must, within 90 days after the occurrence of such
Default, give to the Holders notice of such Default, but the Trustee shall be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the best interest of the Holders, except in
the case of a Default in the payment of the principal of, premium, if any, or
interest on any of the Notes when due or in the payment of any redemption or
repurchase obligation.
The Indenture will provide that if an Event of Default occurs and is
continuing (other than an Event of Default specified in clause (v) above with
respect to the Company), then in every such case, unless the principal of all
of the Notes shall have already become due and payable, either the Trustee or
the Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by notice in writing to the Company (and to the Trustee if given
by Holders), may declare all principal, premium, if any, and accrued interest,
if any, on or with respect to the Notes to be due and payable immediately. If
an Event of Default specified in clause (v) above with respect to the Company
occurs, all principal, premium, if any, and accrued interest, if any, will be
immediately due and payable on all outstanding Notes without any declaration
or other act on the part of the Trustee or the Holders. The Holders of no less
than a majority in aggregate principal amount of Notes generally are
authorized to rescind such acceleration if all existing Events of Default,
other than the non-payment of the principal of, premium, if any, and interest
on the Notes that have become due solely by such acceleration, have been cured
or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except a
default in the payment of principal of, premium, if any, or interest on any
Note not yet cured, or a default with respect to any covenant or provision
that cannot be modified or amended without the consent of the Holder of each
outstanding Note affected. Subject to the provisions of the Indenture relating
to the duties of the Trustee, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request, order
or direction of any of the Holders, unless such Holders have offered to the
Trustee reasonable security or indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the Notes at the time outstanding will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee, or exercising any trust or power conferred on the Trustee.
The Indenture provides that no Holder may pursue any remedy under the
Indenture, except for a default in the payment of principal, premium, if any,
or interest on the Notes, unless the Holder gives to the Trustee written
notice of a continuing Event of Default, the Holders of at least 25% in
principal amount of the outstanding Notes make a written request to the
Trustee to pursue the remedy, such Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense, the
Trustee does not comply with the request within 60 days after receipt of the
request and the offer of indemnity, and the Trustee shall not have received a
contrary direction from the Holders of a majority in principal amount of the
outstanding Notes.
AMENDMENTS AND SUPPLEMENTS
The Indenture will contain provisions permitting the Company and the Trustee
to enter into a supplemental indenture for certain limited purposes without
the consent of the Holders. With the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding,
the Company and the Trustee are permitted to amend or supplement the Indenture
or any supplemental indenture or modify the rights of the Holders; provided,
that no such modification may, without the consent of each Holder affected
thereby: (i) change the Stated Maturity of any Note or reduce the principal
amount thereof or the rate (or extend the time for payment) of interest
thereon or any premium payable upon the redemption thereof, or change the
place of payment where, or the coin or currency in which, any Note or any
premium or the interest thereon is payable, or impair the right to institute
suit for the conversion of any Note or the enforcement of any such payment on
or after the due date thereof (including, in the case of redemption, on or
after the Redemption Date), or reduce the Repurchase Price, or alter the
Repurchase Offer (other than as set forth herein) or redemption provisions in
a manner adverse to the Holders, or (ii) reduce the percentage in principal
amount of the outstanding Notes, the
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consent of whose Holders is required for any such amendment, supplemental
indenture or waiver provided for in the Indenture or (iii) adversely affect
the right of such Holder to convert Notes. A supplemental indenture entered
into in compliance with the "Limitation on Merger, Sale or Consolidation"
covenant would not require the consent of the Holders of the Notes.
NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS, DIRECTORS AND EMPLOYEES
The Indenture will provide that no stockholder, employee, officer, director
or partner, as such, past, present or future, of the Company or any successor
corporation shall have any personal liability in respect of the obligations of
the Company under the Indenture or the Notes by reason of his, her or its
status as such stockholder, employee, officer, director or partner.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange the Notes in accordance with the
Indenture. The Company or Trustee may require a Holder, among other things, to
furnish appropriate endorsements, legal opinions and transfer documents, and
to pay any taxes and fees required by law or permitted by the Indenture. The
Company is not required to transfer or exchange any Notes selected for
redemption. Also, the Company is not required to transfer or exchange any
Notes for a period of 15 days before the mailing of a Repurchase Offer or
notice of redemption.
The registered holder of a Note may be treated as the owner of it for all
purposes.
BOOK ENTRY, DELIVERY AND FORM
Except as set forth below, the Notes will initially be issued in the form of
one or more registered Notes in global form (the "Global Notes"). Each Global
Note will be deposited on the date of the closing of the sale of the Notes
(the "Closing Date") with, or on behalf of, The Depository Trust Company
("DTC") and registered in the name of Cede & Co., as nominee of DTC.
DTC has advised the Company that it is a limited-purpose trust company that
was created to hold securities for its participants ("Participants") and to
facilitate the clearance and settlement of transactions in such securities
between Participants through electronic book-entry changes in accounts of its
Participants. DTC's Participants include securities brokers and dealers, banks
and trust companies, clearing corporations and certain other organizations.
Access to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, "Indirect Participants")
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly.
The Company expects that pursuant to procedures established by DTC, (i) upon
deposit of the Global Note, DTC will credit the accounts of Participants
designated by the Underwriters with an interest in the Global Note and (ii)
ownership of the Notes evidenced by the Global Note will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the interests of Participants), the
Participants and the Indirect Participants. The laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own and that security interests in negotiable instruments can only
be perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Notes evidenced by the Global Note will
be limited to such extent.
So long as DTC or its nominee is the registered owner of a Note, DTC or such
nominee, as the case may be, will be considered the sole owner or holder of
the Notes represented by the Global Note for all purposes under the Indenture.
Except as provided below, owners of beneficial interests in a Global Note will
not be entitled to have Notes represented by such Global Note registered in
their names, will not receive or be entitled to receive physical delivery of
Certificated Notes, and will not be considered the owners or holders thereof
under the Indenture for any purpose, including with respect to the giving of
any directions, instructions or approvals to the Trustee thereunder. As a
result, the ability of a Person having a beneficial interest in Notes
represented by a
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Global Note to pledge such interest to Persons that do not participate in
DTC's system, or to otherwise take actions with respect to such interest, may
be affected by the lack of a physical certificates evidencing such interest.
Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of Notes by DTC, or for maintaining, supervising or reviewing any
records of DTC relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any Note represented by a Global Note registered in the name of DTC or its
nominee on the applicable record date will be payable by the Trustee to or at
the direction of DTC or its nominee in its capacity as the registered Holder
of the Global Note representing such Notes under the Indenture. Under the
terms of the Indenture, the Company and the Trustee may treat the Persons in
whose names the Notes, including the Global Notes, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, neither the Company nor the Trustee
has or will have any responsibility or liability for the payment of such
amounts to beneficial owners of Notes (including, principal, premium, if any,
and interest with respect thereto), or to immediately credit the accounts of
the relevant Participants with such payment, in amounts proportionate to their
respective holdings in principal amount of beneficial interests in the Global
Note as shown on the records of DTC. Payments by the Participants and the
Indirect Participants to the beneficial owners of Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Participants or the Indirect Participants.
Holders who desire to convert their Notes into Common Stock pursuant to the
terms of the Notes should contact their brokers or other Participants or
Indirect Participants to obtain information on procedures, including proper
forms and cut-off times, for submitting such requests.
CERTIFICATED NOTES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary and the Company is unable to locate a
qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes
in definitive form under the Indenture, then, upon surrender by DTC of the
Global Note, Certificated Notes will be issued to each person that DTC
identifies as the beneficial owner of the Notes represented by the Global
Note. In addition, subject to certain conditions, any Person having a
beneficial interest in a Global Note may, upon request to the Trustee,
exchange such beneficial interest for Notes in the form of Certificated Notes.
Upon any such issuance, the Trustee is required to register such Certificated
Notes in the name of such Person or Persons (or the nominee of any thereof),
and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners
of the Notes, and the Company and the Trustee may conclusively rely on, and
shall be protected in relying on, instructions from DTC for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the Notes to be issued).
The information in this and the preceding section concerning DTC and DTC's
book-entry system has been obtained from sources that the Company believes to
be reliable. The Company will have no responsibility for the performance by
DTC or its Participants or Indirect Participants of their respective
obligations as described hereunder or under the rules and procedures governing
their respective operations.
SAME-DAY FUNDS SETTLEMENT AND PAYMENT
Payments in respect of the Notes represented by a Global Note (including
principal, premium, if any, and interest) will be made by wire transfer of
immediately available funds to the accounts specified by DTC. With respect to
Notes represented by Certificated Notes, all payments (including principal,
premium, if any, and
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interest) will be made at the office or agency of the Company maintained for
such purpose, which office or agency shall be maintained in the City of New
York, except that, at the option of the Company, any payments of interest may
be made by mailing a check on or before the due date to the address of the
person entitled thereto as such address shall appear in the Register. The
Notes will trade in DTC's Same-Day Funds Settlement System until maturity, or
until the Notes are issued in certificated form, and secondary market trading
activity in the Notes will therefore be required by DTC to settle in
immediately available funds. No assurance can be given as to the effect, if
any, of settlement in immediately available funds on trading activity in the
Notes.
GOVERNING LAW
The Indenture and the Notes provide that they are to be governed in
accordance with the laws of the State of New York.
THE TRUSTEE
Harris Trust and Savings Bank will be the Trustee under the Indenture. A
successor Trustee may be appointed in accordance with the terms of the
Indenture.
The Indenture will contain certain limitations on the rights of the Trustee,
in the event it becomes a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; provided, however, that if it acquires any conflicting
interest (as defined), it must eliminate such conflict or resign.
In case an Event of Default shall occur (and shall not be cured), the
Trustee will be required to use the degree of care of a prudent person in the
conduct of his own affairs in the exercise of its powers. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders of
Notes, unless they shall have offered to the Trustee reasonable security or
indemnity.
CERTAIN DEFINITIONS
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capitalized Lease Obligation" means, as to any Person, the obligation of
such Person to pay rent or other amounts under a lease to which such Person is
a party that is required to be classified and accounted for as a capital lease
obligation under GAAP.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"Change of Control" means (i) an event or series of events as a result of
which any "person" or "group" (as such terms are used in Sections 13(d)(3) and
14(d) of the Exchange Act) (excluding the Company or any wholly owned
Subsidiary thereof) is or becomes, directly or indirectly, the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, whether or
not applicable) of more than 50% of the combined voting power of the then
outstanding securities entitled to vote generally in elections of directors,
managers or trustees, as applicable, of the Company or any successor entity
("Voting Stock"), (ii) the completion of any consolidation or merger of the
Company with or into any other Person, or sale, conveyance, transfer or lease
by the Company of all or substantially all of its assets to any Person, or any
merger of any other Person into the Company in a single transaction or series
of related transactions, and, in the case of any such transaction or series
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of related transactions, the outstanding Common Stock is changed or exchanged
as a result, unless the stockholders of the Company immediately before such
transaction own, directly or indirectly, immediately following such
transaction, at least a majority of the combined voting power of the
outstanding voting securities of the Person resulting from such transaction in
substantially the same proportion as their ownership of the Voting Stock
immediately before such transaction, or (iii) such time as the Continuing
Directors do not constitute a majority of the Board of Directors (or, if
applicable, a successor corporation to the Company).
"Continuing Director" means at any date a member of the Board of Directors
(i) who was a member of such board on the date of initial issuance of the
Notes or (ii) who was nominated or elected by at least a majority of the
directors who were Continuing Directors at the time of such nomination or
election or whose election to the Board of Directors was recommended or
endorsed by at least a majority of the directors who were Continuing Directors
at the time of such nomination or election.
"Disqualified Capital Stock" means, with respect to the Company, Capital
Stock of the Company that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the
happening of an event or the passage of time would be, required to be redeemed
or repurchased (including at the option of the holder thereof) by the Company,
in whole or in part, on or prior to the Stated Maturity of the Notes, provided
that only the portion of such Capital Stock which is so convertible,
exercisable, exchangeable or redeemable or subject to repurchase prior to such
Stated Maturity shall be deemed to be Disqualified Stock.
"Indebtedness" of any Person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of any such Person, (i) in respect
of borrowed money (whether or not the lender has recourse to all or any
portion of the assets of such person), (ii) evidenced by credit or loan
agreements, bonds, notes, debentures or similar instruments (including,
without limitation, notes or similar instruments given in connection with the
acquisition of any business, properties or assets of any kind), (iii)
evidenced by bankers' acceptances or similar instruments issued or accepted by
banks, (iv) for the payment of money relating to a Capitalized Lease
Obligation or (v) evidenced by a letter of credit or a reimbursement
obligation of such Person with respect to any letter of credit; (b) all
obligations of such Person issued or assumed as the deferred purchase price of
property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business); (c) all net
obligations of such Person under Interest Swap and Hedging Obligations; (d)
all liabilities of others of the kind described in the preceding clauses (a),
(b) or (c) that such Person has guaranteed or that is otherwise its legal
liability, or which is secured by a lien on property of such Person, and all
obligations to purchase, redeem or acquire any Capital Stock; and (e) any and
all deferrals, renewals, extensions, modifications, replacements,
restatements, refinancings and refundings (whether direct or indirect) of, or
any indebtedness or obligation issued in exchange for, any liability of the
kind described in any of the preceding clauses (a), (b), (c) or (d), or this
clause (e), whether or not between or among the same parties.
"Interest Swap and Hedging Obligations" means the obligations of any Person
under any interest rate protection agreement, interest rate future agreement,
interest rate option agreement, interest rate swap agreement, interest rate
cap agreement or other interest rate hedge agreement, interest rate collar
agreement or other similar agreement or arrangement to which such Person is a
party or beneficiary.
"Junior Securities" means any Qualified Capital Stock and any Indebtedness
of the Company that is fully subordinated in right of payment to the Notes and
has no scheduled installment of principal due, by redemption, sinking fund
payment or otherwise, on or prior to the Stated Maturity of the Notes.
"Qualified Capital Stock" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"Senior Indebtedness" means all obligations of the Company to pay the
principal of, premium, if any, interest (including all interest accruing
subsequent to the commencement of any bankruptcy or similar proceeding,
whether or not a claim for post-petition interest is allowable as a claim in
any such proceeding) and rent payable on or in connection with, and all fees,
costs, expenses and other amounts accrued or due on or in connection with, any
Indebtedness of the Company, whether outstanding on the date of the Indenture
or
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thereafter created, incurred, assumed, guaranteed or in effect guaranteed by
the Company, unless the instrument creating or evidencing such Indebtedness
provides that such Indebtedness is not senior or superior in right of payment
to the Notes or is pari passu with, or subordinated to, the Notes; provided
that in no event shall Senior Indebtedness include (a) Indebtedness of the
Company owed or owing to any Subsidiary of the Company or any officer,
director or employee of the Company or any Subsidiary of the Company, (b)
Indebtedness representing or with respect to any account payable or other
accrued current liability or obligation incurred in the ordinary course of
business in connection with the obtaining of materials or services or (c) any
liability for taxes owed or owing by the Company or any Subsidiary of the
Company.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" of the Company within the meaning of Rule 1.02(w) of Regulation S-
X promulgated by the Commission as in effect as of the date of the Indenture.
"Stated Maturity" when used with respect to any Note, means April 1, 2003.
"Subsidiary" with respect to any Person, means (i) a corporation a majority
of whose Capital Stock with voting power normally entitled to vote in the
election of directors is at the time, directly or indirectly, owned by such
Person, by such Person and one or more Subsidiaries of such Person or by one
or more Subsidiaries of such Person, (ii) a partnership in which such Person
or a Subsidiary of such Person is, at the time, a general partner and owns
alone or together with one or more Subsidiaries of such Person a majority of
the partnership interests, or (iii) any other Person (other than a
corporation) in which such Person, one or more Subsidiaries of such Person or
such Person and one or more Subsidiaries of such Person, directly or
indirectly, at the date of determination thereof, has at least a majority
ownership interest.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $.01 par value per share and 2,000,000 shares of Preferred
Stock, $.01 par value per share.
COMMON STOCK
As of March 19, 1998, there were 25,554,054 shares of Common Stock
outstanding held by approximately 105 stockholders of record. Subject to
preferences that may be applicable to any outstanding Preferred Stock, holders
of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." Holders of Common Stock are entitled to one vote per
share in all matters to be voted upon by stockholders. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of the
Company's liabilities and the liquidation preferences of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive rights and no
rights to convert their Common Stock into any other securities, and there are
no redemption provisions with respect to such shares. All of the outstanding
shares of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may issue in the future.
Pursuant to a Rights Agreement adopted by the Company (the "Rights
Agreement"), the holders of Common Stock, including the shares of Common Stock
issuable upon conversion of the Notes and the shares offered in the Common
Stock Offering, have certain rights to purchase Series A Participating
Preferred Stock or Common Stock under certain circumstances, including in the
event of certain unsolicited attempts to acquire a controlling interest in the
Company. See "--Preferred Stock" and "--Rights Agreement."
PREFERRED STOCK
The Company's Board of Directors has authority, without any further vote or
action by the stockholders: to provide for the issuance of the shares of
Preferred Stock in series; to establish from time to time the number of shares
to be included in each such series; to fix the designations, preferences and
relative, participating, optional or other special rights, and qualifications
or restrictions of the shares of each such series; and to determine the voting
powers, if any, of such shares. The issuance of Preferred Stock, among other
things, could adversely affect the rights of holders of Common Stock. For
example, the issuance of Preferred Stock could decrease the amount of earnings
and assets available for distributions to holders of Common Stock. In
addition, any such issuance could have the effect of delaying or preventing a
change in control of the Company and could make the removal of the present
management of the Company more difficult.
In connection with the adoption of the Rights Agreement, the Company's Board
of Directors has created one series of Preferred Stock, consisting of 300,000
shares of Series A Participating Preferred Stock (the "Series A Preferred").
No shares of Series A Preferred have been issued as of the date of this
Prospectus. Each share of the Series A Preferred, when and if issued, would
entitle the holder thereof to receive quarterly dividends equal to the greater
of $1.00 per share or 100 times the dividends per share declared with respect
to the Common Stock. Dividends on the Series A Preferred are cumulative.
Holders of the Series A Preferred would be entitled to exercise 100 votes per
share on all matters submitted to a vote of stockholders and, except as
otherwise required by law, would vote together with the holders of Common
Stock as a single class. In the event of liquidation, such holders would
receive a preference of $1.00 per share over the Common Stock. In general,
each share of the Series A Preferred is intended to have a value and voting
rights equal to 100 shares of Common Stock, and appropriate anti-dilutive
adjustments will be made in accordance with the terms of such Series A
Preferred in the event of certain changes in Common Stock. Except as
contemplated in connection with the Rights Agreement described below, the
Company has no present plans to issue any of the Preferred Stock.
RIGHTS AGREEMENT
The Board of Directors of the Company has declared a dividend distribution
of one preferred share purchase right (a "Right") for each outstanding share
of Common Stock. The dividend was payable to stockholders of
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record on March 1, 1996 (the "Rights Record Date") and with respect to Common
Stock issued thereafter until the Distribution Date (as defined below). Except
as set forth below, each Right, when it becomes exercisable, entitles the
registered holder to purchase from the Company one one-hundredth of a share of
the Series A Preferred of the Company at a price equal to five times the
initial offering price (the "Purchase Price") per one one-hundredth of a
Series A Preferred share, subject to adjustment. The description and terms of
the Rights are set forth in a Rights Agreement (the "Rights Agreement")
between the Company and Harris Trust and Savings Bank, as Rights Agent. A copy
of the Rights Agreement is available to stockholders free of charge from the
Company upon request directed to the Secretary of the Company.
Initially, the Rights will be attached to all certificates representing
shares of Common Stock then outstanding, and no separate Right Certificates
will be distributed. The Rights will separate from the Common Stock upon the
earliest to occur of (i) 10 days following public announcement that a person
or group of affiliated or associated persons (an "Acquiring Person") has
acquired beneficial ownership of 15% or more of the outstanding Common Stock;
or (ii) 15 business days (or such later date as the Board may determine)
following the commencement of, or announcement of an intention to make, a
tender offer or exchange offer the consummation of which would result in a
person or group becoming an Acquiring Person (the earliest of such dates being
called the "Distribution Date"). The definition of an Acquiring Person
excludes any employee benefit plan of the Company, including the ESOP. Albert
J. Speh, Jr., Chairman Emeritus of the Company, his extended family, family
trusts and certain other affiliates and associates will not be deemed to be an
Acquiring Person as long as such persons beneficially own less than 32% of the
outstanding Common Stock. The date that a person or group becomes an Acquiring
Person is the "Share Acquisition Date." Until a Right is exercised, the holder
thereof, as such, will not have any rights as a stockholder of the Company,
including the right to vote or receive dividends thereon.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights) new
Common Stock certificates issued after the Rights Record Date upon transfer or
new issuance of Common Stock will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
Common Stock outstanding as of the Rights Record Date, even without such
notation or a copy of the summary of rights attached thereto, will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Common Stock as of
the close of business on the Distribution Date (and to each initial record
holder of certain Common Stock issued after the Distribution Date), and such
separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on the tenth anniversary of the effective date of the
plan, unless earlier redeemed by the Company as described below.
In the event that any person becomes an Acquiring Person, each holder of a
Right will thereafter have the right to receive upon payment of the Purchase
Price the number of shares of Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a value (immediately
prior to such triggering event) equal to two times the Purchase Price.
Notwithstanding the foregoing, following the occurrence of the event described
above or in the paragraph below (the "Triggering Events"), all Rights that
are, or (under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person or any affiliate or associate
thereof will be null and void.
In the event that, at any time following the Share Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction, or
(ii) more than 50% of the Company's assets or earning power is sold or
transferred to any other person, then each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have
the right to receive, upon exercise, common stock of the acquiring company
having a value equal to two times the exercise price of the Right.
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The Purchase Price and the number of shares of Preferred Stock or other
securities or property issuable upon exercise of the Rights are subject to
adjustment from time to time to as a result of, among other things, a
subdivision, split (other than a stock dividend on the Common Stock payable in
shares of Common Stock), combination, consolidation or reclassification of the
Series A Preferred or the Common Stock, or a reverse split of the outstanding
shares of Series A Preferred or Common Stock.
At any time prior to the earlier to occur of (i) a person becoming an
Acquiring Person or (ii) the expiration of the Rights, and under certain other
circumstances, the Company may redeem the Rights in whole, but not in part, at
a price of $0.01 per Right which redemption shall be effective upon the action
of the Board of Directors. Additionally, at any time after a Triggering Event
and prior to the time that a person or group acquires 50% or more of the
outstanding Common Stock, the Company may exchange the Rights (other than
those that have become null and void), in whole or in part, for shares of
Common Stock at an exchange ratio of one share of Common Stock per Right
(subject to adjustment).
The provisions of the Rights Agreement may be amended by the Board of
Directors in order to cure any ambiguity, defect or inconsistency, provided
that after such time as any person becomes an Acquiring Person, the Rights
Agreement may not be amended in any manner that would adversely affect the
interests of the holders of the Rights.
DELAWARE LAW AND CERTAIN CORPORATE AND CONTRACTUAL PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, this statute prohibits a publicly held
Delaware corporation from engaging, under certain circumstances, in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person becomes an
interested stockholder, unless either (i) prior to the date at which the
person becomes an interested stockholder the Board of Directors approves such
transaction or business combination, (ii) the stockholder acquires more than
85% of the outstanding voting stock of the corporation (excluding shares held
by directors who are officers or held in certain employee stock plans) upon
consummation of such transaction or (iii) the business combination is approved
by the Board of Directors and by two-thirds of the outstanding voting stock of
the corporation (excluding shares held by the interested stockholder) at a
meeting of stockholders (and not by written consent). An "interested
stockholder" is a person who, together with affiliates and associates, owns
(or at any time within the prior three years did own) 15% or more of the
corporation's voting stock. Section 203 defines a "business combination" to
include, without limitation, mergers, consolidations, stock sales and asset-
based transactions and other transactions resulting in a financial benefit to
the interested stockholder.
The Company's Certificate of Incorporation (the "Certificate") and By-laws
contain a number of provisions relating to corporate governance and to the
rights of stockholders. Certain of these provisions may be deemed to have a
potential anti-takeover effect in that such provisions may delay or prevent a
change of control of the Company. These provisions include: (a) the
classification of the Board of Directors into three classes, each class
serving for staggered three year terms; (b) restrictions on the removal of
directors; (c) the authority of the Board to issue series of Preferred Stock
with such voting rights and other provisions as the Board of Directors may
determine; (d) a requirement that a vote of greater than 80% of the voting
power of shares entitled to vote generally for the election of directors is
required to amend provisions of the Certificate and By-laws relating to the
classification of the Board and removal of directors unless 75% of the Board
of Directors approve such action; (e) the requirement that stockholder action
can be taken only at an annual or special meeting of stockholders and
prohibiting stockholder action by written consent in lieu of a meeting; (f) an
advance notice procedure for stockholders to make nominations of candidates
for election as directors; and (g) the requirement that a special stockholders
meeting may only be called by the Chairman of the Board, the President or at
the direction of the majority of the Board of Directors.
These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to acquire control of the Company to negotiate first with the
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Board of Directors. The Company believes that the benefits of these provisions
outweigh the potential disadvantages of discouraging such proposals, because,
among other things, negotiation of such proposals might result in an
improvement of their terms. The description set forth above is intended as a
summary only and is qualified in its entirety by reference to the Company's
Certificate and By-laws.
Under the terms of an employment agreement with Peter I. Mason, the Company
has agreed to have Casey Cowell and Paul G. Yovovich serve as directors of the
Company. Under the terms of an employment agreement with Lawrence J. Speh, the
Company has agreed to nominate Mr. Speh as a director for so long as Mr. Speh
owns at least 500,000 shares of Common Stock, and for so long as Mr. Speh is a
director or nominee for director. Mr. Speh has agreed to vote all shares of
Common Stock owned by him in favor of the Company's nominees. In addition, Mr.
Mason has agreed to support the nomination and election to the Board of Albert
J. Speh, Jr.
CERTAIN REGISTRATION RIGHTS
The Company has granted registration rights to certain holders of Company
securities. As part of the Company's acquisition of GIS, the Company issued
warrants to acquire 180,000 shares of Common Stock at $16.51 per share. As
part of the transaction, the holder of the warrants obtained certain demand
and piggyback registration rights with respect to the underlying shares of
Common Stock.
In connection with an amendment to the Company's employment and consulting
agreement with Lawrence J. Speh, the Company granted certain demand and
piggyback registration rights to Mr. Speh with respect to shares of Common
Stock owned directly by Mr. Speh and with respect to shares of Common Stock
controlled by Mr. Speh in a fiduciary capacity. Following the Common Stock
Offering, Mr. Speh will own directly or control in a fiduciary capacity
approximately 2.1 million shares of Common Stock. The shares of Common Stock
sold by Mr. Speh in the Common Stock Offering were not sold pursuant to these
registration rights.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Harris
Trust and Savings Bank, Chicago, Illinois.
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CERTAIN UNITED STATES INCOME TAX CONSIDERATIONS
The following is a summary of certain material United States federal income
tax considerations relating to the purchase, ownership and disposition of the
Notes and of the Common Stock into which Notes may be converted, but is not
intended and does not purport to be a complete analysis of all the potential
federal income or estate tax, or other tax considerations relating thereto.
This summary is based on the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), applicable Treasury Regulations promulgated or
proposed thereunder ("Treasury Regulations"), court decisions and current
administrative rulings and practice, all of which are subject to change,
possibly on a retroactive basis. This summary deals only with holders that
will hold Notes and the Common Stock into which Notes may be converted as
capital assets, and does not address tax considerations applicable to
investors that may be subject to special tax rules such as banks, tax-exempt
organizations, insurance companies, dealers in securities or enterprises,
persons that will hold Notes as a position in a hedging, straddle or
conversion transaction, or persons that have a functional currency other than
the U.S. dollar. This summary discusses the tax considerations applicable to
persons who purchase Notes upon their initial offering and does not discuss
the tax considerations applicable to subsequent purchasers of Notes. The
Company has not sought any ruling from the Internal Revenue Service (the
"IRS") with respect to the statements made and the conclusions reached in this
summary, and there can be no assurance that the IRS will agree with such
statements and conclusions. INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED
STATES FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AS
WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR
FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a beneficial owner of
a Note or Common Stock that for United States federal income tax purposes is
(i) a citizen or resident of the United States, (ii) a corporation created or
organized in the United States or under the laws of the United States or of
any State or the District of Columbia, (iii) an estate the income of which is
subject to United States federal income taxation regardless of source, or (iv)
a trust which is subject to the supervision of a court within the United
States and the control of a United States fiduciary.
PAYMENT OF INTEREST
Interest on a Note generally will be includable in the income of a United
States Holder as ordinary income at the time such interest is received or
accrued, in accordance with such Holder's method of accounting for United
States federal income tax purposes. The Notes will not have original issue
discount.
SALE, EXCHANGE, REDEMPTION OR RETIREMENT OF THE NOTES
Upon the sale, exchange, redemption or retirement at maturity of a Note, a
United States Holder generally will recognize capital gain or loss equal to
the difference between (i) the amount of cash proceeds and the fair market
value of any property received on the sale, exchange, redemption or retirement
(except to the extent such amount is attributable to accrued interest income,
which is taxable as ordinary income) and (ii) such Holder's adjusted tax basis
in the Note. A United States Holder's adjusted tax basis in a Note generally
will equal the cost of the Note to such Holder, less any principal payments
received by such Holder. Such capital gain or loss will be long-term capital
gain or loss if the United States Holder's holding period for the Note is more
than one year at the time of sale, exchange, redemption or retirement. In
1997, legislation was enacted which, among other things, reduces to 20% the
maximum rate of tax on long term capital gains on most capital assets held by
an individual for more than 18 months and under which gain on most capital
assets held by an individual more than one year and up to 18 months is subject
to tax at a maximum rate of 28%.
CONVERSION OF THE NOTES
A United States Holder generally will not reorganize any income, gain or
loss upon conversion of a Note into Common Stock, except with respect to cash
received in lieu of a fractional share of Common Stock or
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attributable to accrued interest on the converted Note. Such Holder's tax
basis in the Common Stock received on conversion of a Note will be the same as
such Holder's adjusted tax basis in the converted portion of the Note at the
time of conversion (reduced by any basis allocable to a fractional share
interest), and the holding period for the Common Stock received on conversion
will generally include the holding period of the portion of the Note
converted.
Cash received in lieu of a fractional share of Common Stock upon conversion
will be treated as a payment in exchange for the fractional share of Common
Stock and thus generally will result in capital gain or loss (measured by the
difference between the cash received for the fractional share and the United
States Holder's adjusted tax basis in the fractional share).
DIVIDENDS
Any amount distributed by the Company in respect of the Common Stock
generally will be treated as a dividend, subject to tax as ordinary income, to
the extent of the Company's current or accumulated earnings and profits, then
as a tax-free return of capital to the extent of the Holder's tax basis in the
Common Stock, and thereafter as gain from the sale or exchange of such stock.
A dividend distribution to a United States Holder which is a corporation
generally will qualify for the dividends received deduction (which is equal to
70% of the dividend amount if the Holder owns less than 20%, and 80% of the
dividend amount if the Holder owns 20% or more, of the voting power and value
of the Company's stock, excluding any non-voting, non-convertible, non-
participating preferred stock). The dividends received deduction is subject to
certain holding period, taxable income and other limitations. Moreover, in the
event of an "extraordinary dividend" with respect to Common Stock, a corporate
stockholder (i) is required to reduce its basis in Common Stock by the non-
taxed portion (generally the portion eligible for the dividends received
deduction described above) of the extraordinary dividend under certain
circumstances and (ii) is treated as recognizing gain from sale of stock to
the extent that the non-taxed portion of the extraordinary dividend exceeds
the basis in the Common Stock.
If (i) the Company makes a distribution of cash or property to its
stockholders which is taxable to such stockholders as a dividend (e.g.,
distributions of evidences of indebtedness or assets of the Company, but
generally not stock dividends or rights to subscribe for Common Stock) and,
pursuant to the antidilution provisions of the Indenture and the Notes, the
Conversion Price of the Notes is decreased, or (ii) the Conversion Price of
the Notes is decreased at the discretion of the Company, such decrease in
Conversion Price may be treated as the payment of a taxable dividend to United
States Holders of Notes. As a result, United States Holders of Notes could
recognize taxable income as a result of an event pursuant to which they
receive no cash or property.
SALE OF COMMON STOCK
Upon the sale or exchange of Common Stock, a United States Holder generally
will recognize capital gain or loss equal to the difference between (i) the
amount of cash and the fair market value of any property received upon the
sale or exchange and (ii) such Holder's adjusted tax basis in the Common
Stock. Such capital gain or loss will be long-term if the United States
Holder's holding period for the Common Stock is more than one year at the time
of the sale or exchange. In 1997, legislation was enacted which, among other
things, reduces to 20% the maximum rate of tax on long term capital gains on
most capital assets held by an individual for more than 18 months and under
which gain on most capital assets held by an individual more than one year and
up to 18 months is subject to tax at a maximum rate of 28%.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Information reporting generally will apply to payments of principal of and
premium, if any, and interest on a Note, payments of dividends on Common
Stock, payments of the proceeds of the sale of a Note and payments of the
proceeds of the sale of Common Stock to certain noncorporate United States
Holders. The payor will be required to withhold backup withholding tax on
certain payments to noncorporate United States Holders at the
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rate of 31% if (i) the payee fails to furnish a taxpayer identification number
("TIN") to the payor or establish an exemption from backup withholding, (ii)
the IRS notifies the payor that the TIN furnished by the payee is incorrect,
(iii) there has been a notified payee underreporting with respect to interest,
dividends or original issue discount or (iv) there has been a failure of the
payee to certify under penalty of perjury that the payee is not subject to
backup withholding under the Code. Any amounts withheld under the backup
withholding rules from a payment to a United States Holder will be allowed as
a credit against such Holder's United States federal income tax and may
entitle the Holder to a refund, provided that the required information is
furnished to the IRS.
NON-UNITED STATES HOLDERS
As used herein, the term "Non-United States Holder" means any beneficial
owner of a Note or Common Stock that is not a United States Holder. The
following discussion is limited to the United States federal income tax
consequences relevant to a Non-United States Holder.
For purposes of withholding tax on interest and dividends discussed below, a
Non-United States Holder (as defined above) includes a non-resident fiduciary
of an estate or trust. For purposes of the following discussion, interest,
dividends and gain on the sale, exchange or other disposition of a Note or
Common Stock will generally be considered to be "United States trade or
business income" if such income or gain is (i) effectively connected with the
conduct of a United States trade or business or (ii) in the case of most
residents of a country that has an income tax treaty with the United States,
attributable to a permanent establishment (or, in the case of an individual, a
fixed base) in the United States.
STATED INTEREST
Generally any interest paid to a Non-United States Holder of a Note that is
not United States trade or business income will not be subject to United
States tax if the interest qualifies as "portfolio interest." Generally
interest on the Notes will qualify as portfolio interest if (i) the Non-United
States Holder does not actually or constructively own 10% or more of the total
voting power of all voting stock of the Company and is not a "controlled
foreign corporation" with respect to which the Company is a "related person"
within the meaning of the Code, (ii) the beneficial owner, under penalty of
perjury, certifies that the beneficial owner is not a United States person and
such certificate provides the beneficial owner's name and address, (iii) the
Non-United States Holder is not a bank receiving interest on an extension of
credit made pursuant to a loan agreement made in the ordinary course of its
trade or business, and (iv) the Notes are in registered form.
The gross amount of payments to a Non-United States Holder of interest that
do not qualify for the portfolio interest exemption and that are not United
States trade or business income will be subject to United States federal
income tax at the rate of 30%, unless a United States income tax treaty
applies to reduce or eliminate withholding. United States trade or business
income will be taxed at regular United States rates rather than the 30% gross
rate. In the case of a Non-United States Holder that is a corporation, such
United States trade or business income may also be subject to the branch
profits tax (which is generally imposed on a foreign corporation on the actual
or deemed repatriation from the United States of earnings and profits
attributable to United States trade or business income) at a 30% rate. The
branch profits tax may not apply (or may apply at a reduced rate) if a
recipient is a qualified resident of certain countries with which the United
States has an income tax treaty. To claim the benefit of a tax treaty or to
claim exemption from withholding because the income is United States trade or
business income, the Non-United States Holder must provide a properly executed
Form 1001 or 4224 (or such successor forms as the IRS designates), as
applicable, prior to the payment of interest. These forms must be periodically
updated. Under recently issued Treasury Regulations that will generally be
effective after December 31, 1998 (the "New Regulations"), the required Forms
1001 and 4224 will be replaced by a new Form W-8. Under the New Regulations, a
Non-United States Holder who is claiming the benefits of a treaty may be
required to obtain a United States taxpayer identification number and make
certain certifications to the Company. Special procedures are provided in the
New Regulations for payments through qualified intermediaries. Prospective
investors should consult their tax advisors regarding the effect, if any, of
the New Regulations.
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DIVIDENDS
In general, dividends paid to a Non-United States Holder of Common Stock
will be subject to withholding of United States federal income tax at a 30%
rate unless such rate is reduced by an applicable income tax treaty. Dividends
that are connected with such holder's conduct of a trade or business in the
United States (United States trade or business income) are generally subject
to United States federal income tax at regular rates, but are not generally
subject to the 30% withholding tax if the Non-United States Holder files the
appropriate form with the payor, as discussed above. Any United States trade
or business income received by a Non-United States Holder that is a
corporation may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be applicable
under an income tax treaty. Currently, dividends paid to an address in a
foreign country generally are presumed (absent actual knowledge to the
contrary) to be paid to a resident of such country for purposes of the
withholding discussed above and for purposes of determining the applicability
of a tax treaty rate. Under the New Regulations, a Non-United States Holder
claiming the benefits of a treaty generally will be required to provide a Form
W-8 (or suitable substitute form) to the Company certifying such Non-United
States Holder's entitlements to treaty benefits. Other Treasury Regulations
provide special rules to determine whether, for purposes of determining the
applicability of a tax treaty, dividends paid to a Non-United States Holder
that is an entity should be treated as paid to the entity or those holding an
interest in that entity. Prospective investors should consult their tax
advisors regarding the effect, if any, of the New Regulations.
A Non-United States Holder of Common Stock that is eligible for a reduced
rate of United States withholding tax pursuant to an income treaty may obtain
a refund of any amounts currently withheld by filing an appropriate claim for
a refund with the IRS.
CONVERSION
A Non-United States Holder generally will not be subject to United States
federal income tax on the conversion of Notes into Common Stock, except with
respect to cash (if any) received in lieu of a fractional share or interest
not previously included in income. Cash received in lieu of a fractional share
may give rise to gain that would be subject to the rules described below for
the sale of Notes. Cash or Common Stock treated as issued for accrued interest
would be treated as interest under the rules described above.
SALE, EXCHANGE OR REDEMPTION OF NOTES OR COMMON STOCK
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-United States Holder on the sale,
exchange or redemption of a Note or Common Stock generally will not be subject
to United States federal income tax, unless (i) such gain is United States
trade or business income, (ii) subject to certain exceptions, the Non-United
States Holder is an individual who holds the Note or Common Stock as a capital
asset and is present in the United States for 183 days or more in the taxable
year of the disposition, (iii) the Non-United States Holder is subject to tax
pursuant to the provisions of United States tax law applicable to certain
United States expatriates (including certain former citizens or residents of
the United States) or (iv) in the case of the disposition of Common Stock, the
Company is a United States real property holding corporation. The Company does
not believe that it is currently a "United States real property holding
corporation," or that it will become one in the future.
FEDERAL ESTATE TAX
Notes held (or treated as held) by an individual who is not a citizen or
resident of the United States (for federal estate tax purposes) at the time of
his or her death will not be subject to United States federal estate tax
provided that the interest thereon qualifies as portfolio interest and was not
United States trade or business income. Common Stock owned or treated as owned
by an individual who is not a citizen or resident of the United States (for
federal estate tax purposes) will be included in such individual's estate for
United States federal income tax purposes unless an applicable estate tax
treaty otherwise applies.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-United States
Holder any interest or dividend that is subject to withholding, or that is
exempt from United States withholding tax pursuant to a tax treaty, or
interest that is exempt from United States tax under the portfolio interest
exception. Copies of these information returns may also be made available
under the provisions of a specific treaty or agreement to the tax authorities
of the country in which the Non-United States Holder resides.
Treasury Regulations provide that backup withholding and additional
information reporting will not apply to payments of principal on the Notes by
the Company to a Non-United States Holder if the holder certifies as to its
Non-United States status under penalties of perjury or otherwise establishes
an exemption (provided that neither the Company nor its paying agent has
actual knowledge that the holder is a United States person or that the
conditions of any other exemption are not, in fact, satisfied).
The payment of the proceeds from the disposition of Notes or Common Stock to
or through the United States office of any broker, United States or foreign,
will be subject to information reporting and possible backup withholding
unless the owner certifies as to its Non-United States Holder status under
penalty of perjury or otherwise establishes an exemption, provided that the
broker does not have actual knowledge that the holder is a United States
person or that the conditions of any other exemption are not, in fact,
satisfied. The payment of the proceeds from the disposition of a Note or
Common Stock to or through a non-United States office of a non-United States
broker that is not a United States related person will not be subject to
information reporting or backup withholding. For this purpose, a "United
States related person" is (i) a "controlled foreign corporation" for United
States federal income tax purposes, (ii) a foreign person 50% or more of whose
gross income from all sources for the three-year period ending with the close
of its taxable year preceding the payment (or for such part of the period that
the broker has been in existence) is derived from activities that are
effectively connected with the conduct of a United States trade or business,
or (iii) with respect to payments made after December 31, 1998, a foreign
partnership that, at any time during its taxable year, is 50% or more (by
income or capital interest) owned by United States persons or is engaged in
the conduct of a United States trade or business.
In the case of the payment of proceeds from the disposition of Notes or
Common Stock to or through a non-United States office of a broker that is
either a United States person or a United States related person, information
reporting is required on the payment unless the broker has documentary
evidence in the files that the owner is a Non-United States Holder and the
broker has no knowledge to the contrary. Backup withholding will not apply to
payments made through foreign offices of a broker that is not a United States
person or a United States related person (absent actual knowledge that the
payee is a United States person).
Any amounts withheld under the backup withholding rules from a payment to a
Non-United States Holder will be allowed as a refund or a credit against such
Non-United States Holder's United States federal income tax liability,
provided that the requisite procedures are followed.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME AND ESTATE
TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR AS TO PARTICULAR
TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES AND
THE COMMON STOCK OF THE COMPANY, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE
LAWS.
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UNDERWRITING
Subject to the terms and conditions contained in an Underwriting Agreement
dated March 19, 1998 (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters") have severally agreed to purchase from the Company
the respective principal amount of Notes set forth opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITERS NOTES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... $ 45,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................... 45,000,000
ABN AMRO Incorporated....................................... 10,000,000
------------
Total................................................... $100,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the Notes offered hereby are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to purchase and accept delivery of
all the Notes offered hereby (other than those covered by the over-allotment
option described below) if any are purchased.
The Underwriters initially propose to offer the Notes in part directly to
the public at the initial public offering price set forth on the cover page of
the Prospectus and in part to certain dealers (including the Underwriters) at
such price, less a concession not in excess of 1.95% of the principal amount
of the Notes. The Underwriters may allow, and such dealers may re-allow,
discounts not in excess of 0.25% of the principal amount of the Notes. After
the initial offering of the Notes, the public offering price and other selling
terms may be changed by the Underwriters at any time without notice.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Company has granted to the Underwriters an option exercisable within 30
days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an additional $15,000,000 aggregate principal amount
of the Notes, at the initial public offering price less underwriting discounts
and commissions. The Underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with the Note Offering. To the
extent that the Underwriters exercise such option, each Underwriter will
become obligated, subject to certain conditions, to purchase its pro rata
portion of such additional Notes based on such Underwriter's percentage
underwriting commitment as indicated in the preceding table.
The Company's executive officers and directors, other than the Selling
Stockholders, have agreed, subject to certain exceptions, with the
Underwriters not to, directly or indirectly, offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for, or warrants, options or rights to purchase or
acquire, Common Stock or in any other manner transfer all or a portion of the
economic consequences associated with the ownership of any Common Stock, or
enter into any agreement to do any of the foregoing, for a period of 90 days
after the date of this Prospectus. The Selling Stockholders have agreed to the
foregoing lockup provisions for a period of 180 days after the date of this
Prospectus, except that the ESOP may (i) make distributions of shares of
Common Stock to ESOP participants and (ii) sell or otherwise dispose of shares
of Common Stock in order to make cash distributions to ESOP participants, in
each case in accordance with the terms of the ESOP. In addition, the Company
has agreed that for a period of 90 days after the date of this Prospectus it
will not, without the prior written consent of DLJ, directly or indirectly
offer, sell, contract to sell, grant any option to purchase, issue, distribute
or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for, or
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any warrants, options or rights to purchase or acquire, Common Stock, or enter
into any agreements to do any of the foregoing, except for (i) shares of
Common Stock issued pursuant to the exercise of options or warrants
outstanding on the date of this Prospectus and (ii) options granted after the
date of this Prospectus pursuant to the Company's 1994 Executive Stock Option
Plan and the 1995 Employee Stock Option Plan.
The Notes will constitute a new issue of securities with no established
trading market. Application has been made for quotation of the Notes on The
Nasdaq SmallCap Market. The Company has been advised by the Underwriters that
the Underwriters presently intend to make a market in the Notes; however, they
are not obligated to do so, and they may discontinue such market-making at any
time without notice. Therefore, no assurance can be given as to the liquidity
of the trading market for the Notes or that an active trading market will
develop.
DLJ and ABN AMRO Incorporated have in the past provided, and they and other
Underwriters may in the future provide, investment banking services for the
Company. Additionally, certain of the Underwriters are participating as
underwriters in the concurrent Common Stock Offering.
Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the Notes in any
jurisdiction where action for that purpose is required. The Notes offered
hereby may not be offered or sold, directly or indirectly, nor may this
Prospectus or any other offering material or advertisements in connection with
the offer and sale of the Notes be distributed or published in any
jurisdiction, except under circumstances that will result in compliance with
applicable rules and regulations of such jurisdiction. Persons into whose
possession this Prospectus comes are advised to inform themselves about and to
observe any restrictions relating to the offering of the Notes and the
distribution of this Prospectus. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the Notes offered hereby
in any jurisdiction in which such an offer or solicitation is unlawful.
In connection with the Note Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes and Common Stock. Specifically, the Underwriters may overallot the Note
Offering, creating a syndicate short position. The Underwriters may bid for
and purchase the Notes and shares of Common Stock in the open market to cover
such syndicate short position or to stabilize the price of the Notes and
Common Stock. These activities may stabilize or maintain the market price of
the Notes and Common Stock above independent market levels. The Underwriters
are not required to engage in these activities, and may end any of these
activities at any time.
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LEGAL MATTERS
The legality of the Notes offered hereby will be passed upon for the Company
by Freeborn & Peters, Chicago, Illinois. As of the date of this Prospectus, a
total of 39,207 shares of Common Stock were owned by certain partners of
Freeborn & Peters. Certain legal matters will be passed upon for the
Underwriters by Katten Muchin & Zavis, Chicago, Illinois.
EXPERTS
The financial statements of the Company as of September 30, 1996 and 1997
and for each of the three fiscal years in the period ended September 30, 1997,
included in this Prospectus, have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, registration statements, proxy statements and other information filed
by the Company with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, NW,
Washington, D.C. 20549 and at its regional offices at 7 World Trade Center,
New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2551. Copies of such materials can be obtained from
the Public Reference Section of the Commission at its principal office at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a website at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission, including the Company.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act with respect to the Note Offering and the Common
Stock Offering. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete and reference is hereby made to the copy of the such contract,
agreement or document filed as an exhibit to the Registration Statement for a
complete statement of its provisions. For further information with respect to
the Company and the Notes offered hereby, reference is hereby made to the
Registration Statement, copies of which may be obtained at the locations
specified.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents and information filed by the Company with the
Commission are incorporated herein by reference: (i) the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1997; (ii) the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December
31, 1997; and (iii) the description of the Company's capital stock set forth
under the heading "Description of Capital Stock" in the Company's prospectus
that constitutes a part of the Company's Registration Statement on Form S-1
(Commission File No. 33-98302), which description is incorporated by reference
in the Company's Registration Statement on Form 8-A dated March 1, 1996 for
the registration of the Common Stock under the Exchange Act.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering made by this Prospectus shall be deemed to be
incorporated by reference herein. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this
60
<PAGE>
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document that also is incorporated or deemed to be
incorporated herein by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person,
a copy of any or all of the documents that are incorporated herein by
reference, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests should be
directed to Andy V. Jonusaitis, Vice President and General Counsel, May &
Speh, Inc., 1501 Opus Place, Downers Grove, Illinois 60515 (telephone (630)
964-1501).
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets as of September 30, 1996 and 1997 and December
31, 1997 (unaudited)...................................................... F-3
Consolidated Statements of Operations for the years ended September 30,
1995, 1996 and 1997, and for the three months ended December 31, 1996 and
1997 (unaudited).......................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1995, 1996 and 1997, and for the three months ended December
31, 1997 (unaudited)...................................................... F-5
Consolidated Statements of Cash Flows for the years ended September 30,
1995, 1996 and 1997, and for the three months ended December 31, 1996 and
1997 (unaudited).......................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of May & Speh, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of May
& Speh, Inc. and its subsidiary at September 30, 1996 and 1997 and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, Illinois
November 10, 1997, except as to the paragraph
of Note 1 entitled "Per share information" and Note 12, which are as of
February 12, 1998
F-2
<PAGE>
MAY & SPEH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, 1997
-------------------------- -----------------
1996 1997 (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 10,397,858 $ 1,888,817 $ 3,024,013
Marketable securities.......... 20,334,278 20,415,793 12,896,200
Accounts receivable, net....... 21,003,095 28,569,372 29,947,488
Income taxes refundable........ 3,550,617 6,301,217 6,301,217
Prepaid software royalties..... 2,652,398 5,442,796 6,518,476
Deferred income taxes and other
current assets................ 1,991,794 2,445,829 5,594,995
------------ ------------ ------------
Total current assets......... 59,930,040 65,063,824 64,282,389
Property, plant and equipment,
net............................. 32,289,746 50,228,440 50,848,825
Goodwill......................... 16,863,811 20,099,245 19,978,514
Other assets..................... 6,134,473 13,404,419 13,522,314
------------ ------------ ------------
Total assets................. $115,218,070 $148,795,928 $148,632,042
============ ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current maturities of long-term
debt.......................... $ 5,329,670 $ 5,810,927 $ 5,867,996
Accounts payable............... 3,713,421 5,017,666 4,219,114
Accrued wages and benefits..... 3,006,991 4,324,814 2,397,632
Other accrued expenses......... 1,730,938 2,870,903 5,061,922
------------ ------------ ------------
Total current liabilities.... 13,781,020 18,024,310 17,546,664
Long-term debt................... 22,250,802 31,546,484 30,150,736
Deferred income taxes............ 3,455,000 8,090,000 8,090,000
------------ ------------ ------------
Total liabilities............ 39,486,822 57,660,794 55,787,400
------------ ------------ ------------
Commitments and contingencies
(Note 7)
Stockholders' equity (Note 8):
Preferred stock, no par value,
2,000,000 shares authorized;
no shares issued
Common stock, $.01 par value,
50,000,000 shares authorized;
24,934,154 shares, 25,147,354
shares and 25,219,854 shares
issued and outstanding at
September 30, 1996 and 1997
and December 31, 1997......... 249,342 251,474 252,199
Additional paid-in capital..... 46,967,691 48,277,867 48,737,056
Retained earnings.............. 33,860,039 45,575,694 46,231,309
------------ ------------ ------------
81,077,072 94,105,035 95,220,564
Unearned ESOP compensation..... (5,345,824) (2,969,901) (2,375,922)
------------ ------------ ------------
Total stockholders' equity... 75,731,248 91,135,134 92,844,642
------------ ------------ ------------
Total liabilities and
stockholders' equity........ $115,218,070 $148,795,928 $148,632,042
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MAY & SPEH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------- ------------------------
1995 1996 1997 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............ $61,641,273 $77,222,960 $92,457,288 $21,228,730 $26,350,565
----------- ----------- ----------- ----------- -----------
Operating expenses:
Wages and benefits.... 20,983,636 23,950,392 30,436,956 7,143,274 8,948,912
Services and supplies. 4,160,441 6,839,200 6,191,501 2,039,016 1,370,602
Rents, leases and
maintenance.......... 13,878,290 18,064,271 20,137,243 4,637,094 5,251,101
Depreciation and
amortization......... 1,230,066 2,155,481 4,419,933 901,396 1,778,857
Other operating
expenses............. 5,106,579 6,812,536 8,433,104 1,823,590 2,115,297
ESOP principal
payments............. 2,410,539 2,375,923 2,375,923 593,980 593,979
Restructuring costs... -- -- -- -- 4,700,000
----------- ----------- ----------- ----------- -----------
47,769,551 60,197,803 71,994,660 17,138,350 24,758,748
----------- ----------- ----------- ----------- -----------
Operating income........ 13,871,722 17,025,157 20,462,628 4,090,380 1,591,817
----------- ----------- ----------- ----------- -----------
Interest and other
expense:
ESOP interest expense. 863,809 611,552 403,396 124,371 69,214
Other interest
expense.............. 678,843 1,231,263 2,214,705 452,471 686,449
Interest income....... (206,594) (1,147,345) (1,050,765) (293,581) (160,882)
Other, net............ 10,118 (167,896) (2,763) (10,484) (58,182)
----------- ----------- ----------- ----------- -----------
1,346,176 527,574 1,564,573 272,777 536,599
----------- ----------- ----------- ----------- -----------
Income before income
taxes.................. 12,525,546 16,497,583 18,898,055 3,817,603 1,055,218
Income taxes............ 4,665,000 6,274,000 7,182,400 1,450,900 399,603
----------- ----------- ----------- ----------- -----------
Net income.............. $ 7,860,546 $10,223,583 $11,715,655 $ 2,366,703 $ 655,615
=========== =========== =========== =========== ===========
Basic earnings per
share.................. $ 0.38 $ 0.45 $ 0.47 $ 0.09 $ 0.03
Weighted average shares
outstanding............ 20,426,482 22,633,972 25,028,786 24,953,371 25,172,300
Diluted earnings per
share.................. $ 0.38 $ 0.43 $ 0.45 $ 0.09 $ 0.02
Weighted average shares
outstanding, including
common equivalents..... 20,610,517 23,652,901 26,178,963 26,220,184 26,469,818
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MAY & SPEH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN UNEARNED RETAINED
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE--SEPTEMBER 30,
1994................... 20,465,737 $204,658 $ 1,525,927 $(11,362,877) $18,333,582 $ 8,701,290
Net income for the year
ended September 30,
1995.................. 7,860,546 7,860,546
ESOP compensation
earned during the year
ended September 30,
1995.................. 2,410,539 2,410,539
Dividends declared and
paid.................. 1,230,591 (2,545,332) (1,314,741)
Tax benefit of
dividends paid on
unallocated shares
held by the ESOP...... 247,000 247,000
Repurchases and
retirement of common
stock................. (103,080) (1,031) (259,340) (260,371)
---------- -------- ----------- ------------ ----------- -----------
BALANCE--SEPTEMBER 30,
1995................... 20,362,657 203,627 1,525,927 (7,721,747) 23,636,456 17,644,263
Net income for the year
ended September 30,
1996.................. 10,223,583 10,223,583
ESOP compensation
earned during the year
ended September 30,
1996 ................. 2,375,923 2,375,923
Issuance of common
stock warrants........ 1,300,000 1,300,000
Issuance of common
stock................. 4,355,000 43,550 43,005,144 43,048,694
Exercise of stock
options............... 216,497 2,165 1,136,620 1,138,785
---------- -------- ----------- ------------ ----------- -----------
BALANCE--SEPTEMBER 30,
1996................... 24,934,154 249,342 46,967,691 (5,345,824) 33,860,039 75,731,248
Net income for the year
ended September 30,
1997.................. 11,715,655 11,715,655
ESOP compensation
earned during the year
ended September 30,
1997 ................. 2,375,923 2,375,923
Exercise of stock
options............... 213,200 2,132 1,310,176 1,312,308
---------- -------- ----------- ------------ ----------- -----------
BALANCE--SEPTEMBER 30,
1997................... 25,147,354 251,474 48,277,867 (2,969,901) 45,575,694 91,135,134
Net income for three
months ended December
31, 1997 (unaudited).. 655,615 655,615
ESOP compensation
earned during the
three months ended
December 31, 1997
(unaudited)........... 593,979 593,979
Exercise of stock
options (unaudited)... 72,500 725 459,189 459,914
---------- -------- ----------- ------------ ----------- -----------
BALANCE--DECEMBER 31,
1997 (UNAUDITED)....... 25,219,854 $252,199 $48,737,056 $ (2,375,922) $46,231,309 $92,844,642
========== ======== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MAY & SPEH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------- ------------------------
1995 1996 1997 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.............. $ 7,860,546 $10,223,583 $11,715,655 $ 2,366,703 $ 655,615
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 1,230,066 2,155,481 4,419,933 901,396 1,778,857
Deferred income taxes. 492,000 2,172,000 4,727,000 -- --
ESOP principal
payments............. 2,410,539 2,375,923 2,375,923 593,980 593,979
Changes in assets and
liabilities, net of
effect from purchase
of GIS Information
Systems, Inc. &
Credit Strategy
Management
Accounts receivable,
net................ (879,246) (3,130,272) (7,566,277) 3,245,691 (1,378,116)
Prepaid expenses and
other current
assets............. (196,743) (1,312,277) (3,336,433) 656,124 (4,224,846)
Income taxes
payable/refundable. (599,526) (2,330,001) (2,750,600) -- --
Accounts payable and
accrued expenses... 2,558,198 (1,672,404) 4,065,082 (1,113,982) (534,715)
Other............... 553,996 (125,673) (108,597) (148,372) (399,395)
----------- ----------- ----------- ----------- -----------
Net cash provided
by (used in)
operating
activities........ 13,429,830 8,356,360 13,541,686 6,501,540 (3,508,621)
----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities:
Proceeds from sale of
property............... -- -- 12,215,528 -- --
Purchases of property
and equipment.......... (6,918,157) (5,189,216) (19,292,880) (948,384) (1,978,511)
Purchases of marketable
securities............. (647,530) (31,365,521) (13,442,385) (6,861,098) --
Sales of marketable
securities............. 1,575,166 12,919,913 13,360,869 2,232,339 7,519,593
Software development
costs capitalized
including related
equipment.............. (1,227,969) (3,990,359) (7,087,047) (1,658,479) --
Acquisition of GIS
Information Systems,
Inc., and Credit
Strategy Management.... -- (16,148,513) (3,235,734) -- --
Other................... (106,114) (74,000) (74,000) (31,362) (18,500)
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by
investing
activities........ (7,324,604) (43,847,696) (17,555,649) (7,266,984) 5,522,582
----------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Capital lease principal
payments............... -- (1,851,062) (1,890,175) (288,211) (544,699)
Proceeds from line of
credit................. (1,250,000) -- -- -- --
Proceeds from long-term
obligations............ 12,000,000 -- -- -- --
Repayments of long-term
obligations............ (10,266,987) (3,161,105) (3,917,211) (635,268) (793,980)
Dividends paid, net of
related ESOP
remittance............. (1,314,741) -- -- -- --
Issuance of common
stock.................. -- 43,048,995 -- -- --
Exercise of stock
options................ -- 1,138,785 1,312,308 141,667 459,914
Repurchases of common
stock.................. (202,478) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided
by (used in)
financing
activities........ (1,034,206) 39,175,613 (4,495,078) (781,812) (878,765)
----------- ----------- ----------- ----------- -----------
Net change in cash
and cash
equivalents....... 5,071,020 3,684,277 (8,509,041) (1,547,256) 1,135,196
Cash and cash
equivalents:
Beginning of period..... 1,642,561 6,713,581 10,397,858 10,397,858 1,888,817
----------- ----------- ----------- ----------- -----------
End of period........... $ 6,713,581 $10,397,858 $ 1,888,817 $ 8,850,602 $ 3,024,013
=========== =========== =========== =========== ===========
Supplemental cash flow
information:
Cash paid during the
period for:
Interest.............. $ 1,665,000 $ 1,843,000 $ 2,618,000 $ 495,712 $ 806,967
=========== =========== =========== =========== ===========
Income taxes.......... $ 5,155,000 $ 5,770,773 $ 5,250,000 $ -- $ --
=========== =========== =========== =========== ===========
Non-cash
financing/investing
activities:
Acquisition of
property and
equipment under
capital leases....... $ 342,000 $11,373,000 $15,321,000 $ 382,460 $ --
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
May & Speh, Inc. ("May & Speh" or the "Company") is a provider of computer-
based information management services primarily for clients with significant
direct marketing requirements. The Company provides direct marketing services
including database creation, data warehousing, predictive behavioral modeling
list processing and data enhancement. The Company also provides information
technology outsourcing services.
In December 1995, the Company effected a 12-for-one stock split. The
accompanying financial statements and related notes thereto have been restated
to reflect the 12-for-one stock split for all periods presented.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with an original maturity of
90 days or less as cash equivalents.
REVENUE RECOGNITION
Revenue is recognized as services are performed. Direct marketing services
revenues are generally determined based upon the number of records processed
and are recognized as such processes are completed. Information technology
outsourcing services revenues are recognized based upon the amount of computer
time used. Unbilled accounts receivable consist primarily of services
performed which are billable upon project completion or upon occurrence of
other specified events. Unbilled accounts receivable are generally billed
within 90 days of income recognition. Accounts receivable are unsecured.
MARKETABLE SECURITIES
Investments are stated at cost, which approximates fair market value; gains
and losses are recognized in the period realized. The Company has classified
its marketable securities as available for sale.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Betterments are
capitalized; repairs and maintenance are expensed as incurred. Depreciation is
computed using straight-line and accelerated methods over the estimated
economic lives of the related assets as follows:
<TABLE>
<S> <C>
Computers and related equipment.......................... 5 to 10 years
Building and improvements................................ 10 to 31.5 years
Office furniture and equipment........................... 12 years
Automobiles.............................................. 5 years
</TABLE>
CAPITALIZED SOFTWARE COSTS
Development costs for software to be sold or leased to third parties is
expensed as incurred until such time as technological feasibility is
established. Upon establishment of technological feasibility, future costs are
capitalized until the product is available for general release to clients.
Amortization of capitalized software costs is the greater of the amount
computed using (a) the ratio that current gross revenues for a product bear to
the total current and future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life of the product
of five to seven years. It is reasonably possible that those estimates of
anticipated future gross revenues, the remaining estimated economic life of
the product or both will be reduced in the future. In addition, software costs
are generally subject to technological obsolescence in the future.
F-7
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
The Company expenses research and development costs incurred until
technological feasibility is established. For the years ended September 30,
1995, 1996 and 1997, the Company expensed $1,860,055, $2,486,247 and
$3,425,750, respectively, as research and development costs. Research and
development costs are primarily wages and benefits for staff and are reflected
as such in the accompanying financial statements.
INCOME TAXES
The Company uses the asset and liability approach under which deferred
income taxes are provided for temporary differences between the financial
reporting and income tax bases of assets and liabilities based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income.
EMPLOYEE STOCK OWNERSHIP PLAN
Effective October 1, 1988, the Company established the May & Speh, Inc.
Employee Stock Ownership Plan (the ESOP) for the benefit of substantially all
of the Company's employees. The Company borrowed $22,500,000 from a bank (the
ESOP Loan) and loaned the proceeds to the ESOP for the purpose of providing
the ESOP sufficient funds to purchase 9,887,340 shares (then 43.11%) of the
Company's common stock at $2.28 per share.
The ESOP's obligation to the Company, which is evidenced by a note (the ESOP
Note), was initially recorded as unearned compensation (a direct reduction to
shareholders' equity) and is expensed ratably as the ESOP Note is repaid. The
ESOP Note, which contains provisions substantially similar to the Company's
obligation to the bank, is secured by the unallocated ESOP shares which are
released from suspense and allocated to participants as principal is repaid.
The terms of the ESOP agreement require the Company to make minimum
contributions sufficient to meet the ESOP's debt service obligations.
GOODWILL
In connection with its acquisition of GIS Information Systems, Inc. ("GIS")
in July 1996, the Company recorded goodwill of $16,970,000. An additional
$2,416,000 was recorded during the year ended September 30, 1997 related to
incentive payments and estimated costs to be incurred in consolidating GIS's
operations. The Company also recorded goodwill of $1,295,000 related to its
acquisition of Credit Strategy Management, Inc. ("CSM") in 1997. Total
goodwill aggregated $20,681,000 at September 30, 1997. Accumulated
amortization totaled $106,000 and $582,000 at September 30, 1996 and 1997,
respectively. Goodwill is amortized using the straight line method over a 40-
year period for financial reporting purposes.
The Company reviews the carrying value of goodwill and other long-lived
assets for impairment when events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. This review is
performed by comparing estimated undiscounted future cash flows from use of
the asset to the recorded value of the asset.
OTHER ASSETS
Other assets include cash surrender value of life insurance policies,
deposits and capitalized software costs. Capitalized software costs of
$5,218,000, and $12,305,000 are included in other assets as of September 30,
1996 and 1997, respectively. Amortization of such costs will commence when the
product is available for general release to clients.
F-8
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SIGNIFICANT CLIENTS
Sears, Roebuck and Co. accounted for 17.1%, 17.6% and 18.9%, of the
Company's net revenues in fiscal 1995, 1996, and 1997, respectively. Capital
One Bank accounted for 10.6% of the Company's revenue in fiscal 1995.
PER SHARE INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128) during the first quarter of fiscal 1998. SFAS
128 requires presentation of both basic EPS and diluted EPS on the face of the
income statement. Basic EPS is computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during a period. In computing diluted EPS,
the average stock price for the period is used in determining the number of
shares assumed to be purchased under the treasury stock method from exercise
of stock options. All per share information in the Company's financial
statements has been restated to conform to the provisions of SFAS 128.
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the consolidated balance sheets for cash,
marketable securities, accounts receivable, prepaid expenses and other current
assets, accounts payable and accrued expenses approximates fair value because
of the immediate or short-term maturity of these financial instruments. The
recorded value of long-term debt is estimated to approximate fair value due to
the interest rates incurred by the Company on such debt.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," issued in June 1997, will
require the Company to disclose, in financial statement format, all non-owner
changes in equity. Such changes include, for example, cumulative foreign
currency translation adjustments, certain minimum pension liabilities and
unrealized gains and losses on available-for-sale securities. This Statement
is effective for fiscal years beginning after December 15, 1997 and requires
presentation of prior period financial statements for comparability purposes.
The Company expects to adopt this Statement beginning with its financial
statements for the year ending September 30, 1999. Adoption of this statement
is not expected to have a material impact on the Company's financial
statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," issued in June 1997, establishes standards for reporting
information about operating segments in annual financial statements and
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major clients.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company
expects to adopt this Statement in its financial statements for the year
ending September 30, 1999.
F-9
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim information as of December 31, 1997 and for the
quarter then ended and for each of the fiscal quarters in the years ended
September 30, 1997 and 1996 has been prepared from the unaudited financial
records of the Company and, in the opinion of management, reflects all
adjustments necessary for a fair presentation of the financial position and
results of operations and of cash flows for the respective interim periods.
All adjustments were of a normal and recurring nature.
NOTE 2--MARKETABLE SECURITIES
The Company's marketable securities as of September 30, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------
FAIR UNREALIZED
CLASS OF SECURITY COST BASIS MARKET VALUE GAIN (LOSS)
<S> <C> <C> <C>
Municipal bonds...................... $18,415,793 $18,700,051 $284,258
Equities and mutual funds............ 2,000,000 2,000,000 --
----------- ----------- --------
$20,415,793 $20,700,051 $284,258
=========== =========== ========
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------
FAIR UNREALIZED
CLASS OF SECURITY COST BASIS MARKET VALUE GAIN (LOSS)
<S> <C> <C> <C>
Municipal bonds...................... $18,740,278 $18,873,348 $133,070
Equities and mutual funds............ 1,594,000 1,594,000 --
----------- ----------- --------
$20,334,278 $20,467,348 $133,070
=========== =========== ========
</TABLE>
The Company determines the cost basis of its marketable securities using the
specific identification method. The net unrealized gain relating to marketable
securities is not significant and has not been reflected in the accompanying
financial statements. The Company's investments in municipal bonds generally
mature in one to three years.
NOTE 3--ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1997
<S> <C> <C>
Trade accounts receivable:
Billed........................................ $19,289,683 $21,657,013
Unbilled...................................... 2,066,412 4,817,056
----------- -----------
21,356,095 26,474,069
Less--Allowance for doubtful accounts........... (353,000) (330,000)
----------- -----------
21,003,095 26,144,069
Other accounts receivable....................... -- 2,425,303
----------- -----------
$21,003,095 $28,569,372
=========== ===========
</TABLE>
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1997
<S> <C> <C>
Building and improvements...................... $11,297,039 $ 12,814,033
Computers and related equipment................ 20,584,392 36,476,595
Office furniture and equipment................. 3,361,864 5,488,584
Automobiles.................................... 190,452 168,789
----------- ------------
35,433,747 54,948,001
Less--Accumulated depreciation................. (9,347,242) (10,754,380)
----------- ------------
26,086,505 44,193,621
Land and land improvements..................... 6,203,241 6,034,819
----------- ------------
$32,289,746 $ 50,228,440
=========== ============
</TABLE>
F-10
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Assets under capital lease had an initial value of $11,716,000 and
$26,770,978, and accumulated amortization of $362,000 and $1,618,081, at
September 30, 1996 and 1997, respectively. As of September 30, 1996 all assets
under capital leases were computer and related equipment. As of September 30,
1997, $9,103,562 related to buildings and improvements, $5,835,060 related to
land and $11,832,356 related to computers and related equipment. The
amortization of these capitalized assets is included in depreciation expense
for the years ended September 30, 1995, 1996 and 1997.
NOTE 5--INCOME TAXES
The Company's provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------------
1995 1996 1997
<S> <C> <C> <C>
Current:
Federal................................ $3,359,000 $3,125,000 $2,121,200
State.................................. 814,000 762,000 334,200
---------- ---------- ----------
4,173,000 3,887,000 2,455,400
---------- ---------- ----------
Deferred:
Federal................................ 399,000 2,081,000 4,143,000
State.................................. 93,000 306,000 584,000
---------- ---------- ----------
492,000 2,387,000 4,727,000
---------- ---------- ----------
$4,665,000 $6,274,000 $7,182,400
========== ========== ==========
</TABLE>
The Company's deferred income tax asset (liability) balances are summarized
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1997
<S> <C> <C>
ESOP expenses................................... $ 144,000 $ 128,000
Allowance for doubtful accounts................. 138,000 129,000
Accrued expenses................................ 433,000 643,000
Deferred charges................................ 155,000 --
Non-compete agreement........................... 263,000 242,000
Other........................................... -- 30,000
----------- -----------
Gross deferred tax assets................... 1,133,000 1,172,000
----------- -----------
Depreciation.................................... (1,104,000) (3,656,000)
Software development costs capitalized.......... (2,035,000) (4,799,000)
Capital lease payment........................... (545,000) --
Goodwill........................................ (69,000) (173,000)
Other........................................... (109,000) --
----------- -----------
Gross deferred tax liabilities.............. (3,862,000) (8,628,000)
----------- -----------
Net deferred taxes.............................. $(2,729,000) $(7,456,000)
=========== ===========
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
SEPTEMBER 30,
----------------
1995 1996 1997
<S> <C> <C> <C>
Income taxes at federal statutory rate.................. 34% 34% 34%
State taxes, net of federal benefit..................... 5 5 5
Dividends paid on allocated shares held by ESOP......... (2) -- --
Municipal bond interest income.......................... -- (1) (1)
--- --- ---
37% 38% 38%
=== === ===
</TABLE>
F-11
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--LINE OF CREDIT AND LONG-TERM DEBT
Effective May 16, 1994, the Company entered into a line of credit agreement
with a bank under which the Company may borrow up to $2,000,000 with interest
payable at the bank's prime rate (8.5% at September 30, 1996 and 1997). This
loan is payable on demand and is secured by substantially all of the assets of
the Company. No amounts were outstanding under this agreement as of September
30, 1996 and 1997.
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1997
<S> <C> <C>
ESOP loan....................................... $ 5,345,823 $ 2,969,901
Term loan....................................... 11,200,000 10,200,000
Capital lease obligations....................... 9,975,431 23,687,510
Deferred acquisition payments................... 1,000,000 500,000
Other........................................... 59,218 --
----------- -----------
27,580,472 37,357,411
Less--Current maturities........................ (5,329,670) (5,810,927)
----------- -----------
$22,250,802 $31,546,484
=========== ===========
</TABLE>
ESOP LOAN
Effective November 10, 1988, the Company entered into a $22,500,000 term
loan agreement with a bank (the ESOP Loan). Under the terms of the agreement,
the Company must make quarterly payments of principal (in varying amounts as
summarized below) plus interest. This interest rate is subject to adjustments
based upon changes in federal and state tax rates or changes in the proportion
of the bank's income from this loan which is includable in gross income for
federal income tax purposes.
Amounts outstanding under the ESOP Loan are collateralized by the ESOP Note,
an assignment of the pledge agreement between the Company and the ESOP
(whereby the ESOP pledged the unallocated ESOP Shares as collateral for the
ESOP Note) and a security interest in all assets of the Company.
The ESOP Loan contains certain restrictive covenants that, among other
things, limit capital expenditures, additional indebtedness, certain
investments, the repurchase of common stock and the payment of dividends and
require the Company to maintain certain working capital and other financial
measures. The Company was in violation of certain of these restrictive
covenants as of September 30, 1996 and 1997 and waivers of such violations
were received from the bank.
On September 28, 1995, the Company's Board of Directors declared and paid a
$0.125 per share dividend. The portion of this dividend which was paid on
shares held by the ESOP (unallocated and allocated) was used to prepay
$1,231,000 of the ESOP Note and, accordingly, the Company prepaid, without
penalty, $1,231,000 of the variable rate portion of the ESOP Loan.
CAPITAL LEASE OBLIGATIONS
The Company entered into a sale-leaseback agreement with a third party
selling the existing building and land, including 10.4 acres located adjacent
to the existing building that will be used to build a new 200,000 square foot
building. The Company has entered into a 20-year lease with the third party on
the existing building, and it has also entered into a 20-year lease for the
new 200,000 square foot building currently under construction on the property
adjacent to the Company's executive offices. The lease commences upon
completion of the
F-12
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
building expected in September 1998, and is classified as a capital lease. The
existing building and land were sold at their book value of approximately
$12.2 million. The interest rate implicit in the Company's capital leases
approximates 8%.
TERM LOAN
During fiscal 1995, the Company entered into a $12,000,000 credit facility
to finance the expansion of the Company's facilities. The credit facility
requires quarterly principal payments of $200,000 plus interest at 8.5% (fixed
rate) with the balance to be paid in 2005. This credit facility contains
certain restrictive covenants that limit capital expenditures, limit
additional indebtedness, restrict certain investments, restrict the repurchase
of common stock and limit the payment of dividends. This debt agreement was
amended during fiscal 1996 to allow the acquisition of GIS Information
Systems, Inc. (see Note 10). The Company is also required to maintain working
capital and other financial measures. The Company was in violation of certain
of these restrictive covenants as of September 30, 1996 and 1997. Waivers of
such violations were received from the bank.
SUMMARY OF MATURITIES
A summary of principal maturities relating to long-term obligations is as
follows:
<TABLE>
<CAPTION>
DEFERRED
FISCAL YEAR ENDING CAPITAL ACQUISITION
SEPTEMBER 30, ESOP LOAN TERM LOAN LEASES PAYMENT TOTALS
<S> <C> <C> <C> <C> <C>
1998.................. $2,375,922 $ 800,000 $ 2,135,005 $500,000 $ 5,810,927
1999.................. 593,979 800,000 2,471,338 3,865,317
2000.................. 800,000 2,692,799 3,492,799
2001.................. 800,000 2,934,111 3,734,111
2002.................. 800,000 547,497 1,347,497
Thereafter............ 6,200,000 12,906,760 19,106,760
---------- ----------- ----------- -------- -----------
$2,969,901 $10,200,000 $23,687,510 $500,000 $37,357,411
========== =========== =========== ======== ===========
</TABLE>
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company currently leases warehouse and office space in the metropolitan
Chicago area under the terms of operating leases expiring on various dates
through August 2002. The Company also leases certain computer and other office
equipment under the terms of operating leases.
The aggregate future minimum lease commitments under these operating leases
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER 30,
<S> <C>
1998....................................................... $10,611,508
1999....................................................... 8,459,609
2000....................................................... 6,886,069
2001....................................................... 4,365,069
2002 and thereafter........................................ $ 1,269,069
</TABLE>
Total rental expense for the years ended September 30, 1995, 1996 and 1997,
under the operating leases approximated $8,644,000, $11,711,000 and
$11,511,000 respectively.
NOTE 8--STOCKHOLDERS' EQUITY
On March 29, 1996, the Company completed an initial public offering of
3,350,000 shares of its common stock, par value $.01 per share. Certain
stockholders of the Company sold an additional 3,350,000 shares of
F-13
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
common stock in the offering. In addition, on April 24, 1996, the Company
completed the offering of an additional 1,005,000 shares of common stock that
were subject to an over-allotment option granted to the underwriters of the
initial public offering. The net proceeds to the Company were approximately
$43,500,000 after deducting underwriting discounts and offering expenses.
A summary of share transactions within the ESOP is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1995 1996 1997
---------------------- ----------------------- ----------------------
UNALLOCATED ALLOCATED UNALLOCATED ALLOCATED UNALLOCATED ALLOCATED
<S> <C> <C> <C> <C> <C> <C>
Shares
Beginning of year..... 5,070,900 4,796,904 3,445,788 6,398,941 2,403,717 5,963,115
Released and
allocated............ (1,625,112) 1,625,112 (1,042,071) 1,042,071 (1,098,631) 1,098,631
Distributed to
participants......... (23,075) (1,188) (162,566)
Sold in Offering...... (1,476,709)
---------- --------- ---------- ---------- ---------- ---------
End of year........... 3,445,788 6,398,941 2,403,717 5,963,115 1,305,086 6,899,180
========== ========= ========== ========== ========== =========
</TABLE>
NOTE 9--STOCK OPTION PLANS
Effective September 30, 1994, the Company established the 1994 Executive
Stock Option Plan ("the 1994 plan"). The Company has established the 1995 Key
Employee Stock Option Plan ("the 1995 plan"), as amended and restated August
8, 1996. Under the terms of the 1994 plan, the Compensation Committee (the
Committee) of the Company's Board of Directors may grant options for the
purchase of up to 3,600,000 shares of the Company's common stock with exercise
prices and vesting requirements at the sole discretion of the Committee. The
Committee may grant options for the purchase of up to 2,000,000 shares of
common stock under the terms of the 1995 plan.
During fiscal 1995, 1996 and 1997, the Company granted options to purchase
2,202,000, 1,082,200, and 1,305,200 shares of common stock respectively, at
the estimated fair market value at the date of grant to certain employees. The
exercise price of these options ranged from $2.08 to $19.88 per share. Options
to purchase 600,000 shares and 72,000 shares were canceled by the Company in
fiscal 1995 and fiscal 1997, respectively. No options were canceled in fiscal
1996. There were no options which expired or were exercised during fiscal
1995. In fiscal 1996, 216,497 options were exercised at a weighted-average
exercise price of $2.08. In fiscal 1997, 213,200 options were exercised at a
weighted-average exercise price of $2.15.
As of September 30, 1997, options to purchase the Company's common stock
were outstanding as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED-AVERAGE OPTION
UNDERLYING PER SHARE SHARES
DATE OF GRANT OPTIONS EXERCISE PRICE VESTED
<S> <C> <C> <C>
October 1, 1994-June 1, 1995....... 1,700,303 $2.13 1,249,200
February 1, 1996-September 23,
1996.............................. 1,082,200 7.78 216,400
December 24, 1996-August 4, 1997... 1,305,200 9.10 --
--------- ---------
4,087,703 1,465,600
========= =========
</TABLE>
Generally, these options vest and become exercisable in five equal annual
increments beginning one year after the issue date and expire 10 years after
the issue date.
The weighted-average fair value of options at date of grant was $5.86 in
fiscal 1997 and $6.03 in fiscal 1996. These values were determined by the
Black-Scholes model with the following weighted-average
F-14
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
assumptions for fiscal 1997 and 1996, respectively: interest rate of 6.63% and
6.08%; volatility of 46% and 45%; no annual dividends; and an expected life of
8 years for both fiscal years.
The Company generally recognizes no compensation expense with respect to
awards of stock options since the exercise price of the common stock options
awarded are equal to the fair market value of the underlying security on the
date of grant. If the Company adopted Statement of Financial Accounting
Standard Number 123 with respect to stock options, net income would have been
$10,433,192 in fiscal 1997 and $9,788,696 in fiscal 1996. Basic and diluted
earnings per share would have been $0.42 and $0.40 in fiscal 1997,
respectively, and $0.43 and $0.41 in fiscal 1996, respectively. The pro forma
effect on net income and earnings per share for fiscal 1997 and 1996 is not
representative of the pro forma effect on net income in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to September 30, 1995.
NOTE 10--ACQUISITIONS
Effective February 3, 1997, the Company acquired the assets of Credit
Strategy Management, Inc. for $1.4 million cash. Credit Strategy Management,
Inc. provides modeling and analysis services and is located in Atlanta,
Georgia. Approximately $1.3 million of the purchase price was allocated to
goodwill, which is amortized using the straight line method over a 40-year
period. The acquisition has been accounted for under the purchase method of
accounting.
Effective July 1, 1996, the Company acquired all of the outstanding capital
stock of GIS Information Systems, Inc. ("GIS") for $16,148,000 in cash,
guaranteed deferred payments totaling $1,000,000, common stock warrants to
purchase 180,000 shares of the Company's common stock at $16.51 per share and
certain contingent payments. In connection with the acquisition, liabilities
were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired................................ $20,606,581
Issuance of common stock warrants............................ 1,300,000
Cash paid for common stock................................... 16,148,513
-----------
Liabilities assumed...................................... $ 3,158,068
===========
</TABLE>
GIS was a provider of data processing outsourcing services and was based in
Oak Brook, Illinois.
The fair value of the warrant to purchase 180,000 shares (which are fully
vested and expire on July 18, 2001) of the Company's common stock approximated
$1,300,000, and is included in part in capital as of September 30, 1996 and
1997. A payment of $1,050,000 was made based upon an earn-out provision for
the period July 1, 1996 through June 30, 1997. A similar additional payment is
expected based on an earn-out provision for the period July 1, 1997 through
June 30, 1998. Payments made under these earn-out provisions are reflected as
an increase in goodwill. The Company reserved $1,350,000 in the first quarter
of fiscal 1997 related to costs incurred in consolidating GIS operations.
These costs were paid during fiscal 1997 and primarily consisted of rental
commitments for property having no future economic value to the Company. The
amount reserved was also included as a component of goodwill.
The acquisition has been accounted for under the purchase method of
accounting. Accordingly, the purchase price was allocated to the identifiable
assets acquired and liabilities assumed based on their estimated fair values.
The excess of the purchase price over the net assets acquired was allocated to
goodwill. This goodwill is amortized using the straight line method over a 40-
year period for financial reporting purposes.
The following unaudited pro forma financial information presents the results
of operations of the Company and the acquired business as if the acquisitions
had occurred at the beginning of fiscal 1996. The pro forma
F-15
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
information is based on historical results of operations and does not
necessarily reflect the actual results that would have occurred, nor is it
necessarily indicative of future results of operations of the combined
enterprises:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Net Revenues..................................... $73,454,000 $86,696,000
Net Income....................................... 9,096,000 11,217,000
Basic earnings per share......................... $ 0.45 $ 0.50
Diluted earnings per share....................... 0.44 0.47
</TABLE>
NOTE 11--SUBSEQUENT EVENT--RESTRUCTURING CHARGE
In October 1997, the Company announced a one-time, pre-tax charge of
approximately $4.7 million ($2.9 million after-tax) in the first quarter of
fiscal 1998, which represents the present value of payments under existing
contracts with prior members of management.
NOTE 12--SUBSEQUENT EVENT--EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators for the
computations of basic and diluted EPS:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
SEPTEMBER 30,
-----------------------------------
1995 1996 1997
<S> <C> <C> <C>
Basic EPS computation
Numerator.................................. $ 7,860,546 $10,223,583 $11,715,655
Denominator:
Weighted average shares outstanding...... 20,426,482 22,633,972 25,028,786
----------- ----------- -----------
Basic EPS.................................. $ 0.38 $ 0.45 $ 0.47
=========== =========== ===========
Diluted EPS computation
Numerator.................................. $7,860,546 $10,223,583 $11,715,655
Denominator:
Weighted average shares outstanding...... 20,426,482 22,633,972 25,028,786
Common stock equivalent of stock options. 184,035 1,018,929 1,150,177
----------- ----------- -----------
Total shares............................... 20,610,517 23,652,901 26,178,963
----------- ----------- -----------
Diluted EPS................................ $ 0.38 $ 0.43 $ 0.45
=========== =========== ===========
</TABLE>
The weighted-average of securities that could potentially dilute basic EPS
in the future that were not included in the fiscal 1996 and 1997 computations
of diluted EPS was 102,857 and 569,611 shares, respectively. These securities
were not included in the diluted EPS calculation because to do so would have
been antidilutive for the periods presented. No securities were excluded from
the 1995 calculation of diluted EPS.
F-16
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly data for the years ended September 30, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Net Revenues.................. $16,043,616 $19,132,514 $19,997,045 $22,049,785
Operating Income.............. 3,070,007 4,153,782 4,854,828 4,946,540
Net Income.................... 1,661,403 2,368,722 3,067,002 3,126,456
Basic Earnings Per Share...... $ 0.08 $ 0.12 $ 0.12 $ 0.13
Diluted Earnings Per Share.... 0.08 0.11 0.12 0.12
1997
Net Revenue................... $21,228,730 $21,692,905 $23,625,454 $25,910,199
Operating Income.............. 4,090,380 4,347,052 5,347,905 6,677,291
Net Income.................... 2,366,703 2,419,205 3,087,366 3,842,381
Basic Earnings Per Share...... $ 0.09 $ 0.10 $ 0.12 $ 0.15
Diluted Earnings Per Share.... 0.09 0.09 0.12 0.15
</TABLE>
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPEC-
TUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RE-
LIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAK-
ING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
Safe Harbor for Forward-Looking Statements................................ 14
Use of Proceeds........................................................... 15
Capitalization............................................................ 15
Price Range of Common Stock............................................... 16
Dividend Policy........................................................... 16
Selected Financial, Operating and Other Data.............................. 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 25
Management................................................................ 33
Principal Stockholders.................................................... 35
Description of Notes...................................................... 36
Description of Capital Stock.............................................. 49
Certain United States Income Tax Considerations........................... 53
Underwriting.............................................................. 58
Legal Matters............................................................. 60
Experts................................................................... 60
Additional Information.................................................... 60
Incorporation of Certain Documents by Reference........................... 60
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$100,000,000
LOGO
5 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2003
--------------
PROSPECTUS
--------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
MERRILL LYNCH & CO.
ABN AMRO INCORPORATED
PAINEWEBBER INCORPORATED
MARCH 20, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
MARCH 20, 1998
4,000,000 SHARES
LOGO
COMMON STOCK
All of the 4,000,000 shares of common stock, par value $0.01 per share, of
the Company (the "Common Stock") offered hereby are being sold by certain
stockholders of the Company (the "Selling Stockholders"). See "Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of the shares by the Selling Stockholders.
Concurrently with this offering of Common Stock (the "Common Stock
Offering"), the Company is offering (the "Note Offering"), pursuant to a
separate Prospectus, $100,000,000 principal amount (excluding the
underwriters' over-allotment option) of 5 1/4% Convertible Subordinated Notes
due 2003 (the "Notes"). The net proceeds of the Note Offering are expected to
be used to repay the Company's entire indebtedness under a term loan, with the
balance to be used for capital expenditures, working capital and other general
corporate purposes, including possible acquisitions. Consummation of the
Common Stock Offering is not a condition to consummation of the Note Offering,
and consummation of the Note Offering is not a condition to consummation of
the Common Stock Offering. See "Use of Proceeds."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"SPEH." On March 19, 1998, the last reported sale price of the Common Stock
was $12 5/8 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS TO
TO THE DISCOUNTS AND THE SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $12.625 $0.695 $11.93
Total(2)................................ $50,500,000 $2,780,000 $47,720,000
</TABLE>
- -------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Certain Selling Stockholders and the Company have granted to the
Underwriters an option exercisable within 30 days after the date of this
Prospectus to purchase up to an additional 275,000 and 325,000 shares of
Common Stock, respectively, on the same terms as set forth above, at the
Price to the Public, less the Underwriting Discounts and Commissions,
solely for the purpose of covering over-allotments, if any. If such option
is exercised in full, the total Price to the Public, Underwriting
Discounts and Commissions and Proceeds to the Selling Stockholders will be
$58,075,000, $3,197,000, and $51,000,750, respectively, and the total
proceeds to the Company will be $3,877,250 before deducting expenses
payable by the Company estimated at $366,000. See "Underwriting."
The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by them, subject to certain conditions, including
their rights to withdraw, cancel or reject orders in whole or in part. It is
expected that delivery of the shares will be made in New York, New York, on or
about March 25, 1998.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
ABN AMRO INCORPORATED
PAINEWEBBER INCORPORATED
<PAGE>
The inside front cover contains a collage of five photographs depicting
various facilities and operations of the Company as follows:
Top left--a photograph of a May & Speh systems programmer
Top right--a photograph of a Company employee and telecommunications equipment
Bottom right--a photograph of two personal computers showing screens used in
the Company's direct marketing services operations
Bottom left--a photograph of the Company's computer operations command center
and employees
Middle left--a photograph of a computer circuit board
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH
THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK ON THE NASDAQ
NATIONAL MARKET, OR OTHERWISE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the Selected Financial, Operating and Other Data and the
Company's Consolidated Financial Statements and Notes thereto, included or
incorporated by reference in this Prospectus. Except as otherwise specified,
all information in this Prospectus has been adjusted to reflect a 12-for-1
split of the Common Stock effected in December 1995, assumes that the
Underwriters do not exercise the over-allotment option described under the
caption "Underwriting" and, to the extent the Note Offering is described
herein, further assumes no exercise of the underwriters' over-allotment option
in the Note Offering. Diluted earnings per share have been presented for all
periods, unless otherwise specified. The terms "Company" and "May & Speh" refer
to May & Speh, Inc. and its subsidiary, unless otherwise indicated or the
context requires otherwise.
THE COMPANY
May & Speh provides computer-based information management services with a
focus on direct marketing and information technology ("IT") outsourcing
services. The Company's direct marketing services help companies execute more
profitable direct marketing and customer management programs. Services include
strategic analysis and strategy management; systems consulting; custom data
warehouse and datamart design, build, implementation and management;
statistical (predictive) modeling and analysis; and list processing. May &
Speh's IT outsourcing services support multi-platform processing and network
management for clients seeking to outsource their IT operations. The Company's
direct marketing and IT outsourcing services are synergistic and allow the
Company to leverage its investment in technical personnel and its state-of-the-
art data processing facilities, as well as its core competencies in customized
software systems development, large database management, high speed data
processing and data center management. May & Speh's open architecture and
multiple platform data facilities provide its clients with superior processing
flexibility and speed.
Direct marketing enables the delivery of a customized message to a defined
audience and the measurement of the response to that message. The use of direct
marketing by businesses has increased significantly in recent years, as has
spending in support of direct marketing activities. Industry sources estimate
that United States expenditures for information and database services in
connection with direct marketing activities were approximately $17.0 billion in
1996, and that such expenditures are growing at an annual rate of 15% to 20%.
During the past few years, IT outsourcing has become increasingly recognized as
a valuable option for many enterprises. Originally seen as a way of controlling
costs, IT outsourcing is now viewed by many businesses as an integral component
of their growth strategy by allowing companies to focus on their core
competencies and strategic initiatives. According to G2 Research, Inc., total
expenditures for IT outsourcing services in the United States were
approximately $32.7 billion in 1996, and such expenditures are projected to
grow at an average annual rate of approximately 25.2% through 2001.
Direct marketing services accounted for approximately 61.6% of the Company's
net revenues for fiscal 1997. Through customized applications and Company-
developed software tools, May & Speh transforms and enhances its clients'
customer and transactional data from a raw and often disparate form into
useful, actionable information. The Company is increasingly focused on
developing integrated database management solutions, including marketing
strategy development; prospect data and data enhancement services; database
design and maintenance; data modeling, profiling and analysis; and ongoing
strategic evaluation and planning. The Company's integrated solutions enable
clients to access and analyze information collected across multiple client
functions through decision support and campaign management tools. May & Speh
currently targets companies that utilize direct marketing in the financial
services, retail, consumer goods, insurance and high tech industries. The
Company currently provides direct marketing services for approximately 180
clients including Green Tree Financial Corporation, Intel Corporation, Philips
Electronics North America Corporation, Sears, Roebuck and Co. ("Sears") and
Trans Union Corporation.
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IT outsourcing services accounted for approximately 38.4% of the Company's
net revenues for fiscal 1997. By outsourcing their IT infrastructure, May &
Speh's clients increase their flexibility, tap the expertise of scarce, skilled
IT professionals, liberate capital, and turn their fixed IT infrastructure
costs into variable costs. May & Speh's IT outsourcing services allow clients
to improve the speed of delivery and response while controlling their
information processing costs and reducing their exposure to rapid changes in
technology. Outsourcing contracts are typically multi-year arrangements, which
provide a recurring revenue stream that helps May & Speh achieve stable and
consistent growth. May & Speh continues to focus on the mid-sized IT
outsourcing market, which includes clients such as American National Can
Company ("American National Can"), CCC Information Services, Continental Grain
Company, Heller Financial, Inc. and Sanwa Business Credit Corporation.
Over the past five years, May & Speh has experienced significant growth in
revenues and earnings per share and expansion of its operating margins. For the
five fiscal years ended September 30, 1997, the Company's net revenues grew
from $41.8 million to $92.5 million and earnings per share increased from $0.15
to $0.45. During this period, operating margins expanded from 17.9% to 22.1%.
In 1997, the Company further strengthened its management team with the addition
of Peter I. Mason as Chairman, President and Chief Executive Officer, and other
senior management and Board members, each of whom has significant technology
experience.
MAY & SPEH'S COMPETITIVE STRENGTHS
The Company believes it has competitive strengths which have contributed to
its growth and profitability. These include:
Integrated Database Management Solutions. May & Speh offers integrated
database management solutions focused on targeted industries. These integrated
solutions include marketing strategy execution; prospect data and data
enhancement services; database design and maintenance; on-line access and
decision support tools; data modeling, profiling and analysis; and ongoing
strategic evaluation and management. The Company believes that this approach is
a competitive strength because it offers clients strategic direct marketing
tools rather than generic data processing services, resulting in the Company's
integrated database management solutions becoming integral to clients executing
their marketing strategies.
Focus on Targeted Industries. May & Speh's direct marketing services focus on
clients in targeted industries including financial services, retail, consumer
goods, insurance and high tech. The Company believes that as a result of its
focus and experience in specific industries, its sales and technical personnel
better understand the data processing needs, competitive dynamics and
regulatory issues of its clients.
Investment and Scale of its Client Service and Technical Infrastructure. May
& Speh's direct marketing and IT outsourcing services continue to benefit from
its investments in technical personnel and technology. The Company has a
current staff of over 500 skilled IT and direct marketing services personnel,
and maintains state-of-the-art data processing facilities. As a result of these
investments, the Company has developed its client service and technical
infrastructure to a significant scale, which enables the Company to develop and
support mainframe, mid-range and network applications and platforms,
accommodate growth and provide efficient and flexible services.
Long-Term Client Relationships with Recurring Revenues. May & Speh's long-
term client relationships provide the Company with recurring revenues. Over 50%
of the Company's fiscal 1997 revenues were derived from clients who have used
the Company's services for over three years. The Company's direct marketing
revenues are typically recurring because its direct marketing services become
an integral part of the clients' marketing programs and a portion of these
revenues are derived through multi-year contracts. The Company's IT outsourcing
revenues are typically recurring and generated through multi-year contracts.
Significant Operating Flexibility. May & Speh's financial position provides
the Company with significant operating flexibility. The Company has generated
operating margins in excess of 20% in each of the last four
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fiscal years. These operating margins have enabled the Company to reinvest the
cash generated from operations for strategic expenditures, including
technology, skilled technical personnel and capital investments relating to new
clients.
GROWTH STRATEGY
May & Speh's strategy is to continue to grow its business by leveraging its
competitive strengths. The principal components of May & Speh's growth strategy
are:
Offer Integrated Database Management Solutions. May & Speh continues to
develop integrated database management solutions focused on targeted industries
which are expected to continue to attract new clients with significant direct
marketing budgets and increase revenues from existing clients. May & Speh's
approach offers integrated solutions rather than general, disparate services
and systems.
Increase Penetration of Existing Targeted Industries and Target New
Industries. Currently, May & Speh's direct marketing services target the
financial services, retail, consumer goods, insurance and high tech industries.
The Company believes these industries offer significant opportunity for direct
marketing services, and continues to focus on attracting additional clients
within these targeted industries. In addition, the Company believes that direct
marketing is increasingly prevalent in the utilities, telecommunications,
automotive and healthcare industries, and that such industries provide
attractive near term opportunities for potential penetration.
Extend IT Outsourcing Services. May & Speh continues to extend its IT
outsourcing service offerings. In order to build upon and complement its
traditional mainframe outsourcing services, the Company offers client/server
outsourcing and network management services. The Company's strengthened IT
outsourcing capabilities have resulted in the addition of new clients and
contracts such as May & Speh's $41 million, five-year contract with American
National Can. Under this agreement, American National Can is outsourcing its
entire IT infrastructure to the Company including client/server, mainframe and
network management services. The Company believes its broad range of IT
outsourcing services and expertise will continue to attract new clients and
expand relationships with current clients.
Expand Sales Efforts. The Company plans to increase the number of new clients
by expanding its sales efforts in both direct marketing and IT outsourcing. The
direct marketing sales force is focused on increasing penetration within
current targeted industries as well as penetrating new industries. In IT
outsourcing services, the Company intends to continue focusing on United
States-based companies with mid-level processing requirements. In addition, the
Company plans to expand its sales presence in certain geographic areas for both
direct marketing and IT outsourcing services.
Pursue Strategic Acquisitions and Alliances. May & Speh will continue to
explore strategic acquisitions and alliances for additional growth
opportunities. The Company will seek to acquire or form alliances with
companies that have services, technologies, industry specialties or personnel
that would complement or extend those of the Company and facilitate the
addition of new clients. For example, the Company recently agreed to form
Energy Market Connect, LLC, a joint venture with Metzler & Associates, a
leading provider of management consulting services to the energy industry. The
Company believes this joint venture will provide a new sales channel and enable
the Company to incorporate utilities industry expertise in its integrated
database management solutions for the utilities industry. In May 1997, the
Company also formed a strategic alliance with Trans Union Corporation, the
nation's leading credit reporting company. The alliance will combine May &
Speh's expertise in creating custom and generic models with Trans Union
Corporation's data management capabilities.
The Company's executive offices are located at 1501 Opus Place, Downers
Grove, Illinois 60515, and its telephone number at that address is (630) 964-
1501.
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<PAGE>
THE COMMON STOCK OFFERING
Common Stock offered by
Selling Stockholders.........
4,000,000 shares
Common Stock to be
outstanding after the Common
Stock Offering............... 25,730,054 shares(1)
Use of Proceeds............... The Company will not receive any of the net
proceeds from the sale of the Common Stock by
the Selling Stockholders. See "Use of
Proceeds."
Nasdaq National Market SPEH
Symbol.......................
Concurrent Offering........... Concurrently with the Common Stock Offering,
the Company is offering $100,000,000 aggregate
principal amount of 5 1/4% Convertible
Subordinated Notes due 2003 ($115,000,000 if
the underwriters' over-allotment option is
exercised in full). The Notes are convertible
into Common Stock at a conversion price of
$15.91 per share. The Company intends to use
approximately $10.0 million of the estimated
net proceeds of the Note Offering to repay the
entire indebtedness under a term loan. The
remainder of the estimated net proceeds of the
Note Offering will be used for capital
expenditures, working capital and other general
corporate purposes. The Company also intends to
use a portion of the estimated net proceeds of
the Note Offering for acquisitions.
Consummation of the Common Stock Offering is
not a condition to consummation of the Note
Offering and consummation of the Note Offering
is not a condition to consummation of the
Common Stock Offering.
- --------------------
(1) Includes 176,000 shares of Common Stock issued upon the exercise of
outstanding stock options concurrent with the Common Stock Offering at a
weighted average exercise price of $2.08. Excludes (i) 4,290,103 shares of
Common Stock issuable following the Common Stock Offering upon the exercise
of outstanding stock options with a weighted average exercise price of
$8.38 per share and 2,408,900 additional shares reserved for issuance under
the Company's stock option plans; (ii) 6,285,350 shares issuable upon
conversion of the Notes at a conversion price of $15.91 per share; and
(iii) 180,000 shares issuable upon the exercise of outstanding warrants at
an exercise price of $16.51 per share. Outstanding options to purchase
679,603 shares and all of the outstanding warrants are exercisable as of
the date of this Prospectus.
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<PAGE>
SUMMARY FINANCIAL, OPERATING AND OTHER DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------------------------- ---------------------
1993 1994 1995 1996 (1) 1997 (1) 1996 (1) 1997 (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $41,792 $51,667 $61,641 $77,223 $92,457 $ 21,229 $ 26,351
Restructuring costs
(2)................... -- -- -- -- -- -- 4,700
Operating income....... 7,479 11,024 13,872 17,025 20,463 4,090 1,592
Interest expense....... 1,974 1,693 1,543 1,843 2,618 577 756
Net income............. 3,406 5,838 7,861 10,224 11,716 2,367 656
Diluted earnings per
share................. $ 0.15 $ 0.26 $ 0.38 $ 0.43 $ 0.45 $ 0.09 $ 0.02
Weighted average shares
outstanding, including
common equivalents.... 22,917 22,110 20,611 23,653 26,179 26,220 26,470
PRO FORMA DATA (3):
Interest expense....... $ 7,695 $ 1,840 $ 2,036
Income (loss) from
continuing operations
(4)................... 8,569 1,584 (139)
Diluted income (loss)
from continuing
operations per share
(4)................... $ 0.33 $ 0.06 $ (0.01)
OPERATING AND OTHER
DATA:
Operating margin (5)... 17.9% 21.3% 22.5% 22.0% 22.1% 19.3% 6.0%
Number of employees at
end of period......... 272 306 331 434 574 579
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED (6) ADJUSTED (7)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities........... $ 15,920 $ 15,920 $101,056
Working capital.......................... 46,736 47,441 133,825
Total assets............................. 148,632 149,337 238,605
Current maturities of long-term debt..... 5,868 5,868 5,068
Long-term debt........................... 30,151 30,151 120,951
Total stockholders' equity............... 92,845 93,549 92,817
</TABLE>
- --------------------
(1) Includes the results of operations of GIS Information Systems, Inc.,
effective July 1, 1996.
(2) Represents the present value of payments under existing contracts with
prior members of management. Excluding this one-time charge, operating
income and net income for the three months ended December 31, 1997 would
have increased by $4,700,000 and $2,913,000, respectively.
(3) Pro forma information for the fiscal year ended September 30, 1997 gives
effect to the sale of the Notes and the use of the estimated net proceeds
therefrom as if these transactions had occurred on October 1, 1996. Pro
forma information for the three months ended December 31, 1996 and 1997
gives effect to the sale of the Notes and the use of the estimated net
proceeds therefrom as if these transactions had occurred on October 1, 1996
and 1997, respectively. See "Use of Proceeds."
(4) Does not include an assumed extraordinary loss of $0.7 million (after-tax)
relating to the early extinguishment of debt.
(5) Operating margin represents operating income expressed as a percentage of
net revenues.
(6) Gives effect to the Common Stock Offering and the exercise by a Selling
Stockholder of options to purchase 176,000 shares of Common Stock at a
weighted average exercise price of $2.08 per share, as if such transactions
had occurred on December 31, 1997.
(7) Gives effect to the Note Offering and the use of the estimated net proceeds
therefrom as if such transactions had occurred on December 31, 1997.
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RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus, prospective investors should consider carefully the
following factors relating to the business of the Company and the sale of the
shares of Common Stock before acquiring any of the shares offered hereby.
ABILITY TO CONTINUE GROWTH; MANAGEMENT OF GROWTH
The Company has experienced significant growth over the last several years.
For the five fiscal years ended September 30, 1997, the Company's net revenues
grew from $41.8 million to $92.5 million, operating margins increased from
17.9% to 22.1% and net income increased from $3.4 million to $11.7 million.
While the Company's strategy contemplates continued growth of its business,
there can be no assurances that the Company will be able to sustain its recent
growth. In addition, such growth has placed significant demands on the
Company's management, other employees, operations and physical resources.
There can be no assurances that, if the Company continues to grow, management
will be effective in attracting and retaining additional qualified personnel,
expanding the Company's physical facilities, integrating acquired businesses
and otherwise managing growth. Any failure to effectively manage growth could
have a material adverse effect on the Company's business, operating results or
financial condition. See "--Acquisitions and Alliances," "--Dependence on
Personnel; Scarcity of Trained Technical Personnel," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
INTENSE COMPETITION
The information management services industry is extremely competitive, and
the Company faces intense competition in all of its customer markets. The
Company may also encounter new entrants, including well-capitalized
information services companies and other companies, as the markets for May &
Speh's services develop. Many of the Company's competitors have more extensive
financial, technical, marketing and other resources than the Company and may
have a greater ability to obtain client contracts where sizable up-front asset
purchases or investments are required and to respond more quickly than the
Company to new or emerging technologies and other competitive pressures. There
can be no assurances that the Company will be able to compete successfully
against its present or future competitors or that competitive pressures will
not have a material adverse effect on the Company's business, operating
results or financial condition. See "--Rapid Technological Change,"
"Business--Market Overview" and "--Competition."
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's net revenues, cash flows and operating results are subject to
significant variation between quarters. A significant portion of the Company's
quarterly revenues is derived from new projects for direct marketing services
and new contracts for IT outsourcing services, the timing of which is subject
to a variety of factors, such as client marketing budgets and modifications in
client strategies, outside the Company's control. The variability in revenues,
combined with the relatively fixed cost nature of the Company's business, can
have a substantial impact on the Company's quarterly results of operations.
Additionally, the Company periodically incurs cost increases due to both
hiring of new employees and computer capacity upgrades in anticipation of
future revenue growth. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Comparisons."
RISKS ASSOCIATED WITH LEVERAGE
At December 31, 1997, on a pro forma basis after giving effect to the Note
Offering and the use of the estimated net proceeds therefrom and the Common
Stock Offering (assuming the exercise by a Selling Stockholder of options to
purchase 176,000 shares of Common Stock with a weighted average exercise price
of $2.08 per share), the Company would have had (i) total long-term
indebtedness of $121.0 million, of which $100.0 million would be represented
by the Notes, (ii) stockholders' equity of $92.8 million and (iii) available
borrowing capacity of approximately $2.0 million (subject to customary
borrowing conditions) under the
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Company's existing $2.0 million credit facility (the "Existing Credit
Facility"). See "Capitalization." In addition, the Company is negotiating with
a group of banks for a new credit facility (the "New Credit Facility") which
is expected to provide for borrowings of up to $60.0 million. The degree to
which the Company is leveraged could have important consequences to
stockholders, including: (i) the ability of the Company to obtain any
necessary financing in the future for working capital, capital expenditures,
debt service requirements, acquisitions or other purposes may be limited; (ii)
a substantial portion of the Company's cash flows from operations must be
dedicated to the payment of the principal of and interest on its indebtedness
and will not be available for other purposes; (iii) the Company's level of
indebtedness could limit its flexibility in planning for, or reacting to,
changes in its business or in economic conditions; and (iv) the Company's
level of indebtedness will make it more vulnerable in the event of a downturn
in its business.
The Company's ability to satisfy its debt obligations will depend upon its
future operating performance, which will be affected by prevailing economic
conditions and financial, business and other factors, certain of which are
beyond its control, as well as the availability of revolving credit borrowings
under the Company's credit facilities. The Company anticipates that net cash
provided by its operating activities, together with the balance of the
estimated net proceeds from the sale of the Notes, if any, and funds available
under the Existing Credit Facility, will be sufficient to meet its operating
expenses, and working capital, capital expenditures and debt service
requirements, through at least fiscal 1999. However, if the Company is unable
to service its debt, it will be forced to pursue one or more alternative
strategies such as selling assets, curtailing any expansion, restructuring or
refinancing its indebtedness or seeking additional equity capital. There can
be no assurance that any of these strategies could be effected on terms
satisfactory to the Company, if at all.
ACQUISITIONS AND ALLIANCES
A key element of the Company's growth strategy is to pursue strategic
acquisitions of or alliances with companies that have services, products,
technologies, industry specializations or technical personnel that extend or
complement those of the Company. There is extensive competition for attractive
candidates for acquisitions or alliances and there can be no assurances that
the Company will be able to identify or reach mutually agreeable terms with
such candidates. In addition, the Company's management has had limited
experience in making acquisitions and entering into alliances, and there can
be no assurance that any acquired business will be effectively integrated or
that any acquired business or alliance will be profitable. A substantial
portion of the Company's capital resources, including a portion of the
estimated net proceeds of the Note Offering, could be used for acquisitions or
alliances. In addition, the Company may require additional debt or equity
financing for future acquisitions or alliances, which financing may not be
available on terms satisfactory to the Company. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Growth Strategy."
RISK OF DATA CENTER FAILURE
The Company's operations are dependent upon its ability to protect its data
center against damage from fire, power loss, telecommunications failure,
natural disaster or a similar event. A substantial portion of the Company's
computer equipment and operations are located at its headquarters in Downers
Grove, Illinois. While the Company maintains a disaster recovery plan with a
vendor to provide alternative data processing sites in the event the Company
experiences a natural disaster or other interruption at its data center, the
Company could nonetheless be materially adversely affected by damage or
failure that causes significant interruptions in the Company's operations. The
Company's property and business interruption insurance may not be adequate to
compensate the Company for all losses that may occur. See "Business--
Technological Resources and Facilities."
DEPENDENCE ON PERSONNEL; SCARCITY OF TRAINED TECHNICAL PERSONNEL
The Company is highly dependent on the collective skills and efforts of its
senior management team. Among these persons, the Company has employment
agreements with Peter I. Mason, Eric M. Loughmiller, Michael J. Loeffler and
Robert C. Early which include non-competition agreements with all of these
individuals. The
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<PAGE>
Company does not have "key man" life insurance policies covering any of these
individuals. As the Company's business has grown, the Company has found it
difficult to hire the new employees needed, particularly trained technical
personnel with database management services knowledge. Because of the recent
emergence of the industry, only a limited number of such trained technical
personnel are available for hire. Competition for qualified technical and
other personnel is intense, and the Company periodically is required to pay
premium wages to attract and retain personnel. There can be no assurance that
the Company will be able to continue to hire and retain sufficient qualified
management, technical, sales and other personnel necessary to conduct its
operations successfully, particularly if the planned growth occurs. See "--
Ability to Continue Growth; Management of Growth," "Business--Employees" and
"Management."
RELIANCE ON SIGNIFICANT CLIENTS; ABSENCE OF LONG-TERM CONTRACTS
A significant portion of May & Speh's net revenues is derived from
relatively few clients. Sears accounted for 17.6% and 18.9% of the Company's
net revenues in fiscal 1996 and fiscal 1997, respectively. Collectively, the
Company's 20 largest clients accounted for 63.6% and 58.9% of such revenues in
such periods.
The Company's revenues from many of its direct marketing clients are not
derived from multi-year or long-term contracts. Continued revenues from such
clients require ongoing sales efforts, and there is no assurance that the
Company will continue to be successful in generating future sales. While the
Company does have multi-year contracts with most of its IT outsourcing
services clients and a growing number of direct marketing clients, such
contracts usually include provisions for early termination by the client. In
most cases, there are clauses that specify certain customer payments to the
Company upon early termination. However, there can be no assurance that the
Company will successfully collect such payments even when it is contractually
entitled to receive them. Further, in a competitive situation, the Company
may, as it has in the past, renegotiate prices and terms for an existing
contract. Such situations can occur at any time and such re-negotiations
generally result in an erosion of the Company's profitability. See "Business--
Clients."
GOVERNMENT REGULATION; PRIVACY ISSUES
The direct marketing industry has recently been subject to increased
legislative attention. In addition, consumers are growing increasingly aware
of privacy issues related to direct marketing. In 1996, the Fair Credit
Reporting Act ("FCRA") was amended to provide consumers with easier access to
their credit reports and to facilitate the correction of errors in such
reports. New regulations interpreting the amendments were issued by the
Federal Trade Commission ("FTC") in 1997. Among other issues, the amendment
and regulations also addressed the issue of "prescreening," a procedure
utilized by many bankcard issuers and insurance companies in their direct
marketing programs. This legislation regulates the use of credit reports in
the preparation and generation of lists used by companies in offering credit.
This law also provides for significant fines for misuse of credit reports.
Although the Company believes its list processing activities for credit
grantors are in compliance with the recent amendments to FCRA, due to its
recent adoption, there is uncertainty as to its interpretation and
application. Therefore, there can be no assurances that significant fines will
not be levied against the Company or that this portion of its list processing
services will not be adversely affected. In addition to the federal
legislation, numerous bills are pending in various state legislatures. Such
bills are intended to give consumers more control over how personal
information is utilized in the marketplace. There can be no assurance that
this legislation or additional federal or state consumer-oriented legislation
will not significantly limit, or increase the costs of, the direct marketing
activities of the Company's clients. Direct marketing services accounted for
approximately 61.6% of the Company's net revenues in fiscal 1997. See
"Business--Consumer Privacy and Legislative Issues."
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in part upon its technological expertise and
proprietary technologies. The Company relies upon its trade secret program and
non-disclosure safeguards to protect its proprietary technologies. There can
be no assurance that these steps will be adequate to deter misappropriation or
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<PAGE>
infringement of its proprietary technologies. Further, given the rapid
evolution of technology and uncertainties in intellectual property law, there
can be no assurance that the Company's current or future products will not be
determined to infringe proprietary rights of others. If such infringement
occurs, the Company may not be able to obtain the requisite licenses or rights
to use such technology upon reasonable terms, if at all. See "Business--
Intellectual Property Rights."
RAPID TECHNOLOGICAL CHANGE
The market for the Company's services and products is characterized by
rapidly changing technology and frequent new and enhanced service and product
introductions. The Company believes that its future success will be highly
dependent upon its ability to enhance existing products and services and to
develop and introduce new products and services to respond to changing client
needs. There can be no assurances that the Company can successfully identify,
develop and bring new and enhanced services and products to market in a timely
manner, that such services or products will be commercially successful or that
services, products or technologies developed by others will not render the
Company's services and products noncompetitive or obsolete. See "Business--
Services and Products" and "--Competition."
CONTROLLING INTEREST OF CERTAIN PERSONS
Upon the closing of the Common Stock Offering, the Company's executive
officers and directors and their respective affiliates will beneficially own
approximately 14.7% of the outstanding Common Stock, excluding shares
allocated to the accounts of such persons under the Company's Employee Stock
Ownership Plan (the "ESOP"). The ESOP will own approximately 25.6% of the
outstanding Common Stock, and employee participants, including certain
executive officers and directors, exercise voting power over all of such
shares. If such stockholders were to act in concert in the future, they likely
would be able to continue to elect all of the Company's directors, determine
the outcome of most corporate actions requiring stockholder approval and
otherwise control the business affairs of the Company. Under the terms of an
employment agreement with Peter I. Mason, the Company has agreed to have Casey
Cowell and Paul G. Yovovich serve as directors of the Company. Under the terms
of an employment agreement with Lawrence J. Speh, the Company has agreed to
nominate Mr. Speh as a director for so long as Mr. Speh owns at least 500,000
shares of Common Stock, and for so long as Mr. Speh is a director or nominee
for director, Mr. Speh has agreed to vote all shares of Common Stock owned by
him in favor of the Company's nominees. In addition, Mr. Mason has agreed to
support the nomination and election to the Board of Albert J. Speh, Jr. See
"Management," "Principal Stockholders" and "Description of Capital Stock--
Delaware Law and Certain Corporate and Contractual Provisions."
ANTI-TAKEOVER PROVISIONS
The Company has a stockholder rights plan which may have the effect of
delaying or preventing a change of control of the Company. Further, certain
provisions of the Company's Certificate of Incorporation and By-laws, and
certain provisions of the Delaware General Corporation Law, may make it
difficult to change control of the Company and replace incumbent management.
For example, the Company's Certificate of Incorporation provides for a
staggered Board of Directors and permits the Board of Directors, without
stockholder approval, to issue additional shares of Common Stock or establish
one or more classes or series of Preferred Stock having the number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations that the Board of Directors establishes.
The Company has entered into employment agreements with certain members of
senior management that provide for substantial severance pay in the event of a
"change of control" of the Company and the Company's 1994 Executive Stock
Option Plan and 1995 Key Employee Stock Option Plan provide that unexercised
options, whether vested or unvested, may be exercised in full upon a "change
of control" as defined in such plans. See "Description of Capital Stock."
In addition, the terms of the Notes provide that the Company will be
required, upon the occurrence of a Change of Control (as defined) of the
Company, to offer to purchase the Notes for a price equal to 100% of the
11
<PAGE>
principal amount thereof, plus accrued but unpaid interest to the date of
purchase. If the Note Offering is consummated, the Change of Control purchase
features of the Notes may in certain circumstances have an anti-takeover
effect. The definition of "Change of Control" for purposes of the Notes is set
forth in the indenture related to the Notes, which is an exhibit to the
Registration Statement of which this Prospectus is a part.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Information contained or incorporated by reference in this Prospectus
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), which can be
identified by the use of forward-looking terminology such as "believes,"
"contemplates," "expects," "may," "will," "should," "would" or "anticipates"
or the negative thereof or other variations thereon or comparable terminology,
or by discussions of strategy. No assurance can be given that the future
results covered by the forward-looking statements will be achieved. Various
factors, including certain risks and uncertainties described herein under
"Risk Factors," could cause actual results to vary materially from the future
results covered in such forward-looking statements.
12
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the net proceeds from the sale of Common
Stock by the Selling Stockholders. In the event the underwriters' over-
allotment option is exercised in full, the net proceeds to the Company (after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company) are estimated to be approximately $3.5
million. In the event the underwriters' over-allotment option is exercised,
the Company intends to use the estimated net proceeds for working capital and
general corporate purposes.
Concurrently with the Common Stock Offering, the Company is offering $100.0
million aggregate principal amount of Notes ($115.0 million if the
underwriters' over-allotment option is exercised in full). The net proceeds
from the Note Offering are estimated to be $96.3 million ($110.8 million if
the underwriters' over-allotment option is exercised in full). The Company
intends to use approximately $10.0 million of such proceeds to repay the
entire indebtedness under a term loan and approximately $1.2 million ($0.7
million after-tax) to pay an assumed prepayment penalty. The remainder of the
estimated net proceeds of the Note Offering will be used for capital
expenditures, working capital and other general corporate purposes, including
possible acquisitions. From time to time, the Company evaluates potential
acquisitions. However, the Company currently has no understandings,
commitments or agreements with respect to such transactions. Consummation of
the Common Stock Offering is not a condition to consummation of the Note
Offering and consummation of the Note Offering is not a condition to
consummation of the Common Stock Offering.
CAPITALIZATION
The following table sets forth the historical consolidated capitalization of
the Company at December 31, 1997 (i) on an actual basis, (ii) as adjusted to
give effect to the Common Stock Offering (assuming the exercise by a Selling
Stockholder of options to purchase 176,000 shares of Common Stock at a
weighted average exercise price of $2.08 per share), and (iii) as further
adjusted to give effect to the Note Offering and the application of the
estimated net proceeds therefrom. See "Use of Proceeds." This table should be
read in conjunction with and is qualified by reference to the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and marketable securities............. $ 15,920 $ 15,920 $101,056
======== ======== ========
Current maturities of long-term debt....... 5,868 5,868 5,068
-------- -------- --------
Long-term debt:
Term loan................................ 9,200 9,200 --
5 1/4% Convertible Subordinated Notes due
2003.................................... -- -- 100,000
Other debt............................... 20,951 20,951 20,951
-------- -------- --------
Total long-term debt................... 30,151 30,151 120,951
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.01 par value,
2,000,000 shares authorized; no shares
issued.................................. -- -- --
Common stock, $0.01 par value, 50,000,000
shares authorized; 25,219,854 shares
issued and outstanding actual and
25,395,854 shares as adjusted and as
further adjusted........................ 252 254 254
Additional paid-in capital............... 48,737 49,440 49,440
Retained earnings........................ 46,231 46,231 45,499(1)
Unearned ESOP compensation............... (2,376) (2,376) (2,376)
-------- -------- --------
Total stockholders' equity............. 92,844 93,549 92,817
-------- -------- --------
Total capitalization................. $128,863 $129,568 $218,836
======== ======== ========
</TABLE>
- ---------------------
(1) Includes a $0.7 million (after-tax) reduction in retained earnings due to
an assumed prepayment penalty resulting from the early extinguishment of
debt. See "Use of Proceeds."
13
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company has traded on the Nasdaq National Market
under the symbol "SPEH" since March 26, 1996, the date of the Company's
initial public offering of Common Stock. The following table sets forth for
the fiscal periods indicated the range of high and low closing sales prices of
the Common Stock as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Fiscal year ended September 30, 1996:
Second Quarter.............................................. $12 $10 15/16
Third Quarter............................................... 16 1/2 10 7/8
Fourth Quarter.............................................. 21 1/2 13 3/4
Fiscal year ended September 30, 1997:
First Quarter............................................... $19 7/8 $11 1/2
Second Quarter.............................................. 14 7 1/2
Third Quarter............................................... 13 1/2 7 3/8
Fourth Quarter.............................................. 14 3/4 12
Fiscal year ending September 30, 1998:
First Quarter............................................... $15 7/8 $11 1/4
Second Quarter (through March 19)........................... 15 1/8 12
</TABLE>
On March 19, 1998, the last sale price of the Common Stock on the Nasdaq
National Market was $12 5/8 per share. As of that date, there were 25,554,054
shares of Common Stock issued and outstanding, held by 105 stockholders of
record.
DIVIDEND POLICY
The Company currently intends to retain its earnings for future growth and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. The Company's credit agreements prohibit the Company from paying
dividends and making other distributions on its Common Stock without the
consent of its lenders. Any future payment of dividends will depend upon the
Company's results of operations, financial condition, cash requirements and
other factors deemed relevant by the Board of Directors.
14
<PAGE>
SELECTED FINANCIAL, OPERATING AND OTHER DATA
The following table sets forth selected financial, operating and other data
of the Company for the five fiscal years ended September 30, 1997 and for the
three months ended December 31, 1996 and 1997. The selected statement of
operations data for the fiscal years ended September 30, 1995, 1996 and 1997
and the selected balance sheet data as of September 30, 1996 and 1997 have
been derived from the Company's audited financial statements included
elsewhere herein. The selected statement of operations data for the fiscal
years ended September 30, 1993 and 1994 and the selected balance sheet data as
of September 30, 1993, 1994 and 1995 have been derived from audited financial
statements of the Company not included herein. The selected statement of
operations data for the three months ended December 31, 1996 and 1997 and the
selected balance sheet data as of December 31, 1997 have been derived from the
unaudited financial statements of the Company. In the opinion of management of
the Company, the unaudited financial statements have been prepared on the same
basis as the Company's audited financial statements and include all
adjustments, consisting only of normal recurring items, necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended December 31, 1997 are
not necessarily indicative of the results to be expected for the entire fiscal
year. This financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------- ----------------
1993 1994 1995(1) 1996(2) 1997(2) 1996(2) 1997(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING AND OTHER
DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $41,792 $51,667 $61,641 $77,223 $92,457 $21,229 $26,351
Operating expenses:
Wages and benefits..... 14,709 18,624 20,984 23,950 30,437 7,143 8,949
Services and supplies.. 3,240 3,650 4,160 6,839 6,192 2,039 1,371
Rents, leases and
maintenance........... 9,848 11,156 13,878 18,064 20,137 4,637 5,251
Depreciation and
amortization.......... 740 912 1,230 2,155 4,420 901 1,779
Other operating
expenses.............. 3,667 4,034 5,106 6,814 8,433 1,824 2,115
ESOP principal payments
(3)................... 2,109 2,267 2,411 2,376 2,376 594 594
Restructuring costs
(4)................... -- -- -- -- -- -- 4,700
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 34,313 40,643 47,769 60,198 71,995 17,138 24,759
------- ------- ------- ------- ------- ------- -------
Operating income........ 7,479 11,024 13,872 17,025 20,462 4,091 1,592
ESOP interest........... 1,208 1,022 864 611 403 124 69
Other expense (income),
net.................... 662 474 482 (84) 1,161 149 468
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 5,609 9,528 12,526 16,498 18,898 3,818 1,055
Income taxes............ 2,203 3,690 4,665 6,274 7,182 1,451 399
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 3,406 $ 5,838 $ 7,861 $10,224 $11,716 $ 2,367 $ 656
======= ======= ======= ======= ======= ======= =======
Basic earnings per share
(5).................... $ 0.15 $ 0.26 $ 0.38 $ 0.45 $ 0.47 $ 0.09 $ 0.03
Weighted average shares
outstanding (5)........ 22,917 22,110 20,426 22,634 25,029 24,953 25,172
Diluted earnings per
share (5).............. $ 0.15 $ 0.26 $ 0.38 $ 0.43 $ 0.45 $ 0.09 $ 0.02
Weighted average shares,
including common
equivalents (5)........ 22,917 22,110 20,611 23,653 26,179 26,220 26,470
OPERATING AND OTHER
DATA:
Operating margin (6).... 17.9% 21.3% 22.5% 22.0% 22.1% 19.3% 6.0%
Number of employees at
end of period.......... 272 306 331 434 574 579
Processing capacity
(MIPS) at end of
period................. 168 198 500 1,329 5,995
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable
securities............. $ 4,881 $ 4,459 $ 8,602 $ 30,732 $ 22,305 $ 15,920
Working capital......... 10,840 12,091 16,519 46,149 47,040 46,736
Total assets............ 29,971 33,978 46,804 115,218 148,796 148,632
Current maturities of
long-term debt......... 2,724 3,035 3,359 5,330 5,811 5,868
Long-term debt.......... 17,697 15,051 16,860 22,251 31,546 30,151
Total stockholders'
equity................. 3,989 8,701 17,644 75,731 91,135 92,845
</TABLE>
- -------------------
(1) In fiscal 1995, the Company paid a special dividend of $2.5 million. The
principal purpose of the dividend was to permit the ESOP to prepay without
penalty a portion of its outstanding loan balance.
(2) Includes the results of operations of GIS Information Systems, Inc.,
effective July 1, 1996.
(3) Represents tax deductible contributions to the Company's ESOP which are
used to service principal payments on the related ESOP loan.
(4) Represents the present value of payments under existing contracts with
prior members of management. Excluding this one-time charge, operating
income and net income would have increased by $4,700,000 and $2,913,000,
respectively.
(5) Reflects 12-for-1 stock split in December 1995.
(6) Operating margin represents operating income expressed as a percentage of
net revenues.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
May & Speh celebrated its 50th anniversary as a provider of information
technology services in 1997. May & Speh provides computer-based information
management services with a focus on direct marketing and IT outsourcing
services. The Company's direct marketing services help companies execute more
profitable direct marketing and customer management programs. Services include
strategic analysis and strategy management; systems consulting; custom data
warehouse and datamart design, build, implementation and management;
statistical (predictive) modeling and analysis; and list processing. May &
Speh IT outsourcing services support multi-platform processing and network
management for clients seeking to outsource their IT operations, thereby
liberating capital and redirecting their focus to more strategic IT
initiatives.
May & Speh has experienced strong growth in revenues and earnings per share
over the last five years. For the five fiscal years ended September 30, 1997,
the Company's net revenues grew from $41.8 million to $92.5 million and
earnings per share increased from $0.15 to $0.45. During this period,
operating margins increased from 17.9% to 22.1%, reflecting achievement of
certain economies of scale. The Company has invested in human resources,
facilities and technology at rates consistent with growth in revenues over
this period. The number of employees has increased from 272 at September 30,
1993 to 574 at September 30, 1997, reflecting the addition of new technical,
sales and marketing and administrative personnel to support the Company's
overall growth. In addition, the Company's ESOP principal payments, which have
remained relatively constant in dollar terms, have declined as a percentage of
net revenues to 2.6% for fiscal 1997 from 5.0% in fiscal 1993.
In fiscal 1997, approximately 61.6% of the Company's net revenues were from
direct marketing services. Revenues from the Company's existing direct
marketing clients are typically recurring in nature, although many of the
Company's direct marketing clients are not under long-term contracts. IT
outsourcing services provided approximately 38.4% of net revenues and are
typically performed under multi-year contracts. May & Speh's direct marketing
and IT outsourcing services are synergistic and leverage the Company's
investment in its technical personnel and state-of-the-art data facilities.
Investments required to provide services to new clients are typically spread
across multiple contracts. This approach reduces the Company's investment risk
and allows for economies of scale.
The Company regularly evaluates whether to lease or buy its computer
equipment. An environment of rapidly changing technology and cost efficient
financing arrangements has resulted in the Company leasing a significant
amount of its computer equipment under three to ten year leases. Generally,
the Company's computer leases with terms in excess of five years are
classified as capital leases.
As of December 31, 1997, the Company had more than 300 clients. The
Company's 20 largest clients accounted for approximately 58.9% of the
Company's net revenues in fiscal 1997. Sears represented 18.9% of the fiscal
1997 net revenues. The Company's net revenues for fiscal 1996 and 1997 were
concentrated in the following industries:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Direct Marketing:
Financial and banking......................................... 27% 23%
Retail........................................................ 19 18
Consumer goods................................................ 10 8
Insurance..................................................... 6 5
Agency........................................................ 5 5
High tech and other........................................... 7 3
--- ---
Total direct marketing........................................ 74% 62%
=== ===
Outsourcing (not industry specific)............................. 26% 38%
=== ===
</TABLE>
16
<PAGE>
In October 1988, the Company established the ESOP. At the time, the ESOP
acquired 43.1% of the Company's Common Stock from certain stockholders and
incurred a loan obligation of $22.5 million. As of March 2, 1998, the ESOP
owned approximately 31.7% of the Company's outstanding Common Stock. The loan
obligation is being repaid by the Company through annual tax deductible
contributions and as of December 31, 1997, the loan obligation was $2.4
million. ESOP contributions are reflected in the Company's consolidated
statements of operations as "ESOP principal payments" as an operating expense
and as an interest expense.
The Company recorded a one-time, pre-tax restructuring charge of
approximately $4.7 million ($2.9 million after-tax) in the first quarter of
fiscal 1998. This charge represents the present value of payments under
existing contracts with prior members of management.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
derived from the Company's statements of operations as a percentage of
revenues:
<TABLE>
<CAPTION>
FISCAL YEARS THREE MONTHS
ENDED SEPTEMBER ENDED
30, DECEMBER 31,
-------------------- -----------------
1995 1996 1997 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Direct marketing services............ 78.6% 73.0% 61.6% 62.6% 58.6%
Information technology outsourcing
services............................ 21.4 27.0 38.4 37.4 41.4
------ ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
------ ----- ----- ----- -----
Operating expenses:
Wages and benefits................... 34.0 31.0 32.9 33.7 34.0
Services and supplies................ 6.7 8.9 6.7 9.6 5.2
Rents, leases and maintenance........ 22.5 23.4 21.8 21.8 19.9
Depreciation and amortization........ 2.0 2.8 4.8 4.2 6.8
Other operating expenses............. 8.3 8.8 9.1 8.6 8.0
ESOP principal payments.............. 3.9 3.1 2.6 2.8 2.3
Restructuring costs.................. -- -- -- -- 17.8
------ ----- ----- ----- -----
Total operating expenses........... 77.4 78.0 77.9 80.7 94.0
------ ----- ----- ----- -----
Operating income....................... 22.6 22.0 22.1 19.3 6.0
Interest and other expenses............ (2.2) (0.7) (1.7) (1.3) (2.0)
------ ----- ----- ----- -----
Income before income taxes............. 20.4 21.3 20.4 18.0 4.0
Income taxes........................... (7.6) (8.1) (7.8) (6.8) (1.5)
------ ----- ----- ----- -----
Net income............................. 12.8% 13.2% 12.6% 11.2% 2.5%
====== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1996
Net revenues increased to $26.4 million for the three months ended December
31, 1997 from $21.2 million for the three months ended December 31, 1996, an
increase of 24%. The Company's direct marketing services revenues increased to
$15.4 million for the three months ended December 31, 1997 compared to $13.3
million for the three months ended December 31, 1996, an increase of 16%. IT
outsourcing services revenues increased to $10.9 million for the three months
ended December 31, 1997 compared to $7.9 million for the three months ended
December 31, 1996, an increase of 38%.
Wages and benefits expenses increased to $8.9 million for the three months
ended December 31, 1997 from $7.1 million for the three months ended December
31, 1996, an increase of 25%. The increased expenses reflect additional
employees hired to continue the Company's expansion of business volume and the
strengthening of its infrastructure.
17
<PAGE>
Services and supplies expenses decreased to $1.4 million for the three
months ended December 31, 1997 from $2.0 million for the three months ended
December 31, 1996, a decrease of 33%. This decrease reflects the reduction in
cost for outside consultants as full-time employees were hired. Service and
supplies generally consist of outsourced data entry services, general
supplies, contract labor and costs related to the use of outside consultants.
Rents, leases and maintenance expenses increased to $5.3 million for the
three months ended December 31, 1997 from $4.6 million for the three months
ended December 31, 1996, an increase of 13%. The increase was primarily due to
leasing computers, computer peripheral hardware, additional software and
additional facility rent to accommodate overall growth. A portion of this
increase is due to the acquisition in fiscal 1997 of Credit Strategy
Management, Inc. ("CSM"), now known as Strategic Decision Services ("SDS"),
and its existing facility leases.
Depreciation and amortization expenses increased to $1.8 million for the
three months ended December 31, 1997 from $0.9 million for the three months
ended December 31, 1996, an increase of 97%. The increase was primarily
attributable to continued investment in technology including the purchase of
the Hitachi Data System Skyline 21 mainframe computer during the third quarter
of fiscal 1997. In addition, the Company recorded additional goodwill of $3.7
million in fiscal 1997 relating to the acquisition of CSM and incentive
payments and estimated costs to be incurred in consolidating the operations of
GIS Information Systems, Inc. ("GIS"), which the Company acquired during the
fourth quarter of fiscal 1996, resulting in increased goodwill amortization.
Other operating expenses increased to $2.1 million for the three months
ended December 31, 1997 from $1.8 million for the three months ended December
31, 1996, an increase of 16%. The increase was primarily attributable to
variable costs relating to several client contracts.
Research and development costs representing primarily wages and benefits for
information technology staff and reflected as such in the Company's financial
statements increased to $1.0 million for the three months ended December 31,
1997 from $0.8 million for the three months ended December 31, 1996, an
increase of 33%. The Company's research and development expenses relate
primarily to new product development activities.
Restructuring costs of $4.7 million ($2.9 million after-tax) for the three
months ended December 31, 1997 represent a one-time charge equal to the
present value of payments under existing contracts with prior members of
management. Excluding this one-time charge, operating income and net income
would have been approximately $6.3 million and $3.6 million, respectively.
Income taxes decreased to $0.4 million for the three months ended December
31, 1997 from $1.5 million for the three months ended December 31, 1996. The
Company's effective tax rate was 38% for the three months ended December 31,
1997 and 1996.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1996
Net revenues increased to $92.5 million in fiscal 1997 from $77.2 million in
fiscal 1996, an increase of 20%. Of this net increase, $13.7 million was
attributable to new IT outsourcing services clients and $7.9 million to new
direct marketing services clients. These increases were offset by a reduction
in revenues of approximately $6.5 million from credit card issuing clients.
The Company's direct marketing services revenues increased to $57.0 million
for fiscal 1997 versus $56.4 million for fiscal 1996, an increase of 1%. The
Company's IT outsourcing services revenues increased to $35.5 million for
fiscal 1997 versus $20.8 million for fiscal 1996, an increase of 70%. Of this
increase, $9.7 million is attributable to revenues from GIS, which was
acquired effective July 1, 1996.
Wages and benefits increased to $30.4 million for fiscal 1997 from $24.0
million for fiscal 1996, an increase of 27%. The increased expenses reflect
the net addition of 140 employees as a result of the Company's continued
18
<PAGE>
expansion of business volume, the strengthening of its infrastructure, the
1996 acquisition of GIS, the 1997 acquisition of CSM, and the replacement of
temporary labor with full-time employees during 1997.
Services and supplies expenses decreased to $6.2 million for fiscal 1997
from $6.8 million for fiscal 1996, a decrease of 9%. This decrease reflects
the reduction in cost for outside consultants as full-time employees were
hired. Services and supplies generally consist of outsourced data entry
services, general supplies, contract labor and costs related to the use of
outside consultants.
Rents, leases and maintenance expenses increased to $20.1 million for fiscal
1997 from $18.1 million for fiscal 1996, an increase of 11%. The increase was
primarily due to leasing computers, computer peripheral hardware, additional
software, and additional facility rent to house print operations and new
employees. A portion of this increase was due to the acquisition of GIS and
its existing computer, computer peripheral hardware, software and facility
leases, and the acquisition of CSM and its existing facility leases.
Depreciation and amortization expenses increased to $4.4 million for fiscal
1997 from $2.2 million for fiscal 1996, an increase of 105%. The increase was
primarily attributable to continued investment in technology including the
upgrade of the Company's mainframe computer and the conversion of the lease
for the mainframe from an operating lease to a capital lease in the fourth
quarter of fiscal 1996. The Company also purchased the Hitachi Data System
Skyline 21 mainframe computer during the third quarter of fiscal 1997. In
addition, the acquisitions of GIS in the fourth quarter of fiscal 1996 and CSM
in the second quarter of fiscal 1997 created goodwill of approximately $21
million that is being amortized over 40 years.
Other operating expenses increased to $8.4 million for fiscal 1997 from $6.8
million for fiscal 1996, an increase of 24%. The increase was primarily
attributable to variable costs relating to several client contracts.
Research and development costs representing primarily wages and benefits for
information technology staff increased to $3.4 million for fiscal 1997 from
$2.5 million for fiscal 1996, an increase of 38%.
Income taxes increased to $7.2 million for fiscal 1997 from $6.3 million for
fiscal 1996. The Company's effective tax rate was 38% for fiscal 1997 and for
fiscal 1996.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1995
Net revenues increased to $77.2 million in fiscal 1996 from $61.6 million in
fiscal 1995, an increase of 25%. Of the increase, $12.6 million was
attributable to services provided to new clients and the remainder was
attributable to increased demand for services by existing clients. The
Company's direct marketing services revenues increased to $56.4 for fiscal
1996 versus $48.4 million for fiscal 1995, an increase of 16%. Of this
increase, $1.7 million is attributable to the establishment of SDS. The
Company's IT outsourcing services revenues increased to $20.8 million for
fiscal 1996 versus $13.2 million for fiscal 1995, an increase of 58%. Of this
increase, $3.4 million is attributable to revenues from GIS, which was
acquired effective July 1, 1996.
Wages and benefits increased to $24.0 million for fiscal 1996 from $21.0
million for fiscal 1995, an increase of 14%. The increased expenses reflect
the net addition of 103 employees as a result of the Company's continued
expansion of business volume and strengthening of its infrastructure. It also
reflects the addition of GIS' staff of 48 employees during the fourth quarter
of fiscal 1996.
Services and supplies expenses increased to $6.8 million for fiscal 1996
from $4.2 million for fiscal 1995, an increase of 64%. Services and supplies
generally consist of outsourced data entry services, general supplies,
contract labor and costs related to the use of outside consultants. This
increase resulted principally from outsourcing of technical support and data
entry services and the use of outside consultants to improve productivity and
to re-engineer certain work flow processes.
Rents, leases and maintenance expenses increased to $18.1 million for fiscal
1996 from $13.9 million for fiscal 1995, an increase of 30%. The increase was
primarily due to leasing computers, computer peripheral
19
<PAGE>
hardware, additional software, and additional facility rent to house print
operations and new employees. A portion of this increase was due to the
acquisition of GIS and its existing computer, computer peripheral hardware,
software and facility leases.
Depreciation and amortization expenses increased to $2.2 million for fiscal
1996 from $1.2 million for fiscal 1995, an increase of 75%. The increase was
primarily attributable to continued investment in technology including the
upgrade of the Company's mainframe computer and the conversion of the lease
for the mainframe from an operating lease to a capital lease.
Other operating expenses increased to $6.8 million for fiscal 1996 from $5.1
million for fiscal 1995, an increase of 33%. The increase was primarily
attributable to variable costs relating to several client contracts.
Research and development costs representing primarily wages and benefits for
information technology staff increased to $2.5 million for fiscal 1996 from
$1.9 million for fiscal 1995, an increase of 34%.
Income taxes increased to $6.3 million for fiscal 1996 from $4.7 million for
fiscal 1995. The Company's effective tax rate was 38% for fiscal 1996 and 37%
for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $46.7 million as of December 31, 1997
compared to $47.0 million as of September 30, 1997. Cash and marketable
securities decreased to $15.9 million at December 31, 1997 from $22.3 million
at September 30, 1997. The decrease in cash and marketable securities reflects
$2.0 million for capital expenditures and $3.5 million for general operating
expenses, including approximately $2.0 million for payments under existing
contracts with prior members of management. The Company's investment policy is
to invest in marketable, investment-grade debt instruments of the U.S.
Government or tax-free municipal bonds. These investments typically have
maturities of three years or less. The Company historically limits its
concentration of investments in individual municipalities to $500,000 or less.
These tax-free municipal bonds are backed by U.S. Treasuries or insured (as to
principal and interest) by a major municipal insurer. As of December 31, 1997,
the Company's net accounts receivable were $29.9 million, an increase of 5%
from September 30, 1997.
The Company has available borrowings of $2.0 million under the Existing
Credit Facility. At December 31, 1997, there were no outstanding borrowings
under this credit facility. Borrowings under a $12.0 million unsecured term
loan were $10.0 million at December 31, 1997, bear interest at 8.5% per annum
and mature in 2005. The Company will use a portion of the estimated net
proceeds from the Note Offering to repay this loan in full. Capital lease debt
aggregated $22.9 million at December 31, 1997. This debt primarily results
from a sale-leaseback of the Company's primary facility and related land
during fiscal 1997 and an upgrade of one of the Company's mainframe computers
in fiscal 1996. Interest on the capital lease debt approximates 8% per annum.
The Company entered into a loan at the time of the formation of the ESOP. This
loan currently has an outstanding balance of $2.4 million with a blended
interest rate of approximately 8.8% per annum. The Company currently is
negotiating with a group of banks for the New Credit Facility which is
expected to provide for borrowings of up to $60.0 million. No commitment has
been issued with respect to the New Credit Facility, and there can be no
assurances that it will be obtained.
In connection with the Company's acquisition of GIS, the Company is required
to pay $0.5 million of the purchase price on a deferred basis in the fourth
quarter of fiscal 1998. In addition, the Company paid $1.1 million to the
former GIS shareholder in fiscal 1997 based on the Company's earnings from
former GIS clients and expects to make a similar payment in fiscal 1998.
Effective April 1, 1997, the Company entered into a new license agreement
with a major software vendor for software used for IT outsourcing services
clients. This agreement permits the Company to increase its outsourcing client
base and mainframe capacity to double current levels without an increase in
the fixed license fee for seven years. This new arrangement increased rents,
leases and maintenance expenses for the three months ended December 31, 1997
compared to the three months ended December 31, 1996.
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Prior to fiscal 1997, the Company's capital expenditures ranged from
approximately $3.0 million to $7.0 million per year. During fiscal 1997, the
Company's capital expenditures of $19.3 million included expenditures for
mainframe and mid-range computers and related equipment, and equipment to
support the Company's network services agreement with American National Can.
The Company expects capital expenditures in calendar year 1998 to be
approximately $15.0 million.
Software development costs of $7.1 million were capitalized in fiscal 1997.
The Company does not expect research and development expenses to increase
materially as a percentage of revenues in the future.
The Company believes that cash flow from operations, together with the
estimated net proceeds from the sale of the Notes and funds available under
the Existing Credit Facility, will be sufficient to fund its operating
expenses, and working capital, capital expenditures and debt service
requirements through at least fiscal 1999.
QUARTERLY COMPARISONS
The following table sets forth certain quarterly financial information of
the Company for each quarter of fiscal 1996 and fiscal 1997 and for the first
quarter of fiscal 1998. The information has been derived from the quarterly
financial statements of the Company which are unaudited but which, in the
opinion of management, have been prepared on the same basis as the audited
financial statements included herein and include all adjustments (consisting
only of normal recurring items) necessary for a fair presentation of the
financial results for such periods. This information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
the other financial information appearing elsewhere in this Prospectus. The
operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1996 1996 1996(1) 1996(1) 1997(1) 1997(1) 1997(1) 1997(1)(2)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $16,044 $19,133 $19,997 $22,050 $21,229 $21,693 $23,625 $25,910 $26,351
Operating income....... 3,070 4,154 4,855 4,947 4,090 4,347 5,348 6,677 1,592
Net income............. 1,661 2,369 3,067 3,126 2,367 2,419 3,087 3,842 656
PERCENTAGE OF NET
REVENUES:
Operating income....... 19.1% 21.7% 24.3% 22.4% 19.3% 20.0% 22.6% 25.8% 6.0%
Net income............. 10.4 12.4 15.3 14.2 11.1 11.2 13.1 14.8 2.5
</TABLE>
- ---------------------
(1) Includes the results of operations of GIS, effective July 1, 1996.
(2) Includes a one-time, pre-tax restructuring charge of $4.7 million ($2.9
million after-tax).
A significant portion of the Company's quarterly net revenues is derived
from new projects for clients, the timing of which are outside the Company's
control. Operating income and net income as a percent of net revenues have
fluctuated from quarter to quarter principally as a result of the hiring of
new employees and the expansion of computing capacity in response to increased
demand. This quarterly fluctuation is primarily due to the fixed nature of
these expenses and the time difference between such expenses and the
generation of revenues.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits, rather than four, to define the applicable year. Accordingly, any
of the Company's computer programs that have date sensitive software may cause
system failures or miscalculations if data entry of "00" is recognized as 1900
rather than 2000.
Based on a recent assessment, the Company determined that it is required to
modify portions of its software so that its computer systems will properly
utilize dates beyond December 31, 1999. The Company believes that
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with upgrades or modifications to existing software and conversion to new
software, the impact of the Year 2000 Issue can be mitigated. However, if such
upgrades, modifications and conversions are not made, or are not made in a
timely manner, the Year 2000 Issue could have a material impact on the
Company's operations.
The Company will utilize both internal and external resources to reprogram,
or replace, and test software for Year 2000 compliance. The Company has a
full-time manager dedicated to addressing Year 2000 compliance for the
Company, clients and vendors. The Company expects to complete all material
aspects of the Year 2000 project not later than December 31, 1998. The total
Year 2000 project cost is estimated to be $1.0 million to $3.0 million.
Amounts incurred are expected to be expensed as incurred, unless new software
is purchased which will be capitalized. The Company has not incurred
significant costs prior to December 31, 1997 other than internal costs to
evaluate the extent of Year 2000 compliance and to develop a remediation plan.
The costs of the Year 2000 project and the schedule for completion of Year
2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
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<PAGE>
BUSINESS
May & Speh provides computer-based information management services with a
focus on direct marketing and IT outsourcing services. The Company's direct
marketing services help companies execute more profitable direct marketing and
customer management programs. Services include strategic analysis and strategy
management; systems consulting; custom data warehouse and datamart design,
build, implementation and management; statistical (predictive) modeling and
analysis; and list processing. May & Speh's IT outsourcing services support
multi-platform processing and network management for clients seeking to
outsource their IT operations. The Company's direct marketing and IT
outsourcing services are synergistic and allow the Company to leverage its
investment in its technical personnel and state-of-the-art data processing
facilities, as well as its core competencies in customized software systems
development, large database management, high speed data processing and data
center management.
MARKET OVERVIEW
DIRECT MARKETING SERVICES
Direct marketing enables the delivery of a customized message to a defined
audience and the measurement of the response to that message. The marketing
program can then be evaluated, refined and continuously improved. Effective
direct marketing programs require a detailed understanding of customers' and
prospective customers' purchasing patterns to promote more relevant and timely
offers. The ability to measure the response to a specific marketing program
allows the financial return on marketing expenditures to be analyzed. The use
of direct marketing by businesses has increased significantly in recent years,
as has spending in support of direct marketing activities. Industry sources
estimate that United States expenditures for information and database services
in connection with direct marketing activities were approximately $17.0
billion in 1996, and that such expenditures are growing at an annual rate of
15% to 20%.
Demographic shifts and lifestyle changes, combined with a proliferation of
new products and services and the evolution of new marketing mediums
(including cable, telemarketing, direct mail, direct response, on-line
services and the Internet) have made marketing campaigns increasingly complex.
At the same time, marketing costs have been subjected to growing scrutiny by
marketing managers. Many marketers have responded to these pressures by
reallocating their expenditures from traditional mass marketing to direct
marketing.
Direct marketing programs depend upon the ability of a marketer to access
information about their customers and prospects. Historically, valuable sales
and customer data within large corporations was often inaccessible as it
resided in various incompatible systems. Through advances in computer and
software technology, it is now possible to compile very large databases using
disparate customer record files combined with data collected from compiled
lists owned by third parties. With the development of relational and
multidimensional databases, marketers can add new categories of data without
having to redesign or rebuild their databases, making it possible to use this
data in order to develop customer profiles based on many different attributes.
Finally, the development of decision support software has allowed utilization
of database marketing at the decision maker level in a client/server
environment.
Direct marketing service providers require the technical resources to manage
exceptionally large relational and multidimensional databases and the software
capabilities to convert vast amounts of data into usable information. These
functions must be performed within tight time constraints making processing
speed critical. Many companies choose not to invest in the technological
resources necessary to build these capabilities and as a result, choose to
outsource database management and list processing services to a proven vendor
as a more effective means of accessing the latest technological resources and
expertise.
IT OUTSOURCING
IT outsourcing includes the provision and management of all or a portion of
a client's data processing and information systems functions. In essence, the
IT outsourcing services vendor assumes the client's data center
23
<PAGE>
functions and the client continues to retain direct access to their
information, although the hardware and software are no longer located on the
client's premises. Increasingly, companies are outsourcing their information
processing applications as part of an overall effort to focus internal
resources on their core competencies while improving operating efficiencies
and reducing costs. According to G2 Research, Inc., total expenditures for IT
outsourcing services in the United States were approximately $32.7 billion in
1996, and such expenditures are projected to grow at an average annual rate of
approximately 25.2% through 2001.
Many companies' IT departments are burdened with increasing demands for
instant access and communication of large amounts of data to multiple
locations in real time, requiring high speed processing and telecommunications
capabilities. In addition, because computing technology is evolving rapidly,
companies are increasingly faced with the decision to either continually
invest a significant amount of capital in new technology or to outsource. The
increasing demands on IT departments coupled with the significant ongoing
investments required to remain technologically current are key factors in the
growing trend towards outsourcing. The advantages to organizations of
outsourcing their data processing activities include improved flexibility,
reduced capital investments, higher performance and service levels, improved
speed of delivery, capacity on demand and cost control.
The Company believes that the market in which it competes is best defined by
the scale of its clients' data processing requirements, not by such clients'
revenues. Typically, the scale of these requirements is large but not of a
size typically sought by the larger outsourcing service providers. The Company
believes that its data center processing capabilities, while not of a similar
scale, are similar to or better than the capabilities of its large competitors
in terms of throughput, turnaround capabilities and state-of-the-art equipment
utilized.
MAY & SPEH'S COMPETITIVE STRENGTHS
The Company believes it has competitive strengths which have contributed to
its growth and profitability. These include:
Integrated Database Management Solutions. May & Speh offers integrated
database management solutions focused on targeted industries. These integrated
solutions include marketing strategy execution; prospect data and data
enhancement services; database design and maintenance; on-line access and
decision support tools; data modeling, profiling and analysis; and ongoing
strategic evaluation and management. The Company believes that this approach
is a competitive strength because it offers clients strategic direct marketing
tools rather than generic data processing services, resulting in the Company's
integrated database management solutions becoming integral to clients
executing their marketing strategies.
Focus on Targeted Industries. May & Speh's direct marketing services focus
on clients in targeted industries including financial services, retail,
consumer goods, insurance and high tech. The Company believes that as a result
of its focus and experience in specific industries, its sales and technical
personnel better understand the data processing needs, competitive dynamics
and regulatory issues of its clients.
Investment and Scale of its Client Service and Technical Infrastructure. May
& Speh's direct marketing and IT outsourcing services continue to benefit from
its investments in technical personnel and technology. The Company has a
current staff of over 500 skilled IT and direct marketing services personnel,
and maintains state-of-the-art data processing facilities. As a result of
these investments, the Company has developed its client service and technical
infrastructure to a significant scale, which enables the Company to develop
and support mainframe, mid-range and network applications and platforms,
accommodate growth and provide efficient and flexible services.
Long-Term Client Relationships with Recurring Revenues. May & Speh's long-
term client relationships provide the Company with recurring revenues. Over
50% of the Company's fiscal 1997 revenues were derived from clients who have
used the Company's services for over three years. The Company's direct
marketing revenues are typically recurring because its direct marketing
services become an integral part of the clients' marketing programs and a
portion of these revenues are derived through multi-year contracts. The
Company's IT outsourcing revenues are typically recurring and generated
through multi-year contracts.
24
<PAGE>
Significant Operating Flexibility. May & Speh's financial position provides
the Company with significant operating flexibility. The Company has generated
operating margins in excess of 20% in each of the last four fiscal years.
These operating margins have enabled the Company to reinvest the cash
generated from operations for strategic expenditures, including technology,
skilled technical personnel and capital investments relating to new clients.
GROWTH STRATEGY
May & Speh's strategy is to continue to grow its business by leveraging its
competitive strengths. The principal components of May & Speh's growth
strategy are:
Offer Integrated Database Management Solutions. May & Speh continues to
develop integrated database management solutions focused on targeted
industries which are expected to continue to attract new clients with
significant direct marketing budgets and increase revenues from existing
clients. May & Speh's approach offers integrated solutions rather than
general, disparate services and systems.
Increase Penetration of Existing Targeted Industries and Target New
Industries. Currently, May & Speh's direct marketing services target the
financial services, retail, consumer goods, insurance and high tech
industries. The Company believes these industries offer significant
opportunity for direct marketing services, and continues to focus on
attracting additional clients within these targeted industries. In addition,
the Company believes that direct marketing is increasingly prevalent in the
utilities, telecommunications, automotive and healthcare industries, and that
such industries provide attractive near term opportunities for potential
penetration.
Extend IT Outsourcing Services. May & Speh continues to extend its IT
outsourcing service offerings. In order to build upon and complement its
traditional mainframe outsourcing services, the Company offers client/server
outsourcing and network management services. The Company's strengthened IT
outsourcing capabilities have resulted in the addition of new clients and
contracts such as May & Speh's $41 million, five-year contract with American
National Can. Under this agreement, American National Can is outsourcing its
entire IT infrastructure to the Company including client/server, mainframe and
network management services. The Company believes its broad range of IT
outsourcing services and expertise will continue to attract new clients and
expand relationships with current clients.
Expand Sales Efforts. The Company plans to increase the number of new
clients by expanding its sales efforts in both direct marketing and IT
outsourcing. The direct marketing sales force is focused on increasing
penetration within current targeted industries as well as penetrating new
industries. In IT outsourcing services, the Company intends to continue
focusing on United States-based companies with mid-level processing
requirements. In addition, the Company plans to expand its sales presence in
certain geographic areas for both direct marketing and IT outsourcing
services.
Pursue Strategic Acquisitions and Alliances. May & Speh will continue to
explore strategic acquisitions and alliances for additional growth
opportunities. The Company will seek to acquire or form alliances with
companies that have services, technologies, industry specialties or personnel
that would complement or extend those of the Company and facilitate the
addition of new clients. For example, the Company recently agreed to form
Energy Market Connect, LLC, a joint venture with Metzler & Associates, a
leading provider of management consulting services to the energy industry. The
Company believes this joint venture will provide a new sales channel and
enable the Company to incorporate utilities industry expertise in its
integrated database management solutions for the utilities industry. In May
1997, the Company also formed a strategic alliance with Trans Union
Corporation, the nation's leading credit reporting company. The alliance will
combine May & Speh's expertise in creating custom and generic models with
Trans Union Corporation's data management capabilities.
25
<PAGE>
SERVICES AND PRODUCTS
DIRECT MARKETING SERVICES
May & Speh provides comprehensive direct marketing services, including
database creation, data warehousing, data enhancement, predictive behavioral
modeling and list processing. Rather than selling standard products and
services to its clients, the Company's approach has been to design and
implement creative custom database solutions around the specific needs of its
clients. The principal advantages of customized services include (i) the
ability of the database to expand and adapt to the client's changing business
needs, (ii) the ability to have these services developed on a platform of the
client's choosing, and (iii) the integration of database services with the
list processing services necessary to keep the database current.
Database Management Services. May & Speh's broad range of database
management services begins with the Company's proven approach to database
development which includes planning and analytical processes to determine the
client's needs. Typically, direct marketing databases originate with the
client's own files, both current and historical, which generally include name,
address and gender, as well as frequency and value of products purchased.
May & Speh analyzes all of the client's disparate operational files and
determines what data will add value and can be made actionable. Utilizing both
commercial and Company-developed software tools, the Company consolidates all
of the disparate information and relationships across multiple files and
converts the client's raw information into a clean, consolidated format so
that relationships can be understood at both the customer and household
levels.
Once the client's customer data is consolidated and the database created,
May & Speh enhances the data by utilizing a wide selection of demographic,
geographic, census (age, approximate income level, education level and
household composition) and lifestyle information for over 100 million
individuals and households. May & Speh licenses this information from leading
data compilers. The combination of each client's proprietary customer
information with these external data files provides a complete profile of a
client's customers, enabling the client, through the use of May & Speh's
behavior modeling and analysis services, to act on the data. Through the
development of a scoring model, the client can segment its database and
determine its best customers and prospects in each marketplace. The entire
process results in a marketing program that can be targeted to distinct
audiences with a high propensity to buy the client's products. These databases
typically reside at May & Speh's data center. Because of the dynamic nature
and complexity of these databases, May & Speh is routinely asked by its
clients as part of their ongoing direct marketing efforts to update the
databases with the results of recent marketing programs and to periodically
perform the list processing service described below.
List Processing Services. List processing includes the preparation and
generation of comprehensive name and address lists which are used in direct
marketing promotions. May & Speh's state-of-the-art data processing facilities
and large volume processing capabilities allow the Company to meet the direct
marketing needs of its clients, processing over seven billion records through
its advanced list processing software services in fiscal 1997. May & Speh
customizes a list processing solution by utilizing a variety of commercial and
Company-developed software products, such as Address Conversion and Reformat,
Address Standardization and Enhanced Merge/Purge, as well as products which
are licensed through the United States Postal Service such as National Change
of Address, Delivery Sequence File and Locatable Address Conversion System.
Other licensed products are databases used for suppressions such as the Direct
Marketing Association's Mail Preference File, the American Correctional
Association Prison Suppress File and other files.
May & Speh's list processing services seek to reduce its clients' mailing
costs. For instance, because approximately 15% to 20% of the population moves
each year, mailings may be misaddressed or not delivered at all. Through the
utilization of May & Speh's Merge/Purge, Address Standardization software,
National Change of Address database, Delivery Sequence File and Locatable
Address Conversion Database, the Company can eliminate most duplicate names as
well as reduce the amount of undeliverable items by an average of 6%.
Quiddity(TM). In fiscal 1997, development activities were substantially
completed for Quiddity and this new product was introduced to clients and
prospects. Quiddity is an on-line relational and open database management
26
<PAGE>
system designed specifically for marketing professionals. The product's user-
friendly format allows non-technical users to easily access and directly work
with marketing databases to create more targeted and profitable one-to-one
marketing programs. Quiddity integrates custom-developed and commercial
software that complement the Company's suite of direct marketing services. Key
features include open architecture, scaleable platforms and an object-oriented
application that is work-flow-oriented and intuitive.
IT OUTSOURCING
May & Speh's primary IT outsourcing service is to manage all or a portion of
a client's information processing needs on a cost effective basis from the
Company's data center. After migrating their workload to the Company's data
center, clients continue to retain direct access to their information from
their remote sites. The Company also provides, to a much lesser extent,
applications outsourcing services which include the replacement of a client's
in-house technical development staff.
The primary outsourcing services provided include migration (takeover and
turnover) support, on-line and batch processing capacity, technical support,
help desk access and support, back-up and recovery, disaster recovery
services, operations support, account management, media (tapes, documents,
high speed Direct Access Storage Devices subsystems ("DASD"), etc.) management
and handling, production control, telecommunications and network management
support. These services and support functions are available 24 hours a day,
seven days a week.
Historically, the Company's success in IT outsourcing has resulted in part
from its ability to provide its services with minimal disruption to the
client. The Company has established rigorous formal processes to ensure a
successful ongoing processing of a client's workload at the Company's data
centers.
MARKETING AND SALES
The Company markets its direct marketing and IT outsourcing services through
separate direct sales forces. Maintaining a separate sales force for each
service offering allows the Company's sales representatives to concentrate on
particular services, technology and customer demands, thereby staying abreast
of developments in these areas. Sales representatives are encouraged to
identify cross-selling opportunities. The Company's sales force compensation
system provides incentives to salespeople to focus on both attracting larger
clients and selling the Company's most profitable services.
Pricing for direct marketing services is dependent upon the complexity of
service required. In general, May & Speh establishes a price list for clients
detailing the prices for a broad range of service options. These prices are
based on the nature and complexity of the services, volume of records to be
processed and the level of customization required. Additionally, if the level
of up-front customization is high, the Company charges development fees based
on the level of customization required.
Pricing for IT outsourcing services is dependent upon the anticipated range
of resource consumption. Typically, clients are charged a flat or stepped rate
for IT outsourcing services provided under multi-year contracts. If the
processing time, data storage, retrieval requirements and output volume exceed
the budgeted amounts, the client is charged additional amounts. Minimum
charges and early termination charges are typically included in contracts.
CLIENTS
The Company has over 180 direct marketing clients, including Fortune 500
companies and other large and medium-sized companies that have significant
direct marketing requirements. These clients are primarily in the financial
services, retail, consumer goods, insurance and high tech industries. The 10
largest direct marketing clients represented approximately 62.8% of the
Company's direct marketing net revenues in fiscal 1997.
27
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The Company has approximately 150 IT outsourcing clients. These clients are
located primarily in the mid-western United States. The 10 largest outsourcing
clients represented approximately 45.5% of the Company's IT outsourcing
services net revenues in fiscal 1997.
The Company seeks to maintain long-term relationships with its clients. In
fiscal 1997, over 50% of net revenues were derived from clients served by the
Company for more than three years including Sears, the Company's first client
in 1947. In fiscal 1997, Sears accounted for approximately 18.9% of the
Company's net revenues. Net revenues from the Company's 10 largest clients in
fiscal 1997 increased 31.8% from fiscal 1996. IT outsourcing clients typically
operate under contracts, usually three years in length. Direct marketing
clients have traditionally maintained multi-year relationships with May &
Speh, although many of the Company's direct marketing clients are not under
long-term contracts.
TECHNOLOGICAL RESOURCES AND FACILITIES
The Company maintains state-of-the-art data facilities with approximately
6,000 MIPS (million instructions per second) of mainframe and UNIX processing
power. The Company's processors include a Hitachi Skyline Series mainframe
computer, the world's fastest IBM-compatible processor, a Hitachi GX/8824
series mainframe computer capable of executing 390 MIPS, and four Hitachi
Pilot mainframe computers, which are the fastest CMOS, IBM-compatible
mainframe computers. The Company utilizes other state-of-the-art data center
components, such as robotic tape sub-systems, high-speed laser, LED and impact
printers and high speed DASD. The Company supports multiple platforms
including mainframe, UNIX and other mid-range computer systems.
The Company maintains a disaster recovery plan with a commercial disaster
recovery service to provide alternative data processing sites in the event the
Company experiences a natural disaster or other interruption at its data
center. The Company conducts recovery exercises several times per year and
encourages its clients to join in this process.
The Company's headquarters building was custom-designed to be a secure data
center environment. Building characteristics include 24-hour security
protection, television surveillance, fire and motion alarms and a fire
protection system backed up by a sprinkler system. The Company added a
generator system which allows it to be self-sufficient if there is a power
outage by operating continually until power is restored by the electric
utility provider.
COMPETITION
The markets in which the Company operates are highly competitive, with no
single dominant competitor. Although numerous smaller companies compete in the
direct marketing and IT outsourcing markets, the Company regularly competes
with companies that have more extensive financial, marketing and other
resources than the Company. Many of the Company's competitors have
substantially greater assets and thus, may have a greater ability to obtain
client contracts where sizable asset purchases or investments are required.
In the direct marketing services market, competition is based on the quality
and reliability of products and services, technological expertise, historical
experience, ability to develop customized solutions for clients, processing
capabilities and price. Management believes that the Company competes
favorably in this market based upon these competitive factors. The Company's
principal competitors include Acxiom Corporation, Database America Companies,
a subsidiary of American Business Information, Inc., Harte-Hanks
Communication, Inc. and Metromail Corporation.
In the IT outsourcing market, competition is based on the quality and
reliability of services, technical expertise, processing capabilities,
processing environment and price. Management believes that the Company
competes favorably in this market based upon these competitive factors.
Although there are many competitors within the IT outsourcing services
marketplace, the Company's principal competitors are Affiliated Computer
28
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Services, Inc., Lockheed Martin Corporation, PKS Information Services, Inc.
and other regional outsourcers. In addition, but on a less frequent basis, the
Company competes with International Business Machine Corporation's Global
Services division, Electronic Data Systems Corporation, Computer Sciences
Corporation, Perot Systems Corporation and MCI/Systemhouse, Inc., a subsidiary
of MCI Communications Corp.
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon its trade secret protection program and
nondisclosure safeguards to protect its proprietary technologies. The Company
enters into license or other agreements with its clients in the ordinary
course of business which contain terms and conditions prohibiting unauthorized
reproduction of the Company's products. In addition, the Company generally
enters into confidentiality agreements with its employees, clients, potential
clients and suppliers with access to sensitive information and limits access
to and distribution of its software documentation and other proprietary
information. While there can be no assurance that the steps taken by the
Company will be adequate to deter misappropriation of its proprietary rights,
the Company believes that due to the rapid pace of technological change in the
Company's business, legal protections afforded through patent protection for
its products are less significant than the knowledge, ability and experience
of its employees, the frequency of product enhancements and the timeliness and
quality of support.
EMPLOYEES
As of December 31, 1997, the Company employed 579 persons and utilized 52
full-time equivalent contract personnel. None of the Company's employees are
represented by a labor union, and the Company believes that its relations with
employees are good.
PROPERTIES
The Company's executive offices and principal operations are located at 1501
Opus Place, Downers Grove, Illinois, in a 105,352 square foot building leased
from a third party for a term of 20 years. The facility is comprised of 67,352
square feet of office space, 25,000 square feet of raised floor facilities
which house the Company's data center and 13,000 square feet of tape library.
The Company currently occupies an additional 20,000 square feet in connection
with the Company's network services agreement with American National Can, and
leases 127,448 square feet of warehouse and office space in three separate
locations in the metropolitan Chicago area with lease terms expiring on
various dates through August 2002.
The Company has executed a 20 year lease for a 200,000 square foot office
building under construction on property adjacent to the Company's executive
offices. The lease commences upon completion of the building which is expected
in September 1998.
The Company believes that its existing facilities are adequate for its
present needs and that the additional facilities proposed for construction
will be sufficient to sustain the growth of the Company for the foreseeable
future. Notwithstanding, the Company believes that additional space will be
available for lease on commercially reasonable terms on an as needed basis.
CONSUMER PRIVACY AND LEGISLATIVE ISSUES
The direct marketing industry could be adversely affected by growing
consumer awareness of privacy issues. The Company has adopted several policies
to address these privacy concerns. The Company requires each employee to sign
an agreement not to disclose confidential information. The Company's data
center has a sophisticated data security system, which includes 24-hour
security protection, television surveillance and limited access to
confidential information. Periodically, the Company undergoes a detailed audit
of its security system. In addition, the Company subscribes to a Direct
Marketing Association ("DMA") service which allows consumers to request not to
receive unsolicited direct mail offers. At a client's request, the Company
will purge the client lists of all names appearing on the DMA list.
Furthermore, under FCRA, the Company's clients are
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<PAGE>
required to provide the Company with the names of consumers wishing to be
removed from certain lists. Management believes that the policies and
procedures that have been implemented, together with the Company's continuing
efforts to remain informed and responsive to privacy concerns, will prevent
the Company from being adversely affected by increased public concern over
privacy issues.
In 1996 FCRA was amended to provide consumers with easier access to their
credit reports and to facilitate the correction of errors in such reports. New
regulations interpreting the amendments were issued by the FTC in 1997. The
legislation also addresses the issue of "prescreening," a procedure utilized
by many bankcard issuers and insurance companies in their direct marketing
programs. This legislation regulates the use of credit reports in the
preparation and generation of lists used by companies in offering credit. This
law also provides for significant fines for misusing credit reports. Although
the Company believes its list processing activities for credit grantors are in
compliance with the recent amendments to FCRA, due to its recent adoption,
there is uncertainty as to its interpretation and application. Therefore,
there can be no assurances that significant fines will not be levied against
the Company or that this portion of its list processing services will not be
adversely affected. While the Company provides list processing activities for
credit grantors as part of its direct marketing services, such activities
accounted for less than $5.0 million in net revenues in fiscal 1997.
30
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES HELD
<S> <C> <C>
Peter I. Mason.......... 45 Chairman, President and Chief Executive Officer
Terrance C. Cieslak..... 51 Executive Vice President and Chief Technology Officer
Robert C. Early......... 45 Executive Vice President, Corporate Development, and a Director
Michael J. Loeffler..... 40 Executive Vice President, Direct Marketing Services
Eric M. Loughmiller..... 38 Executive Vice President, Chief Financial Officer and Secretary
John G. Jazwiec......... 38 Senior Vice President and Chief Information Officer
Willard E. Engel, Jr.... 51 Vice President, Chief Accounting Officer and Treasurer
Albert J. Speh, Jr...... 78 Chairman Emeritus
Deborah A. Bricker...... 45 Director
Casey Cowell............ 45 Director
Lawrence J. Speh........ 48 Director
Paul G. Yovovich........ 44 Director
Jonathan Zakin.......... 48 Director
</TABLE>
Peter I. Mason has been a director of the Company since November 1994, and
has served as President and Chief Operating Officer of the Company since May
1997, as President and Chief Executive Officer since October 1997 and as
Chairman since November 1997. Prior to joining May & Speh, Mr. Mason was a
partner in the Chicago law firm of Freeborn & Peters, which he co-founded in
1983, and served as chairman of its operating committee from 1986 to 1996. He
served as a director of U.S. Robotics Corporation from 1983 to 1997, and
currently serves as a director of Mastering, Inc. and several privately held
businesses.
Terrance C. Cieslak has served as Executive Vice President and Chief
Technology Officer since October 1995 and is responsible for systems
management and integration for the Company. Since joining the Company in 1987,
Mr. Cieslak has served in a variety of senior management positions including
Technical Support Manager, Data Center Manager and Vice President of Services
and Solutions. Prior to joining the Company, Mr. Cieslak worked with
Electronic Data Systems Corporation and Official Airline Guide.
Robert C. Early has served as Executive Vice President, Corporate
Development since January 1997. Prior to that, Mr. Early served as Executive
Vice President, Chief Financial Officer and Treasurer of the Company from
October 1995 through January 1997 and Director of Corporate Growth for the
Company from 1993 through October 1995. Mr. Early also has served as a
director of the Company since November 1994. Prior to joining the Company, Mr.
Early worked as an independent contractor with business advisory firms,
including Ridge Capital Corp. and Ridge Advisors, Inc., which provide merger
and acquisitions, capital financing and strategic planning advisory services.
From 1990 through 1992 Mr. Early was also Vice Chairman of Consolidated
Convenience Systems, Inc., a holding company. Prior to 1990, Mr. Early spent
approximately 12 years at Grant Thornton LLP, and was the partner responsible
for the Chicago office Capital Markets Group from 1985 through 1990.
Michael J. Loeffler has served as Executive Vice President, Direct Marketing
Services since April 1996 and is responsible for the direct marketing services
group of the Company. Mr. Loeffler joined May & Speh in 1988 as an Account
Executive and has also served as Vice President of Sales and Sales Manager.
Prior to joining May & Speh, Mr. Loeffler had seven years of experience in the
direct marketing industry with UARCO, Inc. and Colorforms Division of Wallace
Press.
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<PAGE>
Eric M. Loughmiller has served as Executive Vice President and Chief
Financial Officer of the Company since January 1997. Prior to joining May &
Speh, Mr. Loughmiller was an audit partner at Price Waterhouse LLP where he
had spent over 15 years in that firm's Accounting and Business Advisory
Services practice. Mr. Loughmiller is a Certified Public Accountant.
John G. Jazwiec has served as Senior Vice President and Chief Information
Officer of the Company since May 1997. He joined the Company with over 15
years experience in data processing services with a background in both
mainframe and client server platforms. From 1994 to 1997, Mr. Jazwiec served
as Vice President and CIO of Fiserv, a banking outsourcing firm. Prior to that
time, he served as Vice President and CIO of Siebe Environmentals, a
subsidiary of Siebe PLC.
Willard J. Engel, Jr. has served as Vice President and Chief Accounting
Officer of the Company since 1986 and in other financial and accounting
capacities since 1972. Effective January 1997, Mr. Engel became Treasurer and
Chief Accounting Officer.
Albert J. Speh, Jr. co-founded the Company and served as Chairman of the
Board of Directors from 1992 to November 1997. Prior to founding the Company,
Mr. Speh served in the Armed Forces during World War II. He was later employed
by Sears, General Finance, Inc. and Encyclopedia Britannica in the field of
data processing. Mr. Speh currently serves as a consultant to the Company and
on the board of Fenwick High School.
Deborah A. Bricker is the President of Bricker & Associates Inc., a
productivity consulting firm based in Chicago, Illinois which she founded in
1979. Ms. Bricker has served as a director of the Company since March 1996.
Casey Cowell has served as Vice Chairman of 3Com Corporation since June
1997. From January 1996 to May 1997, Mr. Cowell was Chairman and Chief
Executive Officer of U.S. Robotics Corporation. Prior to January 1996, he
served for approximately 12 years as Chairman, President and Chief Executive
Officer of U.S. Robotics Corporation. Mr. Cowell has served as a director of
the Company since May 1997. Mr. Cowell currently serves as a director of 3Com
Corporation, Mastering, Inc. and System Software Associates.
Lawrence J. Speh served as Chief Executive Officer of the Company from
January 1993 to September 1997, and as President from January 1993 to May
1997. Mr. Speh currently serves as a consultant to the Company. From 1977
until June 1988, Mr. Speh held various senior management positions with the
Company including President of Direct Marketing Services, Marketing Director
and Treasurer.
Paul G. Yovovich served, from 1993 to 1996, as President of Advance Ross
Corp., a public company until its 1996 merger with CUC International. He
served in various executive capacities at Centel Corporation from 1982 to
1992, including as President of Central Telephone Co., a subsidiary of Centel,
from 1990 to 1992. Mr. Yovovich has served as a director of the Company since
May 1997. Mr. Yovovich is a director of 3Com Corporation, APAC TeleServices,
Inc., Comarco, Inc. and Mastering, Inc.
Jonathan Zakin currently serves as President of Leeward Management/Seaview
Holdings. From 1987 to 1997, Mr. Zakin served in various senior management
positions and was a director of U.S. Robotics Corporation. Mr. Zakin has
served as a director of the Company since November 1997.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 19, 1998, the number of shares
of Common Stock beneficially owned by all persons known by the Company to
beneficially own more than five percent of the outstanding Common Stock, each
director of the Company, certain executive officers and all directors and
executive officers as a group. Unless otherwise indicated, the persons named
below have sole voting and investment power with respect to all shares shown
as beneficially owned by them.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
<S> <C> <C>
May & Speh, Inc. Employee Stock Ownership
Plan(1)................................... 8,086,849 31.6%
Lawrence J. Speh(2)........................ 3,867,216 15.0
William Blair & Company, L.L.C.(3)......... 1,980,300 7.7
Albert J. Speh, Jr.(4)..................... 1,672,503 6.5
Robert C. Early(5)......................... 185,130 *
Michael J. Loeffler(6)..................... 177,158 *
Terrance C. Cieslak(7)..................... 170,666 *
Casey Cowell............................... 100,004 *
Peter I. Mason(8).......................... 91,200 *
Jonathan Zakin(9).......................... 68,003 *
Deborah A. Bricker(10)..................... 14,400 *
Paul G. Yovovich........................... 5,000 *
All directors and executive officers as a
group (13 persons)(2)(4)(11).............. 6,567,076 25.2
</TABLE>
- ---------------------
*Less than one percent.
(1) The address of the May & Speh, Inc. Employee Stock Ownership Plan (the
"ESOP") is c/o Cole Taylor Bank, 850 W. Jackson Blvd., Chicago, Illinois
60607. Includes 6,899,180 shares that have been allocated or are
available for allocation to the accounts of certain employees or former
employees of the Company. ESOP participants have shared voting and
investment power with respect to the shares allocated to their individual
accounts. The ESOP has agreed to sell 1,503,790 shares in the Common
Stock Offering. See "Selling Stockholders."
(2) Includes 176,000 shares issued upon exercise of stock options concurrent
with the Common Stock offering, and 3,758 shares allocated to Mr. Speh's
ESOP account. Excludes 40,612 shares held by Mr. Speh's wife, as to which
he disclaims beneficial ownership. Mr. Speh's address is c/o May & Speh,
Inc., 1501 Opus Place, Downers Grove, Illinois 60515. Mr. Speh has agreed
to sell 1,804,524 shares in the Common Stock Offering. See "Selling
Stockholders."
(3) Based on a Schedule 13G dated February 14, 1998 filed by William Blair &
Company, L.L.C. ("WBC") in which WBC reported sole voting power with
respect to 821,500 shares and sole dispositive power with respect to
1,980,300 shares. The address of WBC is 222 West Adams Street, Chicago,
Illinois 60606.
(4) Includes 3,758 shares allocated to Mr. Speh's ESOP account. Mr. Speh's
address is c/o May & Speh, Inc., 1501 Opus Place, Downers Grove, Illinois
60515. Mr. Speh has agreed to sell 607,819 shares in the Common Stock
Offering. See "Selling Stockholders."
(5) Includes 120,803 shares issuable pursuant to currently exercisable
options, and 43,015 shares allocated to Mr. Early's ESOP account.
(6) Includes 91,100 shares issuable pursuant to options that are currently
exercisable or that will become exercisable within 60 days, and 86,058
shares allocated to Mr. Loeffler's ESOP account.
(7) Includes 75,100 shares issuable pursuant to options that are currently
exercisable or that will become exercisable within 60 days, and 95,566
shares allocated to Mr. Cieslak's ESOP account.
(8) Includes 14,400 shares issuable pursuant to options that are currently
exercisable or will become exercisable within 60 days.
(9) Represents shares held by a family foundation with respect to which Mr.
Zakin has shared voting and investment power.
(10) Represents shares issuable pursuant to options that are currently
exercisable or will become exercisable within 60 days.
(11) Includes 315,803 shares issuable pursuant to options that are currently
exercisable or that will become exercisable within 60 days, and 321,575
shares allocated to the ESOP accounts of the executive officers.
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth, as of March 19, 1998, certain information
regarding beneficial ownership of shares of Common Stock by the Selling
Stockholders and as adjusted to reflect the sale of shares of Common Stock
offered hereby by such Selling Stockholders. See also "Management" and
"Principal Stockholders" for additional information regarding the Selling
Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED NUMBER OF SHARES OWNED
SELLING STOCKHOLDERS: PRIOR TO THE OFFERING OFFERED AFTER THE OFFERING
- --------------------- ----------------------------------------- -----------------------
NUMBER PERCENT NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
May & Speh, Inc.
Employee Stock
Ownership Trust (1).... 8,086,849 31.6 1,503,790 6,583,059 25.6
Lawrence J. Speh (2).... 3,867,216 15.0 1,804,524 2,062,692 8.0
Albert J. Speh, Jr. (3). 1,672,503 6.5 607,819 1,064,684 4.1
Kathleen M. Speh (4).... 40,612 * 8,122 32,490 *
Kathleen M. Malinger
(5).................... 433,816 1.7 1,467 432,349 1.7
Thomas P. Malinger (6).. 35,612 * 7,122 28,490 *
Albert J. Speh III (7).. 454,507 1.8 67,156 387,351 1.5
</TABLE>
- ---------------------
*Less than one percent
(1) Includes 6,899,180 shares that have been allocated or are available for
allocation to the accounts of certain employees or former employees of the
Company, of which 1,503,790 shares are being offered in the Common Stock
Offering. ESOP participants have shared voting and investment power with
respect to the shares allocated to their individual accounts.
(2) Includes 176,000 shares issued upon exercise of stock options concurrent
with the Common Stock Offering and excludes 40,612 shares held by Mr.
Speh's wife, as to which he disclaims beneficial ownership. Shares owned
prior to the Common Stock Offering include shares held in trust for the
benefit of Lawrence J. Speh, Kathleen M. Malinger (Albert J. Speh, Jr.'s
daughter, Lawrence J. Speh's sister and a former executive officer and
director of the Company), Albert J. Speh III (Albert J. Speh, Jr.'s son
and Lawrence J. Speh's brother) and certain grandchildren of Albert J.
Speh, Jr. Lawrence J. Speh serves as sole trustee of each of these trusts
and has sole voting and investment power with respect to the shares held
by the trusts. 1,269,017 of the shares being offered in the Common Stock
Offering are offered by such trusts. Of such shares, 932,328 are offered
by trusts other than for the direct benefit of Lawrence J. Speh and
336,689 are for his direct benefit. Number of shares offered in the Common
Stock Offering excludes 240,000 shares subject to the underwriters' over-
allotment option, which shares are held in trust for the benefit of
certain persons described above, including 175,401 shares held for the
benefit of Ms. Malinger. Lawrence J. Speh is currently a director of the
Company and was formerly its Chief Executive Officer.
(3) Includes (i) 200,000 shares held by The Albert J. Speh, Jr. Foundation,
for which Mr. Speh serves as sole trustee and (ii) 6,725 shares held in
trust for the benefit of certain grandchildren of Mr. Speh, all of which
shares are being sold in the Common Stock Offering. Mr. Speh serves as
trustee of the trusts and the Foundation and has sole voting and
investment power with respect to such shares. Number of shares offered in
the Common Stock Offering excludes 25,000 shares subject to the
underwriters' over-allotment option, which shares are held in trust for
the benefit of certain of Albert J. Speh, Jr.'s grandchildren. Mr. Speh is
currently a director and Chairman Emeritus of the Company and was formerly
its Chairman.
(4) Shares owned prior to the Common Stock Offering excludes shares reported
as beneficially owned by Lawrence J. Speh, Kathleen M. Speh's spouse.
Number of shares offered in the Common Stock Offering excludes 10,000
shares subject to the underwriters' over-allotment option.
(5) Shares owned prior to the Common Stock Offering excludes 422,580 shares
held in trust for the benefit of Ms. Malinger, which shares are reported
as beneficially owned by Lawrence J. Speh and are being sold in the Common
Stock Offering by Lawrence J. Speh, and excludes shares reported as
beneficially owned by Thomas P. Malinger, Ms. Malinger's spouse.
(6) Shares owned prior to the Common Stock Offering excludes shares reported
as beneficially owned by Kathleen M. Malinger, Mr. Malinger's spouse.
(7) Shares owned prior to the Common Stock Offering excludes 319,437 shares
held in trust for the benefit of Albert J. Speh III, which shares are
reported as beneficially owned by Lawrence J. Speh and are being sold in
the Common Stock Offering by Lawrence J. Speh.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $.01 par value per share and 2,000,000 shares of Preferred
Stock, $.01 par value per share.
COMMON STOCK
As of March 19, 1998, there were 25,554,054 shares of Common Stock
outstanding held by approximately 105 stockholders of record. Subject to
preferences that may be applicable to any outstanding Preferred Stock, holders
of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." Holders of Common Stock are entitled to one vote per
share in all matters to be voted upon by stockholders. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of the
Company's liabilities and the liquidation preferences of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive rights and no
rights to convert their Common Stock into any other securities, and there are
no redemption provisions with respect to such shares. All of the outstanding
shares of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may issue in the future.
Pursuant to a Rights Agreement adopted by the Company (the "Rights
Agreement"), the holders of Common Stock, including the shares of Common Stock
issuable upon conversion of the Notes and the shares offered in the Common
Stock Offering, have certain rights to purchase Series A Participating
Preferred Stock or Common Stock under certain circumstances, including in the
event of certain unsolicited attempts to acquire a controlling interest in the
Company. See "--Preferred Stock" and "--Rights Agreement."
PREFERRED STOCK
The Company's Board of Directors has authority, without any further vote or
action by the stockholders: to provide for the issuance of the shares of
Preferred Stock in series; to establish from time to time the number of shares
to be included in each such series; to fix the designations, preferences and
relative, participating, optional or other special rights, and qualifications
or restrictions of the shares of each such series; and to determine the voting
powers, if any, of such shares. The issuance of Preferred Stock, among other
things, could adversely affect the rights of holders of Common Stock. For
example, the issuance of Preferred Stock could decrease the amount of earnings
and assets available for distributions to holders of Common Stock. In
addition, any such issuance could have the effect of delaying or preventing a
change in control of the Company and could make the removal of the present
management of the Company more difficult.
In connection with the adoption of the Rights Agreement, the Company's Board
of Directors has created one series of Preferred Stock, consisting of 300,000
shares of Series A Participating Preferred Stock (the "Series A Preferred").
No shares of Series A Preferred have been issued as of the date of this
Prospectus. Each share of the Series A Preferred, when and if issued, would
entitle the holder thereof to receive quarterly dividends equal to the greater
of $1.00 per share or 100 times the dividends per share declared with respect
to the Common Stock. Dividends on the Series A Preferred are cumulative.
Holders of the Series A Preferred would be entitled to exercise 100 votes per
share on all matters submitted to a vote of stockholders and, except as
otherwise required by law, would vote together with the holders of Common
Stock as a single class. In the event of liquidation, such holders would
receive a preference of $1.00 per share over the Common Stock. In general,
each share of the Series A Preferred is intended to have a value and voting
rights equal to 100 shares of Common Stock, and appropriate anti-dilutive
adjustments will be made in accordance with the terms of such Series A
Preferred in the event of certain changes in Common Stock. Except as
contemplated in connection with the Rights Agreement described below, the
Company has no present plans to issue any of the Preferred Stock.
RIGHTS AGREEMENT
The Board of Directors of the Company has declared a dividend distribution
of one preferred share purchase right (a "Right") for each outstanding share
of Common Stock. The dividend was payable to stockholders of
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<PAGE>
record on March 1, 1996 (the "Rights Record Date") and with respect to Common
Stock issued thereafter until the Distribution Date (as defined below). Except
as set forth below, each Right, when it becomes exercisable, entitles the
registered holder to purchase from the Company one one-hundredth of a share of
the Series A Preferred of the Company at a price equal to five times the
initial offering price (the "Purchase Price") per one one-hundredth of a
Series A Preferred share, subject to adjustment. The description and terms of
the Rights are set forth in a Rights Agreement (the "Rights Agreement")
between the Company and Harris Trust and Savings Bank, as Rights Agent. A copy
of the Rights Agreement is available to stockholders free of charge from the
Company upon request directed to the Secretary of the Company.
Initially, the Rights will be attached to all certificates representing
shares of Common Stock then outstanding, and no separate Right Certificates
will be distributed. The Rights will separate from the Common Stock upon the
earliest to occur of (i) 10 days following public announcement that a person
or group of affiliated or associated persons (an "Acquiring Person") has
acquired beneficial ownership of 15% or more of the outstanding Common Stock;
or (ii) 15 business days (or such later date as the Board may determine)
following the commencement of, or announcement of an intention to make, a
tender offer or exchange offer the consummation of which would result in a
person or group becoming an Acquiring Person (the earliest of such dates being
called the "Distribution Date"). The definition of an Acquiring Person
excludes any employee benefit plan of the Company, including the ESOP. Albert
J. Speh, Jr., Chairman Emeritus of the Company, his extended family, family
trusts and certain other affiliates and associates will not be deemed to be an
Acquiring Person as long as such persons beneficially own less than 32% of the
outstanding Common Stock. The date that a person or group becomes an Acquiring
Person is the "Share Acquisition Date." Until a Right is exercised, the holder
thereof, as such, will not have any rights as a stockholder of the Company,
including the right to vote or receive dividends thereon.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights) new
Common Stock certificates issued after the Rights Record Date upon transfer or
new issuance of Common Stock will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
Common Stock outstanding as of the Rights Record Date, even without such
notation or a copy of the summary of rights attached thereto, will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Common Stock as of
the close of business on the Distribution Date (and to each initial record
holder of certain Common Stock issued after the Distribution Date), and such
separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on the tenth anniversary of the effective date of the
plan, unless earlier redeemed by the Company as described below.
In the event that any person becomes an Acquiring Person, each holder of a
Right will thereafter have the right to receive upon payment of the Purchase
Price the number of shares of Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a value (immediately
prior to such triggering event) equal to two times the Purchase Price.
Notwithstanding the foregoing, following the occurrence of the event described
above or in the paragraph below (the "Triggering Events"), all Rights that
are, or (under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person or any affiliate or associate
thereof will be null and void.
In the event that, at any time following the Share Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction, or
(ii) more than 50% of the Company's assets or earning power is sold or
transferred to any other person, then each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have
the right to receive, upon exercise, common stock of the acquiring company
having a value equal to two times the exercise price of the Right.
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<PAGE>
The Purchase Price and the number of shares of Preferred Stock or other
securities or property issuable upon exercise of the Rights are subject to
adjustment from time to time to as a result of, among other things, a
subdivision, split (other than a stock dividend on the Common Stock payable in
shares of Common Stock), combination, consolidation or reclassification of the
Series A Preferred or the Common Stock, or a reverse split of the outstanding
shares of Series A Preferred or Common Stock.
At any time prior to the earlier to occur of (i) a person becoming an
Acquiring Person or (ii) the expiration of the Rights, and under certain other
circumstances, the Company may redeem the Rights in whole, but not in part, at
a price of $0.01 per Right which redemption shall be effective upon the action
of the Board of Directors. Additionally, at any time after a Triggering Event
and prior to the time that a person or group acquires 50% or more of the
outstanding Common Stock, the Company may exchange the Rights (other than
those that have become null and void), in whole or in part, for shares of
Common Stock at an exchange ratio of one share of Common Stock per Right
(subject to adjustment).
The provisions of the Rights Agreement may be amended by the Board of
Directors in order to cure any ambiguity, defect or inconsistency, provided
that after such time as any person becomes an Acquiring Person, the Rights
Agreement may not be amended in any manner that would adversely affect the
interests of the holders of the Rights.
DELAWARE LAW AND CERTAIN CORPORATE AND CONTRACTUAL PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, this statute prohibits a publicly held
Delaware corporation from engaging, under certain circumstances, in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person becomes an
interested stockholder, unless either (i) prior to the date at which the
person becomes an interested stockholder the Board of Directors approves such
transaction or business combination, (ii) the stockholder acquires more than
85% of the outstanding voting stock of the corporation (excluding shares held
by directors who are officers or held in certain employee stock plans) upon
consummation of such transaction or (iii) the business combination is approved
by the Board of Directors and by two-thirds of the outstanding voting stock of
the corporation (excluding shares held by the interested stockholder) at a
meeting of stockholders (and not by written consent). An "interested
stockholder" is a person who, together with affiliates and associates, owns
(or at any time within the prior three years did own) 15% or more of the
corporation's voting stock. Section 203 defines a "business combination" to
include, without limitation, mergers, consolidations, stock sales and asset-
based transactions and other transactions resulting in a financial benefit to
the interested stockholder.
The Company's Certificate of Incorporation (the "Certificate") and By-laws
contain a number of provisions relating to corporate governance and to the
rights of stockholders. Certain of these provisions may be deemed to have a
potential anti-takeover effect in that such provisions may delay or prevent a
change of control of the Company. These provisions include: (a) the
classification of the Board of Directors into three classes, each class
serving for staggered three year terms; (b) restrictions on the removal of
directors; (c) the authority of the Board to issue series of Preferred Stock
with such voting rights and other provisions as the Board of Directors may
determine; (d) a requirement that a vote of greater than 80% of the voting
power of shares entitled to vote generally for the election of directors is
required to amend provisions of the Certificate and By-laws relating to the
classification of the Board and removal of directors unless 75% of the Board
of Directors approve such action; (e) the requirement that stockholder action
can be taken only at an annual or special meeting of stockholders and
prohibiting stockholder action by written consent in lieu of a meeting; (f) an
advance notice procedure for stockholders to make nominations of candidates
for election as directors; and (g) the requirement that a special stockholders
meeting may only be called by the Chairman of the Board, the President or at
the direction of the majority of the Board of Directors.
These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to acquire control of the Company to negotiate first with the
37
<PAGE>
Board of Directors. The Company believes that the benefits of these provisions
outweigh the potential disadvantages of discouraging such proposals, because,
among other things, negotiation of such proposals might result in an
improvement of their terms. The description set forth above is intended as a
summary only and is qualified in its entirety by reference to the Company's
Certificate and By-laws.
Under the terms of an employment agreement with Peter I. Mason, the Company
has agreed to have Casey Cowell and Paul G. Yovovich serve as directors of the
Company. Under the terms of an employment agreement with Lawrence J. Speh, the
Company has agreed to nominate Mr. Speh as a director for so long as Mr. Speh
owns at least 500,000 shares of Common Stock, and for so long as Mr. Speh is a
director or nominee for director. Mr. Speh has agreed to vote all shares of
Common Stock owned by him in favor of the Company's nominees. In addition, Mr.
Mason has agreed to support the nomination and election to the Board of Albert
J. Speh, Jr.
CERTAIN REGISTRATION RIGHTS
The Company has granted registration rights to certain holders of Company
securities. As part of the Company's acquisition of GIS, the Company issued
warrants to acquire 180,000 shares of Common Stock at $16.51 per share. As
part of the transaction, the holder of the warrants obtained certain demand
and piggyback registration rights with respect to the underlying shares of
Common Stock.
In connection with an amendment to the Company's employment and consulting
agreement with Lawrence J. Speh, the Company granted certain demand and
piggyback registration rights to Mr. Speh with respect to shares of Common
Stock owned directly by Mr. Speh and with respect to shares of Common Stock
controlled by Mr. Speh in a fiduciary capacity. Following the Common Stock
Offering, Mr. Speh will own directly or control in a fiduciary capacity
approximately 2.1 million shares of Common Stock. The shares of Common Stock
sold by Mr. Speh in the Common Stock Offering were not sold pursuant to these
registration rights.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Harris
Trust and Savings Bank, Chicago, Illinois.
38
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an Underwriting Agreement
dated March 19, 1998 (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters") have severally agreed to purchase from the Selling
Stockholders the respective number of shares of Common Stock set forth
opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation............ 837,500
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................. 837,500
ABN AMRO Incorporated.......................................... 837,500
PaineWebber Incorporated....................................... 837,500
BT Alex Brown Incorporated..................................... 130,000
Brean Murray & Co., Inc. ...................................... 130,000
First Analysis Securities Corporation.......................... 130,000
Mesirow Financial.............................................. 130,000
Needham & Company, Inc. ....................................... 130,000
---------
Total...................................................... 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of the Prospectus and in part to certain dealers (including the
Underwriters) at such price, less a concession not in excess of $0.41 per
share. The Underwriters may allow, and such dealers may re-allow a concession
not in excess of $0.10 per share. After the initial offering of the Common
Stock, the public offering price and other selling terms may be changed by the
Underwriters at any time without notice.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Certain Selling Stockholders and the Company have granted to the
Underwriters an option exercisable within 30 days after the date of this
Prospectus, to purchase, from time to time, in whole or in part, up to an
aggregate of 275,000 and 325,000 additional shares, respectively, of Common
Stock at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
overallotments, if any, made in connection with the Common Stock Offering. To
the extent such option is exercised in part, the option granted by the Selling
Stockholders will be exercised in full before exercise of any portion of the
option granted by the Company. To the extent that the Underwriters exercise
such option, each Underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based
on such Underwriter's percentage underwriting commitment as indicated in the
preceding table.
The Company's executive officers and directors, other than the Selling
Stockholders, have agreed, subject to certain exceptions, with the
Underwriters not to, directly or indirectly, offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), any shares of Common Stock or any securities convertible into or
exercisable
39
<PAGE>
or exchangeable for, or warrants, options or rights to purchase or acquire,
Common Stock or in any other manner transfer all or a portion of the economic
consequences associated with the ownership of any Common Stock, or enter into
any agreement to do any of the foregoing, for a period of 90 days after the
date of this Prospectus. The Selling Stockholders have agreed to the foregoing
lockup provisions for a period of 180 days after the date of this Prospectus,
except that the ESOP may (i) make distributions of shares of Common Stock to
ESOP participants and (ii) sell or otherwise dispose of shares of Common Stock
in order to make cash distributions to ESOP participants, in each case in
accordance with the terms of the ESOP. In addition, the Company has agreed
that for a period of 90 days after the date of this Prospectus it will not,
without the prior written consent of DLJ, directly or indirectly offer, sell,
contract to sell, grant any option to purchase, issue, distribute or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for, or any warrants, options or rights to
purchase or acquire, Common Stock, or enter into any agreements to do any of
the foregoing, except for (i) shares of Common Stock issued pursuant to the
exercise of options or warrants outstanding on the date of this Prospectus,
and (ii) options granted after the date of this Prospectus pursuant to the
Company's 1994 Executive Stock Option Plan and the 1995 Employee Stock Option
Plan.
DLJ and ABN AMRO Incorporated have in the past provided, and they and other
Underwriters may in the future provide, investment banking services for the
Company. Additionally, certain of the Underwriters are participating as
underwriters in the concurrent Note Offering.
Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the Common Stock in
any jurisdiction where action for that purpose is required. The Common Stock
offered hereby may not be offered or sold, directly or indirectly, nor may
this Prospectus or any other offering material or advertisements in connection
with the offer and sale of the Common Stock be distributed or published in any
jurisdiction, except under circumstances that will result in compliance with
applicable rules and regulations of such jurisdiction. Persons into whose
possession this Prospectus comes are advised to inform themselves about and to
observe any restrictions relating to the offering of the Common Stock and the
distribution of this Prospectus. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the Common Stock offered
hereby in any jurisdiction in which such an offer or solicitation is unlawful.
In connection with the Common Stock Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Common Stock
Offering, creating a syndicate short position. The Underwriters may bid for
and purchase the Common Stock and in the open market to cover such syndicate
short position or to stabilize the price of the Common Stock. These activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
40
<PAGE>
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Freeborn & Peters, Chicago, Illinois. As of the date
of this Prospectus, a total of 39,207 shares of Common Stock were owned by
certain partners of Freeborn & Peters. Certain legal matters will be passed
upon for the Underwriters by Katten Muchin & Zavis, Chicago, Illinois.
EXPERTS
The financial statements of the Company as of September 30, 1996 and 1997
and for each of the three fiscal years in the period ended September 30, 1997,
included in this Prospectus, have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, registration statements, proxy statements and other information filed
by the Company with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, NW,
Washington, D.C. 20549 and at its regional offices at 7 World Trade Center,
New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2551. Copies of such materials can be obtained from
the Public Reference Section of the Commission at its principal office at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a website at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission, including the Company.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act with respect to the Common Stock Offering and the
Note Offering. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete and reference is hereby made to the copy of the such contract,
agreement or document filed as an exhibit to the Registration Statement for a
complete statement of its provisions. For further information with respect to
the Company and the Notes offered hereby, reference is hereby made to the
Registration Statement, copies of which may be obtained at the locations
specified.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents and information filed by the Company with the
Commission are incorporated herein by reference: (i) the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1997; (ii) the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December
31, 1997; and (iii) the description of the Company's capital stock set forth
under the heading "Description of Capital Stock" in the Company's prospectus
that constitutes a part of the Company's Registration Statement on Form S-1
(Commission File No. 33-98302), which description is incorporated by reference
in the Company's Registration Statement on Form 8-A dated March 1, 1996 for
the registration of the Common Stock under the Exchange Act.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering made by this Prospectus shall be deemed to be
incorporated by reference herein. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this
41
<PAGE>
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document that also is incorporated or deemed to be
incorporated herein by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person,
a copy of any or all of the documents that are incorporated herein by
reference, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests should be
directed to Andy V. Jonusaitis, Vice President and General Counsel, May &
Speh, Inc., 1501 Opus Place, Downers Grove, Illinois 60515 (telephone (630)
964-1501).
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets as of September 30, 1996 and 1997 and December
31, 1997 (unaudited)...................................................... F-3
Consolidated Statements of Operations for the years ended September 30,
1995, 1996 and 1997, and for the three months ended December 31, 1996 and
1997 (unaudited).......................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1995, 1996 and 1997, and for the three months ended December
31, 1997 (unaudited)...................................................... F-5
Consolidated Statements of Cash Flows for the years ended September 30,
1995, 1996 and 1997, and for the three months ended December 31, 1996 and
1997 (unaudited).......................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of May & Speh, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of May
& Speh, Inc. and its subsidiary at September 30, 1996 and 1997 and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, Illinois
November 10, 1997, except as to the paragraph
of Note 1 entitled "Per share information" and Note 12, which are as of
February 12, 1998
F-2
<PAGE>
MAY & SPEH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, 1997
-------------------------- -----------------
1996 1997 (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 10,397,858 $ 1,888,817 $ 3,024,013
Marketable securities.......... 20,334,278 20,415,793 12,896,200
Accounts receivable, net....... 21,003,095 28,569,372 29,947,488
Income taxes refundable........ 3,550,617 6,301,217 6,301,217
Prepaid software royalties..... 2,652,398 5,442,796 6,518,476
Deferred income taxes and other
current assets................ 1,991,794 2,445,829 5,594,995
------------ ------------ ------------
Total current assets......... 59,930,040 65,063,824 64,282,389
Property, plant and equipment,
net............................. 32,289,746 50,228,440 50,848,825
Goodwill......................... 16,863,811 20,099,245 19,978,514
Other assets..................... 6,134,473 13,404,419 13,522,314
------------ ------------ ------------
Total assets................. $115,218,070 $148,795,928 $148,632,042
============ ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current maturities of long-term
debt.......................... $ 5,329,670 $ 5,810,927 $ 5,867,996
Accounts payable............... 3,713,421 5,017,666 4,219,114
Accrued wages and benefits..... 3,006,991 4,324,814 2,397,632
Other accrued expenses......... 1,730,938 2,870,903 5,061,922
------------ ------------ ------------
Total current liabilities.... 13,781,020 18,024,310 17,546,664
Long-term debt................... 22,250,802 31,546,484 30,150,736
Deferred income taxes............ 3,455,000 8,090,000 8,090,000
------------ ------------ ------------
Total liabilities............ 39,486,822 57,660,794 55,787,400
------------ ------------ ------------
Commitments and contingencies
(Note 7)
Stockholders' equity (Note 8):
Preferred stock, no par value,
2,000,000 shares authorized;
no shares issued
Common stock, $.01 par value,
50,000,000 shares authorized;
24,934,154 shares, 25,147,354
shares and 25,219,854 shares
issued and outstanding at
September 30, 1996 and 1997
and December 31, 1997......... 249,342 251,474 252,199
Additional paid-in capital..... 46,967,691 48,277,867 48,737,056
Retained earnings.............. 33,860,039 45,575,694 46,231,309
------------ ------------ ------------
81,077,072 94,105,035 95,220,564
Unearned ESOP compensation..... (5,345,824) (2,969,901) (2,375,922)
------------ ------------ ------------
Total stockholders' equity... 75,731,248 91,135,134 92,844,642
------------ ------------ ------------
Total liabilities and
stockholders' equity........ $115,218,070 $148,795,928 $148,632,042
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MAY & SPEH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------- ------------------------
1995 1996 1997 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............ $61,641,273 $77,222,960 $92,457,288 $21,228,730 $26,350,565
----------- ----------- ----------- ----------- -----------
Operating expenses:
Wages and benefits.... 20,983,636 23,950,392 30,436,956 7,143,274 8,948,912
Services and supplies. 4,160,441 6,839,200 6,191,501 2,039,016 1,370,602
Rents, leases and
maintenance.......... 13,878,290 18,064,271 20,137,243 4,637,094 5,251,101
Depreciation and
amortization......... 1,230,066 2,155,481 4,419,933 901,396 1,778,857
Other operating
expenses............. 5,106,579 6,812,536 8,433,104 1,823,590 2,115,297
ESOP principal
payments............. 2,410,539 2,375,923 2,375,923 593,980 593,979
Restructuring costs... -- -- -- -- 4,700,000
----------- ----------- ----------- ----------- -----------
47,769,551 60,197,803 71,994,660 17,138,350 24,758,748
----------- ----------- ----------- ----------- -----------
Operating income........ 13,871,722 17,025,157 20,462,628 4,090,380 1,591,817
----------- ----------- ----------- ----------- -----------
Interest and other
expense:
ESOP interest expense. 863,809 611,552 403,396 124,371 69,214
Other interest
expense.............. 678,843 1,231,263 2,214,705 452,471 686,449
Interest income....... (206,594) (1,147,345) (1,050,765) (293,581) (160,882)
Other, net............ 10,118 (167,896) (2,763) (10,484) (58,182)
----------- ----------- ----------- ----------- -----------
1,346,176 527,574 1,564,573 272,777 536,599
----------- ----------- ----------- ----------- -----------
Income before income
taxes.................. 12,525,546 16,497,583 18,898,055 3,817,603 1,055,218
Income taxes............ 4,665,000 6,274,000 7,182,400 1,450,900 399,603
----------- ----------- ----------- ----------- -----------
Net income.............. $ 7,860,546 $10,223,583 $11,715,655 $ 2,366,703 $ 655,615
=========== =========== =========== =========== ===========
Basic earnings per
share.................. $ 0.38 $ 0.45 $ 0.47 $ 0.09 $ 0.03
Weighted average shares
outstanding............ 20,426,482 22,633,972 25,028,786 24,953,371 25,172,300
Diluted earnings per
share.................. $ 0.38 $ 0.43 $ 0.45 $ 0.09 $ 0.02
Weighted average shares
outstanding, including
common equivalents..... 20,610,517 23,652,901 26,178,963 26,220,184 26,469,818
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MAY & SPEH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN UNEARNED RETAINED
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE--SEPTEMBER 30,
1994................... 20,465,737 $204,658 $ 1,525,927 $(11,362,877) $18,333,582 $ 8,701,290
Net income for the year
ended September 30,
1995.................. 7,860,546 7,860,546
ESOP compensation
earned during the year
ended September 30,
1995.................. 2,410,539 2,410,539
Dividends declared and
paid.................. 1,230,591 (2,545,332) (1,314,741)
Tax benefit of
dividends paid on
unallocated shares
held by the ESOP...... 247,000 247,000
Repurchases and
retirement of common
stock................. (103,080) (1,031) (259,340) (260,371)
---------- -------- ----------- ------------ ----------- -----------
BALANCE--SEPTEMBER 30,
1995................... 20,362,657 203,627 1,525,927 (7,721,747) 23,636,456 17,644,263
Net income for the year
ended September 30,
1996.................. 10,223,583 10,223,583
ESOP compensation
earned during the year
ended September 30,
1996 ................. 2,375,923 2,375,923
Issuance of common
stock warrants........ 1,300,000 1,300,000
Issuance of common
stock................. 4,355,000 43,550 43,005,144 43,048,694
Exercise of stock
options............... 216,497 2,165 1,136,620 1,138,785
---------- -------- ----------- ------------ ----------- -----------
BALANCE--SEPTEMBER 30,
1996................... 24,934,154 249,342 46,967,691 (5,345,824) 33,860,039 75,731,248
Net income for the year
ended September 30,
1997.................. 11,715,655 11,715,655
ESOP compensation
earned during the year
ended September 30,
1997 ................. 2,375,923 2,375,923
Exercise of stock
options............... 213,200 2,132 1,310,176 1,312,308
---------- -------- ----------- ------------ ----------- -----------
BALANCE--SEPTEMBER 30,
1997................... 25,147,354 251,474 48,277,867 (2,969,901) 45,575,694 91,135,134
Net income for three
months ended December
31, 1997 (unaudited).. 655,615 655,615
ESOP compensation
earned during the
three months ended
December 31, 1997
(unaudited)........... 593,979 593,979
Exercise of stock
options (unaudited)... 72,500 725 459,189 459,914
---------- -------- ----------- ------------ ----------- -----------
BALANCE--DECEMBER 31,
1997 (UNAUDITED)....... 25,219,854 $252,199 $48,737,056 $ (2,375,922) $46,231,309 $92,844,642
========== ======== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MAY & SPEH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------- ------------------------
1995 1996 1997 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.............. $ 7,860,546 $10,223,583 $11,715,655 $ 2,366,703 $ 655,615
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 1,230,066 2,155,481 4,419,933 901,396 1,778,857
Deferred income taxes. 492,000 2,172,000 4,727,000 -- --
ESOP principal
payments............. 2,410,539 2,375,923 2,375,923 593,980 593,979
Changes in assets and
liabilities, net of
effect from purchase
of GIS Information
Systems, Inc. &
Credit Strategy
Management
Accounts receivable,
net................ (879,246) (3,130,272) (7,566,277) 3,245,691 (1,378,116)
Prepaid expenses and
other current
assets............. (196,743) (1,312,277) (3,336,433) 656,124 (4,224,846)
Income taxes
payable/refundable. (599,526) (2,330,001) (2,750,600) -- --
Accounts payable and
accrued expenses... 2,558,198 (1,672,404) 4,065,082 (1,113,982) (534,715)
Other............... 553,996 (125,673) (108,597) (148,372) (399,395)
----------- ----------- ----------- ----------- -----------
Net cash provided
by (used in)
operating
activities........ 13,429,830 8,356,360 13,541,686 6,501,540 (3,508,621)
----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities:
Proceeds from sale of
property............... -- -- 12,215,528 -- --
Purchases of property
and equipment.......... (6,918,157) (5,189,216) (19,292,880) (948,384) (1,978,511)
Purchases of marketable
securities............. (647,530) (31,365,521) (13,442,385) (6,861,098) --
Sales of marketable
securities............. 1,575,166 12,919,913 13,360,869 2,232,339 7,519,593
Software development
costs capitalized
including related
equipment.............. (1,227,969) (3,990,359) (7,087,047) (1,658,479) --
Acquisition of GIS
Information Systems,
Inc., and Credit
Strategy Management.... -- (16,148,513) (3,235,734) -- --
Other................... (106,114) (74,000) (74,000) (31,362) (18,500)
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by
investing
activities........ (7,324,604) (43,847,696) (17,555,649) (7,266,984) 5,522,582
----------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Capital lease principal
payments............... -- (1,851,062) (1,890,175) (288,211) (544,699)
Proceeds from line of
credit................. (1,250,000) -- -- -- --
Proceeds from long-term
obligations............ 12,000,000 -- -- -- --
Repayments of long-term
obligations............ (10,266,987) (3,161,105) (3,917,211) (635,268) (793,980)
Dividends paid, net of
related ESOP
remittance............. (1,314,741) -- -- -- --
Issuance of common
stock.................. -- 43,048,995 -- -- --
Exercise of stock
options................ -- 1,138,785 1,312,308 141,667 459,914
Repurchases of common
stock.................. (202,478) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided
by (used in)
financing
activities........ (1,034,206) 39,175,613 (4,495,078) (781,812) (878,765)
----------- ----------- ----------- ----------- -----------
Net change in cash
and cash
equivalents....... 5,071,020 3,684,277 (8,509,041) (1,547,256) 1,135,196
Cash and cash
equivalents:
Beginning of period..... 1,642,561 6,713,581 10,397,858 10,397,858 1,888,817
----------- ----------- ----------- ----------- -----------
End of period........... $ 6,713,581 $10,397,858 $ 1,888,817 $ 8,850,602 $ 3,024,013
=========== =========== =========== =========== ===========
Supplemental cash flow
information:
Cash paid during the
period for:
Interest.............. $ 1,665,000 $ 1,843,000 $ 2,618,000 $ 495,712 $ 806,967
=========== =========== =========== =========== ===========
Income taxes.......... $ 5,155,000 $ 5,770,773 $ 5,250,000 $ -- $ --
=========== =========== =========== =========== ===========
Non-cash
financing/investing
activities:
Acquisition of
property and
equipment under
capital leases....... $ 342,000 $11,373,000 $15,321,000 $ 382,460 $ --
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
May & Speh, Inc. ("May & Speh" or the "Company") is a provider of computer-
based information management services primarily for clients with significant
direct marketing requirements. The Company provides direct marketing services
including database creation, data warehousing, predictive behavioral modeling
list processing and data enhancement. The Company also provides information
technology outsourcing services.
In December 1995, the Company effected a 12-for-one stock split. The
accompanying financial statements and related notes thereto have been restated
to reflect the 12-for-one stock split for all periods presented.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with an original maturity of
90 days or less as cash equivalents.
REVENUE RECOGNITION
Revenue is recognized as services are performed. Direct marketing services
revenues are generally determined based upon the number of records processed
and are recognized as such processes are completed. Information technology
outsourcing services revenues are recognized based upon the amount of computer
time used. Unbilled accounts receivable consist primarily of services
performed which are billable upon project completion or upon occurrence of
other specified events. Unbilled accounts receivable are generally billed
within 90 days of income recognition. Accounts receivable are unsecured.
MARKETABLE SECURITIES
Investments are stated at cost, which approximates fair market value; gains
and losses are recognized in the period realized. The Company has classified
its marketable securities as available for sale.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Betterments are
capitalized; repairs and maintenance are expensed as incurred. Depreciation is
computed using straight-line and accelerated methods over the estimated
economic lives of the related assets as follows:
<TABLE>
<S> <C>
Computers and related equipment.......................... 5 to 10 years
Building and improvements................................ 10 to 31.5 years
Office furniture and equipment........................... 12 years
Automobiles.............................................. 5 years
</TABLE>
CAPITALIZED SOFTWARE COSTS
Development costs for software to be sold or leased to third parties is
expensed as incurred until such time as technological feasibility is
established. Upon establishment of technological feasibility, future costs are
capitalized until the product is available for general release to clients.
Amortization of capitalized software costs is the greater of the amount
computed using (a) the ratio that current gross revenues for a product bear to
the total current and future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life of the product
of five to seven years. It is reasonably possible that those estimates of
anticipated future gross revenues, the remaining estimated economic life of
the product or both will be reduced in the future. In addition, software costs
are generally subject to technological obsolescence in the future.
F-7
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
The Company expenses research and development costs incurred until
technological feasibility is established. For the years ended September 30,
1995, 1996 and 1997, the Company expensed $1,860,055, $2,486,247 and
$3,425,750, respectively, as research and development costs. Research and
development costs are primarily wages and benefits for staff and are reflected
as such in the accompanying financial statements.
INCOME TAXES
The Company uses the asset and liability approach under which deferred
income taxes are provided for temporary differences between the financial
reporting and income tax bases of assets and liabilities based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income.
EMPLOYEE STOCK OWNERSHIP PLAN
Effective October 1, 1988, the Company established the May & Speh, Inc.
Employee Stock Ownership Plan (the ESOP) for the benefit of substantially all
of the Company's employees. The Company borrowed $22,500,000 from a bank (the
ESOP Loan) and loaned the proceeds to the ESOP for the purpose of providing
the ESOP sufficient funds to purchase 9,887,340 shares (then 43.11%) of the
Company's common stock at $2.28 per share.
The ESOP's obligation to the Company, which is evidenced by a note (the ESOP
Note), was initially recorded as unearned compensation (a direct reduction to
shareholders' equity) and is expensed ratably as the ESOP Note is repaid. The
ESOP Note, which contains provisions substantially similar to the Company's
obligation to the bank, is secured by the unallocated ESOP shares which are
released from suspense and allocated to participants as principal is repaid.
The terms of the ESOP agreement require the Company to make minimum
contributions sufficient to meet the ESOP's debt service obligations.
GOODWILL
In connection with its acquisition of GIS Information Systems, Inc. ("GIS")
in July 1996, the Company recorded goodwill of $16,970,000. An additional
$2,416,000 was recorded during the year ended September 30, 1997 related to
incentive payments and estimated costs to be incurred in consolidating GIS's
operations. The Company also recorded goodwill of $1,295,000 related to its
acquisition of Credit Strategy Management, Inc. ("CSM") in 1997. Total
goodwill aggregated $20,681,000 at September 30, 1997. Accumulated
amortization totaled $106,000 and $582,000 at September 30, 1996 and 1997,
respectively. Goodwill is amortized using the straight line method over a 40-
year period for financial reporting purposes.
The Company reviews the carrying value of goodwill and other long-lived
assets for impairment when events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. This review is
performed by comparing estimated undiscounted future cash flows from use of
the asset to the recorded value of the asset.
OTHER ASSETS
Other assets include cash surrender value of life insurance policies,
deposits and capitalized software costs. Capitalized software costs of
$5,218,000, and $12,305,000 are included in other assets as of September 30,
1996 and 1997, respectively. Amortization of such costs will commence when the
product is available for general release to clients.
F-8
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SIGNIFICANT CLIENTS
Sears, Roebuck and Co. accounted for 17.1%, 17.6% and 18.9%, of the
Company's net revenues in fiscal 1995, 1996, and 1997, respectively. Capital
One Bank accounted for 10.6% of the Company's revenue in fiscal 1995.
PER SHARE INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128) during the first quarter of fiscal 1998. SFAS
128 requires presentation of both basic EPS and diluted EPS on the face of the
income statement. Basic EPS is computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during a period. In computing diluted EPS,
the average stock price for the period is used in determining the number of
shares assumed to be purchased under the treasury stock method from exercise
of stock options. All per share information in the Company's financial
statements has been restated to conform to the provisions of SFAS 128.
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the consolidated balance sheets for cash,
marketable securities, accounts receivable, prepaid expenses and other current
assets, accounts payable and accrued expenses approximates fair value because
of the immediate or short-term maturity of these financial instruments. The
recorded value of long-term debt is estimated to approximate fair value due to
the interest rates incurred by the Company on such debt.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," issued in June 1997, will
require the Company to disclose, in financial statement format, all non-owner
changes in equity. Such changes include, for example, cumulative foreign
currency translation adjustments, certain minimum pension liabilities and
unrealized gains and losses on available-for-sale securities. This Statement
is effective for fiscal years beginning after December 15, 1997 and requires
presentation of prior period financial statements for comparability purposes.
The Company expects to adopt this Statement beginning with its financial
statements for the year ending September 30, 1999. Adoption of this statement
is not expected to have a material impact on the Company's financial
statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," issued in June 1997, establishes standards for reporting
information about operating segments in annual financial statements and
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major clients.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company
expects to adopt this Statement in its financial statements for the year
ending September 30, 1999.
F-9
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim information as of December 31, 1997 and for the
quarter then ended and for each of the fiscal quarters in the years ended
September 30, 1997 and 1996 has been prepared from the unaudited financial
records of the Company and, in the opinion of management, reflects all
adjustments necessary for a fair presentation of the financial position and
results of operations and of cash flows for the respective interim periods.
All adjustments were of a normal and recurring nature.
NOTE 2--MARKETABLE SECURITIES
The Company's marketable securities as of September 30, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------
FAIR UNREALIZED
CLASS OF SECURITY COST BASIS MARKET VALUE GAIN (LOSS)
<S> <C> <C> <C>
Municipal bonds...................... $18,415,793 $18,700,051 $284,258
Equities and mutual funds............ 2,000,000 2,000,000 --
----------- ----------- --------
$20,415,793 $20,700,051 $284,258
=========== =========== ========
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------
FAIR UNREALIZED
CLASS OF SECURITY COST BASIS MARKET VALUE GAIN (LOSS)
<S> <C> <C> <C>
Municipal bonds...................... $18,740,278 $18,873,348 $133,070
Equities and mutual funds............ 1,594,000 1,594,000 --
----------- ----------- --------
$20,334,278 $20,467,348 $133,070
=========== =========== ========
</TABLE>
The Company determines the cost basis of its marketable securities using the
specific identification method. The net unrealized gain relating to marketable
securities is not significant and has not been reflected in the accompanying
financial statements. The Company's investments in municipal bonds generally
mature in one to three years.
NOTE 3--ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1997
<S> <C> <C>
Trade accounts receivable:
Billed........................................ $19,289,683 $21,657,013
Unbilled...................................... 2,066,412 4,817,056
----------- -----------
21,356,095 26,474,069
Less--Allowance for doubtful accounts........... (353,000) (330,000)
----------- -----------
21,003,095 26,144,069
Other accounts receivable....................... -- 2,425,303
----------- -----------
$21,003,095 $28,569,372
=========== ===========
</TABLE>
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1997
<S> <C> <C>
Building and improvements...................... $11,297,039 $ 12,814,033
Computers and related equipment................ 20,584,392 36,476,595
Office furniture and equipment................. 3,361,864 5,488,584
Automobiles.................................... 190,452 168,789
----------- ------------
35,433,747 54,948,001
Less--Accumulated depreciation................. (9,347,242) (10,754,380)
----------- ------------
26,086,505 44,193,621
Land and land improvements..................... 6,203,241 6,034,819
----------- ------------
$32,289,746 $ 50,228,440
=========== ============
</TABLE>
F-10
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Assets under capital lease had an initial value of $11,716,000 and
$26,770,978, and accumulated amortization of $362,000 and $1,618,081, at
September 30, 1996 and 1997, respectively. As of September 30, 1996 all assets
under capital leases were computer and related equipment. As of September 30,
1997, $9,103,562 related to buildings and improvements, $5,835,060 related to
land and $11,832,356 related to computers and related equipment. The
amortization of these capitalized assets is included in depreciation expense
for the years ended September 30, 1995, 1996 and 1997.
NOTE 5--INCOME TAXES
The Company's provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------------
1995 1996 1997
<S> <C> <C> <C>
Current:
Federal................................ $3,359,000 $3,125,000 $2,121,200
State.................................. 814,000 762,000 334,200
---------- ---------- ----------
4,173,000 3,887,000 2,455,400
---------- ---------- ----------
Deferred:
Federal................................ 399,000 2,081,000 4,143,000
State.................................. 93,000 306,000 584,000
---------- ---------- ----------
492,000 2,387,000 4,727,000
---------- ---------- ----------
$4,665,000 $6,274,000 $7,182,400
========== ========== ==========
</TABLE>
The Company's deferred income tax asset (liability) balances are summarized
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1997
<S> <C> <C>
ESOP expenses................................... $ 144,000 $ 128,000
Allowance for doubtful accounts................. 138,000 129,000
Accrued expenses................................ 433,000 643,000
Deferred charges................................ 155,000 --
Non-compete agreement........................... 263,000 242,000
Other........................................... -- 30,000
----------- -----------
Gross deferred tax assets................... 1,133,000 1,172,000
----------- -----------
Depreciation.................................... (1,104,000) (3,656,000)
Software development costs capitalized.......... (2,035,000) (4,799,000)
Capital lease payment........................... (545,000) --
Goodwill........................................ (69,000) (173,000)
Other........................................... (109,000) --
----------- -----------
Gross deferred tax liabilities.............. (3,862,000) (8,628,000)
----------- -----------
Net deferred taxes.............................. $(2,729,000) $(7,456,000)
=========== ===========
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
SEPTEMBER 30,
----------------
1995 1996 1997
<S> <C> <C> <C>
Income taxes at federal statutory rate.................. 34% 34% 34%
State taxes, net of federal benefit..................... 5 5 5
Dividends paid on allocated shares held by ESOP......... (2) -- --
Municipal bond interest income.......................... -- (1) (1)
--- --- ---
37% 38% 38%
=== === ===
</TABLE>
F-11
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--LINE OF CREDIT AND LONG-TERM DEBT
Effective May 16, 1994, the Company entered into a line of credit agreement
with a bank under which the Company may borrow up to $2,000,000 with interest
payable at the bank's prime rate (8.5% at September 30, 1996 and 1997). This
loan is payable on demand and is secured by substantially all of the assets of
the Company. No amounts were outstanding under this agreement as of September
30, 1996 and 1997.
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1997
<S> <C> <C>
ESOP loan....................................... $ 5,345,823 $ 2,969,901
Term loan....................................... 11,200,000 10,200,000
Capital lease obligations....................... 9,975,431 23,687,510
Deferred acquisition payments................... 1,000,000 500,000
Other........................................... 59,218 --
----------- -----------
27,580,472 37,357,411
Less--Current maturities........................ (5,329,670) (5,810,927)
----------- -----------
$22,250,802 $31,546,484
=========== ===========
</TABLE>
ESOP LOAN
Effective November 10, 1988, the Company entered into a $22,500,000 term
loan agreement with a bank (the ESOP Loan). Under the terms of the agreement,
the Company must make quarterly payments of principal (in varying amounts as
summarized below) plus interest. This interest rate is subject to adjustments
based upon changes in federal and state tax rates or changes in the proportion
of the bank's income from this loan which is includable in gross income for
federal income tax purposes.
Amounts outstanding under the ESOP Loan are collateralized by the ESOP Note,
an assignment of the pledge agreement between the Company and the ESOP
(whereby the ESOP pledged the unallocated ESOP Shares as collateral for the
ESOP Note) and a security interest in all assets of the Company.
The ESOP Loan contains certain restrictive covenants that, among other
things, limit capital expenditures, additional indebtedness, certain
investments, the repurchase of common stock and the payment of dividends and
require the Company to maintain certain working capital and other financial
measures. The Company was in violation of certain of these restrictive
covenants as of September 30, 1996 and 1997 and waivers of such violations
were received from the bank.
On September 28, 1995, the Company's Board of Directors declared and paid a
$0.125 per share dividend. The portion of this dividend which was paid on
shares held by the ESOP (unallocated and allocated) was used to prepay
$1,231,000 of the ESOP Note and, accordingly, the Company prepaid, without
penalty, $1,231,000 of the variable rate portion of the ESOP Loan.
CAPITAL LEASE OBLIGATIONS
The Company entered into a sale-leaseback agreement with a third party
selling the existing building and land, including 10.4 acres located adjacent
to the existing building that will be used to build a new 200,000 square foot
building. The Company has entered into a 20-year lease with the third party on
the existing building, and it has also entered into a 20-year lease for the
new 200,000 square foot building currently under construction on the property
adjacent to the Company's executive offices. The lease commences upon
completion of the
F-12
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
building expected in September 1998, and is classified as a capital lease. The
existing building and land were sold at their book value of approximately
$12.2 million. The interest rate implicit in the Company's capital leases
approximates 8%.
TERM LOAN
During fiscal 1995, the Company entered into a $12,000,000 credit facility
to finance the expansion of the Company's facilities. The credit facility
requires quarterly principal payments of $200,000 plus interest at 8.5% (fixed
rate) with the balance to be paid in 2005. This credit facility contains
certain restrictive covenants that limit capital expenditures, limit
additional indebtedness, restrict certain investments, restrict the repurchase
of common stock and limit the payment of dividends. This debt agreement was
amended during fiscal 1996 to allow the acquisition of GIS Information
Systems, Inc. (see Note 10). The Company is also required to maintain working
capital and other financial measures. The Company was in violation of certain
of these restrictive covenants as of September 30, 1996 and 1997. Waivers of
such violations were received from the bank.
SUMMARY OF MATURITIES
A summary of principal maturities relating to long-term obligations is as
follows:
<TABLE>
<CAPTION>
DEFERRED
FISCAL YEAR ENDING CAPITAL ACQUISITION
SEPTEMBER 30, ESOP LOAN TERM LOAN LEASES PAYMENT TOTALS
<S> <C> <C> <C> <C> <C>
1998.................. $2,375,922 $ 800,000 $ 2,135,005 $500,000 $ 5,810,927
1999.................. 593,979 800,000 2,471,338 3,865,317
2000.................. 800,000 2,692,799 3,492,799
2001.................. 800,000 2,934,111 3,734,111
2002.................. 800,000 547,497 1,347,497
Thereafter............ 6,200,000 12,906,760 19,106,760
---------- ----------- ----------- -------- -----------
$2,969,901 $10,200,000 $23,687,510 $500,000 $37,357,411
========== =========== =========== ======== ===========
</TABLE>
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company currently leases warehouse and office space in the metropolitan
Chicago area under the terms of operating leases expiring on various dates
through August 2002. The Company also leases certain computer and other office
equipment under the terms of operating leases.
The aggregate future minimum lease commitments under these operating leases
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER 30,
<S> <C>
1998....................................................... $10,611,508
1999....................................................... 8,459,609
2000....................................................... 6,886,069
2001....................................................... 4,365,069
2002 and thereafter........................................ $ 1,269,069
</TABLE>
Total rental expense for the years ended September 30, 1995, 1996 and 1997,
under the operating leases approximated $8,644,000, $11,711,000 and
$11,511,000 respectively.
NOTE 8--STOCKHOLDERS' EQUITY
On March 29, 1996, the Company completed an initial public offering of
3,350,000 shares of its common stock, par value $.01 per share. Certain
stockholders of the Company sold an additional 3,350,000 shares of
F-13
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
common stock in the offering. In addition, on April 24, 1996, the Company
completed the offering of an additional 1,005,000 shares of common stock that
were subject to an over-allotment option granted to the underwriters of the
initial public offering. The net proceeds to the Company were approximately
$43,500,000 after deducting underwriting discounts and offering expenses.
A summary of share transactions within the ESOP is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1995 1996 1997
---------------------- ----------------------- ----------------------
UNALLOCATED ALLOCATED UNALLOCATED ALLOCATED UNALLOCATED ALLOCATED
<S> <C> <C> <C> <C> <C> <C>
Shares
Beginning of year..... 5,070,900 4,796,904 3,445,788 6,398,941 2,403,717 5,963,115
Released and
allocated............ (1,625,112) 1,625,112 (1,042,071) 1,042,071 (1,098,631) 1,098,631
Distributed to
participants......... (23,075) (1,188) (162,566)
Sold in Offering...... (1,476,709)
---------- --------- ---------- ---------- ---------- ---------
End of year........... 3,445,788 6,398,941 2,403,717 5,963,115 1,305,086 6,899,180
========== ========= ========== ========== ========== =========
</TABLE>
NOTE 9--STOCK OPTION PLANS
Effective September 30, 1994, the Company established the 1994 Executive
Stock Option Plan ("the 1994 plan"). The Company has established the 1995 Key
Employee Stock Option Plan ("the 1995 plan"), as amended and restated August
8, 1996. Under the terms of the 1994 plan, the Compensation Committee (the
Committee) of the Company's Board of Directors may grant options for the
purchase of up to 3,600,000 shares of the Company's common stock with exercise
prices and vesting requirements at the sole discretion of the Committee. The
Committee may grant options for the purchase of up to 2,000,000 shares of
common stock under the terms of the 1995 plan.
During fiscal 1995, 1996 and 1997, the Company granted options to purchase
2,202,000, 1,082,200, and 1,305,200 shares of common stock respectively, at
the estimated fair market value at the date of grant to certain employees. The
exercise price of these options ranged from $2.08 to $19.88 per share. Options
to purchase 600,000 shares and 72,000 shares were canceled by the Company in
fiscal 1995 and fiscal 1997, respectively. No options were canceled in fiscal
1996. There were no options which expired or were exercised during fiscal
1995. In fiscal 1996, 216,497 options were exercised at a weighted-average
exercise price of $2.08. In fiscal 1997, 213,200 options were exercised at a
weighted-average exercise price of $2.15.
As of September 30, 1997, options to purchase the Company's common stock
were outstanding as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED-AVERAGE OPTION
UNDERLYING PER SHARE SHARES
DATE OF GRANT OPTIONS EXERCISE PRICE VESTED
<S> <C> <C> <C>
October 1, 1994-June 1, 1995....... 1,700,303 $2.13 1,249,200
February 1, 1996-September 23,
1996.............................. 1,082,200 7.78 216,400
December 24, 1996-August 4, 1997... 1,305,200 9.10 --
--------- ---------
4,087,703 1,465,600
========= =========
</TABLE>
Generally, these options vest and become exercisable in five equal annual
increments beginning one year after the issue date and expire 10 years after
the issue date.
The weighted-average fair value of options at date of grant was $5.86 in
fiscal 1997 and $6.03 in fiscal 1996. These values were determined by the
Black-Scholes model with the following weighted-average
F-14
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
assumptions for fiscal 1997 and 1996, respectively: interest rate of 6.63% and
6.08%; volatility of 46% and 45%; no annual dividends; and an expected life of
8 years for both fiscal years.
The Company generally recognizes no compensation expense with respect to
awards of stock options since the exercise price of the common stock options
awarded are equal to the fair market value of the underlying security on the
date of grant. If the Company adopted Statement of Financial Accounting
Standard Number 123 with respect to stock options, net income would have been
$10,433,192 in fiscal 1997 and $9,788,696 in fiscal 1996. Basic and diluted
earnings per share would have been $0.42 and $0.40 in fiscal 1997,
respectively, and $0.43 and $0.41 in fiscal 1996, respectively. The pro forma
effect on net income and earnings per share for fiscal 1997 and 1996 is not
representative of the pro forma effect on net income in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to September 30, 1995.
NOTE 10--ACQUISITIONS
Effective February 3, 1997, the Company acquired the assets of Credit
Strategy Management, Inc. for $1.4 million cash. Credit Strategy Management,
Inc. provides modeling and analysis services and is located in Atlanta,
Georgia. Approximately $1.3 million of the purchase price was allocated to
goodwill, which is amortized using the straight line method over a 40-year
period. The acquisition has been accounted for under the purchase method of
accounting.
Effective July 1, 1996, the Company acquired all of the outstanding capital
stock of GIS Information Systems, Inc. ("GIS") for $16,148,000 in cash,
guaranteed deferred payments totaling $1,000,000, common stock warrants to
purchase 180,000 shares of the Company's common stock at $16.51 per share and
certain contingent payments. In connection with the acquisition, liabilities
were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired................................ $20,606,581
Issuance of common stock warrants............................ 1,300,000
Cash paid for common stock................................... 16,148,513
-----------
Liabilities assumed...................................... $ 3,158,068
===========
</TABLE>
GIS was a provider of data processing outsourcing services and was based in
Oak Brook, Illinois.
The fair value of the warrant to purchase 180,000 shares (which are fully
vested and expire on July 18, 2001) of the Company's common stock approximated
$1,300,000, and is included in part in capital as of September 30, 1996 and
1997. A payment of $1,050,000 was made based upon an earn-out provision for
the period July 1, 1996 through June 30, 1997. A similar additional payment is
expected based on an earn-out provision for the period July 1, 1997 through
June 30, 1998. Payments made under these earn-out provisions are reflected as
an increase in goodwill. The Company reserved $1,350,000 in the first quarter
of fiscal 1997 related to costs incurred in consolidating GIS operations.
These costs were paid during fiscal 1997 and primarily consisted of rental
commitments for property having no future economic value to the Company. The
amount reserved was also included as a component of goodwill.
The acquisition has been accounted for under the purchase method of
accounting. Accordingly, the purchase price was allocated to the identifiable
assets acquired and liabilities assumed based on their estimated fair values.
The excess of the purchase price over the net assets acquired was allocated to
goodwill. This goodwill is amortized using the straight line method over a 40-
year period for financial reporting purposes.
The following unaudited pro forma financial information presents the results
of operations of the Company and the acquired business as if the acquisitions
had occurred at the beginning of fiscal 1996. The pro forma
F-15
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
information is based on historical results of operations and does not
necessarily reflect the actual results that would have occurred, nor is it
necessarily indicative of future results of operations of the combined
enterprises:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Net Revenues..................................... $73,454,000 $86,696,000
Net Income....................................... 9,096,000 11,217,000
Basic earnings per share......................... $ 0.45 $ 0.50
Diluted earnings per share....................... 0.44 0.47
</TABLE>
NOTE 11--SUBSEQUENT EVENT--RESTRUCTURING CHARGE
In October 1997, the Company announced a one-time, pre-tax charge of
approximately $4.7 million ($2.9 million after-tax) in the first quarter of
fiscal 1998, which represents the present value of payments under existing
contracts with prior members of management.
NOTE 12--SUBSEQUENT EVENT--EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators for the
computations of basic and diluted EPS:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
SEPTEMBER 30,
-----------------------------------
1995 1996 1997
<S> <C> <C> <C>
Basic EPS computation
Numerator.................................. $ 7,860,546 $10,223,583 $11,715,655
Denominator:
Weighted average shares outstanding...... 20,426,482 22,633,972 25,028,786
----------- ----------- -----------
Basic EPS.................................. $ 0.38 $ 0.45 $ 0.47
=========== =========== ===========
Diluted EPS computation
Numerator.................................. $7,860,546 $10,223,583 $11,715,655
Denominator:
Weighted average shares outstanding...... 20,426,482 22,633,972 25,028,786
Common stock equivalent of stock options. 184,035 1,018,929 1,150,177
----------- ----------- -----------
Total shares............................... 20,610,517 23,652,901 26,178,963
----------- ----------- -----------
Diluted EPS................................ $ 0.38 $ 0.43 $ 0.45
=========== =========== ===========
</TABLE>
The weighted-average of securities that could potentially dilute basic EPS
in the future that were not included in the fiscal 1996 and 1997 computations
of diluted EPS was 102,857 and 569,611 shares, respectively. These securities
were not included in the diluted EPS calculation because to do so would have
been antidilutive for the periods presented. No securities were excluded from
the 1995 calculation of diluted EPS.
F-16
<PAGE>
MAY & SPEH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly data for the years ended September 30, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Net Revenues.................. $16,043,616 $19,132,514 $19,997,045 $22,049,785
Operating Income.............. 3,070,007 4,153,782 4,854,828 4,946,540
Net Income.................... 1,661,403 2,368,722 3,067,002 3,126,456
Basic Earnings Per Share...... $ 0.08 $ 0.12 $ 0.12 $ 0.13
Diluted Earnings Per Share.... 0.08 0.11 0.12 0.12
1997
Net Revenue................... $21,228,730 $21,692,905 $23,625,454 $25,910,199
Operating Income.............. 4,090,380 4,347,052 5,347,905 6,677,291
Net Income.................... 2,366,703 2,419,205 3,087,366 3,842,381
Basic Earnings Per Share...... $ 0.09 $ 0.10 $ 0.12 $ 0.15
Diluted Earnings Per Share.... 0.09 0.09 0.12 0.15
</TABLE>
F-17
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPEC-
TUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RE-
LIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR
ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Safe Harbor for Forward-Looking Statements................................ 12
Use of Proceeds........................................................... 13
Capitalization............................................................ 13
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 14
Selected Financial, Operating and Other Data.............................. 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 23
Management................................................................ 31
Principal Stockholders.................................................... 33
Selling Stockholders...................................................... 34
Description of Capital Stock.............................................. 35
Underwriting.............................................................. 39
Legal Matters............................................................. 41
Experts................................................................... 41
Additional Information.................................................... 41
Incorporation of Certain Documents by Reference........................... 41
Index to Financial Statements............................................. F-1
</TABLE>
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4,000,000 SHARES
LOGO
COMMON STOCK
--------------
PROSPECTUS
--------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
MERRILL LYNCH & CO.
ABN AMRO INCORPORATED
PAINEWEBBER INCORPORATED
MARCH 20, 1998
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